The “Chem Orchid”

Tan Teck Ping Karen AR:

[1] Han Kook Capital Co. Ltd (“HKC”) was at all material times the registered owners of “CHEM ORCHID” (the “Vessel”) until she was sold in Singapore pursuant to a Court Order.

[2] By a Vessel Lease Contract (“Lease Agreement”) entered into between HKC and Sejin Maritime Co. Ltd (“Sejin”), HKC leased the Vessel to Sejin for a total of 108 months. The Lease Agreement is governed by Korean law. It is not disputed that the Lease Agreement is akin to a charter by demise.

[3] In December 2010, HK AMC Co. Ltd (“HKA”) was formed to deal with the bad debts of HKC. The credit under the Lease Agreement was transferred to HKA, but the ownership of the Vessel remained at all times with HKC.

[4] Notice of Credit Transfer from HKC to HKA was given by HKC to Sejin on 24 December 2010. By an Asset Transfer Agreement dated 27 December 2010, the lease credit of the Lease Agreement was transferred from HKC to HKA.

[5] On 4 April 2011, HKA issued a letter titled “Lease contract termination notice”. HKC’s position is that this letter effectively terminated the Lease Agreement. The plaintiffs in the various writs dispute this.

[9] ADM 201/2011 is an action by Mercuria Energy Trading SA (“Mercuria”) against “[the] Owners and/or Demise Charterers of the Ship or Vessel “CHEM ORCHID””. In the indorsement of claim, Mercuria claims “as holders freight prepaid shipped on board Tanker Bill of Lading DUM/HAV-01 dated Dumai Port of Indonesia, 11 June 2011 issued for and on behalf of the Master of the ship or vessel “CHEM ORCHID” of the Port of Jeju South Korea, and/or as owners and/or as persons entitled to possession of the 4815 metric ton of Palm Methyl Ester in bulk that is lately laden on the vessel “CHEM ORCHID” for shipment from the port of Dumai, Port of Indonesia to the Port of Huelva…”. The writ was filed on 8 August 2011.

[10] HKC filed similar applications in these actions seeking inter alia an order that the writ, service thereof and all subsequent proceedings in the said actions be set aside on the basis that the admiralty in rem jurisdiction of the High Court under the High Court (Admiralty Jurisdiction) Act (“HCAJA”) was not properly or validly invoked against the Vessel.

[11] In respect of ADM 198 and ADM 201, both KRC and Mercuria have raised an alternative claim against HKC on the ground that the Master of the Vessel had ostensible authority to bind HKC. HKC argues that this claim is so unsustainable that it should be struck out under O 18 r19 of the Rules of Court (“ROC”) and/or the inherent jurisdiction of the court.

[12] The law on invoking the admiralty jurisdiction of the court was set out by Belinda Ang Saw Ean J in The “Bunga Melati 5” [2001] 4 SLR 1017 (“Bunga Melati HC”) and subsequently by the Court of Appeal in [2012] 4 SLR 546 (“Bunga Melati CA”).

[13] Section 4(4) of the HCAJA provides:

[14] The onus is on the plaintiff to establish jurisdiction and he does so by demonstrating that his claim falls within s4(4) of the HCAJA: per Belinda Ang J in Bunga Melati HC at [80].

[15] As to the standard of proof that has to be satisfied by the plaintiff, the Court of Appeal in Bunga Melati CA referred to Belinda Ang J’s analysis of section 4(4) of the HCAJA and stated at [112]:

[16] For the purpose of step 3, Sejin, the demise charterer, has been identified as the person who would be liable on the claim in an action in personam (“the relevant person”). The dispute between parties is in respect of step 5 i.e. whether Sejin was the demise charterer at the time of the issue of the respective writs. The onus is on the plaintiffs in the various writs to prove this on a balance of probabilities.

[17] A preliminary point had been raised as to the law applicable to the interpretation of the HCAJA and the role of foreign law in the interpretation of the HCAJA.

[18] The plaintiff’s counsel in ADM 201 took the position that whether there was a demise charterparty and whether the charter was terminated at the time the action was commenced is to be decided by Singapore law and not Korean law. He relied on Halcyon Isle [1980] 2 MLJ 217 and The “Andres Bonifacio” [1993] 3 SLR(R) 71.

[19] It is not in dispute that the issue of whether Singapore has jurisdiction pursuant to s 4(4) of the HCAJA is governed by Singapore law. Therefore, the issue of whether the charterparty in this case is a demise charterparty is to be determined according to Singapore law. All the parties agree that the charter being considered in this case is a demise charterparty. Therefore, this issue is not in dispute.

[20] The next question is whether the termination of the Lease Agreement is to be determined in accordance with the terms of the charterparty, i.e. the Lease Agreement. The Lease Agreement states that it is governed by Korean law. Therefore, Korean law should be applied in determining whether the Lease Agreement has been validly terminated. Support for this position may be found in the decision of the Singapore Court of Appeal in The Sangwon [1999] 3 SLR(R) 919 which applied North Korean law to determine whether the party who would be liable in personam was the beneficial owner of the arrested vessel.

[21] To determine whether Sejin was the demise charterer at the time of issue of the respective writs, the following issues were considered:

[22] HKC argued that it had transferred the right to terminate the Lease Agreement to HKA pursuant to a Notice of Credit Transfer (“NCT”) dated 24 December 2010. In the alternative, it is HKC’s position that it had authorised HKA to terminate the Lease Agreement on its behalf. The plaintiffs in the respective writs dispute this.

[23] First, it is not disputed that the entire Lease Agreement was not transferred to HKA. HKC’s position is that only the credit in the Lease Agreement was transferred to HKA, and that in transferring this credit, the “right or status in [HKC’s] possession or management out of personal or physical security, right to profit or the other rights incidental to the [credit]” was transferred from HKC to HKA.

[24] HKC had initially stated that HKA was established in December 2010 to deal with bad credits of HKC. As part of this arrangement, the Lease Agreement was transferred to HKA, but the ownership of the vessel remained at all times with HKC.

[25] HKC appointed Professor In Hyeon Kim (“Professor Kim”) to give his opinion on (i) the nature of the Lease Agreement; (ii) when the Lease Agreement was terminated; and (iii) when Sejin ceased to be the demise charterer of the vessel.

[26] In his 1 opinion, Professor Kim dealt with the above issues and came to the conclusion that the Lease Agreement was terminated on 5 April 2011, which is the date the 4 April 2011 notice (“4 April Notice”) was received by Sejin. He is of the view that this position was reinforced by subsequent letters sent on 9 May, 14 June and 29 June 2011.

[27] However, in rendering his 1 opinion, Professor Kim had overlooked the fact that the 4 April Notice and the subsequent letters of 9 May, 14 June and 29 June 2011 were all issued by HKA and not HKC. This was highlighted as a “fundamental error” by Mr Soo Keun Kyung (“Mr Kyung”), the expert appointed by the Plaintiff in ADM 184,.

[28] In response, Sejun Kim, Assistant Manager of HKC, clarified that it was the “credit of the Lease Agreement that was transferred” and not the Lease Agreement as he had stated earlier. A copy of the Asset Transfer Agreement between HKC and HKA dated 27 December 2010 (“ATA”) and NCT were provided.

[29] The ATA states as follows:

[30] At No. 5 of attachment 3.1 of the ATA, the type of asset transferred in respect of Sejin is described as the “financial lease credit” with “Sejin Maritime Co. Ltd”.

[31] The NCT states as follows:

[32] Sejun Kim, on behalf of HKC, expressed the view that pursuant to the ATA and the NCT, the right to terminate the Lease Agreement was included in the “right or status” transferred from HKC to HKA. Alternatively, HKC takes the position that after the credit transfer, all the matters involving the Lease Agreement was solely determined and handled by HKA. Therefore, all of HKA’s communications with Sejin including the 4 April Notice was done with the full knowledge and authority of HKC.

[33] Professor Kim agreed with HKC and is of the view that the right of termination of the Lease Agreement is included in the “right” or “status” transferred by HKC to HKA as mentioned in paragraph 3 of the NCT and in the “right, obligation or status” of HKC based on the Lease Agreement mentioned in paragraph 4 of the NCT. He concluded that HKA had the right and was legally entitled to terminate the Lease Agreement with Sejin, and HKA’s exercise of this right of termination was lawful. However, Professor Kim did not explain the reason for his view.

[34] Mr Kyung criticises Professor’s Kim’s opinion and notes that Professor Kim is relying on the words “rights or status” found in paragraph 3 of the NCT and “the right and obligation or status” found in paragraph 4 of the NCT as the basis for his opinion that the right of termination of the Lease Agreement was transferred from HKC to HKA. Mr Kyung points out that other than the transfer of the credits which is the assets subject to transfer under the ATA, there was no reference to the transfer of the “right or status” or “right, obligation or status” in article 3 of the ATA. Since the NCT is merely a notice, the contents of the NCT cannot exceed the ATA and the NCT cannot transfer more rights than that transferred under the ATA.

[35] It is Mr Kyung’s opinion that the ATA clearly states that it was only the financial credit with Sejin that was transferred to HKA. This financial credit does not include the transfer of the status of the contractual parties. Since the right to terminate was not one of the rights transferred from HKC to HKA under the ATA, then it would follow that the right to terminate the Lease Agreement was not transferred from HKC to HKA under the ATA. Since the NCT is a document that gives Sejin notice of the ATA and the rights that were transferred under it, the words of the NCT cannot be relied on to transfer rights that exceed the ATA.

[36] In response, Professor Kim clarifies that he is of the opinion that the right of termination was given by HKC to HKA based on the parties’ true intentions which is evidenced by the facts and documents, in particular the NCT.

[37] With respect, it is trite law that the court should only look at parties’ intention when there is ambiguity in the terms of the contract entered into between parties. In this case, I am of the view that the terms of the ATA clearly state that it is the credit that was transferred and there is no ambiguity which needs to be interpreted.

[38] I agree with the opinion of Mr Kyung on this matter. I am of the view that the ATA only transferred the credit from HKC and HKA. There was no transfer of the right to terminate the Lease Agreement in the ATA. There was also no reference to the transfer of “right or status” in the ATA. The NCT was merely a notice to Sejin that the credit had been transferred pursuant to the ATA. Since the NCT is merely a notice, the contents of the NCT cannot exceed the ATA and the NCT cannot transfer more rights than was transferred under the ATA. Therefore, I find that there was no transfer of the right to terminate the Lease Agreement pursuant to the ATA and the NCT.

[39] I now come to the issue of whether HKA was authorised to issue the 4 April Notice and subsequent notices on behalf of HKC. The evidence that I have considered above show that HKC intended to authorised HKA to terminate the Lease Agreement.

[40] The NCT issued by HKC stated in paragraph 3 that HKC transfers the “right or status in their possession” to HKA. Sejun Kim on behalf of HKC explained that, in HKC’s mind, the right to terminate the Lease Agreement was included in the “right or status”. This appeared to be also be HKA’s understanding. For the reasons stated above, I am of the view that the NCT did not transfer the right to terminate to HKA and HKA did not have express authority to terminate the Lease Agreement. However, I am of the view that based on the conduct of parties and the facts of the case implied authority may have been given by HKC to HKA.

[41] The Court of Appeal in Banque Nationale de Paris v Tan Nancy and another [2001] 3 SLR(R) 726 (“BNP”) referred at [64] to Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583; [1967] 3 All ER 98 at 102, in which Lord Denning MR said:

[42] Turning to the facts of the present case, the evidence that has been given by HKC is that HKC intended to transfer the right to terminate the Lease Agreement to HKA. HKA conducted itself in line with this intention and issued the 4 April Notice which expressly referred to the transfer of credit from HKC to HKA, notice of which had been given to Sejin by way of the NCT. Therefore, I am of the view that HKC had intended to authorise HKA to issue the 4 April Notice pursuant to ATA and NCT and HKC had impliedly authorised HKA to issue the 4 April Notice.

[43] Even if it is argued that HKC did not give implied authority to HKA to issue the 4 April Notice, the circumstances of this case and the conduct of the parties show that HKC had represented that HKA had the necessary authority to issue the 4 April Notice.

[44] Bowstead & Reynolds on Agency (Swee & Maxwell, 19 Ed, 2010) in Art 72 states as follows at p364:

[45] The Court of Appeal in BNP (see above at [41]) stated at [69] the two requirements that have to be satisfied to establish apparent authority:

[46] In respect of the first requirement, HKC had given Sejin notice of the asset transfer by way of the NCT. By issuing the NCT, HKC represented to Sejin that HKA had the authority to deal with all the “right and status” under the Lease Agreement. HKA subsequently issued the 4 April Notice pursuant to the transfer of credit. Therefore, I find that these facts show that HKC had represented that HKA had the authority to issue the 4 April Notice on their behalf.

[47] In respect of the second requirement, it is clear that Sejin relied on the representation. There is no evidence that Sejin questioned HKA’s authority or right to issue the 4 April Notice. Sejin’s conduct after receiving the 4 April Notice, in which, inter alia, it requested for a statement of account and requested for more time to make payment and for the lease to be revived showed that it accepted and relied on the representation that HKA had authority to issue the 4 April Notice.

[48] In my view, HKA had authority, actual or apparent, to issue the 4 April Notice on behalf of HKC.

[49] For the reasons stated above, HKA was authorised to issue the 4 April Notice and the subsequent notices on behalf of HKC.

[50] Having established that HKA had the right to terminate the Lease Agreement as agent for HKC, the following issues arise:

[51] The dispute between the parties is whether the Lease Agreement was terminated prior to the commencement of each of the respective actions. The resolution of this dispute will turn on the answer to this question: did the 4 April Notice from HKA to Sejin terminate the Lease Agreement?

[52] The parties all agree that article 24(2) of the Lease Agreement govern the termination of the lease.

[53] Article 24(2) of the Lease Agreement states as follows:

[54] HKC argued that the 4 April Notice complies with article 24(2) and it is effectively terminates the Lease Agreement. To understand this argument, it is necessary to set out this notice in full. It reads:

[55] HKC argued that this is a valid notice of termination pursuant to article 24(2). Professor Kim expressed the view that HKC had the right to invoke the right of immediate termination based on article 24(2) because the rental had not been paid for six months, which was a very substantial amount. Second, even though the it was not expressed in the main body that the Lease Agreement was terminated, the title of the notice clearly shows that it is a letter for “Lease contract termination notice”. Thirdly, there is a demand for the amount which is equal to the balance of the vessel’s acquisition price and this is consistent with the Lease Agreement being terminated as the demand is not for the rental arrears but for the entire outstanding amount under the Lease Agreement, which clearly indicates that the Lease Agreement has come to an end.

[56] Mr Choi disagreed with Professor Kim. He formed the view that the 4 April Notice did not comply with the requirements of article 24(2) as it did not specify the cause for termination. The said notice was, therefore, not an effective notice of termination. However, Mr Choi stated that the cause for termination can be given by way of a separate notice.

[57] On reading Mr Choi’s opinion, Sejun Kim, on behalf of HKC, clarified that many oral demands for payment of the outstanding lease rental had been made and it was only when it was clear that this could not be paid that the 4 April Notice was issued. This was followed by Professor Kim’s opinion that article 24(2) states that as long as HKC is “of the opinion” that Sejin is facing difficulties in continuing its normal business activities due to any reason whatsoever, which gives rise to concerns about Sejin’s ability to perform its obligations to HKC or to maintain or manage the Vessel, HKC may terminate the Lease Agreement with notification specifying the cause towards Sejin. Professor Kim’s view is that unless HKC’s opinion and exercise of its right to terminate based on this view is manifestly wrong, HKC’s judgment to invoke the provision should be respected.

[58] Upon reading Sejun Kim’s clarification, Mr Choi appeared to have no further issue with the 4 April Notice as he does not raise any objection to the same in his subsequent opinions.

[59] Mr Kyung’s major objection to the 4 April Notice is that HKA did not have the right to issue the said notice as HKC did not transfer the right to terminate to HKA by way of the ATA and NCT. I have already dealt with this issue earlier and have found that HKA had the authority to issue a notice of termination on behalf of HKC. The other objection that Mr Kyung had is that the 4 April Notice does not state the cause for termination as required by article 24(2). However, Mr Kyung does not elaborate further and does not give his reasons for his belief that the 4 April 2011 Notice is an invalid notice of termination as it fails to state the cause for the termination.

[60] In my view, it is clear that HKC had cause to terminate the Lease Agreement based on the outstanding arrears.

[61] Article 24(2) states that “[in] the event [HKC] is of the opinion that [Sejin] is facing difficulty in continuing its normal business activities…[HKC] may terminate the Contract with notification specifying the cause towards [Sejin]”. As stated by Professor Kim, the decision to terminate is based on the opinion of HKC. HKC has given evidence that six months of lease rental was outstanding. It was based on this outstanding lease rental that HKC formed the view that it had cause to terminate and the 4 April Notice was issued. This is HKC’s subjective opinion and I agree with Professor Kim that unless HKC’s exercise of this right of manifestly wrong, HKC’s decision to terminate the Lease Agreement based on the outstanding arrears is to be respected.

[62] There is no bright line test to determine whether a valid notice of termination has been issued. The court will examine the notice to determine if it effectively terminated the charter. As stated by Finkelstein J in ASP Holdings Ltd v Pan Australia Shipping Pty Ltd [2006] FCA 1379 [“ASP”] at [27]:

[63] Finkelstein J also observed at [18]:

[64] On reading the 4 April Notice I am of the view that it is an effective notice which terminates the Lease Agreement. First, the subject matter is stated to be “Lease contract termination notice”. While the use of the word “termination” in the subject line is not sufficient by itself to create an effective notice of termination, the use of the word “termination” in the subject line is an indication of the owner’s intention in issuing the notice. The subject line would immediately highlight to Sejin that the intention of this notice is to terminate the Lease Agreement. Second, in paragraph 3 of the 4 April Notice reference is made to “paragraph 2 of article 24” of the Lease Agreement which is one of the clauses dealing with termination of the Lease Agreement. Sejin is informed that it had “lost all the benefit of time of debt against [HKC]” and a demand for immediate payment of all outstanding amounts is made. Third, in paragraph 4 of the notice, Sejin is informed that if the payment demanded is not made, HKC will, inter alia, “[retrieve] the lease object”. To my mind, the effect of this notice is clear. Sejin is being warned that no further time will be granted for the payment of the outstanding amount and that it is to make immediate payment of this outstanding amount failing which HKC will take steps to retrieve the vessel, which will effectively terminate the Lease Agreement.

[65] As stated by Finkelstein J in ASP, no particular form of words or notice is required to terminate a charter. Therefore, there is no requirement for the word “termination” to be used in the body of the notice when it is clear that the effect of the notice is to terminate the agreement. What is required is a clear and unequivocal statement from the owner to the charterer stating the owner’s intention to terminate the charter. In the 4 April Notice, HKC had made it very clear to Sejin that if the full amount outstanding is not paid immediately, it will take steps, which include the retrieval of the vessel. This is a clear indication of the owner’s intention to terminate as once the vessel is retrieved the charter is effectively at an end.

[66] For the above reasons, the combined effect of the subject title read together with the content of the 4 April Notice makes it clear that the intention of the notice is to terminate the Lease. To my mind, though the word termination is not used in the content of the notice, it is a clear and unequivocal notice which states that, if the outstanding payments are not paid immediately, the owner will retrieve the vessel and terminate the Lease Agreement. Therefore, I find that the 4 April 2011 Notice effectively terminates the Lease Agreement.

[67] I note that both Mr Choi and Mr Kyung had taken issue with the 4 April 2011 Notice on the basis that it does not state the “cause” as required by article 24(2). However, on reading the 4 April Notice, I am of the view that it does sufficiently state the cause which entitles HKC to terminate the Lease Agreement under article 24(2). I agree with Professor Kim that the cause is sufficiently stated for the following reasons:

(a) The 4 April 2011 Notice was sent to Sejin against the background that Sejin had failed to pay the lease rental for the vessel for six months despite repeated demands. This demonstrated that Sejin were clearly facing difficulties in carrying out its normal business activities.

(b) Paragraph 3 of the 4 April 2011 Notice stated that “[according] to paragraph 2 of Article 24 of the above lease contract, your company lost all the benefit of time of debt against our company. Therefore, please pay immediately all outstanding principal, period interest, overdue principle and interest, delayed compensation.” This paragraph shows that outstanding amounts have been due and owing by Sejin and HKC was no longer prepared to allow Sejin the benefit of time to make their payment for the full debt in instalments. HKC was demanding immediate payment of all the outstanding amounts.

(c) HKC has given evidence that the outstanding amount of KRW 289,430,562 in the table at the bottom of the 4 April 2011 Notice equates to 6 months of lease rental. Professor Kim is of the view that this is a very substantial sum and amounts to a very serious breach of the Lease Agreement.

[68] It is, therefore, clear from the 4 April Notice that Sejin has been unable to pay the lease rental for a substantial period of time and HKC was not prepared to grant Sejin any further time to make payment of these arrears. In light of the background facts where 6 months arrears are due and owing, I agree with Professor Kim that the 4 April Notice clearly showed that HKC was terminating the Lease Agreement pursuant to Article 24(2) because Sejin was clearly “facing difficulties in continuing its normal business activities” which gave rise to “concerns about [Sejin’s] ability to perform its obligations to [HKC] or to maintain or manage the Vessel”.

[69] Further, as Professor Kim correctly pointed out, when Sejin received the 4 April Notice, they did not question or challenge the termination, nor did they ask for the reason for the termination. This shows that the cause for the termination was clear to Sejin and they knew the reason for the termination. If not, Sejin would have queried the notice and asked for clarification of the cause of termination.

[70] The correspondences that follow the 4 April Notice support this. There was no document from Sejin that challenged the 4 April Notice. Sejun Kim has given evidence on behalf of HKC that after the 4 April 2011 Notice was issued, Mr Keunhyuk Park, the CEO of Sejin meet him in mid-April to ask whether the termination could be revoked and the Lease Agreement revived. Mr Park was informed that the termination could not be revoked by a mere promise to pay and that HKC might consider revocation of the termination only if actual payment of the outstanding amounts was made. Mr Park then asked for the details of the overdue amounts and this was sent to Sejin in an email dated 21 April 2011.

[71] As no payment was received, HKC sent a further notice on 9 May 2011 (“9 May Notice”) with the subject matter stated as “Demand for payment of the liquidated loss amount and the return of the leased ship”. HKC referred to the 4 April 2011 Notice and informed Sejin that if it did not make full payment of the outstanding amount and return the vessel immediately, HKC would, inter alia, “[take] legal actions (pursuing a criminal charge of embezzlement) for refusing to return the leased object”.

[72] It is clear from the 9 May Notice that HKC treated the Lease Agreement as terminated and was demanding full payment of the outstanding amount and return of the vessel, failing which legal action may be commenced. Again, Sejin did not challenge this notice. Sejin’s response to this notice was made on 23 May 2011 when it wrote to HKA, apologising that they were not able to pay the lease payment by the deadline and pleading for an extension of time for the payment of the lease payment as they had entered into some contracts and will use the freight from these contracts to pay the outstanding arrears. Sejin stated that if they cannot make payment as promised, then they will agree to all the actions that HKA will take and will implement all the instructions related to the ship retrieval.

[73] Sejin’s understanding that the Lease Agreement had been terminated may also be seen in the following:

(a) In an email dated 25 May 2011 from Sejin to HKA, Sejin stated: “I am asking you that you allow us to revive the terminated lease contract as I requested…”.

(b) In an email dated 4 July 2011 from Sejin to HKA, Sejin stated: “From April until now, our company’s position regarding the lease termination was delivered many times, and our company worked hard to try to revive [the company or the lease contract] (sic) to the last minute…”

[74] For the above reasons, the cause for termination was sufficiently set out in the 4 April Notice and Sejin understood the same which may be seen from its subsequent conduct and correspondence. Therefore, I am of the view that the 4 April Notice was an unequivocal notice of termination and was understood by Sejin to terminate the Lease Agreement.

[75] The next issue is whether redelivery is required to terminate the Lease Agreement. The plaintiffs in the various writs all argue that redelivery is required under the terms of the Lease Agreement to terminate the Lease Agreement. HKC takes the opposing position that a notice of termination is sufficient to terminate the Lease Agreement and re-delivery is not required.

[76] The cases that I have considered appear divided on the issue of whether redelivery is required to terminate a demise charterparty. The cases are:

(a) Cases that required redelivery for termination:

(i) Australia : Patrick Stevedores No 2 Pty Ltd v MV “Turakina” May 1998, unreported (“Turakina”);

(b) Cases that do not required redelivery for termination:

(i) Hong Kong : Gulf Marine and Industrial Supplies Inc. v The Demise Charterer of the Ship or Vessel M.V. ‘Trident Dawn’ [1992] HKCFl 273 (“Sea Empire”)

(ii) Australia : CMC (Australia) v The Ship “Socofl Stream” [1999] FCA 1419 (“Socofl Stream 1instance”) and on appeal [2001] FCA 961 (“Socofl Stream Appeal”)

(iv) Australia : Ships “Hako Endeavour”, “Hako Excel”, “Hako Esteem” and “Hako Fortress” v Programmed Total Marine Services Pty Ltd [2013] FCAFC 21 (“Hako Fortress”)

[77] I will start with Tamberlin J’s decision which has been referred to in almost every case that I have considered in this decision.

[78] The facts in brief are as follows. The Turakina was sub-demised by Deil Shipowers (“Deil”) to South Pacific Shipping Limited (“SPS”) by way of a demise charterparty. On 18 February 1998, Deil sent a letter by fax to SPS stating that pursuant to clause 10 of the charterparty, the charter hire is payable every 14 days and that the hire monies have remained upaid for more than 60 days. Therefore, Deil stated that they have no alternative but to terminate the charterparty and take possession of the ship. The termination was with immediate effect. Deil also directed that the ship be redelivered to the possession and control of the beneficial owners whose representatives will make contact in respect of the necessary aspects of re-delivery.

[79] There was no dispute that the charter was a demise charter. Clause 10 provides for the payment of hire and reads:

[80] Tamberlin J held that the notice of withdrawal was insufficient to terminate the charter at the time the arrest proceedings were commenced and redelivery is required to terminate a demise charterparty.

[81] Tamberlin J noted that the notice does not refer to the withdrawal of the vessel from SPS. It merely requires re-delivery of possession to be made, which in itself cannot amount to redelivery of possession.

[82] In coming to his decision, Tamberlin J examined the difference between a time charterparty and a demise charterparty. He observed at p7 that:

[83] After examined various cases that dealt with the termination of time charterparties, Tamberlin J came to the follow conclusion at p14-15:

[84] It was argued at p15 that once notice of withdrawn had been given, the charterer had lost the possession and control of the ship which is the hallmark of a demise charter. However, Tamberlin J disagreed. He noted that hire continues to be payable under clause 10(a) of the charter until the day and hour of redelivery of the possession of the vessel. This indicated that the obligations of the charterparty continue to operate after the notice of withdrawal until redelivery of the vessel. Redelivery of the vessel was required to effectively bring an end to the charterer’s possession of the ship. Since there was no redelivery of the ship at the time the arrest proceedings had commenced, Tamberlin J concluded that the notice of withdrawal did not operate to terminate the charter at the commencement of the arrest proceedings.

[85] A similar scenario was considered by Giles J in New Zealand where the sister ships of the Turakina were under arrest.

[86] The brief facts are as follows. SPS demise chartered the vessels Rangiora, Raninui and Takitimu from Deil. SPS was in default of hire and on 18 February 1998 formal notice of withdrawal was given by Deil to SPS. At 1330 hours on 19 February 1998 a shareholders resolution for voluntary winding up of SPS was passed. On 20 February 1998 at 1430 hours, Caterbury Stevedoring Services Ltd commences its action in rem against the vessel Raninui in respect of moneys owed to it by SPS for services provided. This was followed Mobil Oil New Zealand Ltd which commence in rem proceedings against the vessel Rangiora at 1645 hours on 20 February. At approximately 1700 hours on 20 February 1998 the liquidator of SPS despatched a letter acknowledging receipt and recording acceptance of the notice of termination of the demise charters.

[87] Giles J considered the issue of whether redelivery was necessary to terminate the charter and stated at p52:

[88] Giles J agreed with Tamberlin J’s views in the Turakina that a demise charterer is only terminated when both control and possession are withdrawn. A notice of termination removes control from the charterer, but it does not remove possession. Redelivery is required for possession by the charterer to be terminated. He said at p55-56:

[89] On 24 April 1990, Aurora Navigation S.A. (“Aurora”) demise chartered the vessel “Socofl Stream” (“the Ship”) to Sovremenniy Kommercheskiy Flot (“Sovcomflot”). On 31 August 1993, Sovcomflot demise chartered the Ship to Kamchatka Shipping Company (“Kamchatka”). In December 1998, a notice of termination was issued by Sovcomflot to Kamchatka on the basis that there was default in payment of charter hire principal. Kamchatka denied that there was a default and continued in possession of the Ship. In January 1999, bills of lading on behalf of the master of the vessel were issued in Singapore. Further bills of lading on behalf of the master were issued in Port Kelang. On 5 February 1999, CMC (Australia) Pty Ltd (“CMC”) commenced in rem proceedings against the Ship.

[90] One of the issues in the proceedings was whether Kamchatka was a demise charterer when the proceedings commenced.

[91] The relevant clauses were considered by the court. Article 11(2)(a) deals with default and the remedies in the event of default::

[92] Redelivery is dealt with in Article 11(2)(d):

[93] Moore J in the Socoflo Stream 1instance considered the decision of Tamberlin J in the Turakina and observed at [24]:

[94] Moore J formed the view that the key in determining whether delivery is required to terminate the charterparty is the terms of the agreement. Moore J said at [26]:

[95] Moore J then held at [27] that the terms of the charterparty before him were “materially different” from that in the Turakina on two basis. First, “there is a clear contractual right conferred by article 11(2)(a) on Aurora or Sovcomflot to terminate the 1993 sub-demise charterparty by giving a telex notice. It was exercised by Sovcomflot. There was no equivalent power to terminate in the charterparty considered by Tamberlin J”. Second, “[unlike] the charterparty in The “Turakina”, the 1993 sub-demise charterparty did not contain provisions which fairly unambiguously point to the continuation of the demise charter pending redelivery of the vessel. The possession and control of Kamchatka after a notice of termination had been received was not unconditional. It was possession subject to the rights of Aurora and Sovcomflot to direct redelivery or charter the [Ship].”

[96] Moore J concluded that Kamchatka was not a demise charterer at the time of commencement of the proceedings for the reasons stated at [28]:

[97] The parties had entered into a charterparty in the Barecon 2001 form. The Court had found that the notice of termination was not effective and therefore, held that the charterparty was not terminated at the time the action in rem was commenced. The action was thus not set aside.

[98] Finkelstein J considered the issue of whether a notice of termination would bring the charter to an end or whether redelivery is required to terminate the charter. Due to comity, he applied Socofl Stream 1instance and held that the charterparty may be terminated on written notice due to clause 28 and 29 of the Barecon 2001 form. Clause 28 provided for termination by notice and clause 29 says that when the charter is at an end the charterer is the “gratuitous bailee” of the vessel.

[99] However, Finkelstein J at [13] to [15] was troubled by this conclusion as he was of the view that this would result in the charterer retaining possession of the vessel though the charter has been terminated and may result in the master having ostensible authority to bind the owner. He was of the view that the use of the label “gratuitous bailment” cannot disguise the real relationship between the charterer and the vessel

[100] The next case that considered the effect of clauses 28 and 29 of the Barecon 2001 form on the issue of redelivery is the Hako Fortress. The court in Hako Fortress stated affirmatively that clauses 28 and 29 would allow the demise charterparty to be terminated once a notice of termination was issued. No redelivery was required.

[101] Clauses 28 and 29 of the Barecon 2001 form provided:

[102] It was recognised that clauses 28 and 29 of the Barecon 2001 form was redrafted to expressly address the difficulty raised by the earlier Barecon 89 charterparty, which was interpreted to required redelivery to effectively terminate the charterparty.

[103] The court held that when the charterparty contains express terms, such as clause 28 and 29, a notice of termination is sufficient to terminate the charterparty without physical redelivery of the vessel.

[104] Rares J pointed out at [58] that while the analogy of a demise charter with real property is a useful one, it cannot be taken literally. A ship is not realty but is a chattel. He then went on to analysis the charterparty at [63] to [67]:

[105] Since clause 28 and 29 expressly provided that the charterer held the ship as gratuitous bailee once a notice of termination had been issued, there was no requirement for redelivery to terminate the charterparty.

[106] As recently as 2006, Finkelstein J in ASP said at [12]:

[107] As may be seen from the above cases, the Courts in different Commonwealth jurisdictions reached different conclusion on the issue of whether redelivery is required to terminate a demise charterparty. How are the cases to be reconciled?

[108] To answer this question, it is essential to understand that the essence of a demise charterparty is that the owners confer on the charterer possession and control of the ship so as to place the charterers in the same position as the owners for the duration of the demise charterparty. To effectively terminate a demise charterparty, both possession and control of the ship have to be withdrawn.

[109] It should however be noted that demise charterparties are contracts and their construction should be governed, in general, by the ordinary principles of the law of contract, subject, of course to statutory provisions and the principles of the law maritime: as per Rares J in the Hako Fortress at [59].

[110] Therefore, it follows that whether redelivery is required to terminate a demise charterparty will depend on the terms of the charterparty. In Socoflo Stream 1instance, Moore J stated at [26]:

[111] Moore J continued at [28]:

[112] Bearing the above in mind, I am of the view that the guiding principle that may be drawn from the above authorities is that, in general, both a notice of termination and redelivery of the ship are required to terminate a demise charterparty so that control and possession by the demise charterer may be brought to an end. This is due to the unique nature of the demise charterparty. However, as a demise charterparty is in essence a contract between the owner and the charterer, parties are free to include terms in the demise charterparty as to how possession of the ship is to be terminated. Such terms may vary or affect the obligation of redelivery upon the termination of a demise charterparty. This is the common thread that may be found to run through all the cases considered on this issue.

[113] In the Turakina and the Rangiora, it was held that redelivery was required as it was specifically stated in clause 10(a) of the charterparty that hire was to be paid until the day and hour of redelivery of the possession of the vessel. This meant that possession of the ship continued until it was redelivered to the owner. Therefore, the notice of termination was insufficient to terminate the demise charterparty.

[114] The charterparty in the Socofl Stream 1instance did not contain any clause requiring hire to be paid till redelivery. The charterparty contained a clear contractual right to terminate. As stated by Moore J, the charterparty “did not contain provisions which fairly unambiguously point to the continuation of the demise charter pending redelivery of the vessel.” Therefore, the court held that a notice of termination was sufficient to terminate both control and possession of the ship by the charterer.

[115] The contractual terms of the charterparty in ASP and The Hako Fortress were even clearer. It is specifically stated in Clause 29 of the Barecon 2001 form that once a notice of termination is issued, the charterer shall hold the vessel as gratuitous bailee pending physical repossession by the owner. This meant that once the notice of termination was issued, both control and possession of the ship were terminated and the charterer held the ship on bailment for the owner.

[116] The only cases that that does not appear to fit in with this analysis is the Sea Empire. The charterparty contained a clause in the same words as clause 10(a) in the Turakina and the Rangiora i.e. that hire was to be paid until the day and hour of delivery of possession of the vessel. However, the Hong Kong court held that redelivery was not required and the charterparty was terminated once the notice of termination was issued. I note that the Sea Empire was decided before the decision of Tamberlin J in the Turakina and the Hong Kong court did not have the benefit of Tamberlin J’s careful analysis of the law in relation to demise charterparties. Having read both cases, I prefer the position taken by theTurakina as it is in line with the fundamental elements of a demise charterparty – the parting of possession and control. A charterparty that states that hire is to be paid until redelivery indicated that possession has not passed to the owner and the charterparty continues after the notice of termination is issued. For the above reasons, I decline to follow the decision of the Hong Kong court in the Sea Empire.

[117] The Lease Agreement is not in the Barecon 2001 form and there are no terms that are similar to clause 28 and 29 of that form.

[118] Article 24(4) of the Lease Agreement states:

[119] Article 26 deals with return of the vessel:

[120] Articles 26(1) read with 26(5) are similar to Article 11(2)(d) in the Socofl Stream 1instance. At first blush, this appears to indicate that, in line with Socofl Stream 1instance, once a notice of termination is issued, the demise charterparty is terminated and redelivery is not required.

[121] However, upon reading article 26 more closely, it may be seen that article 26(3) provides that in the event HKC delays the redelivery, Sejin is to continue to pay the lease fee until the HKC confirms the return of the vessel. The clause then goes on to expressly provide that the contract is to remain in force and effect till HKC confirms the return of the vessel.

[122] I am of the view that article 26(3) is similar to Clause 10(a) in the Turakina as both provide for payment of the hire due under the charterparty to continue until redelivery of the vessel. This is supported by the last line in article 26(3) which states that the charterparty shall remain in force and effect until the owner confirms the return of the vessel. This effectively means that possession of the Vessel is not terminated when the notice of termination is issued. The possession of the Vessel continues to remain with Sejin until the Vessel is redelivered to HKC. This is the reason the lease fee is to be paid by Sejin to HKC until the return of the Vessel. In light of this and in line with the reasons given in the Turakina and Rangiora, I am of the view that art 26(3) indicates that the obligations of the Lease Agreement continues and demise charterparty is not terminated until the vessel is redelivered to HKC.

[123] Before I leave this point, I wish to address the point raised by Professor Kim which is that article 26 provides that the Lease Agreement is to remain in force purely for the purpose of protecting HKC’s rights and to allow them to enforce their rights under the contract. He is of the view that article 26 does not give Sejin continued rights to use the vessel as demise charterer until redelivery. I disagree with Professor Kim. The charterparty does not have to remain in force for HKC to enforce their rights. A charterparty is a contract and normal contract law will apply. This means that once the charterparty is terminated, the owner has the right of bring an action against the charterer for any damages arises from the breach of the charterparty. There is no need to keep the charterparty alive for the owner to exercise these rights.

Symbolic/Constructive redelivery.

[124] TheTurakina and theRangiora both recognise that an act of symbolic delivery of possession or constructive redelivery would be sufficient to show that redelivery has been effected.

[125] Tamberlin J in the Turakina expressed the view at p16 that redelivery can be by way of actual or symbolic delivery of possession:

[126] A constructive redelivery may also be sufficient. In reply to the submission that there had been constructive redelivery, Tamberlin J stated at p17:

[127] In the Rangiora, Giles J was also of the view that there could be symbolic or constructive redelivery. He said at p55:

[128] The evidence from Sejun Kim of HKC is that after the 4 April Notice was issued, he met with Mr Park, CEO of Sejin in mid-April 2011. At the meeting, Mr Park asked if the termination could be revoked and the Lease Agreement revived. Sejun Kin informed him that HKC would only consider revoking the termination if actual payment of the outstanding amounts were made.

[129] In the Rangiora, a letter from the liquidators acknowledging receipt of the notice of termination and accepting the termination was sufficient to constitute constructive redelivery of the ship. Therefore, following the Rangiora, Mr Park had acknowledged that the 4 April Notice was a notice of termination and had accepted it when he met with Sejun Kim in mid-April. This acknowledgement during the meeting can be taken as constructive redelivery of the vessel.

[130] Even if what was stated in this meeting is challenged, this meeting was followed by correspondences which show Sejin’s intention to return the ship.

[131] In Sejin letter to HKA dated 4 July 2011, Sejin stated:

[132] On 15 July 2011, Sejin wrote to Sejun Kim with a further proposal on how transhipment may be conducted. Sejin acknowledged that they were trying to return the ship and said:

[133] It will be recalled that Tamberlin J in the Turakina (see above at [125]) had indicated that a “statement of intent by the charterer to the effect that possession was surrendered or redelivered” would be an act of symbolic delivery of possession.

[134] Tamberlin J also stated (see above at [126]) that “some step or acknowledgement by the charterer to give effect to the redelivery” is required to show constructive redelivery.

[135] Following theTurakina, the above letters clearly show Sejin’s intention to surrender and redeliver the vessel.

[136] In light of the above, I am of the view that there was constructive redelivery of the ship in mid-April 2011 when Mr Park acknowledged and accepted the termination. Even if this is challenged, I hold that there would be symbolic and/or constructive redelivery on 4 July 2011 followed by confirmation of the same on 15 July 2011.

[137] Therefore, as both control and possession of the Vessel had been terminated, the Lease Agreement was effectively terminated on 15 July 2011 at the latest.

[138] In conclusion, I am of the view that, on a balance of probabilities, the Lease Agreement was terminated at the latest on 15 July 2011 and Sejin was not the demise charterer at the time of the commencement of the action in the various ADM proceedings. Therefore, the ADM proceedings are to be set aside.

[139] HKC has also applied to strike out the claim against them under O18 r19 of the ROC and/or the inherent jurisdiction of this Court in ADM 198 and ADM 201

[140] An action may be struck out pursuant to O18 r19 of the ROC under the following circumstances:

[141] HKC’s application in ADM 198 and ADM 201 did not state which of the four limbs of O 18 r19(1) ROC were relied on as the basis for striking out the respective claims. Their written submissions also did not make it clear which limb of O18r19(1) of the ROC they were relying on. A similar situation arose in the Bunga Melati CA and the CA observed at [31]:

[142] In this case, it appears that HKC’s arguments were premises on O18 r19(1)(b) of the ROC – i.e. the plaintiff’s claim in ADM 198 and ADM 201 were “frivolous or vexatious”. This may be seen from their usage of the phrases “plainly unsustainable” to describe the plaintiff’s claim, which is the phrase that has been used to describe actions which are said to be “frivolous or vexatious”. See Bunga Melati CA at [32].

[143] In respect of the test governing inherent jurisdiction of the court to strike out a party’s claim, the Court of Appeal noted at [33]:

[144] On the issue of when an action is plainly and obviously unsustainable, the Court of Appeal referred to Lord Hope’s holding in Three Rivers District Council v Governor and Company of the Bank of England [2001] UKHL 16 (“Three Rivers”) and said at [38]:

[145] The Court of Appeal then held that this distinction may be applied to O18 r19(1)(b) of the ROC or the inherent jurisdiction of the court to strike out unsustainable actions. The Court of Appeal said at [39]:

[146] I will now apply this analysis in my consideration of the plaintiffs’ claim in ADM 198 and ADM 201 against HKC.

[147] Reliance has been placed on Moore J’s decision in the Socofl Stream 1instance and the Court of Appeal’s decision in the Socofl Stream Appeal as authority for the plaintiff’s position in ADM 198 and ADM 201 that HKC’s conduct in allowing the vessel to take on cargo after 4 April 2011 clothed the master with ostensible authority to issue bills of lading on behalf of HKC.

[148] It will be recalled that in the Socoflo Stream 1instance (see above at [89]), Sovcomflot issued a notice of termination to Kamchatka in December 1998 on the basis that an event of default had occurred. Kamchatka disputed this. Sovcomflot did not take any steps to repossess the vessel and Kamchatka continued to trade the vessel. The vessel took on cargo in Singapore and Port Klang before sailing to Brisbane where she was arrested on 25 January 1999.

[149] At first instance, Moore J found that the Master of the “Socofl Stream” was not employed by Sovcomflot and did not have actual authority to act as its agent. Moore J proceeded to hold that Sovcomflot’s failure to nominate a port for redelivery constituted a representation that the Master had authority to bind it even though the Master was not its employee. It was on this basis that Moore J found that Sovcomflot was bound by the bills of lading and is, for the purpose of the bills, the carrier.

[150] This issue came up for consideration on appeal and it was contended by the appellant that merely allowing a vessel to continue to trade did not constitute a representation to the world by Sovcomflot that the Master has been authorised by it to issue bills of lading.

[151] The Court of Appeal in Socoflo Stream Appeal considered the issue and its’ reasoning is as follows:

(i) First, the legal effect of Art 11(2)(a) and (c) of the charterparty between Sovcomflot and Kamchatka and the telex message of 15 December 1998 was that possession and control of the vessel passed immediately to Sovcomflot. This meant that by the time the bills of lading had been signed, the ship was no longer in the possession and under the control of Kamchatka, although that company continued to employ the master and crew. See [26].

(ii) Second, having terminated the charterparty, Sovcomflot had placed Kamchatka in the position as their representatives in respect of bills of lading issued and indirectly represented to shippers that they, Sovcomflot, have authorised Kamchatka to bind them to these bills of lading.

(a) The Court of Appeal said at [22]:

(b) The Court of Appeal then referred at [32] to Homburg Houtimport B.V. v Agrosin Private Ltd (The Starsin) [2000] 1 Lloyd’s Rep 85, where Colman J at 96 applied the general principle of ostensible authority to the issuing of bills of lading by a time charterer or local agent, and observed:

(iii) The Court of Appeal found that there was reliance by CMC on Sovcomflot’s conduct and said at [37]:

[152] As there was both representation by Sovcomflot and reliance by CMC, the Court of Appeal concluded that the Master had signed the bills of lading as the ostensible agent of Sovcomflot. The Court of Appeal said at [51]:

[153] Following the Court of Appeal’s reasoning in the Socofl Stream Appeal and applying it to the current facts:

(i) First, as stated in [136] above, I am of the view that the Lease Agreement terminated in mid-April 2011. Even if this is eventually challenged and found to incorrect at trial, the fact remains that at this juncture there is an arguable case that the charterparty was terminated in mid-April 2011. This means that the possession and control of the Vessel passed immediately to HKC in mid-April 2011 and the Vessel was not in the possession and control of Sejin when the bills of lading were signed though Sejin continued to employ the master and crew.

(ii) Second, having terminated the Lease Agreement, HKC had placed Sejin in the position as their representatives in respect of bills of lading issued and indirectly represented to shippers (the plaintiffs in ADM 198 and 201) that they, HKC, have authorised Sejin to bind them to these bills of lading.

(iii) There was reliance by the plaintiffs in ADM 198 and 201 on HKC’s conduct. As highlighted by the Court of Appeal in Socoflo Stream Appeal, the natural inference is that after the Lease Agreement was terminated, HKC could have made it clear that the Vessel no longer had their authority to take on cargo and issue bills of lading. HKC claimed that they had treated the Lease Agreement as terminated from 4 April 2011 and had repeatedly demanded the return of the Vessel. Since Sejin did not return the Vessel, it was open to HKC to take steps to recover the Vessel as expressly provided for in article 26(5) of the Lease Agreement. However, HKC did not take any steps to recover possession of the Vessel.

[154] In light of the above, it cannot be said that the plaintiffs’ claim in ADM 198 and ADM 201 against HKC are legally and factually unsustainable such that their claim based on ostensible authority should struck out at this time. Accordingly, the plaintiff’s actions in ADM 198 and ADM 201 against HKC will not be struck out pursuant to O18 r19 of the ROC and/or the inherent jurisdiction of the Court.

[155] For the above reasons, I find that Sejin was not the demise charterer at the time of the commencement of the action in the various ADM proceedings. Therefore, the four ADM proceedings against Sejin are set aside on the basis that the admiralty jurisdiction in rem of the Court under the HCAJA had been improperly invoked against the Vessel.

[156] I also decline to strike out the plaintiffs’ respective claim against HKC in ADM 198 and ADM 201 pursuant to O18 r19 of the ROC and/or the inherent jurisdiction of the Court.