14 May 2015

THE MIRAGE OF A WRONGFUL VESSEL ARREST CLAIM IN THE UAE

Authored by: Raymond Kisswany

THE MIRAGE OF A WRONGFUL VESSEL ARREST CLAIM IN THE UAE
As featured in the May edition of the International Bar Association’s Maritime and Transport Law Newsletter, Raymond Kisswany, Associate in the Maritime, Transport & Trade team at Hadef & Partners explores the possibility of the impossible - a claim for wrongful vessel arrest in the UAE.
 
Everyday ships are arrested in the UAE. Lawyers flood the courts with petitions to arrest ships for various claims and debts. The respective Courts of Cassation and Union Supreme Court have analysed the many facets of arresting ships under UAE Federal Law No. 26 of 1981, concerning the Commercial Maritime Law (“CML”). However, by our count, and subject to a recent judgment, there has not been a single case of wrongful ship arrest in the UAE.[1] This, of course, cannot be mistaken to mean that there has never been a wrongful ship arrest.
 
It has been said among maritime lawyers that UAE courts are reluctant to hold a party liable for wrongfully arresting a vessel. Some of that thinking may stem from the lack of any definition of wrongful vessel arrest or its standards or elements in the CML, or any other UAE law for that matter.
 
At the same time, many shipowners request legal advice as to whether their vessel was wrongfully arrested and what remedy they may have, if any. Most law firms usually advise that, even though the arrest was based on weak or even frivolous maritime claims, the high level of uncertainty does not justify the fees in pursuing a wrongful vessel arrest claim.
 
Perhaps it is time to consider to what extent a UAE court would grant a claim for wrongful vessel arrest and shatter the notion that a wrongful vessel claim is impossible in the UAE.[2]
 
Consider the following:
 
abcshipping 
 
  • ABC Shipping Co. owns 100 percent of the shares of DEF Co and XYZ Co.

  • DEF is the registered owner of Vessel 1

  • XYZ is the registered owner of Vessel 2.
A dispute arises between charterer, GHI Co, and Vessel 1 along with her owners DEF Co.
 
While Vessel 2 is in Dubai discharging her cargo, GHI Co petitions the Dubai Court to arrest Vessel 2. GHI Co’s petition claims its right to arrest Vessel 2 is pursuant to CML Article 116(1) which states ‘[a]ny person seeking to recover the debts referred to in the preceding Article may arrest the vessel to which the debt relates, or any other vessel owned by the debtor if such other vessel was owned by him at the time the debt arose [emphasis added].’ GHI Co knowingly misrepresents evidence to the Dubai Court stating that both Vessel 1 and Vessel 2 are actually owned by ABC Shipping.
 
As a result of GHI Co’s misrepresentation, the court orders the arrest of Vessel 2, which is thereby banned from leaving the UAE for several months. During Vessel 2’s arrest she is unable to operate, unable to collect revenue and forced to renege on previously agreed contracts causing loss of profits and future earnings.
 
Basic Legal Principles
 
Beneficial Owner vs. Registered Owner
 
A beneficial owner is an entity enjoying the benefits of ownership, e.g., through receipt of income, of a vessel; however, actual title of ownership is in the name of another entity, called the registered owner.
 
The aforementioned is no different than the legal relationship between holding and subsidiary companies. Without delving into a prolonged academic discussion with regards to corporate legal personalities, simply stated, the beneficial owner of a vessel is treated as a separate legal entity from the registered owner of a vessel, unless its existence is a mere sham, it is used as an instrument for concealing the truth, or its organisation and control is a mere instrumentality of the registered owner.
 
Sister Ships vs. Associated Ships
 
Sister ships, in the legal context, refers to two or more ships which are or deemed to be in common registered ownership, i.e., are the registered property of the same owner. In our figure above, if XYZ Co also owned Vessel 3, then Vessel 2 and Vessel 3 would be considered sister ships (part of the same immediate family of ships).
 
Associated ships are ships which are indirectly controlled by the same person, i.e., associated ships are ships which can be traced back to the same beneficial owner. Thus, in our figure above, Vessel 1 and Vessel 2 are associated ships as they have the same beneficial owner (if sister ships are siblings, associated ships are cousins).
 
Arresting Non-Guilty Ships
 
The International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships of 1952 (the “1952 Arrest Convention”) and the International Convention on Arrest of Ships of 1999 (the “1999 Arrest Convention”)[3] permit the arrest of a ship other than the ship giving rise to the cause of action (the “non-guilty ship”). Article 3(1) of the 1952 Arrest Convention states ‘a claimant may arrest ... any other ship which is owned by the person who was, at the time when the maritime claim arose, the owner of the particular ship.’ Similarly, the 1999 Arrest Convention permits arrests of non-guilty ships under Article 3(2), ‘[a]rrest is also permissible of any other ship or ships which, when the arrest is effected, is or are owned by the person who is liable for the maritime claim.’ The 1952 Arrest Convention deems ships to be under the same ownership ‘when all the shares [of the ship] are owned by the same person or persons.’[4] Therefore, the international arrest regimes limit the arrest of a non-guilty ship to sister ships, i.e., ships under the same registered ownership.
 
The UAE has not signed or ratified the 1952 or 1999 Arrest Conventions. However, the CML uses similar language under Article 116(1) “[a]ny person seeking to recover the debts ... may arrest the vessel to which the debt relates, or any other vessel owned by the debtor if such other vessel was owned by him at the time the debt arose”. Accordingly, pursuant to UAE maritime law, only ships under the same registered ownership are deemed sister ships. In other words, only siblings can be arrested, not cousins. In fact, the majority of jurisdictions share the same legal concept for ship arrests with a handful of notable exceptions.[5]
 
The Legal Dilemmas
 
Compare & Contrast Legal Standards
 
The 1952 and 1999 Arrest Conventions do not deal with wrongful ship arrest. The Conventions leave that matter to be decided under the law of the country in whose jurisdiction the ship is arrested. Under English law, the test for wrongful arrest, as held in The Evangelismos[6] and The Strathnaver[7], requires proof by the owner of the arrested ship of mala fides (malicious negligence) or crassa negligentia (a form of gross negligence implying malice) on the part of the arresting party. This is the terminology frequently cited to represent the test derived from these decisions, although it has been elaborated on by subsequent case law. Similarly, an arrest will be deemed wrongful in France if the arresting party acted in bad faith or with malice.
 
There are two main hurdles to establishing a wrongful vessel arrest claim in the UAE: (i) no UAE statutory definition of what constitutes a wrongful vessel arrest; and (ii) virtually no case law dealing with this particular legal issue.[8] For these reasons, to determine whether a ship arrest was wrongful, we must analyse UAE statutes and case law analogously. The most relevant statute is Federal Law No. 5 of 1985 (the “Civil Code”), in particular Part 3 concerning Acts Causing Harm.
 
Harm Caused
 
Article 282[9] states ‘[a]ny harm done to another shall render the doer thereof, even though not a person of discretion, liable to make good the harm.’ Article 282 thus conditions the liability to make compensation arising out of any harm on three elements: (i) a harmful act or omission to another; (ii) damages sustained; and (iii) a causal link between the harmful act or omission and the damages suffered. The usage of the word “harm” in Article 282 does not limit liability to unlawful acts or acts contrary to law. Legal commentary provides that what constitutes harm is a determination for the judge, who should be guided by the legal prohibition against causing harm. UAE law, as is the law in many other jurisdictions, imposes upon every person the obligation not to cause harm to others. This obligation requires the judge to examine the defendant’s conduct in a manner similar to the “duty of care” under common law for negligence.
 
The phrase “make good” was translated from the Arabic word daman. Daman is a concept under Islamic jurisprudence which, for actions or omissions causing loss, imposes on a wrongdoer the basic duty to restore the value of the loss. Many jurisdictions recognise similar legal concepts for losses sustained.
 
Therefore, it appears that UAE law recognises liability for harm sustained. However, the more important question is how a party satisfies the court of the elements required to establish a party’s liability for the harm that party has done.
 
Direct vs. Indirect Causation
 
Article 283 states ‘(1) harm may be direct or by causation; (2) if the harm is direct, it must unconditionally be made good, and if it is consequential, there must be a wrongdoing or a deliberate act or the act must have led to the harm.’ It is important to understand that in English, as in Arabic, the words “deliberate” and “wrongful” are not one in the same. Under Article 283, “deliberate” refers to a deliberate act which causes harm, rather than the deliberate doing of the act itself. A person may deliberately perform an act without the intention of causing harm, but harm nevertheless is the result of his deliberate act. A wrongful act is where the person has the right to perform the act, but where damage to another results from the act.
 
Legal commentary on Article 283 sets the Islamic jurisprudence’s criterion for distinguishing between direct damage and indirectly causative damage. It is considered direct damage if the damage is an independent cause and reason for the damage in and of itself. In such a scenario, the claimant is not required to show a deliberate or wrongful act. However, damage is considered indirect causative damage where the act is not the direct cause of the damage. In that event, the claimant has the burden to prove an element of deliberateness or wrongdoing for the court to find liability.
 
The UAE Union Supreme Court has held that [i]ndirect causation is the doing of an act which is a cause leading to the occurrence of the harm, and where such cause would not, in the ordinary course of events, lead to the occurrence of such harm, or contribute to it, and would not have done so but for the fact that it was followed by the direct causative act, which was alone the direct cause connection between the wrongful act and the harm.’[10]
 
The preceding paragraphs are often a spider web of confusion, even for the most astute of legal minds. Let us analyse it through the famous (or infamous) “digging a hole” example. If a person digs a hole on a public road without permission and another person is injured, he will be the indirect causer of damage and will be held liable, because he acted wrongfully and the damage was a causative result of the wrongful act. However, if a person digs a hole on their private property and another is injured, he will not be liable because he was not acting wrongfully since he owns the property. But, if a person digs a hole on his private property with the intention of causing harm to another, and a person is injured, he will be found liable as an indirect causer of harm because he acted deliberately in causing the damage, although the act itself was not wrongful. However, assume a person digs a hole in a public road without permission and another person pushes someone into the hole causing injury, the person who pushed another is the direct cause of harm while the person that dug the hole is the indirect cause of harm. Thus, “direct” means a positive action to cause harm (pushing another into a hole), whereas “indirect” means an action leading to harm (digging the hole).
 
The example above of digging holes is relevant to claims for wrongful vessel arrests. The paramount question in wrongful arrest cases is whether the arresting party was the direct cause or the indirect cause of the damage. The arresting party will petition the court to arrest the vessel. Based on that petition the court will issue its order to arrest the vessel. In such cases did the court directly cause the damage with the arresting party being the indirect cause of damage?
 
Some have argued that, in a wrongful vessel arrest claim, the damage would not occur separate and apart from the court’s order. As such, the court, the argument goes, is the direct cause of harm while the arresting party is the indirect cause of harm.
 
The aforementioned legal analysis is flawed for several reasons. First, under a vessel arrest petition, the court merely reviews the petition as a procedural matter rather than delving into the merits or substantive claims (hence why parties must file substantive claims apart from their arrest petitions). Second, what recourse does a ship owner have against the court that issued the arrest order (we have not heard of the case Shipowner Company v. Dubai Court of First Instance!)? Third, what would be the public policy message sent where the defence of an arresting party is simply ‘if you dont like it, go sue the court?’
 
Putting aside the above considerations, for argument’s sake assume an arresting party is the indirect cause of harm.  A party’s misrepresentations to the court with regard to the ownership structure of two vessels (as in our example above) is both a wrongful and deliberate act. In our example, GHI Co had no right under UAE law to arrest Vessel 2. Stating to the court that ABC Shipping Co is the owner of both Vessel 1 and Vessel 2 is a clear misrepresentation of the facts. It is only through misrepresenting the facts to the court that the court ordered the arrest. Misrepresentation of facts to a court should be considered no differently than the forgery of documents submitted as evidence. In both circumstances a party has deliberately and wrongfully misled the court to a decision it would otherwise rule against. If misrepresentation of material facts to the court does not suffice for a wrongful vessel arrest claim, then it is hard to imagine what does.
 
On the other hand, where a party has a legal right to arrest a vessel but innocently misstates a fact, this situation would be similar to digging a hole on your private property. The arresting party had a rightful maritime claim and a right against the vessel under the CML, but innocently misstated a material fact which resulted in the wrongful arrest. Here, harm was done to the shipowner, but the arresting party should not be liable under Article 283 because they were not acting wrongfully or deliberately in filing the petition.
 
Direct Always Beats Indirect
 
The aforementioned analysis seems to support holding an arresting party liable for wrongfully arresting a ship even though the arresting party is the indirect cause of harm. But Article 284 of the Civil Code must also be considered.
 
Article 284 states ‘[i]f the same harm is caused by a direct actor and an indirect actor, judgment shall be against the direct actor.’ The Dubai Court of Cassation has held that ‘[i]f two acts combine to cause damage, one of them direct and the other indirect, then the basic rule is that compensation will be payable by the doer of the direct act.’[11] Consider once again the “digging a hole” example where a person digs a hole in a public road without permission and another person pushes someone into the hole causing injury. Pursuant to Article 284, the person who pushed another is liable but the digger of the hole is not liable because digging the hole (although wrongful) did not directly lead to damage. Absent the direct act of pushing another into the hole there would be no injury, and the digger is absolved of liability. However, had the person fallen into the hole on their own then our example from above would apply, i.e., the person that dug the hole will be liable as the indirect causer of damage.
 
Following the rationale that the arresting party is the indirect causer of a wrongful vessel arrest and the court is the direct causer, liability for a wrongful vessel arrest will be against the court that issued the arrest order. Put another way, under the above reasoning, an arresting party will never be liable for wrongfully arresting a ship because it will always be the court that directly caused the ship to be arrested!
 
There is no way to believe this was the intention of the drafters of the Civil Code. The courts have held that the question of whether an act was the direct or indirect cause of harm sustained is a matter of fact to be determined in the discretion of the trial court.[12] The trial court must also determine whether there has been fault, and the causal connection between fault and the harm suffered. Such decision must be based on ‘sound grounds sufficient to support’ the judgment.[13]
 
As a result, the trial court should find that the arresting party is the direct causer of harm in the situation of a wrongful vessel arrest. Otherwise, UAE law will effectively provide complete immunity to parties which may misrepresent and even forge evidence in obtaining ship arrest orders.
 
Conclusion
 
UAE law did not intend for arresting parties to have blanket immunity for arresting vessels, especially where the arrests are frivolous or otherwise based on misrepresentations of material facts to the court. The existing law and the discretion afforded to the courts provide the framework for judges to hold those who wrongfully arrest accountable for their wrongdoing -- and it is time the courts did so.
 
 

[1] Prior to publication of this article, a case for wrongful vessel arrest was handed down by the Court of First Instance in favour of the shipowner. The author has not had the opportunity to review the judgment as it has not yet been published at the time of this article’s publication. However, it is understood that the judgment is based on the legal analysis discussed in this article. The judgment is appealable to the Court of Appeal.
[2] See endnote 1.
[3] The 1999 Arrest Convention is a modification of the 1952 Arrest Convention, however it has thus far only been signed by 11 countries.
[4] Article 3(2) of the 1952 Arrest Convention.
[5] France and South Africa.
[6] (1858) 12 Moo PC 352.
[7] (1875) 1 App Cas 58.
[8] It is important to note that the UAE legal system is not precedent based and case law, though used as a guideline, is not binding.
[9] Hereon in all Articles refer to the Civil Code, unless otherwise stated.
[10] Union Supreme Court, Decision 66 of Judicial Year 22, 20 November 2001.
[11] Dubai Court of Cassation, 188/2009, 18 October 2009, para. 4.
[12] Id.
[13] Union Supreme Court, Decision 155 of Judicial Year 20, 19 November 2000, para. 4.
 
 

This article, including any advice, commentary or recommendation therein, is provided on a complimentary basis, without consideration of any specific objective, circumstance or need. It reflects views of the writer which may differ from those of the firm. Having read this article, any person taking action, or refraining from taking action, does so at their sole risk.