12 Oct 2015

LIQUIDATION OF OW BUNKER HIGHLIGHTS NEED FOR INTERPLEADER PROCEEDINGS IN THE UAE

Authored by: Raymond Kisswany

LIQUIDATION OF OW BUNKER HIGHLIGHTS NEED FOR INTERPLEADER PROCEEDINGS IN THE UAE

The OW Bunker’s (“OWB”) liquidation has highlighted a potential gap in the UAE legal system relating to the arrest of vessels as a result of unpaid bunkers and the possible exposure to double payment.[1] The lack of interpleader proceedings in the UAE legal system, in comparison to the United States or England, has resulted in mass vessel arrests by suppliers in the short term and potential vessel arrests by OWB’s liquidator in the future for the same bunker supply. These arrests result in substantial losses. This article discusses whether there is a similar concept to interpleader proceedings in the UAE legal system and how shipowners/charterers may avoid double payment.

By way of background, an interpleader is a civil procedure that allows a party to initiate legal action to compel two or more other parties to litigate a dispute. An interpleader action originates when a party holds property on behalf of or owes a debt to another, but does not know to whom the property should be transferred or the debt paid. In the OWB liquidation, interpleader actions, where shipowners/charterers have either paid the disputed amount into court or into escrow, have avoided ship arrests pending determination of competing claims and may have avoided the potential exposure to pay the same debt twice.

In the ordinary course of business, shipowners/charterers would have contracted with OWB and, in turn, OWB would have arranged the bunker supply with the supplier. The shipowners/charterers would make payments directly to OWB and, in turn, OWB would pay the supplier. Usually, suppliers will issue a bunker delivery receipt (“BDR”) once bunkers have been delivered to the vessel. BDRs are addressed to the master, shipowners and charterers. The master will typically sign the BDR.

Unfortunately, the insolvency of OWB has left shipowners/charterers vulnerable. On the one hand, their contract is with OWB; on the other hand, the supplier holds a BDR. Under US and English law, a BDR is considered an acknowledgment of delivery and does not necessarily create a contractual relationship between the shipowners/charterers and supplier. However, under UAE maritime law, documents signed by the master, including BDRs, constitute contracts on behalf of the shipowners/charterers and would permit the supplier to arrest and claim against the shipowners/charterers.[2] Shipowners/charterers correctly believe that, if they make payment to OWB (as per the ordinary course), OWB may not make payment to the supplier, because of their liquidation. At the same time, directly paying the supplier may relieve the immediate threat of a ship arrest, but there exists a risk that in the foreseeable future, OWB’s liquidator may decide to demand the same amounts from the shipowners.

US Federal Rule of Civil Procedure (“FRCP”) 22(a)(1) defines an interpleader as an action filed by a plaintiff against persons, where those “persons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead”. Interpleader proceedings have been used by shipowners/charterers in US Federal District Courts to resolve the dilemma as to whom the shipowners/charterers should pay.[3] In such cases, shipowners/charterers have deposited the amount owed into court or into escrow, and this procedure has prevented ship arrests and the chaos caused as a result.[4] Unfortunately, interpleaders are not a function of the UAE legal system.

How can shipowners/charterers protect themselves from double payment in the UAE?

Settlement Agreement

The first option is a settlement agreement with the supplier whereby the shipowners/charterers pays the supplier directly for the bunker supply. In exchange, the supplier turns over the BDR to the shipowners/charterers and agrees to indemnify them. This will prevent the supplier from arresting the vessel under the BDR and, if in the future OWB’s liquidator claims against the shipowners/charterers, the supplier will be required to indemnify them.

Declaratory Judgment

The second potential option is for the shipowners/charterers to petition the court to issue a form of declaratory judgment invalidating either the contract with OWB or the BDR under Articles 209 and 210 of the Civil Code (UAE Federal Law No. 5 of 1985) and Article 49(4) of the Civil Procedures Law (UAE Federal Law No. 11 of 1992). Articles 209 and 210 discuss the necessary elements of a valid contract and the effect of a void contract. The shipowners/charterers would petition the court under Article 49(4) of the Civil Procedures Law requesting the court to rule on the validity of the contract for bunker supply following the argument that there cannot be two contracts for the same contractual object.

Offer and Deposit

The third potential option is for the shipowners/charterers to petition the court under Articles 189 to 196 of the Civil Procedures Law (so-called “Offer and Deposit”). The Dubai Court of Cassation has held that Offer and Deposit is “a legal means for discharging liability of the obligor. It is in reality a voluntary performance whereby the obligor seeks to make voluntary satisfaction of what is owed to the obligee, and the court with which the deposit of the thing offered has been made shall rule on the validity of the offer and as to whether the liability of the obligor has been discharged”.[5] This procedure has elements in common with an interpleader whereby the shipowners/charterers may file an Offer and Deposit including OWB and the supplier while depositing the amount in question with the court. The court would be requested to rule that the shipowners/charterers discharged their liability with respect to the bunker supply.

There are at least two potential problems with proceeding under an Offer and Deposit theory. First, the Dubai Court of Cassation held that if the “contract made between the parties to the litigation contains an arbitration clause […] judgment [must] be passed disallowing the action on the grounds of the arbitration clause, because the ‘Offer and Deposit’ relates to the performance of the contract in matters directly relating to the subject matter of the dispute in respect of which the arbitration clause exists […] and the court may not pass judgment independently to the effect that the obligor is discharged of his liability in such a way as to deprive the arbitration clause”. The contract between OWB and the shipowners/charterers contains an arbitration clause and as such, it is probable that an Offer and Deposit is unlikely to be heard by the court as a result.

Second, and more importantly, even if the Offer and Deposit proceedings continued in the court, there is nothing preventing the supplier from arresting the vessel under the BDR. Therefore, Offer and Deposit will not protect the vessel from arrest.

Joinder

If the vessel is arrested, a fourth potential option arises whereby, once security is submitted and the ship is released, the shipowners/charterers can file a ‘joinder’ application. Article 94 of the Civil Procedures Law provides that “the defendant may, if he claims that he has a right of recourse for the right claimed against him, against a person who is not a party to the proceedings, lodge a written application to the court setting out the nature of the claim and the grounds thereof, and apply that that person be joined as a party to the action …”.

Thus, after release of the ship from arrest, the shipowners/charterers could file a joinder to join OWB to the lawsuit requesting the court to determine to whom the shipowners/charterers should pay for the bunker supply. This option is essentially a ‘defensive interpleader’.

Conclusion

While there is no direct method of an interpleader proceeding under UAE law there are several options whereby shipowners/charterers may avoid double payment for the same bunker supply. Having said that, there is little to no action shipowners/charterers may take to avoid a ship arrest. Therefore, it would be beneficial to have interpleaders available under UAE procedural law, where a party is able to discharge its obligations without fear of double payment.

 

(This article was originally published in Marasi News and has since been updated and republished in IBA Maritime and Transport Newsletter)

 

 

[1] OWB was a Danish company with subsidiaries around the world (including a Dubai-based entity) and was the world's largest marine fuel (bunkers) company. On 7 November 2014, OWB declared insolvency amid fraud accusations and mounting debts.

[2] UAE Federal Law No. 26 of 1981, concerning the Commercial Maritime Law Article 115(2)(i) or (k).

[3] e.g. OSG Ship Management, Inc. v. O.W. Bunker USA, Inc. et al (2014cv09973)

[4] Pending appeals.

[5] See Dubai Court of Cassation, 301/2007 of 25 February 2008.

 

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.