FEDERAL COURT OF AUSTRALIA OW Bunker & Trading Company Ltd A/S v The Ship MV "Mawashi Al Gasseem" (No 2) [2007] FCA 1139 ADMIRALTY – priority of claims in rem against ship over proceeds of sale of ship and sale of bunkers – whether mortgage over ship includes fuel oil in bunkers WORDS AND PHRASES – ship – component – appendage – annexe Patrick Stevedores No 2 Pty Ltd v The Proceeds of Sale of the Vessel MV Skulptor Konenkov (1997) 75 FCR 47 followed The "Angel Bell" [1979] 2 Lloyd's Rep 491 cited Coltman v Chamberlain (1890) 25 QBD 328 discussed The "Eurosun"and "Eurostar" [1993] 1 Lloyd's Rep 106 applied The "Honshu Gloria" [1986] 2 Lloyd's Rep 67 cited The "Pan Oak" [1992] 2 Lloyd's Rep 36 considered Enforcement of Maritime Claims (2nd ed, LLP, London, 1996) Admiralty Jurisdiction and Practice (3rd ed, LLP, London 2003 OW BUNKER & TRADING COMPANY LTD A/S v THE SHIP MV "MAWASHI AL GASSEEM" SAD 146 OF 2005 MANSFIELD J 3 AUGUST 2007 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SAD 146 OF 2005 BETWEEN: OW BUNKER & TRADING COMPANY LTD A/S Plaintiff AND: THE SHIP MV "MAWASHI AL GASSEEM" Defendant JUDGE: MANSFIELD J DATE OF ORDER: 3 AUGUST 2007 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The Admiralty Marshal pay to the Bank of Kuwait and the Middle East the balance of the account styled "Admiralty Marshal – Sale of the MV Mawashi Al Gasseem", account number 100 639911 USD 115601, less any bank fees associated with that payment and closure of that account. 2. The Admiralty Marshal, as soon as reasonably practicable after Order 1 is complied with and after payment out of the costs of the plaintiff in accordance with the Order made herein on 2 August 2007, pay to each of Dubai Drydocks, Quin Marine Pty Ltd, Arab Shipbuilding and Repair Yard Company, Viking Enterprises Co Ltd, BP Oil International Limited and BP Marine Ltd, Ahmed Ali Maintenance & Ship Repairs (LLC), the Bank of Kuwait and the Middle East, Al Mawashi Al Mukairish United Co and Al Mukairish Australia Pty Ltd the balance of the account styled "Admiralty Marshal – Sale Bunkers and Unused Lubricants on MV Mawashi Al Gasseem" account no. 100 640033 USD 115601, less any bank fees associated with those payments and closure of that account, pro rata in accordance with their respective judgments. 3. For the purpose of the pro rata calculations: (1) The judgment in favour of the Bank of Kuwait and the Middle East is to be reduced by the amount it receives pursuant to Order 1. (2) Each judgment except that in favour of the Bank of Kuwait and the Middle East include interest at a rate of 10.5% pa (being the agreed rate of interest on certain judgments and otherwise being the rate of interest prescribed by O 35 r 8 of the Federal Court Rules) from the date of each judgment respectively to two days before the payments to be made in accordance with Order 2. (3) The judgment in favour of the Bank of Kuwait and the Middle East include interest at a rate of 10.5% pa from the date of judgment to the date when Order 1 is complied with and then interest of 10.5% pa on the amount calculated in accordance with Order 3(1) to two days before the payments to be made in accordance with Order 2. (4) Each judgment in currency other than US$ be converted to US$ two days before the payments to be made in accordance with Order 2 at the exchange rate as specified in the daily statistical release of the United States Federal Reserve Board (for the conversion of AU$ and Japanese Yen to US$) and in the daily report of the Central Bank of Kuwait (for the conversion of Kuwaiti Dinar to US$). 4. The Admiralty Marshal, as soon as practicable after Orders 1 to 3 herein are complied with, close the accounts referred to in Orders 1 and 2 herein. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SAD 146 OF 2005 BETWEEN: OW BUNKER & TRADING COMPANY LTD A/S Plaintiff AND: THE SHIP MV "MAWASHI AL GASSEEM" Defendant JUDGE: MANSFIELD J DATE: 3 AUGUST 2007 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 The Mawashi Al Gasseem (the ship) was arrested by the Marshal on the application of the plaintiff on 3 July 2005. The ship and the unused bunker and lubricant oil was sold on 4 November 2005 by the Marshal. The proceeds of sale were deposited in two separate interest bearing bank accounts named "Admiralty Marshal - Sale of the MV Mawashi Al Gasseem" (the ship account) and "Admiralty Marshal - Sale Bunkers and Unused Lubricant on MV Mawashi Al Gasseem" (the bunker account). The sum of US$5,750,000 was deposited into the ship account, and US$535,162.35 was deposited into the bunker account again. 2 It is now time to address the final payment of the moneys presently held in those accounts. 3 The following judgments have been entered against the ship: Matter Date Entered Judgment Amount Dubai Drydocks v The Ship MV 'Mawashi Al Gasseem' as Surrogate for the Ship MV 'Mawashi Tabuk' SAD 202 of 2005 20 Sep 05 US$161,538.41 plus interest of 10.5% pa and costs Alcantara Jr v Mawashi Al Gasseem SAD 201 of 2005 17 November 2005 US$625,430.75 plus costs of US$59,728.28 23 December 2005 Quin Marine Pty Ltd ACN 007 537 439 v The Ship Mawashi al Gasseem SAD 208 of 2005 20 Dec 05 AU$76,648.87 plus costs Arab Shipbuilding and Repair Yard Company v Mawashi Al Gasseem SAD 257 of 2005 7 Dec 05 US$136,078.00 plus interest of 10.5% pa and costs Viking Enterprises Co Ltd v The Ship Mawashi Al Gasseem SAD 274 of 2005 15 Dec 05 3,324,164 Japanese Yen plus costs BP Oil International Limited v The Ship "Mawashi Al Gasseem" SAD 275 of 2007 7 Nov 05 US$136,354.79 plus interest of 10.5% pa and costs Ahmed Ali Maintenance & Ship Repairs (LLC) v The Proceeds of the Judicial Sale of the Ship MV Mawashi Al Gasseem SAD 343 of 2005 20 Dec 05 US$61,737.65 plus costs Bank of Kuwait and the Middle East v The Ship MV "Mawashi Al Gasseem" SAD 276 of 2005 29 May 07 11,145,784.486 Kuwaiti Dinars plus costs Al Mawashi Al Mukairish United Co v Mawashi Al Gasseem SAD 342 of 2005 23 July 2007 US$1,280,150.30 4 Each of these claims are claims in rem against the ship. 5 Each of the entities with a judgment against the ship has been given an opportunity to make written or oral submissions in respect of the final disposition of the funds now held in the ship account and in the bunker account including the priority with which those amounts should be paid. The only entity which has made any submission as to the priority of payment out is Bank of Kuwait and the Middle East. It claims the whole of the remaining proceeds of the two funds. It does so because it is a mortgagee of the ship: see Bank of Kuwait and the Middle East v The Ship MV "Mawashi Al Gasseem" (No 2) [2007] FCA 815. 6 In Patrick Stevedores No 2 Pty Ltd v The Proceeds of Sale of the Vessel MV Skulptor Konenkov (1997) 75 FCR 47 at 50 – 51, Sheppard J said: Neither the provisions of the Admiralty Act nor those of the Admiralty Rules deal generally with the priority of claims against the proceeds of sale of a vessel arrested and sold by the Court. The English practice should be followed in Australia. There was no submission that I should do otherwise. The order of priorities is stated in Meeson N, Admiralty Jurisdiction and Practice (1993). It is there said (at 159-161) that, although there is a well-settled order of priorities which is regularly applied by the Court, this order is only a prima facie ranking. The determination of priorities is an equitable jurisdiction and in theory the Court exercises its discretion afresh in the circumstances of each case. In practice, the court follows the well-settled order of priorities and then considers whether there are any particular circumstances where justice requires it to disturb that prima facie order. The overall framework of priorities is said to be straightforward. It is as follows: (i) The Admiralty marshal's charges and expenses are a first charge on the proceeds of sale and will be paid out in priority to any other claim. The marshal's charges and expenses will include the expenses incurred in effecting the arrest, in maintaining the arrest, for example in paying port dues or for the cost of a shipkeeper and supplies required to maintain the ship whilst under arrest. Also included will be any other expenses authorised by the Court to enable the ship to be sold for the best possible price. (ii) After the expenses of the marshal have been satisfied, priority is granted to the original arresting party in respect of the costs of his action up to and including the arrest and the costs of the party who obtained the order for appraisement and sale up to and including the date of the making of that order. All these costs were incurred by the original plaintiffs. (iii) A claim with a maritime lien ranks first and has priority over all other types of claim. There are no maritime liens involved in the present case. (iv) Claims by mortgagees; there is no such claim in the present case. (v) Claims of others entitled to proceed in Admiralty in rem will be subject to maritime liens and mortgages but will have priority over general creditors of the shipowner, except those who have perfected their execution prior to the issue of the writ in rem. (vi) The claims of in personam creditors of the owner and of the res will be last, having no priority. (vii) The owner of the res is entitled to the balance remaining, if any. 7 Although the determination of priorities is an exercise of the Court's equitable jurisdiction, theoretically it exercises its discretion afresh in the circumstances of each case. As all the potentially affected parties have had an opportunity to make submissions as to whether the normal priority rules should apply, and some including the Bank of Kuwait and the Middle East have accepted that they should apply, and none has submitted that they should not apply, in the exercise of my discretion, I determine that those principles should apply. 8 In accordance with those principles, those who have a judgment against the ship have agreed to the Admiralty Marshal's charges and expenses having been paid as a first charge on the proceeds of sale and in priority to any other claim. The charges and expenses include the Marshal's expenses incurred in effecting the arrest, in maintaining the arrest, and in supplies to maintain the ship whilst under arrest and to secure its sale for the best possible price. There is no dispute as to the amounts paid to the Marshal having properly been treated as a first charge on the proceeds of sale held in the ship account. Hence, the Admiralty Marshal has been paid either directly or in reimbursement to the plaintiff for advances made to the Marshal's account by the plaintiff on account of expenses to be paid by the Marshal the sum of US$547,484.20. There were six separate orders made for payment of, or reimbursement of, the Marshal's expenses. They were, as necessary, converted into US$ at the time of payment as the ship account and the bunker account were established in US$. Those amounts were paid from the ship account. 9 The costs of the plaintiff relating to the arrest of the ship and its sale, totalling US$104,463 were ordered to be paid on 26 October 2006 and duly paid out of the ship account. Again, that was done with the agreement of those having claims against the ship, and reflect the second priority in accordance with the principles referred to. 10 At an early point, all potentially affected parties also agreed with the payment from the ship account of the claims of the master and crew for outstanding salary and wages against the ship, it being accepted that they were maritime liens which should have a priority over all other types of claim, including costs. That is the third priority in the principles referred to. Those claims are the amounts recovered in the action of Alcantara Jr (SAD 201 of 2005) included in the table above. Those payments also were duly made. They were made from the ship account. 11 The balance of the ship account as at 2 August 2007, including accrued interest, is US$4,771,310.27. 12 As the above observations of Sheppard J indicate, the fourth priority of claims, ahead of other in rem claims, will be claims by the mortgagee. As noted, I have determined that the Bank of Kuwait and the Middle East does have a mortgage over the ship securing the advances made to the ship and its owners by the Bank of Kuwait and the Middle East. Its mortgage, although its validity was determined by the law of Kuwait (see The "Angel Bell" [1979] 2 Lloyd's Rep 491 at 495), is treated in the priority sequence on the same basis as a domestic mortgage. See Jackson DC, Enforcement of Maritime Claims (4th ed, LLP London, 2005) p 581. There has been no submission that I should not follow that principle. 13 The mortgage of the Bank of Kuwait and the Middle East has been declared to be a valid mortgage for the purposes of all proceedings against the vessel commenced in this Court and pertaining to the priority in which the proceeds of sale of the ship should be paid out. The secured sum, as the judgment in favour of the Bank of Kuwait and the Middle East shows, is very much in excess of the balance of the funds held in the ship account. 14 I therefore order that the Marshal pay out to the Bank of Kuwait and the Middle East, as soon as practicable, the balance of the amount held in the ship account. That amount may differ slightly from the amount referred to in [11] above, by any additional interest and bank fees. 15 The plaintiff's original claim on the bunker account was to recover the unpaid purchase price of two quantities of bunker oil supplied to the ship under the Danish law of contract. Judgment was entered in that action for US$639,379.60 with interest by Finn J on 26 July 2005. Subsequently, by agreement of the interested parties, I ordered that a fixed amount of US$433,624.56 be paid to the plaintiff from the bunker account. That amount was less than the judgment amount, but it is not necessary to explore the parties' reasons for their agreement. That sum was duly paid from the funds in the bunker account. I also ordered that the costs of the plaintiff in relation to that claim be paid out of the bunker account. Agreement has been reached that those costs be AU$80,000, so they should be paid to the plaintiff from the bunker account before the balance of the moneys in the bunker account is applied in accordance with these reasons for decision. 16 The balance of the moneys, including interest, in the bunker account, after conversion and payment of that sum, as at 2 August 2007, will be US$60,932.91. Again, by the time of payment of that balance it may vary a little by any further interest and by any bank fees. 17 In my view, the balance of the moneys in the bunker account should not be paid out to the Bank of Kuwait and the Middle East as a priority above other in rem claims against the ship. That is because I do not consider that the property attached by its mortgage secures the oil in the bunkers of the ship. 18 In Meeson N, Admiralty Jurisdiction and Practice (3rd ed, LLP, London 2003, at [10.68] the author quotes from Coltman v Chamberlain (1890) 25 QBD 328 in support of the proposition that a mortgage of a ship passed to the mortgagee under the word "ship" will cover: … all articles necessary to the navigation of the ship or to the prosecution of the adventure, and without which no prudent person would sail, which were on board at the date of the mortgage and articles brought on board in substitution for them subsequently to the mortgage. The Bank of Kuwait and the Middle East relies upon that text to support its claim, as well as upon Coltman 25 QBD 328. The mortgage of a "ship" included such articles, without needing to have regard to its "appurtenances" also mortgaged under the instrument in question. 19 On the other hand, the submissions of the Bank of Kuwait and the Middle East acknowledge that there are decisions concerning the construction of ship mortgages to the effect that the word "ship" does not include the bunkers and further that the word "appurtenances" in the description of the secured property also does not include the bunkers: see The "Eurosun"and "Eurostar" [1993] 1 Lloyd's Rep 106 per Sheen J at 111; The "Honshu Gloria" [1986] 2 Lloyd's Rep 67; The "Pan Oak" [1992] 2 Lloyd's Rep 36. The text referred to above, Meeson at [10.73], also makes a similar comment based upon those decisions. 20 In The "Eurosun" and "Eurostar" [1993] 1 Lloyd's Rep 106 at 111, Sheen J said: The question whether the fuel oil was mortgaged as security for the loan is to be answered by construing the words of the mortgage. Nevertheless I cannot refrain from observing that there is something unreal in the concept of a bank manager being willing to accept an unspecified and variable amount of fuel oil as security for a loan, particularly when that fuel oil may be sold by the shipowners to charterers. If the lenders intended to accept fuel oil as part of their security, prudence would have dictated that the wording of the mortgage would include a reference specifically to fuel oil and that the deed of covenant would include a covenant not to sell the oil to a charterer. I respectfully agree with his Lordship and adopt his approach. 21 The mortgage provides that the security given over certain vessels (including the ship) would include: … all parts of the said vessels, licences and components including the engine with all the alterations and repairs that are made to it, safety equipment, and all appendages and annexes that may be found after the conclusion of the mortgage, in addition to the wreckage of the vessels in the event of their destruction. 22 Within that description, the Bank of Kuwait and the Middle East contends that the ordinary meaning of the words "component" as part or element of a larger whole, especially a part of a machine or vehicle; "appendage" as a thing that is attached or added to something larger or more important; and "annexe" as an extra or subordinate part of a building jointed to or associated with the main building, providing additional space or accommodation all provide a means by which its mortgage included the bunkers of the ship. Whilst it is correct to say that those terms distinguish its mortgage from those considered in The "Eurosun"and "Eurostar" [1993] 1 Lloyd's Rep 106, I do not consider that the distinction enhances the contention. 23 The words "component", "appendage", and "annexe" do not in their natural meaning extend to the bunkers, because each has the feature of being a physical part of or of being physically attached to or a functioning feature of the ship. It is not necessary, nor usual, that the bunkers to be part of the property of the ship owners. They are commonly the property of the charterers. In The "Pan Oak" [1992] 2 Lloyd's Rep 36 at 39, Sheen J said: The problem which has arisen in this case can only arise when the lender lends more than the value of the ship. Most lenders do not contemplate lending more than the value of their security and would not want to look to variable security which would depend upon the quantity of oil in a ship when the ship is arrested, and upon whether the ship is on charter. For these, and perhaps many other reasons the bunkers are not usually part of the security for a mortgage. 24 In my judgment, therefore, the funds remaining in the bunker account should be distributed pro rata between those entities with an outstanding in rem judgment against the ship. The Bank of Kuwait and the Middle East is entitled to participate in that distribution to the extent that its judgment remains unsatisfied after it has received as a priority payment on the balance of the funds remaining in the ship account secured by its mortgage. 25 The amounts to be paid out proportionately cannot presently be calculated with exactitude. That is because, firstly, the amount of the claim of the Bank of Kuwait and the Middle East upon which its proportion of the balance of the bunker account cannot be precisely known until the amount it receives from the ship account is known, and, secondly, because the precise amount available in the bunker account for distribution will only be known when a final date for payment is determined. 26 I therefore order that the funds remaining in the bunker account, after payment of the plaintiff's costs as ordered in [15] above be paid out by the Marshal as soon as reasonably practicable to each of Dubai Drydocks, Quin Marine Pty Ltd, Arab Shipbuilding and Repair Yard Company, Viking Enterprises Co Ltd, BP Oil International Limited and BP Marine Ltd, Ahmed Ali Maintenance & Ship Repairs (LLC), Bank of Kuwait and the Middle East and Al Mawashi Al Mukairish United Co and Al Mukairish Australia Pty Ltd pro rata in accordance with their respective judgments, save for the judgment in favour of the Bank of Kuwait and the Middle East, which is to be reduced for the purpose of the pro rata payment by the amount it receives from the ship account pursuant to the order made in [14] above. The pro rata calculation should be made on the basis that each judgment includes interest, calculated at the rate specified in the judgment from the judgment to two days before the payment out or, if no such rate was so expressed, in accordance with the Federal Court Rules (simply for the purpose of enabling a precise calculation to be made). Currency conversions are necessary for three of the judgments which are not expressed in US dollars, as the bunker account is in that currency. The conversions should also be made two days before payment out for the purposes of the pro rata calculation. I have made no allowance for costs on any judgment. They have not been taxed, and it is desirable that the balance of the funds in the bunker account should be paid promptly. The amounts involved do not warrant the expense of taxation or the delay that would involve. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 2 August 2007 Solicitors for the Plaintiff: Holman Fenwick & Willan Lawyers Counsel for the Defendant: The defendant did not appear Solicitors for Dubai Drydocks: DLA Phillips Fox Solicitors for Quin Marine Pty Ltd: Mouldens Lawyers Solicitors for Arab Shipbuilding & Repair Yard Company: Fisher Jeffries Solicitors for Viking Enterprises Co Ltd Mouldens Lawyers Solicitors for BP Oil International Limited and BP Marine Ltd: Ebsworth & Ebsworth Lawyers Solicitors for Ahmed Ali Maintenance and Ship Repairs (LLC): Holman Fenwick & Willan Lawyers Counsel for Bank of Kuwait and the Middle East: Mr H Austin Solicitors for Bank of Kuwait and the Middle East: Minter Ellison Solicitors for Al Mukairish Australia Pty Ltd and Al Mawashi Al Mukairish United Co: Donaldson Walsh Closing Date for Submissions: 29 June 2007 Date of Judgment: 3 August 2007