UKDC Publications : SOUNDINGS - Issue 1 2006

The Association has recently experienced an increase in the number of attachments of funds in the United States in support of maritime claims. They have been used successfully on behalf of Members both to secure claims and enforce awards ranging from US$100,000 up to US$8 million. This issue of SOUNDINGS discusses the rise in their use and effectiveness; how to obtain and maintain an attachment of funds.

Maritime, or Rule B, attachments in aid of claims being pursued outside the United States have long been a feature of the US legal system. However, until recently, unless a claimant had detailed information about a payment, it was almost impossible to attach funds as they passed 'momentarily' through a US bank. Post 9/11, anti-terror law reforms have increased surveillance of payers and beneficiaries of electronic transfers of funds via the US.

Today, around 80% of all payments in US dollars are routed through some 20 intermediary banks in New York. Anyone wishing to bring a maritime claim, or enforce a foreign judgment or award which arose out of a maritime claim, can now intercept these electronic transactions in the intermediary bank, regardless of where the payment originates from or is due to be received e.g. Europe or the Middle East. The only information required is the identity of the beneficiary or payer. A claimant need not have any connection with New York to apply. This has made the Rule B attachment a highly effective method for obtaining security for claims.

Obtaining the attachment order

Whether you are intending to commence proceedings or have done so already, an exparte hearing is all that is required to obtain the attachment order. At the hearing the claimant must demonstrate to the court:

• a maritime claim;
• a prima facie case that security is required;and
• that the defendant cannot be 'found' within the court district in which the assets are sought to be attached.

Once obtained, a claimant's lawyer is able to serve the Rule B attachment order on any or all of the intermediary banks. This can be done on a daily basis, either electronically or by fax. It will generally however, only attach funds in the account at the time of service.

A real need for security?

Once the attachment is granted, the party whose assets have been attached is entitled to a prompt hearing. This is not to determine the dispute itself, but for the claimant to show that the attachment was reasonable and should not now be vacated. For example, the defendant can be said to be 'found' within the court district where the intermediary bank is located, or if the attachment is considered to be unreasonable, unfair or abusive, the application will either fail at the outset, or will be routinely vacated at this follow-up hearing. At the hearing the claimant must therefore show that the attachment is needed either:

• to satisfy favour; or
• to found a judgment in the claimant's jurisdiction in a convenient district.

To counteract the ease with which a maritime attachment can now be obtained, in maintaining that attachment, the court also balances the claimant's need for security against the hardship it imposes on the defendant. Ideally there must be a substantial risk that, without the attachment, it will not be able to locate sufficient assets to satisfy its claims. Tangible evidence is required to show, for example, that an award against the defendant would be unenforceable because its assets are sheltered in a jurisdiction where that award will not be recognised.

No safe haven for assets

An Owner Member recently enforced an arbitration award obtained in default against a Swiss company, to which it had voyage chartered its ship. The company had refused to pay a balance due of US$100,000, primarily by shielding itself behind a Monaco registered company which had signed the charterparty as agent. Legal advice from English, Swiss and Monegasque lawyers had indicated that, whilst it might be possible to enforce the award by combining court actions in all three jurisdictions, there would be significant costs and risks involved.

 

The Club Managers therefore proposed a Rule B attachment as a simpler, more effective method of obtaining security in order to press the charterer to pay up. Within a month of the application, full security had been put up and the claim was settled shortly afterwards. The Owner Member successfully recovered the outstanding balance in full, plus interest (at Court rates) and costs.

Is counter-security required?

Claimants should evaluate the prospect of a demand for counter-security for any counterclaims. Where a counter-claim has merit, the court may order that counter-security up to the value of the attachment be provided. A claimant may also be exposed to a claim for wrongful attachment, although this generally means that the defendant need show bad faith, malice or gross negligence.

Can you pierce the corporate veil?

In theory, the attachment can extend to subsidiary or related companies, or to the alter ego of the defendant. Provided actual control by the parent company, rather than the mere opportunity to control, can be demonstrated, the court may pierce the corporate veil to grant the attachment. In practice, each case has tumed on its particular facts.

What does it cost?

The cost of an attachment will of course vary according to the circumstances and complexity of each case. Costs will escalate if, for example, a number of banks are targeted repeatedly, or the defendant contests the attachment, or (which is becoming commonplace) any decision is appealed. Costs may then spiral, on one attorney's estimate, to between US$35-45,000. However, this rapid and sometimes inexpensive method of bringing pressure to bear upon your opponent is certainly worth bearing in mind whether your claim arises out of a charterparty, bill of lading, COA or casualty. In the Managers' experience, a simple attachment can cost as little as US$3,000 to obtain and serve, and a further US$4,OOO to defend if a standard challenge is made. In appropriate cases, the attachment costs will fall within the scope of Defence cover.

Whilst spurious tactical attachments are not to be encouraged, any well founded attachment, whether maintained or not, will at least focus the defendant's mind on the claim in hand.

Concentrating the defendant's mind

An Owner Member claimed damages of approximately US$70,000 for premature redelivery of its ship by time charterers. Considering the delay and expense usually associated with having to track timechartered ships with a view to arresting the time charterer's bunkers, the Club Managers proposed obtaining security by means of a Rule B attachment. Over US$500,000 was attached 6 weeks later. The balance of the attached funds was released on provision of adequ ate security for the claim, interest and costs.

 

While negotiations continue, the attachment has led to the time charterer increasing its own offer of settlement. The Member will be able to satisfy its claim either by agreeing with the charterer to payout of the attached funds on the basis of a settlement agreement, or, if the arbitration is progressed, by enforcing the eventual award in New York, and drawing down upon these funds.

Friend and foe

On a cautionary note, the attachment will only secure the funds in the intermediary bank at the moment it is served. If therefore a claim is for US$100.000, and the transfer is only US$10,000, further attachments may be required. There is however, some authority to say that there are tactical steps available to the defendant to restrict any further attachment. This issue will no doubt be resolved either way by the US Court of Appeals. In the meantime, any knowledge of the size of the transfer is crucial.

In addition, there is no reason why the relative ease with which an attachment can be obtained will not be exploited by cargo interests, charterers, shipyards or suppliers seeking an alternative to ship arrest. We are aware of at least one time charterer that has successfully sought security from an owner in this way. With renowned cargo lawyers opening offices in New York, the writing has to be on the wall for evasive ship operators, or any others who might be in their sights.

The future

Due to the range of decisions of the lower courts, a number of cases on the scope of Rule B, and the appropriate criteria for granting or vacating an attachment, are pending before the US Court of Appeals. In particular the courts are focussing on balancing the need for security and the hardship the attachment order imposes on the defendant. We anticipate the law developing further in the near future and will report any major implications for Members in further issues of SOUNDINGS.

 

For further information on any matters covered by SOUNDINGS, please contact the Managers.