Action in rem – Warrant of arrest – Whether breach of contract for sale of ship gave rise to right to arrest a ship – High Court Ordinance (Cap 4) s 12A(2) – Ex parte application – Continuing duty of full and frank disclosure in relation to application for warrant of arrest – Cavalier attitude and ‘malicious negligence’ – Misuse of arrest process – Damages for wrongful arrest

Sale of goods – Part payment of deposit when full payment stipulated – Retention by seller of partly paid deposit – Availability of specific performance – Whether equitable interest in subject matter of sale acquired by buyer – Termination and forfeiture of deposit expressly stipulated in the contract

BIRNAM LTD v OWNERS OF THE ‘HONG MING’ [2011] 5 HKC 484

Court of First Instance
Admiralty Action No 105 of 2011
Reyes J
26 August 2011

Janet Ho (Holman Fenwick Willan) for the plaintiff.
Colin Wright (Ince & Co) for the defendants.

On 16 July 2011 the defendants entered into a memorandum of agreement (MOA) with Star Matrix or nominee for the sale of a vessel. On the same day Star Matrix nominated Birnam as buyers. A new MOA was entered into between the defendants and Birnam on 19 July 2011. Birnam was required to pay a 20% (US$663,968) deposit within three banking days of the MOA’s signing. However it only paid US$400,000. Birnam requested a variation of the MOA to reduce the deposit payable. The defendants rejected that request. The defendants cancelled the MOA. Further negotiations ensued on 3 August 2011 for a new MOA. Birnam made a counter-offer and applied to the duty judge for a Warrant of Arrest. Birnam filed itsWrit on the following day. As part of its revised counteroffer on 4 August 2011, Birnam proposed and later insisted on inspection of the vessel in Hong Kong. The defendants later agreed to the inspection, and the vessel was arrested by Birnam when it arrived in Hong Kong. The defendants applied, among other things, to set aside the Warrant of Arrest.

Held, discharging the warrant of arrest and striking out the writ:
Claim for possession or ownership
High Court Ordinance (Cap 4) s 12A(2) did not include claims arising from contracts for the sale of a ship or a claim by a buyer for breach of a contract for the sale of a ship as giving rise to a right to arrest a ship. The 1952 Arrest Convention did not include such claims either.

It was asserted that Birnam’s claim was a claim to the possession or ownership of a ship or to the ownership of any share therein. The original MOA with Birnam had been terminated as a result of Birnam’s failure to pay the full deposit. There could be no prospect of obtaining specific performance of a contract which had been terminated. It could not therefore be argued (even speculatively) that a right of specific performance gave rise to some sort of equitable interest in the vessel.

On the terms of the MOA alone, it could not be asserted that the retention by the defendants of the part deposit paid somehow enabled Birnam to assert a proprietary right in the ship to get the deposit back. Under the MOA, the deposit was expressly payable as security for the performance by Birnam of its obligations as buyer. It failed to do what it ought to have done under the MOA, namely, pay the full deposit. Birnam having failed to pay the full deposit within the stipulated time or any reasonable period thereafter, the defendants were entitled to treat the original MOA as terminated. The defendants in consequence were further entitled to treat the part deposit paid as forfeited by Birnam.

Duty of disclosure
At the ex parte stage it was not drawn to the duty judge’s attention that conventional wisdom was that Birnam’s claim did not fall within the claims giving rise to a right of arrest. It was simply asserted that Birnam had a right or interest in the vessel. The judge was not provided with a fair, even-handed analysis of the authorities in connection with how such interest was alleged to arise.

Nor was the Court informed (as it ought to have been) of the later negotiations which took place following the issue of the Warrant of Arrest. On the day following issue of the Warrant, Birnam accepted that the original MOA had been terminated and was negotiating fresh terms with the defendants. The duty of full and frank disclosure was a continuing one.

Misuse of arrest process
The chronology of events gave rise to a strong inference that the inspection requested by Birnam was merely a ruse to bring the Vessel into Hong Kong waters so it could be arrested here. The arrest could then be used by Birnam as leverage or pressure in the negotiations with the defendants for a revised MOA on terms favourable to Birnam or for the return of the part deposit previously paid by Birnam. Such motive coupled with a cavalier attitude would amount to a misuse of the arrest process. It would at least constitute ‘malicious negligence’. Birnam’s tactic could not have been a sincere use of the arrest mechanism to enforce a genuine in rem claim. The conduct would justify an inquiry into the damages suffered by the defendants as a result of the wrongful arrest.