Court discharges freezing order in unsubstantiated misdelivery claim

Maritime

24 Feb

Fimbank PLC v. Discover Investment Corp (Nika, renamed Nord) [2020] EWHC 254 (Comm)

The Court has discharged a freezing order that was originally granted on an ex parte basis. The Court found that the claim, on its substance, had no seriously arguable merit and that the factual circumstances relevant to the possible merits of the intended substantive claim had not been fully and fairly presented to the Court that had granted the freezing order. Factual circumstances are material to any serious consideration of the merits of a claim and a party seeking injunctive relief without notice to the other party has a duty of full and frank disclosure which, if not complied with, may result in the discharge of the injunction at the return date.

The background facts

The claimant, Fimbank PLC (“Fimbank”), provided finance to its customer, AOS Trading DMCC (“AOS”), for the purchase of a cargo of Ukrainian wheat that was shipped to Egypt on board the MV Nika (the “Vessel”).

Fimbank claimed that it became the lawful holder of the bills of lading pursuant to its arrangement with AOS. The arrangement between Fimbank and AOS was that the cargo would be discharged by the Vessel without production of the bills of lading and transferred into a bonded warehouse. The original bills in the hands of AOS’ buyers, collected by them from the collecting bank against payment by them, would lead to discharge of the cargo from the bonded warehouse.

The shipowners, Discover Investment Corp (“DIC”), discharged the cargo to an agent on behalf of AOS without production of the original bills of lading and against a letter of indemnity from the Vessel’s charterers. The cargo was consigned to the bonded warehouse, but was subsequently delivered out of the warehouse against production of forged bills of lading. The cargo was never paid for.

Fimbank commenced arbitration, seeking damages from DIC for misdelivery. It also obtained a freezing order on a without notice basis. At the return date, DIC sought to have the freezing order discharged on the basis that Fimbank had no good arguable case, that it had failed to disclose material facts to the Court granting the freezing order, that DIC had no assets on which the freezing order could bite and that Fimbank had breached an undertaking in the order.

The Commercial Court decision

No arguable case

The Court agreed that there was no good arguable case to support a freezing order. DIC had submitted that the cargo was simply discharged by the Vessel pursuant to the LOI to an agent acting on behalf of AOS, at which point DIC gave up any control over the cargo. The Court agreed that, in those circumstances, DIC was no more liable than if it had delivered directly into Fimbank’s own custody and the cargo had subsequently been stolen. In those circumstances, DIC could not be held liable for the loss of the cargo.

The Court commented that AOS was authorised by Fimbank (as the holder of the bills) to take delivery from the Vessel without production of the bills and AOS did precisely that. Pursuant to the finance arrangements, it was envisaged by the parties that the cargo would be delivered without production of the bills of lading and that it would be stored in a bonded warehouse. The Court found that this is what had happened. In the contractual and factual set-up structured by Fimbank, the only effective cause of loss was not the shipowner’s discharge of the cargo otherwise than against bills of lading that Fimbank had no intention of presenting to the ship, but “rather the breakdown in the arrangements ashore by way of the victim becoming a victim of fraud that had nothing to do with the shipowner”.

The Court added that, even if there had been a good arguable case, the freezing order would nonetheless have been discharged. There had been a failure to fully and fairly present Fimbank’s substantive claim to the Court at the without notice hearing. The full factual picture known to Fimbank was nothing like that described to the Court. Those factual circumstances were material to any serious consideration of the merits of the claim.

Dissipation of assets

At the time the freezing order was granted, the judge thought that the sale of the Vessel was likely not to have been at arm’s length and considered that there was a real risk of dissipation of assets. However, at the return date, the Court did not agree and found that a one ship company was a legitimate, well-known ownership structure that did not of itself present a risk of dissipation. There was no suggestion that the sale was for anything other than a proper and fair price for the Vessel.

In any event, the Court held that there was nothing to dissipate by the time Fimbank made its application several weeks after the Vessel had been sold.

In addition, Fimbank had refused to extend a standstill agreement between the parties, which provided that DIC would not sell or transfer title to the Vessel and Fimbank would not to arrest the Vessel or interfere with its use or trading. As a result, DIC was no longer obliged to maintain ownership of the Vessel. DIC sold the Vessel for Euros 5.8 million, presumably because a sale and change of ownership was the only way she could trade effectively where there was a risk that Fimbank might arrest. In the Court’s view, therefore, Fimbank had brought the risk of dissipation on itself.

Conduct

Fimbank had also breached an undertaking to issue and serve its arbitration claim form as soon as practicable after the freezing order was granted. It only did so 13 days later and just two days before the original return date.

Comment

The judgment raises interesting practical points in respect of both misdelivery claims and applications for freezing orders.

Fimbank’s failure to provide the Court with an accurate picture of the factual background to the claim and to refuse to extend the standstill agreement in order to avoid the Court proceedings meant that the Court would have required compelling merits on the substantive claim to uphold the freezing order. The Court commented that, even if the merits were sufficient to show a strong arguable case, they would not have been sufficiently strong as to outweigh the overall failures to fully and justly present the facts, particularly when seeking to “launch one of the Court’s nuclear weapons in the direction of” a defendant.

This decision stresses the importance of presenting a complete factual picture to the Court and makes it clear that the conduct of a party in ex parte applications will be material in any serious consideration of the merits of the claim.