Mobil Oil NZ Ltd v The Ship "Rangiora" [Fund Providers' Costs]

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
AD 877

BETWEEN MOBIL OIL NZ LTD
Plaintiff

AND THE SHIP "RANGIORA" & OTHERS
Defendant/Intervenors

AND AD 881
BETWEEN CANTERBURY STEVEDORING SERVICES LTD
Plaintiff

AND THE SHIP "RANGINUI" & OTHERS
Defendant/Intervenors

AND AD 882
BETWEEN PARTENREEDEREI MS TAKITIMU
Plaintiff

AND THE SHIP "TAKITIMU" & OTHERS
Defendants/Intervenors

AND AD 937
BETWEEN LÖWER HOLDING GmbH
Plaintiff

AND THE PROCEEDS OF THE SHIP "RANGIORA"
Defendant

AND AD 938
BETWEEN LÖWER HOLDING GmbH
Plaintiff

AND THE PROCEEDS OF THE SHIP "TAKITIMU"
Defendant

AND AD1/99
BETWEEN LÖWER HOLDING GmbH
Plaintiff

AND THE PROCEEDS OF THE SHIP "RANGINUI"
Defendant

Hearing: 21, 22, 23, 24, 28, 29 June 1999

Counsel: A.N. Tetley & A.S. Olney for Mobil Oil
J.R. Gresson for Owners & Plaintiff in AD 822
P.A.D. Davies for Löwer Holding GmbH
J.E. Sutton for Mortgagee Banks
M.S. Ryan for Masters & Officers
J. Haigh QC & K.M. Beck for Crew Members
T.J. Broadmore & W.J. McIntosh for Canterbury Stevedoring Services Ltd

Judgment: 11 August 1999

RESERVED JUDGMENT OF FISHER J: FUND PROVIDERS' COSTS

Solicitors:
Russell McVeagh McKenzie Bartleet & Co., DX CX 10085, Auckland for Mobil
Simpson Grierson, DX CX 10092, Auckland for Owners and Plaintiff in AD 822
Jordan Smith & Davies, DX CP 20525, Auckland for Löwer Holding GmbH
Rudd Watts & Stone, DX SP 20009, Wellington for Mortgagee Banks
Garry Pollak, P.O. Box 91288, Auckland for Masters & Officers
Haigh Lyon, DX CP 19014, Auckland for Crew Members
Chapman Tripp Sheffield Young, DX CP 24029, Auckland for Canterbury Stevedoring Services Ltd

Introduction

1. These proceedings involve competing claims upon the proceeds of the sale of the ships "Rangiora", "Ranginui" and "Takitimu". For determination in this judgment are priority claims by the plaintiffs Canterbury Stevedoring Services Limited and Mobil Oil NZ Limited who seek an indemnity for costs they incurred in producing funds for the benefit of creditors in general. Canterbury claims $107,256 and interest of $9,268 incurred in the arrest of the Ranginui and subsequent steps to preserve and maximise that fund. Mobil claims $136,397 costs and interest of $9,616 as the arresting party and fund provider with respect to the Rangiora. The bulk of those claims is opposed by the owners and mortgagees. No similar dispute arises in the case of the third vessel, the Takitimu, since it was arrested by the owners themselves who took all subsequent steps for realisation of the proceeds.

Factual background

2. For the purposes of the present applications the material facts are as follows. The Rangiora and the Ranginui were registered in Germany. In the German register for ships the first and second mortgages were recorded along with the principal sums secured under each. By a series of demise charters the ships were held by South Pacific Shipping Co Ltd ("SPS") on a demise charter.

3. SPS fell into arrears on its charter payments. On 18 February 1998 a notice of withdrawal of the immediate sub-charter demise was sent to SPS and on the following day it was placed into voluntary liquidation. On 19 February 1998 Ports of Wellington brought proceedings against Ranginui, followed by Canterbury which brought its proceedings in rem against Ranginui on the following day. It applied for arrest on 20 February 1998 but it did not effect the arrest until 26 February 1998. On 20 February 1998 Mobil commenced its own in rem action against the Rangiora and effected the arrest of that ship on the same day, 20 February 1998.

4. On 26 February 1998 the officers of the two vessels lodged caveats against the release of both. The officers were followed by the ratings who lodged their own caveats against both vessels on 27 February 1998.

5. In March 1998 the owners of the two vessels entered conditional appearances and applied to strike out the in rem proceedings which had been brought by Mobil and Canterbury. The ground for the strike-out application was that pursuant to s 5(2)(b)(i) of the Admiralty Act the person who would be liable on the claim in an action in personam, SPS, was neither the beneficial owner of the vessel nor a current charterer at the time when the action was brought. Canterbury, Mobil and the owners were thereafter engaged in extensive preparation for a hearing of the strike-out application. The affidavits included affidavits from German law experts engaged by Canterbury and Mobil respectively. In April and May 1998 the officers and ratings applied for leave to intervene in the proceedings for both Rangiora and Ranginui in order to enforce their respective maritime lien claims.

6. The affidavits filed on behalf of the owners in the jurisdiction hearing included those of a German Marine Superintendent, D. Hagedorn, who had a supervisory role in managing the ships in question. The affidavits noted that mortgages were registered against the ships and exhibited untranslated records showing the sums owing. Upon service of those affidavits the arresting plaintiffs must have learned of the existence of the mortgages, even if they had not earlier arranged for their own searches of the public registers in Germany. On the other hand, it was not until July 1998, when the first mortgagees were granted leave to intervene, that the plaintiffs first had notice that the mortgagees intended to take active steps in the proceedings.

7. The owners' strike-out applications were heard over a period of three days on 2, 3 and 4 June 1998. Active roles were played by separate counsel for the owners, for Canterbury and for Mobil. In a reserved decision of 14 July 1998 Giles J dismissed the owners' application. He also dismissed the applications to strike out the caveats of the officers and ratings and certain other trade creditors which had filed caveats by that stage.

8. The mortgagees took no part in the proceedings until 16 June 1998. The first mortgagees then made ex parte applications for leave to intervene in the proceedings against both the Rangiora and the Ranginui, leave being given, and the other parties notified, in July. On 17 July 1998 the first mortgagees applied for orders for sale pendente lite of the Rangiora and Ranginui. The orders sought were granted at a hearing on 24 July 1998.

9. Following the order for appraisement and sale on 24 July the Registrar appointed a broker to effect the sale. This was objected to by the owners and the plaintiffs. At a hearing on 20 August 1998 Giles J directed that the Registrar reconsider which broker should be appointed as agents for the sale on the ground that there had been an inadvertent non-compliance with a direction for consultation with the parties over selection of an appropriate agent. The primary role in pursuing that application was carried by the owners but an affidavit was filed on behalf of Mobil. Mobil were also actively represented at the hearing.

10. Both plaintiffs made a series of payments to the Registrar by way of security for various disbursements incurred by him in the process of maintaining and selling the vessels. The vessels were sold in late 1998. In February of this year the plaintiffs were reimbursed for their security payments but without interest thereon.

Claims by plaintiffs

11. Canterbury and Mobil claim $9,268 (Canterbury) and $9,616 (Mobil) representing interest on the sums advanced to the Registrar and since repaid. In addition, they claim that portion of their legal costs which they say was incurred in providing and sustaining the fund for creditors of the Ranginui and the Rangiora respectively. Copies of all relevant bills of costs have been produced. There are a few disbursements but the great bulk of the claims represent legal attendances by New Zealand solicitors and counsel and the further attendances of their legal counterparts overseas. Some attempt has been made to distinguish between those attendances attributable to the individual claims of Canterbury and Mobil on the one hand, and steps taken to arrest, maximise and realise the funds for the benefit of creditors in general on the other. Canterbury and Mobil say that after deducting the former, $107,256 remains as a prior claim upon the Ranginui fund for Canterbury and $136,397 as a prior claim on the Rangiora fund for Mobil.

12. The owners and mortgagees accept the claim to interest on security payments and also a few thousand dollars of the costs incurred in making the initial arrests. However, they say that no step which Canterbury or Mobil took after 26 February 1998 determined, contributed to, or even affected, the position of the defendant ships or their ultimate transformation into funds available to creditors. They say that continuing detention of both vessels was assured from 26 February 1998 due to the intervention at that stage by seafarers who had caveatable claims to maritime liens in any event.

13. The bulk of the legal costs claimed by Canterbury and Mobil were incurred in resisting the owners' application to strike out Canterbury and Mobil's in rem proceedings for failure to satisfy the jurisdictional requirements of s 5(2)(b)(i). The owners and mortgagees argue that resistance to that application related solely to the interests of Canterbury and Mobil as individual plaintiffs. Canterbury and Mobil, on the other hand, argue that it was in the interests of all creditors that they resist the owners' strike-out application in that, with the exception of the seafarers who had maritime liens, the in rem creditors were reliant upon their roles as mere interveners in the proceedings brought by Canterbury and Mobil.

14. No-one doubts the general principle that the costs of providing a fund for creditors in general represent a prior claim upon the fund. The principal legal question, however, is whether that concept extends to steps taken by a plaintiff to maintain the plaintiff's own action in order that other in rem claimants may bring their own claims by way of intervention in the same proceedings. Counsel say that there are no precedents available on that question.

15. Further questions of principle upon which counsel differed were whether the fund provider could claim attendances after an order had been made for appraisal and sale; whether it was first necessary for the fund provider to obtain judgment in its own action; whether the quantum of legal costs allowed to a fund provider as a priority payment should be on a full indemnity basis; whether an order could be made for priority costs relating to a defended interlocutory application where a party and party costs direction had already been given; and whether it was appropriate to make any allowance to the plaintiffs in respect of matters where other creditors were actively supporting the same application.

Principles upon which priority costs awarded to fund providers

16. Counsel helpfully traversed standard texts on admiralty law and a number of decisions from the United Kingdom (The Rana (1921) 8 LI.L.Rep 369, The Athena (1921) 8 LI.L.Rep 369, The Leoborg (No 2) [1964] 1 Lloyd's Rep 380, The "Conet" [1965] I Lloyd's Rep 195 and The World Star [1987] 1 Lloyd's Rep 452), from Australia (Ray v Selvage Pacific Limited [1993] 2 QdR 580 and Bremer Landesbank & Ors v Patrick Stevedores No 2 Pty Ltd (unreported, Federal Court of Appeal)) and from New Zealand (International Factors Leasing Pte Limited v Komtek II (unreported, HC Auckland, AD 841, 10 November 1998, Cartwright J), ABC Shipbrokers v The Ship "Offi Gloria" [1993 ] 3 NZLR 576 and ABC Shipbrokers v The Ship "Offi Gloria " (Minute of Holland J, HC Auckland, AD 47/92, 16 September 1993)). That these sources do not directly answer the questions raised by this case may not be surprising given that costs are inherently flexible and discretionary (see R 46 of the High Court Rules). In this area rigidity and technicality are to be resisted. It seems legitimate, however, to identify some of the considerations likely to be taken into account. The following are drawn from those authorities together with some comments of my own:

(a) As a general principle a creditor has a priority claim against the ship and its proceeds for costs incurred in producing a fund for the benefit of creditors as a whole. The underlying rationale is that since the general body of creditors stand to benefit from acts taken, and expenses incurred, on their behalf it would be inequitable for the cost to fall upon the particular creditor who happened to take the initiative. There is some analogy here with the priority afforded to creditors who initiate bankruptcy and company winding up proceedings and beneficiaries who initiate necessary will construction proceedings for the proper administration of the estate: see Bremer Landesbank, supra, at p 16 adopting for admiralty purposes the principles identified by Kekewich J in Re Buckton [1907] 2 Ch 406 at 414-415.

(b) No difficulty arises in applying that principle to security or disbursements paid to the Registrar for arresting, preserving and selling a vessel. These are recoverable with interest: The World Star, supra, at p 456.

(c) Also qualifying under that principle is the legal cost of steps reasonably taken to provide, preserve and maximise the fund which will be available for the benefit of creditors as a whole. Examples are costs incurred in arresting the ship, paying wharf and maintenance fees, and obtaining orders for appraisal and sale.

(d) Although orders for appraisal and sale will normally be the cut-off point, the rationale extends to any steps thereafter required to ensure that the fund is maximised and adequately invested: see, for example, The Leoborg (No 2), supra, at p 384 (costs incurred in correspondence with the Court over investment of the fund "expended for the benefit of all"); International Factors Leasing Pte Ltd v Komtek II, supra, at p 6 (preparation of documents for auction of the vessel undertaken at the request of the Registrar); The "Conet", supra, at p 197 (priority costs normally to date of appraisal and sale but exceptionally beyond that); and Offi Gloria (Minute 16 September 1993), supra, at pp 4-5 (steps reasonably taken in opposition to an owners' application for release of the vessel).

(e) The quantum of costs recoverable will generally be approached on an indemnity basis, albeit with the usual careful scrutiny as to reasonableness (Offi Gloria, supra, at pp 583-584). Given the different approach to costs in general, English and Australian authorities are of limited authority on this aspect but only an indemnity would ensure that the active creditor is not penalised by his or her initiative - note also Holland J's use of the word "indemnity" in the Offi Gloria (Minute 16 September 1993), supra, at p 4.

(f) The arresting party's claim to costs is not dependent upon later obtaining judgment in its substantive action since the rationale is not that party and party costs should follow the event but that costs incurred for the benefit of all should be reimbursed. Nor is it a disqualification that other prior claims are ultimately shown to extinguish the fund leaving nothing for the plaintiff and other in rem creditors - see, for example, the "Rana", supra, at p 369 (priority costs awarded although fund extinguished by prior claims for wages and mortgages) and the Offi Gloria (Minute 16 September 1993), supra, at p 4 - priority costs awarded notwithstanding extinction of funds by mortgagee).

(g) Where, with the benefit of hindsight, it can be seen that steps taken by a costs claimant did not in fact create, preserve or enhance the general fund, or that the steps were futile in the light of prior liens or mortgages, the claimant must show that his or her actions were reasonable in the light of all the circumstances as they appeared at the time; reasonableness is not to be viewed with the benefit of hindsight: see the effect of the rulings in the "Rana", supra; Offi Gloria (Minute 16 September 1993), supra; and International Factors v Komtek II, supra, (another case in which, apart from the Registrar's costs and priority costs, the balance of the fund was extinguished by crew claims in priority to the claims of the plaintiff). The claimant must be allowed some latitude in this respect: The "Conet", supra, at p 197.

(h) It is different, however, if the costs claimant was guilty of malice or gross negligence (Bank of Nakhodha v The Ship "Abruka" (1996) 10 PRNZ 326 at 334) or if the step taken was unreasonable or unnecessary, or if the position taken over an interlocutory application was obviously unmeritorious (Bremer Landesbank, supra, at p 18). A costs claimant is not justified in continuing to take steps to preserve or enhance the fund for the benefit of creditors as a whole once it becomes obvious that the fund will be extinguished by the claims of a party which has intervened in the proceedings: the Offi Gloria (Minute 16 September 1993), supra, at p 5.

(i) Reasonableness similarly governs steps taken by the costs claimant in association with other creditors who actively pursue the same outcome. In the interests of litigation efficiency the Court should be slow to reimburse duplicated costs where the sole or dominant role could have been left to one creditor. The situation is analogous to the presumptive denial of separate costs' for multiple defendants who might have joined in their common defence (R 51; Jagwar Holdings Ltd v Julian (1992) 6 PRNZ 496). Logic also demands that where more than one creditor has incurred costs in the same exercise, no single creditor should be indemnified at the expense of the others.

(j) Priority will not be afforded to costs incurred by a creditor in pursuing its own substantive claim or in pursuing adversarial disputes between members or classes of creditors: Bremer Landesbank, supra, at p 16, Re Buckton, supra, at 414-415. Once it is clear that the optimum fund will be reliably available in New Zealand for creditors as a whole, priority costs will not extend to further steps taken to ensure that it will be accessible to creditors of a particular class such as in rem trade creditors unprotected by maritime liens. The test is whether, but for the step taken by the costs claimant, it would have been necessary for some other creditor to take that step or risk jeopardising the existence or value of the fund for the benefit of creditors as a whole.

(k) Given the difference between party and party costs principles and indemnities for steps taken on behalf of others, an order as to party and party costs made in the context of a defended interlocutory hearing does not necessarily preclude a subsequent indemnity order against the fund: see The World Star, supra, at p 456 (plaintiffs ordered to pay party and party costs of an intervener which successfully applied to have the ship moved; subsequent order indemnifying plaintiffs out of the fund). Nevertheless it would normally seem preferable to dispose of both aspects when the interlocutory application is heard.

(l) The foregoing considerations are not exhaustive and all remain subject to the Court's overriding discretion to award costs according to the justice of the particular case.

Allowance for resisting owner's strike-out application

17. The bulk of the priority costs claimed in the present case were incurred by Canterbury and Mobil in resisting the owners' application to strike out their proceedings. The ground of the strike-out application was said to be that when the plaintiffs commenced their respective actions the party liable in personam, SPS, was neither the beneficial owner nor the charterer pursuant to a still extant demise charter. Although that application was ultimately dismissed, the owners and mortgagees argue that the resistance by Canterbury and Mobil could not be described as necessary for the protection of creditors in general.

18. The time at which the in rem proceedings were commenced was critical, given that the two in rem actions were commenced on 20 February 1998. Giles J held, at least for the purposes of the strike-out application, that the demise charter did not come to an end until the owners constructively or physically took redelivery of the vessels over the following few days. Although Port of Wellington had already commenced its own in rem action against the Ranginui on 19 February 1998, it would be too late for any trade creditor unsupported by a maritime lien to commence an action after the redelivery.

19. By the time the owners moved to strike out there were four statutory in rem caveators (Burns Philp, NZ Stevedoring, Vernfield Shipping and Port Nelson) as well as the officers and ratings as caveators. Although the officers and ratings had their own maritime liens, the statutory in rem caveators were reliant upon intervention in the existing Canterbury and Mobil proceedings: Pusan Shipbuilding and Engineering Co Ltd v The Ship "Ivan Korobkin (1997) 11 PRNZ 308. Canterbury and Mobil therefore argue that it was their duty to take active steps to resist the owners' application to strike out since, if it succeeded, it would see an end not merely to the claims of Canterbury and Mobil but to the claim of any other creditor relying upon the Canterbury and Mobil proceedings. It would have been necessary to resolve the same point in the Port of Wellington proceedings.

20. The owners and mortgagees meet that argument by pointing to the maritime liens of the officers and the ratings. Even if the Canterbury and Mobil proceedings were struck out, this would not of itself lead to a release from arrest since the arrest would continue to be supported by the maritime liens. But to that Canterbury and Mobil respond that the crew's claims protected by a wages lien would foreseeably amount to a very small proportion of the value of the ships. Freed of the proceedings brought by Canterbury and Mobil, the owners would inevitably compromise the seafarers' claims by payment or bond. By that means they would obtain a release from arrest, the ships would depart, and there would be nothing left for creditors as a general body.

21. I accept that the seafarers' claims represented a very small proportion of the value of the vessels and that there was some justification for Canterbury and Mobil's attitude that the seafarers' liens did not represent a sufficient bulwark against release of the ships. The only way in which the ships could be reliably kept in New Zealand was to maintain the existing Canterbury and Mobil proceedings. It follows that it was not simply a retention of the ships for the benefit of Canterbury and Mobil, or even for the benefit of the trade creditors with statutory in rem claims. It could be regarded as retention of the ships within the New Zealand jurisdiction for the benefit of any creditor, secured or otherwise. There is some analogy here with the steps which were initially taken by the first plaintiff in the Offi Gloria, supra, in resisting the owner's application for release from arrest.

22. The other class of secured creditor to consider was the mortgagees. Canterbury and Mobil knew of their existence before the strike-out hearing which commenced on 2 June 1998 since the mortgagees were referred to in the Hagedorn affidavits of 6 May 1998. Canterbury and Mobil also knew, or had the means of knowing, that the sums secured by the mortgages, in combination with crew claims and other costs, might well exceed the realised proceeds of the ships. Should Canterbury and Mobil have realised earlier that further legal costs incurred in supporting their own statutory in rem proceedings could no longer be justified on behalf of creditors as a whole? I am inclined to think not. The details recorded in the German shipping register would not necessarily coincide with the sums in fact still owed. The sums owed could have been secured across other assets. The owners and the mortgagees could have come to their own arrangement over financial restructuring or consent to departure of the vessels from New Zealand. Above all, no steps had been taken by the mortgagees in the New Zealand proceedings until after the strike-out hearing.

23. In my view it was reasonable for Canterbury and Mobil to actively resist the strike-out application with the various disbursements and legal attendances which that entailed. Given the likelihood of a compromise with the seafarers, the proceedings commenced by Canterbury and Mobil represented the only reliable means of staving off a release from arrest.

Other aspects of priority costs claimed

24. I can see grounds for more modest reductions in the costs claimed. Mobil, and to a minor extent Canterbury, incurred costs investigating and supporting the review of the Registrar's decision as to the appointment of a broker. The main burden of that application was undertaken by the owners. Some reduction in the costs now claimed is warranted on that account. I am reinforced in that view by the direction of Giles J on that hearing that the costs of all parties other than the Registrar should lie where they fell. While not determinative, I can see no reason for revisiting that direction in the present context.

25. I can also see room for a greater degree of co-ordination between Canterbury and Mobil over their approach to the strike-out applications. For example it seems hard to justify the engagement of two German lawyers to independently advise as to German law. I would also have thought that as between Canterbury and Mobil one senior counsel could have undertaken the main burden of resistance to the strike-out with a lesser role for the other. I can see no reason for indemnifying either Canterbury or Mobil on matters concerned with the application for appraisal and sale, given that the application itself was made by the first mortgagees. I am not satisfied that certain attendances relating to the implications of mortgagee involvement in the proceedings are properly claimable. However the owners and mortgagees did not argue that beyond those points the time, steps or sums involved were excessive. In those circumstances I do not intend to comb through the voluminous bills in order to conduct the equivalent of a taxation.

26. For the reasons traversed I consider it appropriate to reduce Canterbury's claim from $107,256 to $75,000 and that of Mobil from $136,397 to $90,000, in both cases inclusive of disbursements and GST. The reduction for Mobil is the greater of the two bearing in mind a conceded duplication relating to a Barbudan lawyer, a greater claim with respect to post-appraisal and sale attendances, and a higher costs figure to begin with. As mentioned earlier, there is no difficulty over the interest on security payments for each.

Result

27. Subject to any prior claims for the Registrar's expenses, Canterbury is to be awarded as a first charge upon the Ranginui fund the sum of $84,268 (inclusive of legal costs, disbursements, GST and interest on funds advanced to the Registrar by way of security) as the costs of the producer of that fund. Subject to the expenses of the Registrar Mobil is awarded as a first charge upon the Rangiora fund the sum of $99,616 (inclusive of legal costs, disbursements and GST and interest on funds advanced to the Registrar by way of security) as the costs of the producer of that fund. Costs on the determination of the present priority hearing are reserved.