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Caveat against arrest of a ship: Cost saving measures for maritime stakeholders

Caveat against arrest of a ship: Cost saving measures for maritime stakeholders

In the course of my maritime practice, I have observed that many shipowners in Nigeria and other parties that have interest in a ship do not file a caveat against arrest (“caveat”) of their ships (it is noteworthy that the definition of a ship under the Admiralty Jurisdiction Act, 1991includes a rig). This stems from a lack of understanding of the commercial need for filing such a caveat in court. It is axiomatic that shipping is capital intensive and the effective utilisation of a ship by a shipowner or charterer is critical to the profitability of the business of shipowners or charterers.

Every single minute and hour count in shipping business. Shipowners and charterers stand to lose profits or have lucrative charter parties terminated while a ship is under arrest for a protracted period. The operations and business of oil and gas companies that have chartered a shipto carry their products or carry out transhipment operations or drilling operations, may also be deleteriously impacted while the ship is under arrest, with the concomitant additional burden of trying to quickly find a substitute ship. Critically, the loss of profit by a shipowner while its/his ship is under arrest may also adversely impact the ability of the shipowner to service its/his debt obligations to its/his lenders. Therefore, the inimical domino effect of a ship arrest cannot be overstated.

Where a ship is arrested in our jurisdiction, the ship may stay under arrest for up to three (3) months or more before she is released from arrest by an order of court, even after the shipowner has furnished security for her release. The loss of profit for such protracted period can only be imagined. Here comes the ‘knight in shining armour caveat’ to save the day. The caveat is a document filed in court by a shipowner or any other party that has an interest in a ship (which could be a bank as a mortgagee of the ship) to the effect that any party who has a claim against the ship or shipowner up to a specific sum (which sum would be stated in the caveat) should serve its claim on the caveator, instead of arresting the ship and that the caveator will provide security for such claim.

In expounding on the purpose of a caveat, his lordship, Uwaifo, JCA (as he then was), in MV Da Qing Shan &Orsv Assan Oil Mills Ltd (The Da Qing Shan No 1) (1991) 4 NSC 151 at 157stated that “a caveat may be filed by a party who seeks to prevent the arrest of the ship”. Order 8 Rules 1 and 2 of the Admiralty Jurisdiction Procedure Rules, 2011 (“AJPR”) provides that a caveat against arrest of a ship could be filed, wherein the caveator will undertake to appear to a suit within three days of been served with a claim and provide security for the claim.

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Where the caveat is filed, a maritime claimant usually will not be able to obtain an order of arrest of a ship from the court and would have to serve its/his claim on the caveator. Thus, the caveat provides the caveator a “three-day window” within which to explore several options to protect its/his ship from arrest. Within the three days, the caveator may initiate settlement discussions with the claimant towards the amicable resolution of the dispute. Even if settlement is not achieved within the three-day period, the claimant may be disposed to continue settlement discussions and not apply to the court for the arrest of the ship during the settlement discussions. The caveator could also, within the three-day period, reach out to its bank or Protection and Indemnity (P&I) Club or insurer to procure a bank guarantee or a P&I letter or an insurance bond as security for the claim. Once the security is filed in court, the claimant will no longer be able to obtain an order of arrest of the implicated ship under our admiralty law.

From my interaction with shipowners/ship agents, shipowners do not file caveats because of certain misconceptions. The first misconception is that upon filing the caveat, they are bound to provide security to the value of a claim that is served on them. There is no provision in the AJPR or case law that states that a caveator is bound to provide security for any claim that is served on it/him. Though Order 8 Rule 3 of the AJPR provides that the filing of a caveat constitutes an undertaking (which shall be enforceable by the Court) to provide security for a claim against the relevant ship, our courts, in practice, rarely enforce such an ’undertaking’. What our Courts do in practice is to order the arrest of a ship, upon the application of the claimant, where the caveator fails to provide security for a claim served on it/him. Another misconception is that the caveat must be accompanied with a bank guarantee or a P&I letter or an insurance bond at the time it is filed. This misconception is based on the fact that shipowners may not be disposed at the time of filing the caveat to obtain such security. Though some shipowners, in practice, accompany their caveats with a P&I letter, there is no such requirement in our admiralty law. Order 8 Rule 2(2) of the AJPR only provides that the Admiralty Marshall may request that a caveat should be accompanied with a bank guarantee or a P&I letter or an insurance bond. This discretion is rarely exercised in practice by the Admiralty Marshall.

Taking cognisance of the capital intensiveness of shipping business, Nigerian shipowners should at least adopt cost saving measures such as filing of caveats to protect their ships and their bottom line, while maritime stakeholders continue to clamour for government policies that will cut down on their operating costs and boost local tonnage.

Dr. Ukattah is a partner in the Dispute Resolution practice of the law firm, Olaniwun Ajayi LP. He has cognate experience in maritime law, international trade law, arbitration and litigation practice. He has advised and represented shipping companies, government agencies and other maritime bodies in admiralty and maritime cases in superior courts in Nigeria.