Maritime industry may need new mode of payment security

Maritime industry may need new mode of payment security

Bangalore: AUS rule used by shipowners to enforce payments by errant customers has ended after an appeals court ordered on 16 October that electronic fund transfers (EFTs) passing through banks in New York cannot be attached.

An EFT is an instruction to transfer funds from one bank account to another.

The landmark ruling was given on a case involving India’s state-run Shipping Corp. of India Ltd and Singapore-based Jaldhi Overseas Pte Ltd, promoted by a person of Indian origin. The order overruled an earlier decision that formed the basis for so-called Rule B attachments under the US Admiralty Code.

“A good way of enforcing payments on shipping contracts is gone/over," Jeb Clulow, partner at London-based law firm Barlow Lyde and Gilbert Llp, told Mint on the sidelines of the India Shipping Summit in Mumbai last week.

“Rule B is ruled out for the moment," Rovine Chandrasekera, partner at London-based law firm Stephenson Harwood and Lo, said at the same summit. “It’s a big blow for ship owners," he added.

Rule B attachments have provided a popular mechanism, widely used by the international shipping and trading community, to obtain financial security for maritime claims. Rule B attachments work by enabling a party with a claim to freeze US dollar EFTs transiting through the New York banking system.

Over the past year, the shipping crisis and payment defaults had led to an explosion of Rule B EFT attachments, putting pressure on the New York banking system.

The Clearing House Association Llc, comprising all major New York banks, estimates that between 1 October 2008 and 31 January 2009, maritime claimants filed 962 lawsuits seeking to attach $1.35 billion (Rs6,264 crore). Such lawsuits comprised one-third of all suits filed in the Southern District Court of New York.

According to the ruling given by the US Court of Appeals for the Second Circuit, the rising maritime writs added to the burden of some 900 writs already served daily on the district’s banks. A copy of the ruling was reviewed by Mint.

In March 2008, SCI rented out one of its ships to Jaldhi Overseas to carry iron ore from India to China. As per the contract, SCI handed over the ship to Jaldhi on 29 March 2008. But, the next day, while in Kolkata port, a crane on board the ship collapsed, killing the crane operator, halting cargo operations. As a result, Jaldhi suspended the contract and this led to a payment dispute.

SCI invoked Rule B and attached $4,689,247 towards the unpaid balance, interest and attorney fees. Jaldhi appealed against the attachment that led to the 16 October ruling.

SCI declined to comment. Jaldhi could not be reached for comments.

Lawyers say the ruling could have several effects. First, it could derail arbitrations in London that were proceeding because EFTs were attached. Second, it could lead to more traditional ship arrests. And, third, it could hurt profits of Manhattan maritime law firms specializing in litigation.

Rule B has been used by Indian shipowners in the past. India Steamship, the shipping division of Chambal Fertilisers and Chemicals Ltd, attached EFTs of Mercator Lines Ltd to recover dues.

After several years of benefiting from a quick, relatively cheap and available security process in New York, the maritime industry will now have to look at other ways of payment security, including obtaining performance bonds/parent company guarantees, in case the counterparty (customer) fails to perform.