Getting Drawn into China's New Litigation Laws

New litigation laws have just made China a more attractive place to arrest ships. 

While China cannot yet be considered a jurisdiction of choice for foreign litigants to resolve their disputes, being a major international trading nation and home to the world’s biggest ports makes China an ideal place for parties to seek to arrest ships for security.  

New regulations came into force on March 1, 2015. The regulations, entitled “The Regulations on Certain Issues Concerning the Application of Law relating to Arrest and Auction of Ships”, supplement existing regulations in China’s Special Maritime Procedure Law.  

Some of the key changes are:

Sale of a vessel following arrest for a claim against a bareboat charter

The Special Maritime Procedure Law was unclear about whether a bareboat chartered vessel arrested for a claim against the bareboat charterer could be sold. The logic was that it would deprive the owner of his possession for something he was not liable for. This has now been clarified so that such a vessel can be sold.    

This is a concern for owners in theory. They may lose their vessel. In practice though it is unlikely things would ever get that far. Insurers, charterers, guarantors or the owners themselves could simply put up security to avoid a judicial sale. 

What is certain, however, is that the arrest of bareboat chartered vessels is now more attractive in China. This might be a concern for financing houses that commonly finance vessels by acting as owners in bareboat charters. They could suddenly be drawn into arrest proceedings, and faced with losing their asset. 

Multiple Arrests Are Now Possible

Prior to March 1, 2015, only one arrest could exist at a time over a vessel in China. If a second party wanted to arrest a vessel this could only be done after the prior earlier arrest was lifted.  

The regulations now allow a second (and more) arresters to arrest, but such a subsequent arresting party can also apply for the vessel to be sold at auction even if the party who first arrested the vessel does not make such an application. This clearly increases risks faced by shipowners, and gives an impetus to an arresting party and the shipowner to resolve arrests quickly, before things get out of control. 

“Paper” Arrest Possible 

An applicant may now apply to the Chinese court for an injunction to restrict disposal of, or registration of mortgages over, vessels.

Previously this measure was only possible after a physical arrest had taken place - no longer. In practice such an order from the Chinese courts is only of concern to those who have vessels flying the Chinese flag. But this is a useful tool for litigants to ensure that a vessel is not sold, or otherwise encumbered to such an extent that makes them uninteresting as arrest targets. This will be useful for those with claims against Chinese shipowners.  

Standardization of Counter Security

Previously the method adopted by the courts when calculating the amount of countersecurity required to be posted before an arrest order varied significantly from court to court. 

The regulations provide that the amount of countersecurity to be posted shall be the total of the possible maintenance costs to be incurred during the arresting period, the loss of hire to be caused by the arrest and the respondent’s costs of posting countersecurity to release the ship. 

Unfortunately the regulations do not provide any guidance on how the court will estimate the length of any arrest period and in reality this means that the approach taken to the courts is likely still to vary considerably from court to court. 

Procedure for Auction Sale

The regulations simplify the procedures governing the conduct of a judicial sale. In short the steps are now:
1.    Secret valuation of the vessel by the court.
2.    Reserve price for first auction set at 80 percent of valuation.  
3.    If reserve price not attained a second auction is held with the reserve being 80 percent of the original reserve, or 64 percent of the valuation.
4.    If reserve still not met then a sale may take place at 50 percent of the valuation, or above. 
5.    If still not sold the vessel can be sold below 50 percent of the valuation if 2/3 of registered creditors by value agree.

The regulations emphasize that the auction of a vessel under arrest shall be executed by the maritime court’s vessel auction committee. The maritime court is prohibited from authorizing a commercial auction company to handle the auction sale.   

Other clarifications

Other clarifications of the regulations include provisions regarding return of counter security, management of the arrested ship, execution of the arrest and the order of payment out of sales proceeds.  

All in all the regulations are to be welcomed as clarifying and standardizing the law in China further. Whilst there is still work to be done, this is a step in the right direction to making China an attractive place seek security.