Maule case on ship mortgage and sale after event of default
how the ship Maule’s arrest turned on whether a mortgagee could sell after an event of default without first accelerating the loan.
Banque Worms lent money to a group of three related shipowning companies under a written Loan Agreement dated 20 January 1993, and the owners of the Cyprus-flag cargo ship MAULE gave security for that loan by granting a registered first-priority ship mortgage on 4 February 1993 together with a Deed of Covenant signed the same day. The loan was to be repaid in instalments over five years, but the paperwork also listed special “Events of Default.” One of those events covered a different vessel owned within the same group, a drilling ship called FORESIGHT DRILLER II. The group promised that FORESIGHT DRILLER II would have employment by 31 December 1993 on terms set out in the Loan Agreement. If not, the lenders could require the owners to sell that drilling vessel within 60 days. That promise was not kept. On 3 March 1994 the lenders gave formal notice requiring the sale of FORESIGHT DRILLER II within those 60 days, so by 3 May 1994 the ship should have been sold. It was not. That failure counted as an Event of Default for the group, including the company that owned MAULE, because the borrowers had promised to make sure the sister company kept its word. In June that year the borrowers challenged the sell-order in London, but on 15 June 1994 Mr Justice Rix ruled in Zeeland Navigation Co Ltd v. Banque Worms that the 3 March 1994 notice was valid and that the lenders were entitled to enforce the sale of FORESIGHT DRILLER II. The vessel was then sold later in June 1994 and the money from that sale was used to reduce the group’s debt as allowed under the covenant.
After the sale of FORESIGHT DRILLER II, the lenders turned to MAULE. On 24 August 1994 they issued a writ in Hong Kong invoking the Cyprus mortgage over MAULE. The writ, however, had a problem. The lawyer intended to state that the lenders were suing “to exercise a right of sale as a result of an Event of Default,” but he was unwell and left out those crucial words. Even though the text of the writ was incomplete, the lenders still moved to secure the ship. MAULE was arrested in Hong Kong at 19:00 on 24 August 1994. At that moment there was no unpaid instalment due under the loan. The lenders’ right under the Loan Agreement to “accelerate” the whole loan—meaning to demand that all money be paid at once—was not used until the next day, 25 August 1994. On 26 August 1994 the lenders applied for appraisement and sale pendente lite, asking the court for a sale of the ship while the case was still going on, and on 7 September 1994 they filed a statement of claim identifying the Events of Default as the same defaults that had justified the forced sale of FORESIGHT DRILLER II. Meanwhile, the time charterers of MAULE stepped in. On 8 September 1994 they applied to intervene, and on 22 September 1994 they moved to set aside the arrest.
The core legal question was simple to ask but difficult to answer: when a ship mortgage and its accompanying Deed of Covenant say that the mortgagee may exercise “all the powers possessed by it as mortgagee,” including a power of sale, “upon the occurrence of any of the Events of Default specified in the Loan Agreement,” does that mean the lender can move to sell right after such an Event of Default, or must the lender first make some amount “due” by calling in the loan or waiting for a missed instalment? The lenders said the contract let them act as soon as an Event of Default occurred, even if no instalment was yet overdue. The owners said the power of sale could not be used unless and until money was actually due, which, in a case like this, would require acceleration first.
The dispute first reached Barnett J in the Hong Kong court. On 1 September 1994 the defendants moved to strike out the writ for disclosing no cause of action. On 26 September 1994, during these proceedings, the judge ordered the release of MAULE without the owners providing substitute security, and the ship departed Hong Kong for Taiwan. On 28 September 1994 he gave his main ruling: he struck out the writ and set aside the warrant of arrest, and he ordered an inquiry into damages for wrongful arrest. He reasoned that, as a matter of general mortgage law, a power of sale cannot be used if no sum is yet due. In his view an Event of Default that is not a failure to pay does not, by itself, unlock the power of sale. An additional step is required so that the borrower knows what must be paid to redeem the property. In this case, he said, the needed step was acceleration. Because acceleration happened on 25 August 1994, one day after the arrest and the issuing of the defective writ, the writ at the moment of issue did not ground the arrest. He read clause 7 of the Deed of Covenant as doing no more than restating a mortgagee’s usual powers, which he believed had to be used “in accordance with general law,” meaning only when a debt is due.
The lenders appealed. The Hong Kong Court of Appeal agreed with the result on the strike-out but approached the problem as one of contract interpretation rather than general mortgage law. Bokhary JA, with Nazareth VP and Litton JA concurring, held that on the true meaning of the Deed of Covenant the power of sale could not be used unless the loan had first been accelerated or a sum had otherwise become due. They also considered the proviso in clause 7, which said that a purchaser need not inquire whether the mortgagee’s power of sale “has arisen in the manner herein provided,” and understood it to support the owners’ view that two stages were contemplated: a power “arising” when money is due and a power becoming “exercisable” after some further condition. While the Court of Appeal remitted the question of a damages inquiry for wrongful arrest to be reconsidered, it upheld the striking out of the writ.
The lenders then appealed to the Judicial Committee of the Privy Council in London. The appeal was heard by Lord Browne-Wilkinson, Lord Lloyd of Berwick, Lord Hope of Craighead, Lord Hutton, and Sir John Balcombe, and the Board delivered its advice on 24 February 1997. By this time MAULE’s mortgage had been discharged because, on 22 February 1995, the borrowers had repaid the loan in full. Even so, the Board took the case because the owners still had a theoretical claim for wrongful arrest and because the point raised was important to lenders and shipowners far beyond this single lawsuit.
The Privy Council approached the matter directly as a problem of reading the contract. The Board noted that ship mortgages are “overwhelmingly dominated by contract,” and that the Cyprus ship mortgage code (which mirrored the Merchant Shipping Act 1894 and was later consolidated in the Merchant Shipping Act 1995) did not contain the two-stage “arises” versus “exercisable” structure found in English land law under sections 101 and 103 of the Law of Property Act 1925. The owners’ argument leaned heavily on a land-law analogy: in land law, a statutory power of sale “arises” only when money is due, and it becomes “exercisable” after certain breaches or notices. The Board said that analogy did not fit ship mortgages registered under the Cypriot regime corresponding to the Merchant Shipping Act 1894 because there was no statutory mirror of those two stages for ships. More importantly, the Board emphasized that even if land-law sections were considered, they could not cut down an express power granted by a mortgage deed. When parties clearly agree on an express power, that agreement governs.
Reading clause 7 of the Deed of Covenant in a natural way, the Board found no hidden condition that money must already be due. The text said that upon the occurrence of any Event of Default, the mortgagee “shall become forthwith entitled as and when it may see fit to put into force and to exercise all the powers possessed by it as Mortgagee and Chargee of the ship,” and then it listed, “in particular,” the power “to sell the ship or any share therein with or without prior notice to the owner.” Nothing in those words suggested that the power of sale had to wait for an unpaid instalment or an acceleration notice. The owners had relied on the opening words—“all the powers possessed by it as mortgagee”—to argue that the clause merely pointed back to general mortgage law. The Board disagreed, saying those words did not pull in a condition that was not stated. The parties chose to make an Event of Default the trigger, and the clause meant what it said.
The Board also examined the proviso that protected a purchaser by stating that the purchaser “shall not be bound to see or inquire whether the Mortgagee’s power of sale has arisen in the manner herein provided,” and held that the only sensible reading in this contract was that “arisen in the manner herein provided” meant that an Event of Default had occurred. If the owners’ reading were right, the buyer would be told not to check the very thing that, under their theory, determined whether a sale could happen at all—namely whether money had become due by acceleration or otherwise—while still leaving the buyer exposed to checking the existence of an Event of Default. That was backwards. If the contract makes an Event of Default the trigger, then the buyer is protected from having to audit that trigger. In this deed the phrases “arise” and “be exercisable” were not separate stages; they were used in a way that made them effectively the same in context.
The owners raised a fairness concern: if a lender could sell “without notice” when no money was yet due, would that not rob the borrower of the right to redeem? The Board accepted that any sale done in a way that wrongly blocked the right to redeem—such as a precipitous sale without giving a real chance to pay—would be unlawful and would lead to damages. But the mere presence of a power to sell without notice did not make the power invalid. Context mattered. These borrowers knew a sale was on the table. They also had under clause 4.03(a) of the Loan Agreement a practical way to redeem: by giving seven days’ notice and repaying. Because the contract gave a clear route to redemption and the borrowers were aware of the lenders’ intent, recognizing the contractual power of sale upon an Event of Default did not defeat their equity of redemption.
Having settled the meaning of clause 7, the Board turned to what should have happened to the writ. Even though the writ, as filed on 24 August 1994, was defective because of the missing words, the Board said it was still capable of cure by amendment. Once amended to say clearly that the lenders were enforcing the power of sale after an Event of Default, the writ would state a proper claim, because, on the correct reading of the deed, no acceleration was needed before moving to sell or to arrest in support of a sale. Therefore the judge should not have struck out the writ; he should have allowed an amendment.
The Board allowed the appeal on 24 February 1997. It advised that the Court of Appeal’s order upholding the strike-out be set aside. It awarded the lenders their costs before the Board and in the Court of Appeal. As to the costs in the court of first instance, the Board sent the case back to the trial judge because the record showed “loose ends” that had been left open. In particular, the judge had ordered an inquiry for damages for wrongful arrest when he struck out the writ entirely. Since, on the proper approach, he should have permitted an amendment and then decided the case with that pleading in place, it could not be said what his costs order would have been. The Board therefore remitted the first-instance costs for him to consider afresh in light of the case’s true footing.
The final outcome gives a clear and concrete rule for lenders and shipowners. When a ship mortgage and its related covenant say that, after an Event of Default listed in the loan contract, the mortgagee may “forthwith” exercise all mortgagee powers including a sale “with or without notice,” that is exactly what the parties have agreed. The lender does not need to wait for a missed instalment or send an acceleration notice before using the sale power, unless the contract itself says so. Land-law statutes about when a mortgagee’s statutory power of sale “arises” and becomes “exercisable” do not rewrite an express ship-mortgage bargain, and the Cyprus ship mortgage code offers no two-stage scheme that would force such a delay. Borrowers remain protected by their right to redeem and by the rule that a sale conducted in a way that unlawfully blocks redemption can generate damages. But they cannot insist on an extra precondition for sale that the contract does not contain. In this case the Privy Council therefore ruled on 24 February 1997 that the arrest linked to an Event of Default could be supported by an amended writ and that the lenders’ appeal should be allowed, fixing costs in the appellate courts and sending the trial costs back for the judge to decide in line with this interpretation.
