Focal Finance Ltd v. The Owners and/or Demise Charterers of the Ship or Vessel "Dragon Sunrise"

HCAJ000396/1997

IN THE HIGH COURT OF THE HONG KONG SAR

COURT OF FIRST INSTANCE

ADMIRALTY JURISDICTION

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Admiralty Action in Rem against the Ship "DRAGON SUNRISE"

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IN THE HIGH COURT OF THE HONG KONG SAR

COURT OF FIRST INSTANCE

ADMIRALTY JURISDICTION

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Admiralty Action in Rem against the Ship "DRAGON SUNRISE"

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Coram: The Hon. Mr. Justice Waung in Court

Date of Hearing: 25 May 1998

Date of Handing Down of Judgment: 4 August 1998

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JUDGMENT

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1. Late in the evening of the 12^th of July 1997, the chemical tanker "DRAGON SUNRISE" ("Vessel") suffered an engine breakdown and by 2200 hours, she was without propulsion and was drifting with no power at a position approximately 21^o 24'N 113^o 52'E. Because of the deep water, she was unable to anchor and due to the failure of all but emergency battery power, she was unable to fix her position. The Master of the Vessel managed however to contact the Vessel's agents in Hong Kong, Dragonix (HK) Co. Ltd. which in turn got in touch with the Plaintiff, South China Towing Co. Ltd. ("Plaintiff"). An oral agreement was made at about 2200 hours that evening between Mr. Tony Lai of the Plaintiff and Mr. Franco Cheung of the Vessel's Agent that for the agreed sum of $150,000, the Plaintiff would send a tug to assist her and bring her back to Hong Kong. Accordingly, the steel screw motor tug "Shanghai" ("Tug") of 271 tonnes gross register and 30.80 metres length with a bollard pull of 40 tons was sent out from Hong Kong to assist the Vessel. The weather that night was moderate and there was a moderate to rough sea with a north-easterly swell of about 2 to 3 metres.

2. The Tug arrived some 6 hours after sailing but was unable to find the Vessel at the position indicated to the Plaintiff. A search for the Vessel therefore had to be undertaken by the Tug which lasted for some seven hours. Finally at about 1420 hours the Tug located the Vessel at a position of 21^o 55'N 113^o 33'E, quite some distance away from the original position given and some 40 miles from Hong Kong. At the time when the Vessel was eventually located, she was without power, drifting in a busy navigational channel towards shallow water and towards two wrecks only 4 miles away. There was a danger of collision with the wrecks and there was danger of collision with other vessels in the area. There was further considerable likelihood of grounding within 30 minutes if she was not rescued. The Tug approached the Vessel and carefully manoeuvred her stern into position under the bow of the Vessel to enable a heaving line to be passed from the Tug to the Vessel so that the towing connection could be properly made. The Vessel was then towed by the Tug to a safe berth in Hong Kong. The operation finally completed at about 23.10 hours. The Tug returned to her station at about 2 a.m. on 14^thJuly 1997. In terms of time, the Plaintiff's Tug had spent something like 25 hours to perform this service. In terms of distance, the Tug had travelled about 140 miles to the Vessel and then towed the Vessel some 46 miles back to a safe berth in Hong Kong.

3. The Plaintiff rendered to the Defendants an Invoice of the agreed $150,000 for the service performed. The Vessel did not pay. The Vessel was arrested in late December 1997 and was eventually sold by this Admiralty Court for HK$3,947,400. Focal Finance Ltd. ("Mortgagee") is the mortgagee of the Vessel and Default Judgment was entered against the Vessel in a sum well in excess of HK$10 million. The Plaintiff also obtained Default Judgment against the Vessel in the sum of HK$150,000. The question now before the Court is whether the Plaintiff should have priority over the Mortgagee, it being agreed that if the Mortgagee should have priority, then there would be nothing left from the proceeds of the sale for the Plaintiff. The parties at the hearing took the view that the answer to the question depended on whether the Court determined the services performed by the Plaintiff Tug as being towage or salvage, it being the principle emerging from authorities that mortgage ranks behind salvage but before towage. For reasons which I will explain later, it seems to me that there is another way of looking at the problem. I will start however on the debated question of whether the services rendered is towage or salvage.

SERVICES RENDERED - TOWAGE OR SALVAGE

4. From the factual account given earlier, it seems to me that the original contract made was for salvage services rather than mere towage, because what was agreed was for the Plaintiff to send out a tug for assistance to the Vessel rather than for a mere towage from a stated position to Hong Kong. The Vessel was in open sea, without power and drifting and was therefore exposed to danger and it was necessary to give her such assistance as might be necessary to enable her to be brought back to safety in Hong Kong. On these facts, I find that the agreement was for salvage services although the parties contemporaneously might have used the word towage, a prime example of this was the Plaintiff's invoice.

5. This finding should therefore be sufficient to determine the matter at issue. But in the event that I might be wrong on my finding that the oral agreement was for salvage services, I will proceed on the basis that the oral agreement was for mere towage and consider whether the circumstances were such as to change the nature of the contract from towage to salvage.

6. The oral agreement was made on the basis of an agreement reached on the phone where the Plaintiff was in substance asked to tow the Vessel from the position given to Hong Kong. When the Vessel could not be found at the location given, could it be said that the duties of the Tug under the towage contract ceased. English law has always placed a duty on a ship which has undertaking a towing contract. In The Leon Blum [1915] P. 90, Sir Samuel Evans, the President said at page 96:-

"Tugs which have been engaged to tow have certain duties, to remain by the tow in circumstances of danger, and to render such assistance as they can or perhaps such as it would be fair and reasonable to expect them to render without running undue risks to themselves and their crew. Apart from such duties arising from the contract they would have others of a moral kind which must be distinguished from the former. Thus the duties of tugs may be only of such a character as are common to all honest seafaring persons, apart from any legal obligations; such moral duties as were in the mind of Lord Stowell, when he said: "It is the duty of all ships to give succour to others in distress; none but a freebooter would withhold it." Or they may be such duties as are obligatory by law on persons who have contracted to tow. The line between these may be difficult to draw, and the use of the word 'duties' as common to both classes must not be allowed to confuse them."

7. What is somewhat unique about this case is that this was not a situation of a tug having to tow a ship from one calm harbour location to another calm harbour location but from one position in an open sea back to Hong Kong. There was no question of the tug having the other ship already under tow and then events taking place whereby the duties of the tug might be said to continue to stand by the tow, notwithstanding the changed circumstances. Here when the Tug arrived at the given position, the Vessel could not be found and the question is how far did the duty of the Tug continue under the towage contract before the Tug was relieved of its duties under the towage contract. This is where the original characterisation of the oral contract become important. If the original characterisation of the oral contract was salvage then it seems to me reasonable to infer from it that the Tug had to do everything it could to assist the Vessel including searching everywhere for the Vessel and then render whatever assistance the Vessel required to bring the Vessel to safety. That is after all the essence of salvage. But if the oral contract was characterised as being merely towage and not salvage, then it seems to me following from it the Tug was not obliged to search a large area of the sea to look for the Vessel and certainly not some 7 hours to find the Vessel. It took the Tug only 6 hours to sail from Hong Kong to the reported position and if the Vessel was there then it would probably take a little more than 6 or 7 hours to tow the Vessel back to Hong Kong. The Tug could hardly be expected to spend hours and hours to search for the Vessel and certainly not as many hours to search for the Vessel as it would have taken to come out to the Vessel from Hong Kong. What had happened in my view is that the Tug had crossed from the towage contract duty to the moral duty referred by Sir Samuel Evans, when the Tug found the Vessel some 7 hours later. Therefore in my judgment, when the Tug eventually found the Vessel, it was acting as a volunteer with a moral duty and freed from the restraint of a towage contract duty. It followed therefore in my view the Tug was entitled to salvage service award.

8. The rationale of the Courts confining tugs to the towage contract is so that little departure from the exact mode of the towage contract is not magnified by the tugs to elevate from towage to salvage and to increase the amount of claim by a substantial salvage award sum. As said in Kennedy on Salvage, 5^th edition at para. 499:-

"The court's reticence has the effect of keeping the parties to their contract so far as it is possible, protecting the tow from extortionate demands which may be made by the tug where the tow may be in a difficulties, and protecting the tow so far as is possible from the large amount of salvage which is normally awarded to tugs by virtue of the amount of valuable property which is risked by salvors which are tugs."

The foundation of this rationale was laid in last century in cases such as The Liverpool [1893] P154, where Gorell Barnes, J. said at 164:-

"While it is the duty of the court to take care to adequately remunerate all salvors for salvage services, in order to encourage those services to be performed-and in this spirit salvage services are always looked upon in this court-it is equally the duty of the court to see, where a towing contract has been made, that a little departure from the exact mode in which that contract is to be performed is not magnified so as to convert towage into salvage."

In the very old authority of The Minnehaha (1861) 15 Moo. 133 much of the same thing is also said. What is significant about this approach of the Court is the necessity to confine the tugs to the towage contract sum and to prevent minor change of circumstances to increase the amount of the tugs claim by reason of characterising the claim as one of salvage. It is the increase in the claim which is the subject of the Court's restraint or careful control. This element is not present in this case, as the Plaintiff is not seeking a larger amount because there was salvage rather than towage. The unfairness here is not of the tug but of the tow, namely with the tow through the Mortgagee, advancing a case that the Tug should receive nothing for her valuable services.

9. The authorities have not in the past quite analysed the conversion from towage contract to salvage services from the point of view of crossing the towage contract duty to the moral duty. The Admiralty Court of England had approached the towage contract/salvage dichotomy by reference to the test laid down by Hill, J. in The Homeward (1928) 31 LI. Rep. 336 at page 339-40:-

"To constitute a salvage service by a tug under contact to tow two elements are necessary:

This is the test which was strongly urged upon me by Mr. Hingorani for the Mortgagee. I myself have considerable doubt that this is necessarily the correct test but for a variety of reasons, as I am in favour of the Plaintiff Tug overall, I will for the purpose of this judgment apply this test, assuming that it is the correct test. The result in my judgment is in favour of the Plaintiff because:-

(1) The Vessel was in a position of considerable danger which was not reasonably contemplated at the time when the oral contract was entered into, Mr. Hingorani argued that all the dangers were within the contemplation of the parties when the oral contract was made on the telephone. I disagreed. He could not have it both ways because the oral agreement was only for towage which denotes very little danger and that is why it was held not to be salvage contract. Being therefore a mere towage contract, the danger to the Vessel must be measured by reference to that towage contract. It was clear that the parties acted very quickly that night. There was neither the evidence nor the likelihood that the parties would have the chart in front of them and had done a plotting and calculation of how likely the Vessel would drift to that position of danger where she was eventually found at 1420 on 13^th July. The fact that the Tug took some 7 hours to search for the Vessel clearly disproved this suggestion that the danger the Vessel faced in the afternoon of the 13^th July was within the reasonable contemplation of the parties at eleven o'clock the night before.

(2) The risk undertaken by the Tug and the extra duties performed by the Tug were not in my view within the scope of the towing contract. Towage contract prices are based to a large part on two factors:-

(a) the amount of time, it would take the Tug to perform the towage services and in many ways the prices are by reference to the time the Tug would be out of the Tug Station and

(b) the distance the Tug had to travel to effect the service.

Once this case had to be considered on the basis of mere towage contract (not salvage contract), it must follow in my view that it was not within the scope of a towage contract for the Tug to spend either indefinite time or uncertain number of hours and of uncertain Tug travelling distance searching for the tow in order to find the tow (if it could be found at all). (The evidence is that the price was agreed based on a calculation of the distance from Hong Kong to the reported position of the Vessel and back.) So far as the additional risk and dangers to the Vessel and the Tug are concerned, these would be even less within the scope of a mere towage contract as it could hardly be said that the parties on the telephone even imagined that this situation would arise. I therefore do see the case very differently from Mr. Hingorani and I cannot accept his submission that towage contract imposes on the Tug a duty to search the Vessel no matter how long and no matter in whatever dangerous position that the Vessel and the Tug might find themselves in and that all these are included within the agreed towage remuneration of $150,000. As I have said the Mortgagee could not have it both ways. If the oral contract was for salvage then understandably these duties would be included in the oral contract but if the oral contract was for mere towage from one point to another point then the duties of the Tug are very limited and certainly did not extend to long searching for the Vessel. Accordingly, I reject the contention of Mr. Hingorani that what the Tug actually did was all within the contemplation of the parties and that there was neither additional risk nor additional work performed by the Tug which was outside the scope of the towing contract.

10. For reasons stated above, I therefore find that the services performed by the Tug was salvage. The claim of the Tug therefore deserves to have the high priority given to it by established law, namely ahead of the Mortgagee claim. However, it seems to me plain that the facts of this case indicate that there are two more compelling reasons, which I regard as my primary reasons, for holding that the claim of the Plaintiff should rank in priority to the claim of the Mortgagee. Unfortunately, at the hearing Counsel did not focus on these two compelling reasons and therefore I did not hear any argument on this subject.

PRIORITY BASED ON BENEFIT TO ALL & PUBLIC POLICY

11. The law of Admiralty on priority is based on equity, although such equity has to be exercised according to some established general principle. Fundamental to the general principle on priority is the notion that a person who preserves the res (ship) for the benefit of all claimants has a prior claim to the res from the other claimants. Notions of fairness will recognise that efforts made to preserve the res (the foundation of all actions in rem) must receive the commensurate reward of being given priority to the res. It is for this reason that claims in the form of preservation of res for everyone, such as salvage and wages, are given very high priority by the Admiralty Court. As is said in Thomas on Maritime Liens at para. 419:-

"the preserving lien is viewed as possessing a "superior equity", the broad effect of which is to give a lien arising out of a benefit conferred upon a res a prima facie priority over all existing liens whether they be contractual, quasi contractual or tortious in nature."

A salvage subsequent to a previous lien therefore under English law has always enjoyed very high priority. The reason for this very high salvage priority is simple, because without the performance of the salvage to preserve the res, there would be nothing for the other liens on which a claim could be made. Without the salvage, either there will be no res or there is less of a res for everyone (e.g. vessel is grounded and therefore far less valuable as a res). As was said by Langon, J. in The Mons [1932] P. 109 at 111:-

"...the salvor who has preserved the whole of the res should have his claim considered in priority to the various creditors of the ship who would have nothing upon which to claim if the exertions of the salvor had not been made."

This "superior equity" is of general application and is not confined to salvage although the most frequent and well known application of the principle is in respect of salvage. The application of this "superior equity" principle to the present case is that irrespective of whether one classifies the services performed by the Plaintiff as salvage or towage, what cannot be disputed is that these services had preserved the res for the benefit of all liens including in particular the mortgage lien. If the Tug did not come to the assistance of the Vessel and did not rescue the Vessel from danger, there would likely be no res or possibly a damaged res and it follows therefore in my judgment that both on basis of equity and on basis of the established principle of "superior equity" that the Plaintiff's claim should be given a priority higher than the Mortgage claim.

12. There is yet finally another reason which I consider entitles the Plaintiff to higher priority and that is Public Policy should encourage efforts to save a Vessel, even when there was in existence a towage contract. Public Policy of course has always recognised that salvage should be encouraged and for that reason salvage has been generally afforded a very high priority. In relation to towage however, the established principle seems to be that it enjoys a low priority. What should be the position in relation to services which are really in the nature of salvage but which arose out of the towage contract and which are subsequent in time to the creation of other liens. In these circumstances, should Public Policy extend the high priority of the pure salvage also to the towage/salvage services so as to give proper encouragement to a tug (who is otherwise under a towage contract) to render special services in the nature of salvage or akin to salvage. In my view, the answer must be yes, as this would serve to promote preservation of property rather than to discourage the preservation of property and to encourage tugs to save property by the taking of substantial risk with the corresponding promise of a high priority for such services.

13. I therefore conclude that on the grounds of benefit to all and public policy, the claim of the Plaintiff ought to be given higher priority than the claim of the Mortgagee. I must however repeat that I have reached this decision without the benefit of arguments from Counsel. Having regard to the small amount at stake and the clear conclusions I have reached, I had not regarded it as necessary to seek further submissions from Counsel before handing down this Judgment.

CONCLUSIONS

14. On the basis of my reasons given earlier, I conclude that on the two Motions before me that the following Orders should be made:-

As the matter of priority based on benefit to all and public policy had not been argued before me, the parties might wish to advance submissions to me and accordingly I direct that the Orders in the two Motions should not be drawn up for 7 days to enable arrangements to be made should the parties wish to present further arguments to me on this aspect.

Representation:

Mr. Anthony Houghton instructed by Messrs Sinclair Roche & Temperley for South China Towing Co. Ltd., the Plaintiff in AJ430/97

Mr. Hingorani instructed by Messrs. Holman Fenwick & Willan for Focal Finance Ltd., the Mortgagee, the Plaintiff in AJ 396/97