The Mauritius Sugar Syndicate (the MSS) sold approximately 11,150 mt of sugar to Tate & Lyle Refineries Ltd (T & L). Agents of the MSS chartered the Rena K from its owners, Black Lion Shipping Co SA, to transport the cargo. However, upon leaving St Louis, seawater entered the Rena K's hold, resulting in damage to approximately 2,440 metric tons of sugar, which was subsequently jettisoned.

While the Rena K was still en route, T & L, as the plaintiffs, began an action in rem against the Rena K and against the shipowners in personam, seeking damages for the breach of duty related to the carriage of the cargo. The amount claimed was GBP 549,000 inclusive of interest and costs.

Thereafter, the writ was served on the Rena K, leading to its arrest in the action. The shipowners' solicitors accepted service of the writ in personam. The defendants then entered an appearance in the action and filed a notice of motion requesting, first, a stay of the action on the grounds that the dispute should be referred to arbitration as agreed by the parties. Second, they sought the release of the Rena K from arrest, contingent upon the stay of action.

An agreement was reached between the plaintiffs, the shipowners, and their P&I club. This agreement ensured the release of the vessel while simultaneously preserving all the plaintiffs' rights which they would have possessed if the Rena K stayed under arrest as security. Alternatively, if maintaining the arrest was not possible, the agreement aimed to obtain comparable security through a Mareva injuction. Security was provided by a letter of undertaking (LOU), and the Rena K was released from arrest.

The Court noted that a survey conducted on the ship revealed that the ingress of water resulted from pre-existing defects, rendering the ship unseaworthy at the start of the voyage. Since the carriage of the cargo was governed by the Hague Rules, the shipowners had the obligation to prove that, despite unseaworthiness, they had exercised due diligence to make the vessel seaworthy.

The Court considered four questions:

1) Was the dispute to which the cargo owners' action related one which the parties had agreed should be referred to arbitration?
2) If so, were the owners entitled to a stay of the action?
3) If so, were the shipowners entitled to the unconditional release of the ship from arrest, along with and consequent on such stay?
4) If so, were the cargo owners entitled to a Mareva injunction as an alternative security for their claim regarding the ship?

Held: On questions 1) and 2), an order for a stay of action is granted. On questions 3) and 4), a declaration should be made stating that the club is not entitled to the return and cancellation of its letter of undertaking.

Regarding the first question, the cargo owners' action is based on the bills of lading, and therefore, the dispute arises from those documents. Hence, the dispute falls within the scope of the arbitration agreement in the bill of lading.

On the second question, the cargo owners are entitled to a stay under s 1(1) of the Arbitration Act 1975.

On the third question, the shipowners argued that whenever an action in rem, involving an arrested ship, is stayed under s 1(1) of the Arbitration Act 1975, an order for the unconditional release of the ship from arrest must be issued. They further contended that the Court had no discretion to deny such an order.

The Court referred to the different possible approaches put forward in The Golden Trader [1975] QB 348. The first approach was for the Court to retain security in order to satisfy the judgment or award of the other tribunal. This approach, known as 'the retention method', was contemplated by arts 7.1-4 of the Arrest Convention 1952, to which the United Kingdom was a party. The second method involved the Court releasing the security, provided that the defendants offered equivalent security outside the Court to satisfy the award or judgment of the other tribunal.

The Court then considered whether the view in The Golden Trader that the Court had no jurisdiction to arrest or keep a ship under arrest solely to provide security for the payment of an arbitration award, as opposed to a payment related to a judgment or settlement in the action in rem, was correctly decided. The Court disagreed. The reasons for this were twofold. First, the Court believed that, quite apart from any international Convention dealing with the matter, a court should have the power to retain security provided in an action in rem when granting a stay due to the necessity of proper adjudication in another tribunal, in order to satisfy any award or judgment of the other tribunal. Second, arts 7.1-4 of the Arrest Convention 1952 contemplated the use of this 'retention method'.

However, the Court pointed out that in The Golden Trader, the Court had stated in its judgment that it lacked the power envisioned by the Arrest Convention 1952. This situation was deemed unsatisfactory, and it was considered desirable for Parliament to address it. Therefore, the Court held that the decision in The Golden Trader remained unchallenged. Without any statutory authority enacted by Parliament, the Court lacked jurisdiction to employ the 'retention method'.

The shipowners also argued that a party entering into an arbitration agreement should be deemed to have abandoned their rights to security for any claim covered by the agreement. The Court strongly disagreed with this contention, asserting that the choice of forum for deciding the case's merits differed from the right to security concerning maritime claims under UK admiralty law. It held that this distinction was clearly recognised and given effect by the Arrest Convention 1952.

There was nothing in s 1(1) of the Arbitration Act 1975 which obliged the Court, whenever it granted a stay of an action in rem in which security had been obtained, to make an order for the unconditional release of such security. It was a matter for the discretion of the Court what order it should make with regard to such security, and the way in which it exercised that discretion must depend on the circumstances of each particular case.

If, on the one hand, the case is one where in all probability the stay will be final and there will therefore never be any judgment in the action to be satisfied, the Court should exercise its discretion by releasing the security unconditionally, as was done in The Golden Trader. If, on the other hand, the case is one where the stay may well not be final and there may well therefore still be a judgment in the action to be satisfied, the Court should exercise its discretion either by refusing to release the security at all, or by only releasing it subject to a term that the defendants shall provide alternative security for payment of any award in the arbitration.

Here, if the cargo owners should obtain an award in respect of the full amount of their claim, the shipowners might well be unable to satisfy it, either themselves or through the medium of the club. It followed that a cause of action in rem does not, as a matter of law, become merged in an arbitral award, that this is a case where the stay might well not be final, and that there might well therefore still be a judgment in the action to be satisfied.

Regarding the fourth question, the Court held that the cargo owners were entitled to an alternative form of security for their claim, specifically a Mareva injunction.