This was an application arising from the State of Kerala's arrest of the MV MSC Akiteta II as security for its claim for loss and damages pursuant to the sinking of the vessel MSC Elsa 3 and resulting pollution. The State based its claim on s 4(1)(u) of the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act 2017 (India) (the Act), which provides that

(1) The High Court may exercise jurisdiction to hear and determine any question on a maritime claim, against any vessel, arising out of any - ...

(u) damage or threat of damage caused by the vessel to the environment, coastline or related interests; measures taken to prevent, minimise, or remove such damage; compensation for such damage; costs of reasonable measures for the restoration of the environment actually undertaken or to be undertaken; loss incurred or likely to be incurred by third parties in connection with such damage; or any other damage, costs, or loss of a similar nature to those identified in this clause ...

The State claimed a total of INR 9,531 Crores in compensation. The Court granted a conditional order of arrest of the MV MSC Akiteta II on the basis that it was a sister ship of the MSC Elsa 3 until the owners deposited the claim amount into Court or until security was furnished to the satisfaction of the Court. The owners asked the Court to consider whether the order of conditional arrest was to be continued during the pendency of the suit or whether it required any modification.

The following questions arose for consideration:

1. Whether the State is competent to file this Admiralty suit?
2. Whether the MV MSC Akiteta II is the sister ship of the sunken vessel MSC Elsa 3?
3. Whether the State has made out a prima facie case or reasonably arguable best case with respect to the claims under various heads in the suit?
4. Whether a Letter of Undertaking (LOU) from a Protection and Insurance (P&I) Club can be accepted as security for releasing the arrested vessel?

Held:

1. Yes.
2. Prima facie, yes.
3. Yes. The required security is to be reduced to INR 1,227.62 Crores.
4. No.

Question No 1

The owners argued that the sinking of the MSC Elsa 3 occurred 14.6 nm from the Kerala coast, beyond the territorial waters of India and in the Exclusive Economic Zone (EEZ), over which the State of Kerala has no power. The owners pointed to s 7(4)(d) of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act 1976 (India) to substantiate the point that the Central Government alone has exclusive jurisdiction over the EEZ. The State argued to the contrary that under s 4(1)(u) of the Act, a maritime claim may arise from a damage or threat caused by the vessel to the environment. Oil from the sunken vessel has been spotted inside territorial waters. The vessel is located near territorial waters. It has been causing an imminent threat to territorial waters. Even if the sinking of the vessel occurred outside territorial waters, if it has an effect inside territorial waters or causes a threat to territorial waters, the State is competent to sue on a maritime claim arising therefrom. The Court finds force in this submission.

The owners drew the Court's attention to the Question put by Mexico and the Answer given by the United States in the proceedings of the Main Committee for the Travaux Préparatoires of the International Arrest Convention 1999, as to how a threat of damage can give rise to a maritime claim. The United States answered that a whole series of measures may have to be taken in order to prevent damage to the environment, ie, when a threat has arisen, but a pollution or incident has not yet occurred, and that it is intended to capture claims that would arise in response to the threat of damage, even though the damage itself did not occur. Of course, a mere threat caused by the vessel to the environment alone will not constitute a cause of action for an Admiralty suit. A maritime claim should arise from such a threat. It is not the preventive measures alone that would constitute a maritime claim. A maritime claim would arise from such a threat if, on account of the threat, loss or injury is suffered on account of the inability to perform regular activities in the area where the threat prevails. If there is pollution within territorial waters on account of the sinking of a vessel outside territorial waters, or if the sunken vessel outside territorial waters has been causing a threat to territorial waters, the State can institute an Admiralty suit with respect to the maritime claim arising from such pollution or threat under s 4(1)(u) of the Act.

Question No 2

The State alleges that the MV MSC Akiteta II is a sister ship of the MSC Elsa 3. According to Equasis, the registered owner of the MSC Elsa 3 is Elsa 3 Maritime Inc, and the registered owner of the MV MSC Akiteta II is Nairne Oceanway Ltd. The State contends that the registered ownerships are merely nominal and not indicative of true operational and financial control. The evidence prima facie supports the State's contention that the owners set up shell/paper companies and then register the vessels which are actually owned by them in the name of these shell/paper companies with the sole intention to defraud potential claims against them.

The State cited the decision of the Bombay High Court in MSC Mediterranean Shipping Co v MV MSC Clementina 2015 SCC OnLine Bom 4224, which held that this sort of sister ship issue is to be finally decided in the trial on the basis of the evidence adduced by the parties to the suit. Hence, the Court finds prima facie at this preliminary stage that the MV MSC Akiteta II is a sister ship of the MSC Elsa 3.

Question No 3

In Admiralty suits, the balance of convenience and irreparable injury of the parties are always found in favour of the plaintiff, as if a conditional arrest is not made, the foreign vessel would leave from the jurisdiction of the Court, making the decree that may be passed in the suit virtually unenforceable against the foreign national/entity. Thus, in Admiralty suits, the plaintiffs are always in a better bargaining position than the defendants. There is every chance of the plaintiffs in Admiralty suits misusing their upper hand in order to compel the defendants to accede to unreasonable demands.

When considering an application for conditional arrest, courts should be very careful to ensure a strong prima facie case with reference to the materials produced by the plaintiff. What would be the degree of a strong prima facie case depends on the facts and circumstances of each case. The Court has to satisfy itself that the maritime claim made by the plaintiff is prima facie supported by the materials before it. If the prima facie case is made out by the plaintiff, the Court has to pass an order of conditional arrest, and the rest is a matter of evidence to be proved in the trial. But when the Court is satisfied only with respect to part of the claim in an Admiralty suit, the security shall only be for that part of the claim.

The Bombay High Court held in Shree LTC Agro Sales Ltd v Mediterranean Shipping Company SA 2013 SCC OnLine Bom 852 that ship arrest is regarded as a mere procedure to obtain security to satisfy the judgment; that the plaintiff is entitled to security to the extent of its reasonably best arguable case or prima facie case; and that even assuming that the plaintiff is entitled to insist for security, it cannot be excessive in nature.

The law is thus well settled that security in lieu of arrest of the vessel shall not be excessive and oppressive. When the Court is of the view that the claim is exorbitant, it must make due enquiry to find out the proper amount of security to be demanded from the defendant in lieu of arrest of the vessel.

After an exhaustive examination of the evidence, the Court decides that appropriate security would be INR 1,227.62 crores. This finding would not prevent the State from seeking an increase in the security on obtaining further materials to support such increase during the pendency of the suit. The State has every right to seek the arrest of any other sister vessel of the sunken vessel to demand additional security on furnishing supporting materials for the increase.

Question No 4

Under s 5 of the Act, the purpose of arrest is for providing security for the maritime claim in a Admiralty suit. Section 2(1)(c) of the Act defines 'arrest' as the detention or restriction for removal of a vessel by order of a High Court to secure a maritime claim. A foreign vessel is arrested to secure the decree amount that may be passed against the defendant. The reason for ship arrest is that if the vessel leaves the territorial waters of the jurisdiction without furnishing security, the plaintiff will not be able to execute the decree against the foreign national/entity. If a security in the form of an LOU is accepted from a foreign entity in lieu of arrest, the decree cannot be executed it refuses to honour its LOU. Then, the very purpose of the arrest is defeated. That apart, the Court may not be able to assess the financial and other credibility of the foreign entity that issues the LOU. It is difficult to confirm even the genuineness of an LOU.

In some Admiralty suits, bank guarantees of Indian banks are accepted as security in lieu of arrest. No Court will accept an LOU, even from an Indian bank, as security in lieu of arrest. The Act does not recognise an LOU from a P&I Club in lieu of arrest in an Admiralty suit. This view is supported by the Division Bench decision of the Calcutta High Court in SB International Ltd v The Owners and Parties in Vessel MT Zaima Wavard (1998) ILR 2 Cal 222 in which the Court refused to accept a P&I Club LOU to release a vessel from arrest, holding that the Court is more concerned with the possibility as to what will happen if the P&I Club does not pay up. In that event, the plaintiff has to go abroad. The very purpose of obtaining Admiralty security, that the plaintiff does not have to chase the ship, or the owners and parties interested in the ship, all over the world, would be defeated, because the plaintiff, even after winning its Admiralty suit, would have to go to England to enforce the letter of security. An LOU from a P&I Club cannot be accepted as security for releasing the arrested vessel.