Zhoushan Zhongchang Shipping Co. v. Handybulk Shipping Ltd., 2004 FC 1135

Date: 20040816

Docket: T-738-04

Citation: 2004 FC 1135

BETWEEN:

                                      ZHOUSHAN ZHONGCHANG SHIPPING CO.

                                                                                                                                              Plaintiff

                                                                           and

                                                  HANDYBULK SHIPPING LTD.,

                             THE SHIP "OTELLO MANSHIP", HER OWNERS AND

                                            ALL OTHERS INTERESTED IN HER

                                                                                                                                      Defendants

                                                        REASONS FOR ORDER

HARGRAVE P.

[1]                 These reasons arise out of a motion on short leave, which was adjourned to allow the parties to file additional material, to set the amount of security needed to have the Otello Manship released from arrest. In these reasons I have used the term "bail" as a general term for the security required to obtain the release of the vessel. There is the usual consideration of the Plaintiff's reasonably arguable best case as a measure of bail, a concept which ought to be followed unless there are special circumstances: see C.P. Ships (Bermuda) Ltd. v. The "Panther Max Canmar Supreme", an unreported decision of Mr Justice Gibson, 2002 FCT 406 at paragraphs 18 through 20 as to special circumstances. I must, as a special circumstance, consider the impact on the amount of bail of the doctrine of mitigation: if a plaintiff fails to mitigate or reasonably contain his or her loss, "A defendant is only liable for such part of the plaintiff's loss that is properly to be regarded as caused by the defendant's breach of duty" (The Solholt, [1983] 1 Lloyd's Rep. 605 at 608, a decision of the Court of Appeal).

[2]                 In considering both the doctrine of mitigation and the principle leading to an appropriate amount of bail, I have kept in mind that I must not decide the case: that is the job of the trial judge, or in this instance a London arbitrator: thus the task of setting bail is to arrive not at an absolute figure, but a figure reflecting the reasonably best arguable case of the plaintiff. Determining bail to correspond to the reasonably best arguable case must always be at a discretionary approximation bounded, on the one hand, by the right of an arresting plaintiff to have sufficient bail, but on the other hand limited by the requirement that the defendant ship owner not be subjected to the unnecessary hardship of excessive bail in order to regain the use of the ship. Here I would note that it is of no real help to try to avoid the dilemma, of bail appropriate to the circumstances of each side, by relying on an after-the-fact resolution through execution against assets if the bail is too low, or of an award to costs to reimburse a defendant who had been required to post excessive bail.

[3]                 The Plaintiff, in its Statement of Claim, seeks as alternatives either damages for breach of the 1 September 2003 contract for sale and purchase, being the difference between the initial agreed sale price and the subsequent market value of the vessel, in this instance on 30 April 2004, or damages for loss of use calculated on the basis of the actual net daily charter hire received for the vessel by Handybulk. On the motion the Plaintiff sought security for breach of contract, that security to cover any award of damages by way of a London arbitration between the parties. In this instance the Plaintiff's reasonably best arguable case, for breach of the contract of sale or purchase, adjusted by the circumstances, including those of a Plaintiff who has an optimistic outlook and the Defendants who believe discussion between the parties and reasonably proper mitigation could have avoided the need for bail, is $9,128,210.00 (US): bail will therefore be, in round figures, $9.1 million (US). Before considering parts of this in more detail I will turn to some relevant background.

BACKGROUND

[4]                 By a contract dated 1 September 2003, set out in a Saleform 1993 Agreement, the Plaintiff, Zhoushan Zhongchang Shipping Co. Ltd. ("Zhoushan") and the Defendant, Handybulk Shipping Ltd. ("Handybulk"), Zhoushan agreed to purchase the Otello Manship, a 42,244 dwt bulk carrier build by Mitsubishi Heavy Industries Ltd., of Japan, in 1985.

[5]                 The price of the vessel, which was to be delivered to the port of Zhoushan in China, between 15 November 2003 and 20 January 2004, was $7,171,500.00 (US): the deposit was remitted by Zhoushan on 6 September 2003. Handybulk continued to use the vessel: on 7 November 2003 the delivery date was extended until 30 April 2004. This latter date is relevant as a valuation date for the vessel in setting damages for breach of contract.

[6]                 On 3 February 2004 Zhoushan, on receiving advice of pending delivery, made a timely payment of balance of $6,619,981.20.00 (US), which included an allowance for bunkers aboard the vessel, to the HSBC in Hong Kong. Zhoushan was subsequently advised that the Otello Manship would be delivered at the port of Zhoushan on 12 February 2004. There was then a dispute over documentation, Handybulk alleging that the corporate records of Zhoushan's board of directors were not in accordance with Chinese law, a position disputed by Zhoushan. The Otello Manship was not delivered on 12 February 2004.

[7]                 Being concerned that Handybulk might try to sell the vessel elsewhere, Zhoushan obtained an injunction, in Malta, where the Otello Manship was registered, preventing dealings with the vessel.

[8]                 On 3 March 2004 Handybulk again tendered a delivery notice, a 30-day notice and subsequently, on 28 April 2004 tendered a one-day definite notice of delivery, although without advising as to the position of the vessel. The vessel did not arrive by 30 April 2004. Handybulk apparently refused to deliver the vessel because of its interpretation of the injunction against dealing with the vessel, obtained in Malta, which was still in place.

[9]                 All of the foregoing failures to deliver, in the view of Zhoushan a breach of contract, led to the commencement of an arbitration proceeding in London, with Zhoushan appointing its arbitrator on 5 March 2004. Handybulk did not appoint an arbitrator. The London arbitration is proceeding before a sole arbitrator.

[10]            On 7 May 2004 there was a repudiation of the sale and purchase agreement. Here there is some disagreement as to who repudiated the contract and who accepted the repudiation, however for the purpose of these reasons I accept that the contract came to an end on that date. Subsequently Handybulk chartered the vessel to Cargill International S.A. to load grain at Tacoma, Washington, for Asian ports, the vessel first being ordered to Vancouver to bunker, where the vessel was arrested.

CONSIDERATION

Reasonably Best Arguable Case

[11]            I turn to the security that must be put in place in order to obtain a release of the Otello Manship from arrest. The starting point, in an instance of breach of contract for the delivery of a vessel is the value of the vessel on the relevant delivery date, the last day of the extended delivery date range, 30 April 2004, as compared with the contractually agreed price of the vessel, thus in a rising market giving a figure for loss of profit which would have accrued to Zhoushan had Zhoushan became the owner. In effect this is a loss of profit figure, for clearly Zhoushan could have sold the vessel at the end of April 2004 for substantially more than the purchase price agreed to in November of 2003.

[12]            The parties are not in agreement as to the market value of the Otello Manship on the last day on which the vessel could have been delivered.    To establish value, Handybulk tenders an assessment of the value of the Otello Manship. An assessment is not an appraisal by actual attendance of an appraiser, but rather it is a market estimate given the particulars of the vessel. That evaluation, by Cleaves Capital Ship Brokers Ltd., of London, is $13,750.00 (US) as of the end of April 2004.

[13]            The Certificate of Valuation of the Otello Manship, relied upon by Zhoushan, was issued by Simpson Spence & Young who put the value of the vessel, as of 30 April 2004, between a willing seller and a willing buyer, at "approximately U.S. $15,500,000.00". While this is said to be an approximate value, Zhoushan also tenders a 30 April 2004 Optima Ship Brokers Ltd. summary of actual sales, showing the sale of the Qui Gon Jinn, a slightly smaller bulk carrier also built in 1985 in Japan, with Ocean Bulk Maritime as seller to undisclosed Greek buyers at $14,500,000.00 (US). PF Vassoe, of Oslo Norway, then document what is obviously an immediate re-sale by the Greek buyers to Far-eastern buyers at $15,500,000.00 (US).

[14]            I do not have to decide which of the valuations is in fact correct. The test is only as to the reasonably arguable best case that Zhoushan can make as to the value of the Otello Manship on 30 April 2004, although the values put forward by Handybulk and by Zhoushan are really not that far apart. The reasonably arguable best case as to value on 30 April 2004 is that the Qui Gon Jinn, a slightly smaller bulk carrier, with cranes and engines similar to those of the Otello Manship, built in the same year, in fact sold for $15,500,000.00 (US). However there is the issue of mitigation.

Mitigation

[15]            Whether or not there ought to have been some mitigation by Zhoushan, of the loss suffered, should be taken into account as a special circumstance by which to moderate bail from the amount of the reasonably best arguable case. This was at issue in The Solholt, [1981] 2 Lloyd's Rep. 574 [Q.B. (Com. Ct.)], a decision of Mr Justice Staughton. There he began with the concept that the damage suffered, in a sale and purchase contract, was the difference between the contract price and the market price. However he then went on to determine that the buyer had in fact failed to mitigate its loss and was not entitled to any recovery. The basis of that decision was that the buyer, when the contract for the sale and purchase of the vessel fell through, merely because of a one-day delay in tendering the ship for delivery, could have made a new offer for the Solholt. The buyer in the Solholt did make an offer to purchase the vessel at $250,000.00 less than the earlier agreed price and that was turned down. However on the evidence Mr Justice Staughton decided that the buyer could immediately have purchased and taken delivery of the vessel, at the agreed place of delivery, for the initial agreed purchase price. The Court of Appeal, [1983] 1 Lloyd's Rep 605 upheld Mr Justice Staughton because the buyer had the alternative of actually purchasing the Solholt, by way of a new contract, the vessel being immediately available at the delivery port, for the original purchase price. Thus the loss of profit claim was denied.

[16]            In the present instance both sides tried to come to an agreement which could have resulted, to a substantial degree, in mitigation of damages, after the vessel had been arrested at Vancouver. However what actually took place at various meetings and the interpretation one should place upon those negotiations is not something that either can or ought to be determined, in any absolute sense, short of a full hearing. Moreover, by the time that the parties decided to discuss resolution, in Vancouver in early June 2004, neither side trusted the other. Certainly, from the point of view of Handybulk, by early June 2004 difficulty with the documents produced by Zhoushan seemed to have disappeared. However a good deal of distrust remained, for it would seem that Handybulk still harboured uncertainties as to the conduct of Zhoushan. From the point of view of Zhoushan, it was concerned that Handybulk had twice failed to deliver the vessel, when it was at or near the delivery port in China and that should the vessel be released from arrest in Vancouver, without proper security, Zhoushan had no guarantee that the vessel would ever be delivered in China.

[17]            Even the point of delivery, the port of Zhoushan, produced friction between the parties. The essence of Zhoushan's requirement for delivery in China is based on evidence that it is a coastal shipping company and that to obtain permission to engage in a foreign voyage, should Zhoushan take delivery of the ship in Vancouver, would be time-consuming and difficult to obtain and that there would be other problems including obtaining a class survey, crewing and licencing which would make Vancouver delivery difficult. The position of Handybulk is that all of those difficulties could be resolved in a couple of weeks. Here again is an issue which can only be resolved at a full hearing where witnesses might be cross-examined under the eye of a judge, or in this instance at a full hearing before a London arbitrator. Thus I am left with determining the reasonably arguable best case of Zhoushan, which is that Vancouver delivery would have been and continues to be unsatisfactory. However there is more to the mitigation aspect.

[18]            Handybulk had proposed, on 30 May 2004, that it complete the Cargill charter and then deliver the Otello Manship to Zhoushan. The present position of Handybulk is that, after meetings between Handybulk and Zhoushan on 3, 4 and 5 June in Vancouver, on 7 June 2004 Handybulk formally tendered delivery of the vessel at Vancouver, with the Cargill charter to be carried out by Zhoushan, the purchase to be at the initial agreed price of $7,171, 500.00. Leaving aside the problem of obtaining permission from the Chinese government to import the vessel and the costs of either taking the vessel in ballast from Vancouver to China, or obtaining further permits and permissions to make a commercial voyage for Cargill from Vancouver to the Orient and then onward to China, such a resolution, in effect a compromise, would still have left Zhoushan with a loss of income claim and with its legal costs to that date.

[19]            Zhoushan was apparently receptive to the idea of releasing the vessel from arrest, allowing Handybulk to complete the Cargill charter and then to deliver the vessel at the port of Zhoushan, but Zhoushan wanted either bank security or a P & I Club letter as security. Zhoushan was not prepared to take a letter of undertaking from the manager of the vessel for, in view of the earlier aborted deliveries, Zhoushan did not feel an undertaking from the manager would advance matters.

[20]            In advance of a final meeting between the two sides, which was to take place on 5 June 2004, Zhoushan proposed that each side produce its closing documents, that Handybulk both pay $2 million (US) as a settlement on the loss of use claim and lodge a $1 million (US) cash deposit as a guarantee that Handybulk would deliver the vessel at Zhoushan, the deposit to be returned on successful delivery.

[21]            The proposal of a $2 million payment, to cover compensation for loss of earnings during the time that Zhoushan would have had the Otello Manship had she been delivered on time, was felt by Handybulk as being contrary to the spirit of mitigation. However one should also look at the overall situation. Mr Bregante, of Genoa, Italy, solicitor for Handybulk, put the daily net hire of vessel at "approximately US $14,000". Zhoushan in turn used a daily net hire figure of $15,731.25 (US), a figure taken from an earlier letter from Mr Bregante. Using that exact figure, rather than an approximate figure of $14,000.00 per day, Zhoushan calculated loss of use at $2,690,043.00 (US), being loss of use over the span of 171 days, running between 12 February 2004, the last day on which the vessel might have been delivered under the original contract and 31 July 2004.

[22]            Handybulk characterizes the $2 million loss of use claim as both inconsistent with mitigation, Zhoushan knowing it would not be acceptable, and as a cash grab, I think perhaps in the American sense of an aggressive collection practice. At least equally valid would be characterization of the $2 million cash compensation proposal as a compromise of the $2.69 million (US) loss of use claim.

[23]            From the evidence before me it would appear that the 5 June 2004 meeting, in Vancouver, was brief. The seller would not agree to pay compensation for loss of use, but suggested some sort of deduction from the purchase price. Handybulk rejected the concept of posting security for delivery of the vessel in Zhoushan. In any event, the proposal of Zhoushan was rejected and the vessel formally tendered for delivery at Vancouver on 7 June 2004. The bearing of all of this on the amount of bail can profitably be analysed, without deciding the present case, within the facts and outcome of The Solholt (supra).

[24]            In The Solholt (supra), as I have already pointed out, the vessel was a day late, but immediately available at the delivery port, for the original price. Because the buyer had the alternative of entering into a new contract for the sale and purchase and immediate possession of the Solholt, there were no damages for breach of contract.

[25]            In contrast, in the present instance, the vessel was not at the agreed delivery port. In addition, Zhoushan had a reasonably arguable case for loss of use. It is reasonably arguable that both sides tried to work out an agreement whereby there might be mitigation, but were unable to come to a mutual accommodation. Whether any fault ought to be attributed to one side or the other, that is for a failure of the part of Zhoushan to mitigate, or for a failure on the part of Handybulk to facilitate that mitigation, is not something to be decided on an application to set bail, for that is a determination of the actual case, something which I may not do.

CONCLUSION

[26]            The reasonably arguable best case of Zhoushan is that it has suffered a loss, a difference between the initial agreed sale price of $7,171,500.00 and the reasonably arguable best case for value as of 30 April 2004, $15,500.00, a loss of $8,328,500.00. A reasonably arguable best case, as to costs, is not $500,000.00, but something less: it is appropriate to reduce that amount, which is excessive, to $300,000.00. Given the claim for damages for breach of contract at this time, some allowance for interest must be made. Simple interest at 6% is a reasonable figure. In that the London arbitration is already under way, a one-year horizon for interest is appropriate. Thus security for the reasonably arguable best case is as follows:

The amount of security in order to obtain the release from arrest of the Otello Manship is therefore set, in round figures, at $9,100,000.00 (US).

[27]            The Plaintiff may have its taxable costs of this motion in a lump sum, based on mid-range Column III of Tariff B and taking into account that the motion took place during portions of two days, in the amount of $1,000.00.

(Sgd.) "John A. Hargrave"

                                                                                          Prothonotary

Vancouver, British Columbia

16 August 2004

                                                             FEDERAL COURT

                           NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                         T-738-04

STYLE OF CAUSE:                       Zhoushan Zhongchang Shipping Co. v. The Ship "Otello Manship" et al.

DATE OF HEARING:                     10 August 2004

REASONS FOR ORDER BY:     Hargrave P.

DATED:                                           16 August 2004

APPEARANCES:                         

SOLICITORS OF RECORD: