Arrest of claims for hull insurance proceeds

Shinichiro Yamashita
Attorney-at-law, Hiratsuka & Co, Tokyo
sy@h-ps.co.jp  

Naruku Okamoto
Attorney-at-law, Hiratsuka & Co
no@h-ps.co.jp

Introduction

In Japan, there are some court decisions concerning arrest (legally termed ‘seizure’) of claims for hull insurance proceeds. As such, seizures may be useful in securing satisfaction of claims for damages arising from marine casualty, this article outlines them.

Where a creditor holds a claim for damages against a debtor arising from a marine casualty, if the debtor possesses sufficient financial resources, the creditor need only obtain a judgment and enforce it against the debtor’s assets. However, where the debtor is a company incorporated in a flag of convenience jurisdiction that owns only a single vessel, and that vessel has become a total loss as a result of a marine casualty, the standard approach of obtaining a judgment and enforcing it will not prove effective. The creditor will want to secure something to serve as security for the debtor’s payment. If the debtor refuses or ignores such a request, the creditor must take legal action to put pressure on the debtor to provide security. Examples include the attachment of the debtor’s parent company’s assets through the piercing of the corporate veil, or the arrest of vessels owned by the debtor’s associated companies via ‘associated ship arrest’; however, there is also the option of seizing the debtor’s claim for hull insurance proceeds. Below, we provide an overview of decisions handed down by Japanese courts.

Court decisions

Tokyo District Court Decision of 19 August 1991 (Hanrei Times 764.286, The Manila Transporter): A cargo vessel carrying iron ore sank whilst sailing in the Indian Ocean. The time charterer of the vessel asserted that it has a right to claim damages from the owner of the vessel and sought seizure of the owner’s claim for hull insurance proceeds. The basis of the time charterer’s claim was breach of contract, and the alleged damages were the total loss of the cargo and loss of profit. The court ruled that: (1) the time charterer had a claim for damages against the owner; (2) in respect of the claim, the time charterer had a statutory lien over the vessel; and (3) by virtue of the effect of the lien (extension of security interest to the proceeds of the collateral), the owner’s claim for hull insurance proceeds against the hull insurer was subject to seizure.

Tokyo District Court Decision of 15 December 1992 (Hanrei Times 811.229, The Nagasaki Spirit): A container vessel and a tanker collided in the Strait of Malacca, causing a fire on board the container vessel, resulting in the total loss of the container vessel and its cargo, and the death of all crew members. The owner of the container vessel asserted that it had a right to claim damages from the tanker owner and sought seizure of the tanker owner’s claim for hull insurance proceeds. The basis of the container ship owner’s claim was tort and the alleged damages were the total loss of the container vessel, damages sustained by bearing the obligation to compensate the crew, damages sustained by bearing the obligation to compensate for the total loss of the cargo on board the container vessel, and damages sustained by bearing the obligation to reimburse the costs incurred by the salvors who carried out oil spill response operations. The court ruled that: (1) the container vessel owner had a claim for damages against the tanker owner; (2) in respect of the claim, the container vessel owner had a statutory lien over the tanker; and (3) by virtue of the effect of the lien (extension of security interest to the proceeds of the collateral), the tanker owner’s and its affiliated companies’ claims for hull insurance proceeds against the hull insurers were subject to seizure.

Tokyo District Court Decision of 13 February 2006, Tokyo Court of Appeal Decision of 24 March 2006 (Unpublished, The Twin Star): A Panamanian-flagged cargo vessel and a Maltese-flagged cargo vessel collided in a Peruvian port, resulting in the sinking of the Panamanian vessel. The Maltese vessel owner asserted that it has a right to claim damages from the Panamanian vessel owner and sought seizure of the Panamanian vessel owner’s claim for hull insurance proceeds. The basis of the Maltese vessel owner’s claim was tort, and the alleged damage was the damage sustained by bearing the obligation to compensate for the total loss of the cargo onboard the Panamanian vessel (the cargo interests had arrested the Maltese vessel). The court ruled that: (1) the Maltese vessel owner had not yet had a claim for damages against the Panamanian vessel owner because the Maltese vessel owner had not yet compensated the owners of the cargo onboard the Panamanian vessel; (2) in respect of recourse claim in future, no one has a statutory lien; and (3) the application for the seizure of the claim for hull insurance proceeds was dismissed.

Tokyo District Court Decision of 3 April 2014 (Maritime Law Study Group Journal 227.26, The Beagle III): A cargo vessel and a container vessel collided, resulting in the sinking of the cargo vessel. The time charterer of the cargo vessel asserted that it had a right to claim damages from the owner of the vessel and sought seizure of the owner’s claim for hull insurance proceeds. The basis of the time charterer’s claim was tort, and the alleged damage was the total loss of the fuel oil and the diesel oil. The court ruled that: (1) the time charterer had a claim for damages against the owner; (2) in respect of the claim, the time charterer had a statutory lien over the vessel; and (3) by virtue of the effect of the lien (extension of security interest to the proceeds of the collateral), the owner’s claim for hull insurance proceeds against the hull insurer was subject to seizure.

Analysis

Three of the four cases mentioned above involved vessels subject to a statutory lien had sunk and become total loss. In one case (The Nagasaki Spirit), the Tokyo District Court’s ruling did not state that the vessel had become total loss, and therefore, it would be a case of partial loss. In theory, the effect of statutory lien extends to owner’s claim for hull insurance proceeds, regardless of whether a vessel in question has suffered total loss or partial loss. However, where the damage to the vessel is minor, it is sufficient simply to arrest the vessel. In the case mentioned above, it appears that the vessel sustained considerable damage (see the House of Lords judgment in Semco Salvage v Lancer Navigation [1997] 1 Lloyds Rep 323). It is presumed that the parties to that case concluded that seizing the vessel would not be beneficial and therefore proceeded to seize the claim for hull insurance proceeds.

In all four cases mentioned above, the hull insurer is a Japanese corporation. There is a dispute in legal academics as to the circumstances under which Japanese courts have international jurisdiction. The prevailing view holds that it must be possible to bring a judicial claim against hull insurer in Japan in order to admit international jurisdiction of the Japanese court. Consequently, if the hull insurer is a foreign corporation, it is highly likely that, even if a creditor applies for seizure of claim for hull insurance proceeds, the Japanese court will dismiss the application on the grounds that it lacks international jurisdiction.

Claims for hull insurance proceeds are seized on the basis of a statutory lien without a creditor having obtained a court judgment – and consequently without a debtor having an opportunity to contest the claim (the same applies when a vessel is arrested in Japan on the basis of a statutory lien). For this reason, Japanese courts tend to scrutinise evidence rigorously. See the Sendai Court of Appeal Decision of 11 November 2005 (the Financial and Business Law Precedents 1231.24).

In order to prove the existence and amount of the creditor’s claim against the debtor, collaboration with lawyers from the country whose law governs the contract or the country where the tort occurred is essential. It is difficult to carry out this work with Japanese lawyers alone.

A creditor must prove that it holds a claim against a debtor. In the case of a tort claim, the requirements of both the law of the place where the tort occurred and the law of Japan must be satisfied with regard to both liability and damages (Article 22(1) of the General Rules on the Application of Laws).

In this regard, a claim for damages may be asserted where the damage consists of a creditor’s bearing obligation to compensate to a third party for damages (a creditor’s future claim of recourse against a debtor). In The Nagasaki Spirit case, the Tokyo District Court admitted such a claim, whereas in The Twin Star case, both the Tokyo District Court and the Tokyo Court of Appeal rejected it. In current practice, it would be difficult to seize a claim for hull insurance proceeds even if a creditor alleges and establishes its future right of recourse against a debtor.

In Japan, there is a fierce debate regarding the governing law for judgment of establishment and effect of a statutory lien. Typical views are:

• the flag state law;
• the law of the forum;
• the cumulative application of the governing law of the secured claim and the flag state law; and
• the cumulative application of the governing law of the secured claim and the law of the location of the subject matter.

In the four cases mentioned above, the courts have consistently held that the governing law for judgment of establishment of a statutory lien is Japanese law.

It should be noted that Japan has not ratified either the 1952 Arrest Convention or the 1999 Arrest Convention. However, in respect of a claim arising from loss or damage to property other than the vessel itself, occurring in direct connection with the operation of the vessel, a person holding the claim has a statutory lien over the vessel and its appurtenances involved in the incident (Articles 95(1) and 3(1)(i) of the Shipowners’ Liability Limitation Act).

A shipowner may obtain loans from financial institutions when building or purchasing a vessel, and may assign its claim for hull insurance proceeds as security for such loans. There appear to be no Japanese court precedents in which the priority has been disputed between a court seizure of clam for hull insurance proceeds and an assignment of the claim to a financial institution for security purposes.

In the case of an ordinary assignment of a claim, creditor P holds a claim against debtor X, and debtor X holds a claim against third-party debtor Y; P then seizes the claim. Furthermore, X assigns the claim against Y to Q, and the priority between P and Q may be disputed. In such cases, the priority between a court seizure and an assignment of a claim (ie, the priority between P and Q) is determined by the sequence of events between: (1) the date and time on which the court order for seizure of the claim was served on Y; and (2) the date and time on which a notice of the assignment of the claim bearing a certified date reached Y, or the date and time of Y’s acceptance bearing a certified date (the Supreme Court Judgment of 4 October 1983, Financial Law Journal 1049.75).

Similar scenarios may arise in relation to the assignment of claims for security purposes. Suppose creditor P holds a claim against debtor X, and debtor X holds a claim against third-party debtor Y; P then attaches the claim. Furthermore, X assigns the claim against Y to Q for security purposes, and the priority between P and Q may be disputed.

In this regard, the Act on Contract of Assignment for Security Purposes and Retention of Title was enacted on 30 May 2025. This Act does not establish criteria for determining the priority between court seizure and assignment of claim for security purposes. However, Article 49 of the Act stipulates that the priority between security interests arising from assignment of claim shall be determined by a notice of assignment bearing a certified date or by the debtor’s consent bearing a certified date. Furthermore, Article 51 of the Act stipulates that the priority between a security interest arising from assignment of a claim and a pledge of a claim is determined by a notice of assignment bearing a certified date or the debtor’s consent bearing a certified date. Taking these provisions into account, the priority between a court seizure and a security interest arising from assignment of a claim is likely to be determined by the sequence of events between: (1) the date and time on which the court order for seizure of the claim was served on Y; and (2) the date and time on which the notice of assignment bearing a certified date reached Y, or the date and time of Y’s consent bearing a certified date.

After a seizure order of a claim for hull insurance proceeds has been served on a hull insurer, if a financial institution wishes to assert its priority stating that it had received an assignment of the claim as security prior to the service of the seizure order, it must file a third-party action for objection (Article 38 of the Civil Execution Act) to contest the matter. Although the financial institution may ultimately prevail, this is a time-consuming process as it involves litigation.

However, the seizure of a claim for hull insurance proceeds is often carried out not for the creditor to receive payment directly from the hull insurer, but for the purpose of obtaining a letter of guarantee from the debtor or a related party, and is frequently withdrawn once such a letter has been obtained. It is therefore presumed that, following service of the seizure order, a reasonable resolution is sought through consultation amongst the parties concerned.

Conclusion

The above outlines the situation in Japan. The authors believe that similar systems exist in other countries, and that they are utilised, or could potentially be utilised, to enhance the recoverability of claims for damages arising from marine casualty. It is hoped that this article will be of assistance to those involved in maritime claims, particularly maritime lawyers.