by Edward Kuznetsov, MCIArb
Partner, Marine Legal Bureau
LMAA Supporting Member
ek@mlb.lv
When Ship Arrest Becomes a Commercial Weapon
Wrongful Arrest, Commercial Purpose and Causation in Two Interrelated LMAA Arbitrations
Introduction
Ship arrest is one of the most powerful remedies available in maritime law. Its legitimate purpose is straightforward: to provide security for a maritime claim. But arrest inevitably does more than that. It immobilises a ship, interferes with her employment, generates costs and places considerable commercial pressure on the owner.
None of this makes arrest objectionable. Ships are mobile assets, and without an effective right of arrest a claimant may find that a valid maritime claim has little practical value. The difficulty arises where the owner alleges that the arrest was not used simply to obtain security, but as part of a wider commercial strategy.
Two separate but interrelated LMAA references raised that issue in an unusually stark form. They concerned two vessels, referred to here as Vessel A and Vessel B. The vessels belonged to different single-ship owning companies within the same wider shipowning group. The references were never consolidated and each remained legally separate. The same commercial claimant was, however, involved in both, and the same three arbitrators ultimately dealt with the wrongful-arrest issues in the two references.
Each reference produced three awards. The significance of that history is not the number of awards. It is that the wrongful-arrest allegations were determined only after the underlying claims, the circumstances of the arrests, the custodianship arrangements, the applications for judicial sale, the subsequent detention of the vessels and the parties’ competing explanations had been developed in evidence and submissions.
The central question was therefore not simply whether the arresting party had ultimately been wrong about its claims. It was whether the arrests had been sought and maintained for the legitimate purpose of security, or whether the surrounding events proved a different commercial purpose.
Two ordinary maritime disputes
Both disputes began conventionally. Each vessel had been let on bareboat charter. Towards the end of the respective charters, disputes arose concerning the condition of the vessels, expenditure said to have been incurred on them and the financial consequences of redelivery. The vessels were subsequently arrested, and the claims underlying the arrests were then referred to arbitration.
In Vessel A, the first arrest preceded the commencement of the LMAA reference. The arrest order itself contemplated London arbitration as the forum in which the secured claim would be resolved. The arbitration was then commenced while the arrest remained in place. This sequence later formed part of the broader factual background relied upon by the Owners when they challenged the purpose for which the arrest machinery had been used.
The Charterers, as the arresting party, were appointed by the local court as custodians of Vessel A. A substantial monthly custodianship budget was approved and applications for judicial sale followed before the merits of the underlying claim had been finally determined. What might normally have followed the straightforward course of “claim – arrest – security – determination” had instead developed into “claim – arrest – custody – mounting expenditure – proposed judicial sale”.
None of those steps, taken alone, necessarily indicated impropriety. An arrested vessel has to be preserved; preservation costs money; a custodian may have to be appointed; and judicial sale may be justified where the cost of detention threatens to consume the value of the asset. The significance, if any, lay in the combination and sequence of events.
Vessel A: the dispute expands beyond the first arrest
The first award rejected the claimant’s principal substantive claim and the accounting between the parties resulted in a balance in favour of the Owners. That was important, but it did not decide wrongful arrest. English law does not convert an unsuccessful arrest into a wrongful arrest merely because the secured claim later fails.
The dispute nevertheless continued. The first arrest remained in place after the substantive award. The same claimant later obtained a second arrest for a separate bunker claim. Further arrests were also imposed at the instance of another creditor in respect of port-cost claims. Those later arrests were relevant to the factual and causation history, although the third award expressly did not determine the wrongfulness of arrests imposed after the original arrest.
This distinction is important. The later arrests should not be treated as if they were all findings of repeated wrongful conduct by the same arresting party. Their relevance was narrower: they showed how the vessel remained caught in an increasingly complex web of detention, competing claims and security measures, and they later had to be considered when deciding whether losses claimed by the Owners had in fact been caused by the wrongful first arrest.
Vessel B: a different claim, a familiar commercial sequence
Vessel B involved a different owning company within the same wider shipowning group and a different contractual history, but several features were strikingly familiar to those seen in Vessel A. A claim relating to upkeep of the vessel was transferred to the same commercial party involved in Vessel A. The amount transferred was approximately EUR 54,000. The vessel was arrested in the same Baltic jurisdiction and the arresting party again became custodian under the local court’s order.
A second arrest application contemplated approximately EUR 450,000 in custodianship expenditure, many times the amount of the transferred claim. An application for judicial sale followed before the underlying dispute had been finally determined.
During the arbitration the Owners put the commercial point bluntly: why would a party contemplate expenditure of approximately EUR 450,000 in order to recover a claim of approximately EUR 54,000? That disparity did not itself prove bad faith. It was, however, one circumstance requiring an explanation. The Owners contended that, if recovery of the approximately EUR 54,000 claim had truly been the commercial objective, expenditure of approximately EUR 450,000 on custodianship would have been difficult to explain. This disparity therefore formed part of the Owners’ case that the arrest served a different commercial purpose.
The first award in Vessel B dismissed the substantive claim and reserved the Owners’ wrongful-arrest counterclaim. The second award dealt with costs, jurisdiction and procedural and evidential matters while preserving the unresolved counterclaim. The third award determined the pleaded wrongful-arrest claim and the damages sought by the Owners.
The evidential problem: proving purpose
The Owners’ case in both references went beyond saying that the claims supporting the arrests were weak or unsuccessful. They alleged that the arrest process had been used to create conditions in which the vessels could be acquired through judicial sale at prices below their true commercial value.
There was no document recording such a plan, no board resolution and no admission by a witness. If an improper commercial purpose existed, it therefore had to be established largely by inference from conduct and surrounding circumstances.
That feature is important because mala fides and malicious purpose are not tangible facts capable of direct observation. They usually have to be established by inference from what was known and done before the arrest, the manner in which the arrest was pursued, and what happened afterwards. The evidential exercise therefore required a course of conduct to be examined, not merely the wording of the original arrest application.
At the same time, almost every individual circumstance relied upon by the Owners was capable of an innocent explanation. Related companies may share personnel. Claims may lawfully be assigned. Ships may lawfully be arrested. Custodianship is expensive. Judicial sale is an established Admiralty remedy. Creditors may seek to participate in a judicial auction. The real question was whether those individually explainable facts acquired a different significance when viewed cumulatively.
The legal framework applied in the two references
The parties and the tribunal addressed an extensive line of English authority rather than treating the cases as a free-standing exercise in commercial impression. The authorities considered included the nineteenth-century decisions in The Evangelismos, The Cheshire Witch and The Strathnaver, and the modern authorities The Kommunar (No. 3), Willers v Joyce and The Alkyon. Other authorities addressed associated questions of corporate personality, arbitration jurisdiction, redelivery and causation, including Prest v Petrodel Resources, Fiona Trust and The Greek Fighter.
The starting point was The Evangelismos (1858) 12 Moo PC 352. The traditional rule is demanding: the failure of the underlying claim, or even the fact that the arrest ultimately proves unjustified, is not enough. The owner must establish mala fides or crassa negligentia – bad faith or gross negligence of the character recognised by the authorities. The Strathnaver (1875) LR 1 App Cas 58 reinforces the point that a mere error of judgment in arresting a vessel is insufficient to establish liability for wrongful arrest.
The Kommunar (No. 3) [1997] 1 Lloyd’s Rep 22 gave particular practical content to that distinction. Ordinary negligence or a genuine mistake is not enough. The objective basis for the arrest must be so deficient, or the surrounding circumstances such, that the necessary inference as to lack of bona fide belief or gross negligence can properly be drawn. The case also distinguishes a malicious motive from the legitimate motive of seeking to recover sums genuinely believed to be due.
Willers v Joyce [2016] UKSC 43; [2018] AC 779 was not a ship-arrest case, but its treatment of malicious civil proceedings was relied upon in relation to the seriousness of an allegation of malice and the heavy burden involved in establishing the absence of a bona fide basis. The Alkyon [2018] EWHC 2033 (Admlty); [2019] QB 969 confirmed in a modern Admiralty setting that The Evangelismos remains the governing approach and that an arresting party acting in good faith and without the requisite gross negligence does not become liable merely because its underlying case later fails.
These authorities did not provide a mechanical formula. They defined the legal boundary within which the evidence had to be assessed. The question in each reference remained whether the arrests were honest but unsuccessful attempts to obtain security, or whether the evidence established the mala fides or crassa negligentia required by English law.
From individual facts to commercial purpose
The third awards were not identical in their reasoning or degree of unanimity. In Vessel B, the relevant findings on wrongful arrest were made by the tribunal. In Vessel A, one arbitrator dissented from the majority’s finding of the alleged acquisition plan and from the resulting conclusion on wrongful arrest. References below to the ‘majority’ therefore relate to Vessel A unless the context indicates otherwise.
Neither decision rested on one decisive fact. The Awards record a cumulative assessment of the commercial and corporate relationships between the participants; what was known about the underlying charterparty circumstances; the transfer and foundation of the claims; the timing and manner of the arrests; the appointment of the arresting party as custodian; the scale of custody expenditure; the creditor and mortgage position; the pursuit of judicial sale; and the evidence concerning possible participation in the sale and acquisition of the vessels.
In Vessel B, the relationship between the size of the transferred claim and the much larger contemplated custodianship expenditure was treated as part of that wider picture. The tribunal concluded that expenditure of approximately EUR 450,000 in pursuit of approximately EUR 54,000 sat better with the Owners’ case than with the claimant’s explanation when considered together with the corporate relationships, the custodianship and the proposed judicial sale.
The crucial conclusion was that the arresting party had counted on judicial sale as a means of acquiring Vessel B below market value while circumventing the claims of other creditors, and that execution of that plan was the ultimate reason for the first and second arrests. On that factual finding, the tribunal applied The Alkyon, Willers v Joyce, The Kommunar (No. 3) and The Strathnaver and held the first two arrests wrongful.
A closely related conclusion was reached by the majority in Vessel A. The majority found that the purpose of the original arrest and the subsequent events was the execution of what the Award described as a ‘malicious plan’ to acquire the vessel at a discounted price in circumstances where the Owners would be unable effectively to oppose the sale. The nature and objective foundation of the secured claim, procedural defects in the arrest process and the later conduct were treated as additional elements supporting the conclusion under The Kommunar and The Strathnaver.
Maintaining an arrest after the underlying claim fails
Vessel A raised a further issue: the justification for obtaining an arrest and the justification for maintaining it are not necessarily identical. Once the substantive claim secured by the first arrest had been dismissed, the first arrest nevertheless remained in place.
The parties addressed The Cheshire Witch and The Kommunar (No. 3) on this issue. The authorities supported an important distinction: continued detention may itself become wrongful where the basis for maintaining the arrest has disappeared, although an adverse decision does not necessarily require immediate release where a genuine appeal remains in play.
On the particular facts of Vessel A, the majority concluded that there was no reasonable ground to maintain the first arrest after the substantive award and that its continued maintenance was wrongful. The practical lesson is straightforward: an arresting party must reassess the justification for continued detention when the claim secured by the arrest has materially changed or failed.
Two separate arbitrations and the significance of similarity
The two references remained separate and there was no consolidation. Each therefore had to be decided on its own evidential record. The fact that the same three arbitrators dealt with the wrongful-arrest issues did not permit evidence from one reference simply to be imported into the other.
The similarity of the two commercial histories nevertheless raised an obvious analytical question: when does repetition remain coincidence, and when can repeated conduct form part of the evidence from which purpose is inferred? Similarity alone cannot prove wrongdoing and cannot lower the standard of proof. Each case still depended on the evidence properly before the tribunal in that reference.
The dissent: inference and supposition
As noted above, the conclusion in Vessel A was not unanimous. One arbitrator dissented from the majority’s finding of the alleged plan. The dissent stressed that lawyers had been instructed, an application had been made to a competent court and the court had granted the arrest. The legal advice obtained by the arresting party from its lawyers was privileged. There was no direct evidence of an acquisition plan.
For the dissenting arbitrator, the evidence did not justify the grave finding of bad faith or gross negligence and the majority’s reconstruction rested largely on ‘inference and supposition’. That disagreement exposes the central evidential difficulty.
Circumstantial evidence is real evidence, and commercial intention frequently has to be inferred from the conduct of the parties. If direct documentary proof were always required, a sophisticated misuse of legal process could be exceptionally difficult to establish. The opposite danger is equally real: once a theory of improper purpose has emerged, individually ambiguous facts may appear to confirm one another simply because they fit the same theory.
The majority and dissent therefore differed less about the demanding Evangelismos standard than about whether the cumulative evidence had crossed the line from suspicion and inference to proof on the balance of probabilities.
The fact that a court granted the arrests
The grant of an arrest order by a competent court is plainly relevant, but it is not necessarily conclusive of the later wrongful-arrest question. At the arrest stage the court may be deciding, often on a limited or prima facie basis, whether the requirements for provisional security have been met. A later tribunal may have a substantially fuller evidential record and a different question to determine: the merits of the underlying claim and, separately, whether the arresting party’s conduct satisfies the English-law test for wrongful arrest.
The distinction cuts both ways. An arrest may be set aside under the law of the arrest jurisdiction without automatically being wrongful in the English-law sense. Conversely, the initial grant of an arrest order does not necessarily preclude a later finding of mala fides or crassa negligentia on a fuller evidential record.
Wrongful arrest does not itself prove damages
The two references diverged sharply once liability for wrongful arrest had been addressed. A finding that an arrest was wrongful does not establish that every loss suffered while the vessel was detained was caused by that arrest. The owner must still prove the counterfactual: what would probably have happened if the wrongful arrest had not occurred.
That inquiry may require consideration of whether the vessel would have traded, whether she was technically and commercially capable of doing so, whether another arrest or independent liability would have detained her in any event, whether the same port or upkeep expenditure would have arisen, whether later events broke the chain of causation and whether reasonable mitigation was available.
The Greek Fighter [2006] EWHC 1729 (Comm), one of the authorities considered in the materials, was relevant in this broader setting. It illustrates the relationship between detention, redelivery and causation of loss. In Vessel A it was also relied upon in the debate over whether redelivery could occur notwithstanding breach of contractual redelivery requirements; the bareboat context made possession and control especially important.
Two different outcomes on damages
In Vessel B, the first two arrests were held wrongful, but the Owners recovered no damages on the pleaded heads: the claimed hire, port and upkeep losses were not established as recoverable consequences of those arrests.
Vessel A produced the opposite financial result. The majority held the first arrest, and its continued maintenance after the substantive award, wrongful. After a separate causation analysis, approximately USD 4.9 million in principal damages was awarded, together with substantial interest.
The contrast is the practical point: wrongful arrest – yes in both references; recoverable loss – radically different. Liability asks whether the arrest was wrongful. Damages ask what loss that wrong actually caused.
What the cases do – and do not – show
The Awards do not establish that any single feature automatically proves mala fides. A large custodianship budget does not by itself establish wrongful arrest. Neither does an assignment of a claim, corporate connection, appointment of the claimant as custodian, an application for judicial sale, possible participation in an auction, or the eventual failure of the underlying claim.
The findings depended on combinations of circumstances and on the commercial purpose inferred from them. The dissent in Vessel A demonstrates that this inferential process can be highly contestable. That is precisely why the old Evangelismos threshold remains important: it prevents the extraordinary consequences of arrest from becoming a regime of strict liability whenever the arresting party ultimately loses.
Practical lessons for arresting parties and their lawyers
For lawyers preparing an arrest, the practical lesson is broader than checking whether the formal statutory or Convention requirements can be satisfied on the day of the application. The file should also be capable of answering a second question: if the arrest is later examined with the benefit of the full commercial history, will the steps taken before and after arrest remain consistent with the legitimate purpose of obtaining security?
Particular care is required where the claimant seeks to become custodian of the arrested vessel, where custody expenditure becomes disproportionate to the secured claim, where judicial sale is pursued before the merits have been resolved, where the claimant or related interests may participate in the sale, or where the substantive basis for the arrest materially weakens while detention continues.
The lawyer’s task should therefore not end when the arrest order is obtained. The continuing basis for detention should be reviewed when circumstances materially change, especially after an adverse award or judgment. It is equally important to keep a clear contemporaneous record explaining why custody, expenditure, sale or other enforcement steps remain necessary for security.
For owners alleging wrongful arrest, the reverse lesson applies. It is not enough to prove that the arresting claimant was wrong, or even that the arrest order should not have been granted. Where direct evidence of bad faith is absent, the case will often depend on what the claimant knew, what it did before and after arrest, who obtained control of the vessel, how the economics of continued detention made sense, why judicial sale was pursued, and whether the innocent explanation remains convincing when the circumstances are viewed together.
When security becomes strategy
Ship arrest provides security, but it also creates leverage and, in some circumstances, control. English law protects the honest arresting party precisely because an effective maritime security remedy would be seriously weakened if liability followed automatically whenever the underlying claim failed.
The protection is not unlimited. The difficult cases arise where the formal purpose of arrest – security for a maritime claim – is alleged to conceal another commercial objective. Such purpose will rarely be recorded expressly. It may have to be reconstructed from conduct over time.
The two LMAA references show why failure of the underlying claim is not enough; why the court’s initial grant of an arrest is relevant but not necessarily decisive; why conduct before and after arrest may matter when mala fides is alleged; why the established authorities from The Evangelismos to The Alkyon continue to provide the legal framework; and why a finding of wrongful arrest still leaves causation and damages to be proved separately.
For practitioners, the practical lesson is to treat arrest not as a single procedural event, but as the continuing use of a powerful remedy. Ask at the outset why the vessel is being arrested, and keep asking whether the same legitimate purpose continues to justify detention and the steps taken in connection with it.
The point at which security becomes strategy may be difficult to identify. But once an arrest is later examined as a course of conduct rather than as an isolated court application, that distinction can become decisive.
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