i-law

Maritime Law and Practice in China

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CHAPTER 23

Maritime security

Introduction

23.1 The maritime security discussed in this chapter refers to both: (1) the security that is put up by the person against whom the claim is made in court proceedings, for the preservation of a maritime claim; and (2) the security that is put up by the claimant in court proceedings for the preservation of a maritime claim, maritime injunction or the preservation of maritime evidence.1 In practice, the latter is usually termed “counter security”. The performance guarantee or refund guarantee involved in charterparties, shipbuilding contracts and other maritime contracts may sometimes be also called a maritime security. Such guarantees, however, are not governed by the Special Maritime Procedure Law and therefore are not the subject of the discussions of this chapter. 23.2 The Special Maritime Procedure Law (the “SMPL”) and the Interpretation of the Special Maritime Procedure Law of the PRC Supreme People’s Court (the “Interpretation of the SMPL”) provide for the rules on maritime security.2 On 28 February 2015, the PRC Supreme People’s Court (the “SPC”) issued “Certain Rules on the Application of Law in the Arrest and Sale of Ship by Auction” (the “Rules on the Arrest and Sale of Ships”). The Rules on the Arrest and Sale of Ships address the issues of, among others, the exemption of the claimant from putting up a counter security, the requirements for further counter security, and the return of the counter security in ship arrest cases.3 Apart from the SMPL and the judicial interpretations, the pertinent provisions of the Civil Procedure Law (the “CPL”) and the Security Law, as well as the interpretations of these two laws, may also be applicable to maritime security. In addition, the following rules and cases may be referred to by the maritime court in adjudicating on a case involving maritime security:
  • (a) “Answers to the Questions involved in Foreign-Related Commercial and Maritime Trial Practice (No. 1) of Division 4 of the Supreme People’s Court” (the “Answers to the Questions involved in Foreign-Related Commercial and Maritime Trial Practice (No. 1)”);
  • (b) typical cases published by the SPC;
  • (c) replies by the SPC to lower courts;
  • (d) directions or guidance promulgated by the SPC; and
  • (e) judgments of the maritime courts, High People’s Court and SPC.

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Security put up by a defendant in proceedings involving a maritime claim

23.3 To secure the fulfilment of a maritime claim, a claimant can either prior to commencing legal proceedings of the claim, or during the course of legal proceedings, apply to the competent maritime court for compulsory measures against the property of the defendant. Compulsory measures include the arrest of the ship, as well as cargo, bunkers and other types of property.4 The purpose of making such an application is normally to obtain security for the fulfilment of a claim. The claimant must set out in its application the amount of security required.5 The maritime court will then state the amount of security in its civil ruling for compulsory measures. After the defendant has provided the required security to the court or the claimant, the court then lifts the arrest order to release the property from the compulsory measures.6

Amount of security

23.4 The amount of security as required should be equal to the claimant’s credit amount but should not exceed the value of the preserved property.7 If the amount required is so excessive as to cause losses to the defendant, the claimant bears the liability to compensate for such losses.8 Negotiation between the two parties concerning the amount and type of security is permissible. In the absence of an agreement, the security shall be determined by the court.9 Sufficiency, reliability and enforceability of a security are essential factors to be taken into account. The SMPL does not provide for the scope of the credit for which the security can cover. The claimant may refer to the pertinent provisions of the Security Law. Pursuant to this law, the security amount consists of the principal, interest, damages, costs and fees incurred for the preservation of property as well as court fees.10

Claimant’s liability for requirement of an excessive amount of security

23.5 The law does not provide for the criteria of an excessive amount of security. The maritime court may return the counter security to the claimant if the final judgment or arbitration award determines that the defendant or respondent (as the case may be) is liable and the quantum is by and large equal to the amount of security as required by the claimant.11 It may be inferred from this provision that if the security amount is larger than the judgment or arbitration award amount, the claimant would likely be exposed to a claim from the respondent for requiring an excessive amount of security. As a broad indication, some scholars believe that the security amount should be regarded as excessive when the amount is higher than the judgment or arbitration award amount by 50 per cent.12

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 23.6 The above criteria of simply linking the claimant’s liability to the difference between the security amount and the final judgment or arbitration award amount does appear to be very harsh to the claimant. In the majority of cases for the preservation of maritime claims, a claimant makes an application for security prior to commencing the legal proceedings for the underlying maritime claim. In such cases, in order to fully secure the claims, very likely, the claimant will request a sufficient amount of security. Therefore, it would be very likely that the required security amount is more than the amount to be awarded by the final judgment or arbitration award. If the security amount is reasonably assessed by the claimant in good faith and supported by preliminary evidence at the time when the claimant demands the security, the claimant should not be liable for the excessive security unless it is proved that the claimant was malicious to require such a security. In Zhong Shan Port Shipping Enterprises Group v Haikou Nanqing Container Lines Co., Ltd. 13 in respect of a maritime security dispute, Haikou Maritime Court held that the defendant shall not be liable for the alleged claim for requiring an excessive security because the court took the view that the defendant had provided preliminary evidence in support of the security amount when they applied for the arrest of the plaintiff’s ship. Meanwhile, the plaintiff had also failed to prove that the defendant was malicious to demand such a security. In this case, two vessels that were respectively owned by the plaintiff and defendant collided and the defendant’s vessel sank as a result of the collision. The defendant demanded a security in the sum of RMB 15,000,000 from the plaintiff as damages for the collision. The plaintiff rejected this requirement, on the ground that the security amount should be restricted to the limitation of liability of the plaintiff’s vessel, which was in the sum of about RMB 2,000,000. The defendant then arrested the plaintiff’s vessel. The Guangzhou Maritime Court granted the defendant’s application, and held that the plaintiff was to put up a security in the sum of RMB 15,000,000. The plaintiff filed an objection to the rulings on the ground that they had applied to Haikou Maritime Court for the constitution of the limitation of liability fund in the sum of about RMB 2,000,000 in respect of the collision and therefore the defendant could not then arrest their vessel. The Guangzhou Maritime Court rejected the plaintiff’s application, holding that the application for the limitation of liability fund was pending before the Haikou Maritime Court. The plaintiff further contended that the security amount required by the defendant well exceeded the value of the arrested vessel. This contention was also rejected by the court because the plaintiff failed to prove the value of the vessel. After hearing the collision case, the Haikou Maritime Court finally adjudged that the plaintiff was liable to the defendant in the sum of RMB 2,261,264.85, as damages for the collision claim. After the judgment, the plaintiff then commenced legal proceedings against the defendant claiming for a wrongful request of security. The Haikou Maritime Court rejected the plaintiff’s claim. When making the request for security, the defendant had already provided preliminary evidence in support of their credit amount including salvage, cargo claims and property losses, etc. It could not have been determined in advance whether the plaintiff could restrict their liability for the collision claim, at least until the plaintiff’s application for the establishment of the limitation of liability fund had been approved by the court. Thus, the court held that it was not unjustified for the defendant to require a security in the full amount of the claim. Moreover, the plaintiff failed to prove

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that the defendant was malicious in making the request for security. In fact, the plaintiff was within its rights to apply to the court for a reduction of the amount of security from when it was able to provide a proof of the ship’s value and also when the court had approved the establishment of the limitation of liability fund, but the plaintiff failed to exercise their rights. The plaintiff later appealed the judgment to the Hainan High People’s Court but withdrew the appeal during the trial of the case.

Reduction, alteration and cancellation of security

23.7 The security amount as required shall not exceed the value of the preserved property.14 For example, in a ship arrest, if the security amount exceeds the arrested ship’s value, the shipowners can refuse to provide the security as required. This is much the same as the provisions of International Convention on the Arrest of Ships (Geneva, 12 March 1999).15 If the person against whom the claim is made believes that the security amount as required is excessive, it can also apply to the court for the reduction of the security amount either before or after it has provided the security.16 The challenge to the security amount must be substantiated by the proof of the value of the preserved property. For example, in ship arrest cases, the shipowner would carry the burden of proving the value of the arrested ship. For example, the shipowner can provide an appraisal report on the ship’s value, notwithstanding that there are no specific requirements for an appraisal report in the law. However, it is worth noting that the maritime court may likely refer to article 86 of the SMPL which provides that in trials involving ship collision claims, the survey and appraisal of a ship shall be undertaken by a PRC-authorised or other qualified institute or individual, otherwise the appraisal or survey report may not be admitted by the court. 23.8 Even after the security has been put up, the party who provides the security can still apply to the court for the reduction, alteration or cancellation of such security if the party has good reasons to do so.17 Good reasons include where the amount of security is obviously excessive, or if the person against whom the claim is made has provided alternative and effective security, or where the claimant’s right of the claim has been distinguished.18

Claimant’s liability for wrongful request of security

23.9 The claimant’s liability for wrongful requirement of a security is associated with the wrongful application of the compulsory measure against the property. The claimant shall indemnify the person against whom the claim is made or the interested person against the losses caused by wrongful application.19 The SMPL does not provide for the criteria of a wrongful application. Generally, the maritime court may hold that an application is wrongful if the conditions of the compulsory measures against the property have not been met without

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regard to whether the claimant is malicious to make the application.20 In ship arrest for example, a wrongful application may happen in one of the following circumstances: the underlying claim based upon which the ship arrest application is made is not a maritime claim as identified in article 21 of the SMPL; the underlying maritime claim has been totally rejected by the court or arbitration tribunal or has been withdrawn by the claimant; the arrested ship is neither owned nor bareboat chartered by the person against whom the claim is made. 23.10 The claimant’s liability for the wrongful application includes, among others, the fees and costs incurred for the provision of the security. In Polembros Shipping Ltd. v Shenzhen Chiwan Wharf Holdings Limited in respect of wrongful application for ship arrest,21 the defendant arrested MV Milos in Shenzhen and required the plaintiff to provide a security in the sum of RMB 3,000,000 for an alleged cargo shortage claim. The plaintiff provided a letter of guarantee issued by a P&I Club in the sum as required to the court and then the vessel was released. The defendant proceeded to commence the proceedings against the plaintiff for the cargo claim before Guangzhou Maritime Court. The claim was totally rejected by both the maritime court and the Guangdong High People’s Court. The plaintiff then claimed against the defendant damages for wrongful requirement of the security. The damages as claimed included the commission charge, service and correspondence fee of the P&I Club for the provision of the letter of guarantee and the lawyers’ fee. As the cargo claim had been totally rejected by both courts, the maritime court took the view that the defendant was not entitled to arrest the ship and require the plaintiff to put up the security. The court adjudged further that the charges and fees paid to the P&I Club for the provision of the security were recoverable from the defendant, but the lawyers’ fees incurred arrest were not recoverable due to lack of legal basis. However, the parties may now recover lawyers’ fees based on a new judicial interpretation published by the SPC on 12 September 2016.

Type of security

Cash

23.11 The security can be by cash, letter of guarantee, mortgage or pledge.22 Compared with other types of security, cash security is more reliable and easier to enforce. However, if the security amount is substantial, it might not be practical to provide the security entirely in cash. The cash security can be deposited into the court’s designated bank account, or into an account as agreed by the parties – usually an escrow account. If the cash is deposited into the court’s designated account, the interest accrued upon the principal during the deposit time period belongs to the party that provides the cash security. The cash remitted in foreign currency is usually converted into the local currency Renminbi automatically when it is deposited into the court’s designated account due to the foreign currency control policy. The claimant can require the payment of the judgment or arbitration award or settlement agreement from the cash security unless the parties have agreed

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otherwise. The claimant or the party that provides the cash security is allowed to convert the cash security into foreign currency and then remit it abroad by showing the judgment or arbitration award or settlement agreement and other documents as required to the bank. 23.12 It appears that the claimant has no right to claim priority to the cash security over other creditors of the defendant when the defendant becomes bankrupt. In COSCO (Nantong) Clavon Ship Engineering Co. v Zhejiang Jingang Shipbuilding Co., Ltd.,23 COSCO applied to Ningbo Maritime Court for the freezing of the bank account of Zhejiang Jingang in respect of shipbuilding contract disputes. After Zhejiang Jingang had put up a cash security in the sum of RMB 850,000, the court lifted the freezing order. Shortly after that, Zhejiang Jingang went into bankruptcy. The receiver in bankruptcy determined that COSCO’s credit was an ordinary credit without security. COSCO commenced proceedings against the receiver requiring a declaration judgment, inter alia, that its credit was secured by the cash in the sum of RMB 850,000 and COSCO should have been able to claim priority to the cash over other creditors of Zhejiang Jingang. Both the Ningbo Maritime Court and the Zhejiang High People’s Court ruled against COSCO, holding that the security put up by Zhejiang Jingang was to secure the enforcement of a future judgment that may be in COSCO’s favour rather than to secure COSCO’s claim in itself, and therefore COSCO’s credit was an ordinary one. Accordingly, COSCO could not claim priority to the cash security over the other creditors of the shipyard.

Letter of guarantee

23.13 The letter of guarantee is widely adopted in the preservation of maritime claim proceedings either by the claimant or by the person against whom the claim is made. The letter of guarantee can be provided to the court or to the claimant.24 A letter of guarantee should be examined from the perspective of its sufficiency, reliability and enforceability; for example, whether the guarantor has the capability to pay the debt and has a good credit record to honour its promise, whether there is any compulsory requirement of the guarantor for the provision of the letter of guarantee pursuant to the laws of the place where the guarantor company is incorporated, and whether the letter of guarantee can be successfully enforced pursuant to its governing law. In principle, the maritime court can only accept a letter of guarantee issued by a PRC bank or insurance company or other substantial company.25 Of course, a claimant would also likely agree to accept a letter of guarantee issued by a company other than these mentioned entities, for example by a P&I Club in a ship arrest situation. In recent years, the letter of guarantee issued by companies that are engaged in the business of providing security may also be accepted by the maritime court. However, the court usually strictly examines the licences and qualifications of such companies and may also set up a limit to the amount of the security that the companies may provide. For example, the Shanghai High People’s Court requires that a qualified security company must be established with the approval of the State financial administration and must have the licence for providing security in court litigation matters. Moreover the security amount

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provided by such a company in each individual case cannot exceed 30 per cent of its net assets.26 23.14 The parties can negotiate the terms and conditions of a letter of guarantee themselves. If the parties cannot reach an agreement on it, it shall be determined by the court. The main terms and conditions of a letter of guarantee include the details of the guarantor, debtor and guarantee, the payment conditions, the maximum security amount, time period of the security, and a law and jurisdiction clause. 23.15 The enforcement of a letter of guarantee must be in accordance with the requirements for the guarantee and its governing laws. For letters of guarantee governed by PRC law, where the letter of guarantee provides for a time period of the guarantee, the claimant shall require the guarantor to perform its payment obligation under the letter of guarantee within such time period; conversely, where the letter of guarantee does not provide for the time period of the guarantee, the claimant shall make the requirement for payment within six months counting from the last day of the payment period of the credit that is secured by the letter of guarantee, otherwise the guarantor’s obligation under the letter of guarantee is distinguished.27 Where a letter of guarantee provides that the guarantor’s obligation remains valid until the secured credit has been fully paid up, the claimant shall require the guarantor to make payment within two years counting from the last day of the payment period of the credit that is secured by the letter of guarantee; otherwise the claimant’s right under the letter of guarantee is distinguished.28 It is of course best to require the guarantor to honour the letter of guarantee as soon as the payment conditions provided in the letter of guarantee have been met.

Mortgage and pledge

23.16 The security can also be provided by way of mortgage or pledge. The properties that can be mortgaged include real estate, ships, motor vehicles, equipment and machines, etc.29 Movable assets and some kinds of property rights can be pledged.30 The claimant and the defendant should sign the security agreement to set out the terms and conditions of the mortgage or pledge. It is permissible for a third party to provide its own property to create a mortgage or pledge.31 If the mortgaged or pledged property is provided by a third party, such a third party should sign the security agreement as a party. The agreement should include the particulars of the property, maximum security amount, any insurance of the property, the exercising of the right to the mortgaged or pledged property, and other particulars that the parties believe necessary. The agreement becomes effective only after the mortgaged or pledged property has been registered with the authorities in accordance with the Security Law and the Property Law; meanwhile if it is pledged, it is only effective if the property has been delivered to the claimant.32

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 23.17 Before agreeing to accept the mortgage or pledge, it is necessary for the claimant to investigate the status of the mortgaged or pledged property in order to make sure that there exist no claims, other security or other compulsory measures against the property and that the property has been sufficiently and properly insured. It is likely for the value of the mortgaged or pledged property to change during the security period. This should be taken into account when the claimant considers accepting a mortgage or pledge as security. The pledged property must be delivered to the claimant during the security period.33 This may bring about some inconvenience to the claimant in keeping the property. There also exists the risk that the value of the pledged property depreciates during the security period. For these reasons, a pledge is rarely accepted by the claimant as security. 23.18 Pursuant to the Property Law, the claimant shall exercise its right to the mortgaged or pledged property by the last day of the time limit of the claim that is secured by the mortgage or pledge; otherwise the claimant’s right to the mortgaged or pledged property cannot be recognised and enforced by the court.34 The claimant is better advised to require the person who provides the mortgaged or pledged property to pay the secured claim from the value of the property as soon as the judgment or arbitration award or settlement agreement of the claim has become effective and enforceable.

Return of security

23.19 The claimant shall return the security to the party that provides it if the claim secured by the security has been extinguished, such that the claim has either been totally rejected in the final judgment or arbitration award, the claimant has withdrawn the proceedings of the claim or the claim has been fully paid up. To prevent the claimant from abusing the right to apply for compulsory measures, it is required by law that the claimant must commence legal proceedings of the underlying claim within 30 days of a ship being arrested or within 15 days of cargo, bunkers or other property being attached, otherwise the court will lift the preservation order and return the security to the party that provides the same.35 That said, given that the parties may negotiate the settlement of the claim without commencing legal proceedings immediately, the law may permit the claimant to keep the security even if the claimant does not act within the time limit. The claimant may produce the settlement agreement or the agreement for the security period, and apply to the court for recognition of the agreements.36 23.20 The party that provides the security can apply to the court for the return of the security. Before allowing the return of the security, the court usually gives notice of such application to the claimant. If the claimant raises no objection within a certain time period (for example, 30 days) or has no good reasons for the objection, the court may order the return of the security to the provider of the security. If the security is provided to the claimant, the party that provides the security can directly require the claimant to return it. If the claimant refuses to return the security, the person can apply to the court for a maritime injunction order against the claimant to return it.

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Counter security put up by claimant

23.21 To prevent the claimant from abusing the right to make the application for compulsory measures against the property, maritime injunction or preservation of evidence, the court may require the claimant to provide a security to assure that it will compensate for any losses that may be caused to the defendant arising from a wrongful application. If the claimant fails to provide the security according to the court’s requirement, the court will not grant the claimant’s application.37 The security provided by the claimant is called counter security, in contrast with a security provided by a defendant. The amount of counter security shall be equal to the loss that may be caused as a result of such preservation or injunction. The court has the discretion to decide the exact amount and type of the counter security.38

Counter security in ship arrest

23.22 In ship arrest, the claimant must put up the counter security to the court regardless of whether or not the party has commenced legal proceedings for the underlying claim when it applies for the arrest of the ship.39 The court may allow the claimant not to provide a counter security in circumstances where the cause of action arises from crew employment contracts or marine casualty accidents that occur in the sea or in water linked to the sea; in addition, the background facts of the claim should be clear, and the rights and obligations involved in the claim should be unequivocal.40

Amount of counter security

23.23 The amount of the counter security shall be equal to the losses that may be caused as a result of wrongful application of the arrest.41 The amount consists of the arrested ship’s maintenance costs, expenses and loss of earnings during the arrest period and the fees incurred for the provision of the security for the release of the ship from the arrest.42 Usually, the court assesses the loss of earnings by reference to the market charter hire rate of the arrested ship on a monthly basis. In the absence of a market rate, it may be assessed by reference to the daily net profit of the ship, which is calculated according to the last two voyages of the ship.

Alteration and reduction of counter security

23.24 The court may require the claimant to provide further security after the ship has been arrested if the court believes that the security provided by the claimant is not sufficient.43 For example, if a ship has been arrested beyond one month, the original security provided by the claimant may not be enough to cover the maintenance costs and expenses and

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the loss of earnings of the ship that are to be further incurred. If the claimant fails to provide further security according to the court’s requirements, the court may lift the arrest order.44 23.25 The loss of earnings of the arrested ship can be less than one month’s charter hire of the ship if she is released shortly after it has been arrested. An issue may therefore arise as to whether the claimant can apply to the court for the reduction of the amount of the counter security in proportion to the actual arrest time. In the arrest of the MV Coral, the cargo interests arrested the vessel in respect of a cargo damage claim in Shenzhen in November 1999, after which the cargo interests had put up a letter of guarantee issued by China Merchant Corporation Shekou in the sum of US Dollar (USD) 250,000. About six days after the vessel was arrested, the shipowners provided the security as required and then the vessel was released. Subsequently, the cargo interests applied to Guangzhou Maritime Court to replace the letter of guarantee with cash in the sum of USD 100,000. The maritime court granted the application on the ground that the vessel was arrested for only six days and the loss that may be caused to the shipowners could not exceed USD 100,000; moreover, the security in cash was more reliable than a letter of guarantee.45 23.26 Since the Interpretation of the SMPL has come into force, it has become unclear whether the claimant can still apply for the reduction, alteration or cancellation of the counter security. Article 77 of the SMPL provides that the person who provides the security can apply to the court for the reduction, alteration or cancellation of the security after the security has been provided if the person has good reasons to do so. According to this article, both the claimant and the defendant may make such an application. However, article 52 of the Interpretation of the SMPL provides that the “good reasons” referred to in article 77 of the SMPL means that: (1) the security amount required by the claimant is excessive; (2) the defendant has put up other types of enforceable security; and (3) the claimant’s right to require a security has been distinguished. According to this interpretation, only the defendant can make the application while the claimant cannot, on the basis that it has no “good reasons” to do so. This issue has not been resolved by the Rules on the Arrest and Sale of Ships. The claimant may argue that the SMPL does not restrict its right to apply for the reduction, alteration and cancellation of the counter security.

Type of counter security

23.27 The counter security must be provided to the court. The claimant can provide security by cash or a letter of guarantee. If the counter security is cash, the court usually also requires the claimant to provide a letter of guarantee. The letter of guarantee is not a separate security but is attached to the cash security. It is to assure that the claimant will take the liability for the wrongful arrest of a ship to the extent of the amount of the cash security provided. The cash is deposited into the court’s designated bank account. The interest accrued upon the cash belongs to the arresting party (provider of the counter security). 23.28 The claimant can provide a letter of guarantee as a counter security. The letter of guarantee can be issued by the claimant itself or by a third party. The maritime court may accept that a PRC bank, insurance company or other substantial company issue a letter of

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guarantee. Similarly, the court may also accept a company that is engaged in the business of providing security for court litigation to issue a letter of guarantee. For example, as mentioned previously, according to the Rules on Preservation of Property of Shanghai High People’s Court, which was promulgated on 25 June 2014, the court may accept a letter of guarantee provided by a major company with universal recognition by the public, a financial company of substantial assets, or a company that is established by the approval of the State financial administration and has the licence of providing security for court litigation.46 23.29 The letter of guarantee should usually identify the guarantor, the guarantee and the beneficiary. It should also state the maximum security amount and the liability assured by it. 23.30 The court may also accept that the claimant provides property other than cash or a letter of guarantee. The claimant must prove the value of the property and that there exist no claim, security or other compulsory measures against such property. The court will take the compulsory measures against the property provided by the claimant as counter security.47 The compulsory measures will not be lifted by the court until the underlying claim has been settled.

Return of counter security

23.31 The claimant can apply to the court for the return of the counter security after the underlying claim has been settled. The court shall first inform such application to the defendant. If the person does not commence legal proceedings against the claimant for wrongful arrest within 30 days of such information, the court may return the counter security to the claimant.48 If the person has commenced legal proceedings within the statutory time limit, the court shall not return the security, but shall wait for the result of the proceedings. The court may also directly return the security to the claimant without informing the defendant of the application if the final judgment or arbitration award determines that the defendant is liable to the claimant and the amount of the liability is by and large equal to the security amount as required by the claimant.49

Counter security in the proceedings of the attachment of other types of property

23.32 In addition to ship arrest, the claimant can also apply to the court for the attachment of bunker, cargo and other property that belongs to the defendant. While the law does not provide that the claimant must provide the counter security in the attachment of these types of property, the maritime court usually requires the claimant to put up counter security if the claimant has not commenced legal proceedings of the underlying claim when it makes the application for such an attachment. The court may exempt the claimant from this obligation in certain kinds of claims, such as crews’ claims for the payment of wages and claims arising from marine casualty accidents. If the application is made during the course of the legal proceedings of the underlying claim, the court may decide according to the merits of the case.

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 23.33 The amount of counter security shall be equal to the amount of loss that may be caused by the attachment of property.50 For example, in the attachment of cargo, the amount of counter security may be assessed by reference to the cargo’s storage fee, physical damage or loss, loss of market value during the attachment period, and fees incurred for the provision of security. If the claimant has not commenced legal proceedings of the underlying claim when making the attachment application, the court may even require a counter security in the full amount of the attached property’s value.51 Different maritime courts may have different approaches to the assessment of the amount of the counter security. It is prudent for the claimant to seek the court’s directions before filing an application.

Counter security in the proceedings of maritime injunctions and the preservation of maritime evidence

23.34 As mentioned in the previous chapters, a claimant can apply to the maritime court for an injunction order to compel the defendant to do or not to do certain things so as to prevent the lawful rights and interest of the claimant from being prejudiced.52 The claimant shall satisfy the court that he has a specific maritime claim and, furthermore, that the party subject to the injunction order violates the law or is in breach of contract, and that in such a situation losses will likely be caused or will likely become worse if the injunction order is not granted immediately.53 A common maritime injunction order will order the release of withheld bills of lading or cargoes, and for the party subject to the injunction to refrain from arresting a ship. The court may order the claimant to provide the counter security and reject the claimant’s application if it is not provided.54 23.35 The court has the discretion to decide the exact amount and type of the counter security.55 There is no universal approach to the assessment of the amount of counter security. In principle, it is to be decided according to the facts of each individual case. In an injunction case concerning the release of a withheld cargo, the Qingdao Maritime Court decided that the claimant should provide the counter security both by cash and a letter of guarantee and that the total amount of the counter security be equal the value of the cargo.56 In another injunction case heard by the Guangzhou Maritime Court, the shipowners applied to the maritime court for an injunction order to forbid the stevedores from arresting the vessel in respect of a security for a personal injury. In this case, the stevedores were injured during the unloading of cargo on board. The stevedores claimed against the shipowners for damages in the sum of RMB 1.6 million. The shipowners were unable to put up a cash guarantee as required by the stevedores and offered to provide a letter of guarantee for the claims but this was rejected by the stevedores. To avoid vessel arrest by the stevedores, the shipowners applied to the maritime court for an order for the stevedores to accept the letter of guarantee to be issued by China Reinsurance Company in the sum of RMB 2.5 million

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and not to arrest the vessel. The Guangezhou Maritime Court granted the shipowners’ application.57 23.36 If the party against whom the order is made does not raise an objection to the order and also does not commence legal proceedings in respect of the injunction order against the claimant within 15 days of the injunction order, the maritime court may, upon the application of the claimant, return the counter security to it.58 It is further provided in the Answers to the Questions in Foreign-Related Commercial and Maritime Trial that if the person against whom the injunction is made or the interested party neither raises objection nor commences legal proceedings in respect of the injunction order within 30 days of the completion of the execution of the injunction order, the counter security shall become null and void.59 In practice, some maritime courts apply the provision of the 30-day time period to return the counter security to the claimant.

Counter security in applications for the preservation of evidence

23.37 As mentioned in the previous chapter on the preservation of evidence, a claimant can apply to the maritime court for preservation measures against the evidence that can substantiate the maritime claim but is out of the claimant’s possession and control. The claimant must prove to the court that it is in such emergency situations that the evidence will likely be lost or would be hard to obtain unless the preservation measures are taken immediately.60 Preservation measures include photocopying, taking pictures or videos, or the sealing up of the evidence. Unlike the preservation of property or injunction orders, the preservation of evidence may unlikely cause loss to the person against whom the preservation application is made. However, in some circumstances, in carrying out the preservation measures, it may possibly have some impact upon the person against whom the application is made. For example, photocopying shipping documents kept on board might cause some delay to the voyage of the vessel. Depending upon the likely result of the preservation, the court may require the claimant to provide the counter security. Likewise, the type and exact amount of the counter security are at the court’s discretion. If the claimant fails to act according to the court’s requirement, the court will reject the application.61 The claimant shall compensate the person against whom the application is made for the loss suffered as a result of a wrongful application.62 23.38 In Shanghai Baosteel International Economic & Trading Co., Ltd. v the Owners of MV Redestos, the shipowners declared general average because the main engine of the vessel broke down after she departed from the loading port in Brazil in June 2002. The cargo interests applied to the Shanghai Maritime Court for the preservation of the engine book of the vessel and other proof of the alleged breakdown of the main engine as well as the repairing records of the main engine that were kept on board when the vessel arrived at Shanghai and Ningbo. The cargo interests provided to the court a letter of guarantee to undertake that they will assume the liability of the shipowners for any loss that may be

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caused by the wrongful application for the preservation measures. The court granted the application.63 In Guangxi Wanxin International Trade Co., Ltd. v the owners of MV Michal Akis, due to a voyage charter dispute, Guangxi Wanxin as the voyage charterers applied to the Beihai Maritime Court for the preservation measures of the shipping documents including the log book, statement of facts at both loading and discharge ports, sea protest, manifest, mate’s receipt and other pertinent documents kept on board the vessel. Guangxi Wanxin provided counter security as required by the court. The court granted the application and took measures to preserve the documentary evidence accordingly.64 23.39 It is not provided for in the law as to how and when the court may return the counter security to the claimant. The court may refer to the rules on the return of the counter security under the maritime injunction. The court may upon the application of the claimant return the counter security if the party against whom the application is made does not raise an objection to the preservation order nor commences legal proceedings against the claimant in respect of the preservation of evidence within 15 days of the completion of the execution of the preservation order.

Security involved in the constitution of a limitation fund and advanced payment prior to judgment

23.40 Apart from the maritime security as discussed above, the proceedings of the constitution of the limitation of liability fund and any advance payment prior to judgment also involves the provision of security. The discussion and the applicable rules mentioned above may also apply to such security where they are applicable.65 In the proceedings of the constitution of the limitation of liability fund, the law allows the fund to be paid by cash or by way of security.66 Such security must be a letter of guarantee issued by a PRC bank or other financial institution.67 In the circumstances where the claimant claims for alimony, allowance, pension, medical expense and wages, or the claim is in an emergency situation, the court may upon the claimant’s application require that the defendant pay the claim before the court has rendered a final judgment on the claim.68 The advance payment prior to judgment happens only in identified claims or situations. The requirements for the advance payment prior to judgment are very strict. The claimant shall prove that: (1) the background facts are clear; (2) the liability of the defendant is indisputable; (3) the life or business operation of the claimant will be significantly impaired if the defendant does not pay in advance; and (4) the defendant is able to pay.69 The court may require the claimant to provide the counter security for the application according to the facts of the claim.70 Generally, the claimant is in a poor economic state, thus negating the rationale behind this possible requirement. If the requirements have been met, the court would unlikely require the claimant to put up a counter security.