Kalafrana Shipping Ltd v Sea Gull Shipping Co Ltd (S.D.N.Y., 08 Civ. 5299 (SAS) (Oct. 4, 2008)
Buyers sought to enforce a London arbitration award for the costs of repair obligations under a contract for sale of an existing vessel. Buyers froze US Dollar assets in New York using Rule B of the US maritime procedure rules. Sellers applied to lift the attachment arguing that the claim under the sale contract was not a maritime contract under US law (as required for attachment). The Court ruled that the test for whether the claim was a maritime claim changed in 2005 and was now whether the nature and character of the contract was maritime commerce. As a result, the claims arising from a contract for the sale of an existing ship were to be subject to Rule B attachments.
The Facts
On 4 May 2006, Sea Gull agreed to sell The Assil to Kalafrana under a Memorandum of Agreement (“MOA”). Sea Gull also agreed in the MOU to make repairs to the vessel prior to delivery. Kalafrana claimed against Sea Gull in London arbitration for costs arising from repairs and for wrongful arrest. The London arbitrator awarded Kalafrana US$611,373.62 plus interest and costs of the arbitration.
On 10 July 2008, Kalafrana filed proceedings in the US District Court for the Southern District of New York (comprising Manhattan), seeking an order to attach Sea Gull’s assets in New York City under Rule B of the Supplemental Admiralty Rules for Certain Admiralty and Maritime Claims of the US Federal Rules of Civil Procedure (“Rule B”). As of August 2007, Kalafrana had attached US$123,195.28 of payments made by Sea Gull being cleared by intermediary banks in New York.
Sea Gull applied to set aside the order allowing the attachment on the basis that the underlying claim arose from a contract for the sale of a vessel, which under prior US cases was not traditionally considered a maritime claim.
The Aqua Stoli rule
In 2006, the US Second Circuit Court of Appeals (with appellate jurisdiction over the Southern District of New York) established the requirements for attaching property under Rule B in The Aqua Stoli case:
1. “a valid prima facie admiralty claim against the defendant”;
2. “the defendant cannot be found within the district”;
3. “the defendant’s property may be found within the district”; and
4. “there is no statutory or maritime law bar to the attachment”.
Sea Gull disputed whether Kalafrana’s claim under the MOA was considered to be an admiralty claim under US law. The US Constitution designates admiralty and maritime law as subject to federal (and not state) law. The scope of maritime jurisdiction over contracts is defined only by case law (as opposed to statute) and is occasionally clarified by the Courts.
Sea Gull argued that the London arbitrator’s award in Kalafrana’s favour was based on a contract for the sale of a vessel and as a result failed to satisfy the first part of the Aqua Stoli test. Sea Gull relied on a 1918 case (the Ada) stating that a contract for the sale of a vessel is not considered a maritime contract, on the basis that it was a well-established principle and upheld by the Second Circuit as recently as 1989.
The Decision
The Court in Kalafrana concluded that the MOU was a maritime contract, subject to attachments under Rule B. Contracts which fall within US maritime jurisdiction were defined by two requirements:
1. “[T]he nature and character of the contract” is maritime commerce. This rule was derived from two recent decisions by superior Courts:
a. The recent decision of the US Supreme Court in Norfolk Southern Railway Co v James N. Kirby, Pty Ltd (2004) (Kirby) was considered. The Court stated that whether a contract is maritime depends on whether it was “reference to maritime service or maritime transactions”.
b. Following Kirby, the Second Circuit Court of Appeals in Folksamerica Reinsurance Co v Clean Water of New York Inc (2005) (Folksamerica) called for reconsideration of cases on the subject. Kirby was interpreted as establishing a requirement that “the principal objective of the contract is maritime commerce”.
As vessels are central to maritime commerce, claims arising from contracts for their sale are maritime claims. In support of the first requirement, the Judge cited criticism of the rule in the Ada on the basis that ship sale contracts are properly the subject of admiralty law and procedure, including attachments under Rule B.
2. The contracts be related to seaborne activities. In describing contracts within maritime jurisdiction, the Kalafrana Court stated that they have a “genuinely salty flavor” (a phrase borrowed by O’Connor J in Kirby and coined by Harlan J in Kossick v United Fruit Co (1961)). It should be noted that an express limitation was recognised in relation to newbuilding and financing contracts. These contracts were identified as being “made on land, to be performed on land”, in contrast to the sale of an existing launched ship.
Judge Scheindlin, whose judgment is not binding on other judges of the federal (US) courts in New York, concluded that Kirby and Folksamerica changed the previous rule (from the Ada) that vessel sale contracts were not maritime contracts. As it interprets very recent binding decisions from superior Courts, it is likely that Judge Scheindlin’s order will be appealed by Sea Gull to the Second Circuit Court of Appeal. This potentially groundbreaking order may warrant rethinking by maritime claimants everywhere as to whether their claims have the “genuinely salty flavour” enabling attachment of US Dollar assets under Rule B.