January 20, 2014

Arrest of the “Henna”: commercial dispute and consumer protection

The “Henna”, a luxury cruise ship carrying 1,659 passengers and a crew of 650 on board on a voyage between China and Korea, was scheduled to sail at 4:00 pm on 13 September 2013 from Jeju to Incheon.

It was arrested before departure by an order of the Jeju Court which had received an application for the arrest of the “Henna” by a subsidiary of Jiangsu Shagang Group Co Ltd (“Jiangsu Shagang”). The ship was said to be owned by HNA Tourism Holding (Group) Company Ltd (“HNA Tourism”).

After providing security in the sum of KRW 3 billion (or around USD 2.76 million) to the Jeju Court, the ship was released but not before 1,659 passengers had been detained in Jeju for more than 40 hours.

HNA Tourism indicated that the arrest of the ship restricted passengers’ freedom seriously harming their legal interests. The company condemned the practice and reserved the right to pursue legal claims for any losses resulting from what is viewed as an irresponsible practice. In response, Jiangsu Shagang expressed its sympathy for passengers and indicated that they would be willing to pay the repatriation costs of passengers, if HNA Tourism failed to do so.

According to Jiangsu Shagang, Grand China Shipping (Hong Kong) Co Ltd (“GCS”) entered into a charterparty with Jiangsu Shagang and HNA Group provided a Performance Guarantee to Jiangsu Shagang. Since GCS had failed to pay the hire, Jiangsu Shagang filed an arbitration case in London against GCS and an arbitral award was issued whereby GCS was ordered to pay a sum of USD58,375,700. GCS has entered into insolvency proceedings in Hong Kong, and HNA Group failed to perform its obligations under the guarantee. Jiangsu Shagang therefore has had to pursue this claim against HNA Group’s assets, as a result of which the “Henna” was arrested in Korea.

Does such ship arrest comply with the applicable laws and practice?

Under the International Convention Relating to the Arrest of Sea-Going Ships 1952 or the International Convention on the Arrest of Ships 1999, a dispute arising from the guarantee contract is not a “maritime claim” as defined in either convention. However, neither China nor Korea is a signatory to the above conventions, as a result of which, the claimant would then have the freedom to choose a favourable jurisdiction.

Unfortunately for the claimants, in accordance with Articles 21, 22 and 23 of the Chinese Special Maritime Procedure Law, Jiangsu Shagang would not be able to arrest the vessel in China for the following reasons:

  • Similar to the above conventions, under Chinese law, a dispute over the guarantee contract is not a “maritime claim” as stated in Article 21 and will not give rise to the ship arrest.
  • Pursuant to Article 23, the ship may be arrested where the shipowner is liable for the maritime claim (ie was the owner when the claim arose) and is still the shipowner at the time of the arrest. In the present claim, most would agree that HNA Group should be the party liable but as it is apparently not the registered owner of the Vessel the fact that HNA Group may ultimately own and control the Vessels would not be sufficient confer to the power to arrest on to the Chinese Court.

In the circumstances, Jiangsu Shagang therefore had to resort to the Korean Court as Korean law is more favourable to the ship arrest applicant.

Consumer Protection

A lawyer, Mr Qiu Baochang, representing the China Consumers’ Association, indicated that any commercial dispute should not infringe upon the legitimate rights and interests of consumers. According to Mr Qiu, the personal freedom of consumers has been restricted and the right to knowledge of the true facts concerning purchased services, the right to fair dealing and the right to be respected were all infringed.

In respect of the possible remedies open to consumers, they are entitled to pursue a contractual claim against the travel agent, which is a party to the contract for the holiday, or against HNA Tourism, which is a party to the contract of carriage of passengers by sea (represented by the cruise fare). Alternatively, consumers are also entitled to pursue a tortious claim against the travel agent and/or HNA Tourism for infringement of the above-mentioned rights.

However, whether consumers chose to bring a contractual or tortious claim, there would be a potential defence of force majeure, which refers to any unforeseeable, unavoidable event and that which cannot be overcome. Whilst the arrest of the vessel arose from Jiangsu Shagang’s application, the action of arrest was made by the Korean Court and a governmental act may likely be regarded as a force majeure event.

Although the force majeure defence would make consumers’ claim uncertain and more difficult, this does not ultimately appear to be an issue in this case, simply because HNA Tourism has voluntarily compensated consumers for their losses and delay.

The story of the “Henna” is consigned to history, but the same dilemma will continue to be an issue when commercial disputes conflict with consumers’ rights and interests, and a balance of both would no doubt be taken into consideration. However, we will have to wait for the next “Henna” to be any closer to an answer.

For further information on this article, please contact Ik Wei Chong, Andrew Rourke or Christian Liu.

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