Trials of Disputes over Ship Financial Leasing Contract
(January 2012 to December 2016)
Ningbo Maritime Court
Preface
In recent years, ship financial leasing has become one of the most important ship financing modes under the continuous downturn of the shipping market. The proportion of ship financial leasing in the whole financial leasing industry has increased with each passing day. Till the end of March, 2017, 60 financial leasing companies had been established nationwide, 23 of them ran ship financial leasing business, and 989 ships were operated by this industry, the balance assets of them reaching 11.39 billion yuan. As a result, the number of disputes over ship financial leasing contract brought to maritime courts increased accordingly. In pursuit of offering better maritime judicial guide and service, this white paper, based on a review of the cases of disputes over ship financial leasing contract handled by Ningbo Maritime Court in recent five years, analyzes common issues and difficulties, and comes up with some risk preventing countermeasures for the typical problems in judicial practice.
Ⅰ Basic Information about Cases of Disputes over Ship Financial Leasing Contract
From Jan 1st, 2012 to Dec 31st, 2016, this court had accepted 39 cases of disputes over ship financial leasing contract, and the total amount of subject matters is 2.614 billion yuan. The number of the cases closed is 39 and the total amount of subject matters is 2.487 billion yuan. The average handling period is 94.92 days per case. These cases present the following features:
ⅰ The Number of Accepted Cases Grows with the Development of Financial Leasing Business
The number of cases of disputes over ship financial leasing was relatively small in the early days of this court, only 2 cases accepted during the period from its establishment day to 2003, and 1 for each year of 2005 and 2008. The number began to increase since 2012, and from 2012 to 2016, the number was 8, 11, 7, 11 and 2, respectively. In recent five years, the number of the accepted cases grew with the development of financial leasing business. The reason behind this growth lies in two factors. Firstly, The Measures for the Administration of Foreign Investment promulgated by the Ministry of Commerce in 2005 and The Financial Leasing Companies Management Rules issued by the Banking Regulation Commission has regulated the establishment and operation of business activities of financial leasing. Secondly, the “Investment Plan of 4 Trillion” established in November 2008, which took a proactive fiscal policy and moderately loose monetary policy, had stimulated the shipping and ship-building industry tremendously.
ⅱ The Amount of Subject Matter is Huge, and the Proportion of Preservation is High
The amount of subject matters of ship financial leasing cases accepted is relatively huge. In recent five years, 39 cases have been accepted, among which 38 cases are with subject matters that exceed 10 million yuan in each, the average subject matter is 67 million, apparently higher than other cases accepted by the court at the same period. Annually speaking, the total subject matter of accepted cases increased since 2012, reaching the peak of 1.27 billion yuan in 2013, and decreased year by year afterwards. The large amount of subject matter and the defendants’ lack in solvency has caused difficulty in enforcement. In order to secure effective enforcement, the percentage of application for preservation in these cases has grown up obviously in recent years. According to statistics, there were 23 cases in recent 5 years where the claimants applied for preservation measures towards the defendants’ property, such as bank deposit, ship under construction, real estate or land use right, accounting for 58.97%.
Image 1: Diagram of the Amount of Subject Matters of Ship Financial Leasing Cases Accepted in Recent 5 Years
(Unit: 10 thousands)
ⅲ Leasing Back Ships and Purchasing Ships that are under Construction Accounts for 90 Percent
Ship financial leasing has various modes of lease in practice. What is most commonly used is the typical ship financial leasing, i.e. the lessor buys a ship from a vendor in accordance with the lessee’s choices of vendor and ship, and provides the ship to the lessee in return of the hire paid by the lessee. Apart from that, there are other modes, such as lease-back, purchasing ships that are under construction, and demise charter with hire purchase, etc. In respect of the leasing modes demonstrated in the disputes judged by our court, the shares of the typical ship financial leasing and demise charter with hire purchase are relatively low, which both is 4.65%, whilst the shares of the leasing back ships and purchasing ships that are under construction are relatively high, which is 39.53% and 51.17%, respectively. The above data also exhibits some basic conditions and trends in the development of ship financial leasing. For example, in terms of the related leasing modes in these disputes, some conspicuous features can be found, i.e. being different from general chattels, in the market of ship financial leasing ships cannot be produced in large-scale for their specific purposes and different designs. Besides, with the enhanced trend of “larger ships” in shipping industry, the building cost becomes higher and higher, and building ships needs large amounts of capitals. All these factors determine that the ship-building enterprises are unable to use the general modes adopted by the general chattel producers, such as producing with the self-raising capitals and recouping them after sale, thus the ship-building enterprises choose the order-oriented production mode. Therefore, the typical “the lessor buys a ship from a vendor in accordance with the lessee’s choices of vendor and ship, and provides the ship to the lessee in return of the hire paid by the lessee” cannot play its role in the ship financial leasing market. In the process of hire purchase, owing to the involvement of the lessee, the buyer would always pay more than the amount of payment as if buying the ship directly. The buyer can save the costs by the mode that “pays part of the purchase of the ship—the seller transfer the ownership of the ship to the buyer while keep the ship by himself—the buyer pays the rest purchase after getting the mortgage—the seller delivers the ship to the buyer”. This mode is rarely used in the practice. In distinct comparison to these two modes, lease-back and purchasing ships that are under construction take over large shares in the recent ship financial trades, given that they are accustomed to the practical requirements of shipping and building market, especially the later one.
ⅳ Mediation and Withdrawal Occupies High Proportion, Disputes are Easy to Ease
Because ship financial leasing contracts have specific stipulations in respect of the parties’ rights and duties, for instance, basically all contracts would stipulate the ownership of the ship hired prior to all the hire has been paid, the value of ships and devices is high, and the probability of case preservation is high, the litigants would always reach agreements under organization of courts in respect of some issues, such as postponing the payment of the hire, resuming the performance of the contract, etc., so as to avoid causing destruction to both sides. Therefore, the rate of mediation and withdrawal of this kind of cases is high. In terms of case closing methods, among the cases of disputes over ship financial leasing contract tried by our court, the number of the cases closed by judgment is 13, accounting for 33.3%, the number of the cases closed by mediation is 19, accounting for 48.72%, and the number of the cases closed by withdrawal and deemed as withdrawal is 7, accounting for 17.49%. The rate of mediation and withdrawal is 66.21%, outperforming the average rate of mediation and withdrawal of first-instance cases tried by our court in recent 5 years by 13.53%.
II. Problems and Advices on Ship Financial Leasing Disputes
ⅰArrest, Auction and Auction Proceeds Distribution
1. Whether or not a ship under financial leasing can be arrested.
Arresting ship is the most important way of preservation for maritime claims, but Chinese laws, especially the Special Maritime Procedure Law (“SMPL”), are not clear with respect to whether a ship under financial leasing can be arrested or not. Given that, there are 3 different opinions in judicial practice as to that issue. The first is that ship under financial leasing can be arrested, based on that ship financial leasing contract is classified as a bareboat charter, under which, ordinary creditor may also apply for arrest of ship apart from special maritime claims such as maritime lien. The second holds that ship under financial leasing cannot be arrested. Article 23 of the SMPL provides that a ship may be arrested due to maritime claims for which the bareboat charterer shall be liable, but ship financial leasing is an independent commercial contract which is different from bareboat charter. As such, strictly speaking, there is no legal basis to arrest a ship under financial leasing. Furthermore, Article 3 of The Provisions of the Supreme People’s Court on Issues concerning the Application of Law in Handling Ship Arrest and Judicial Sale has set a legal doctrine in relation to bareboat chartered ship that “if you can arrest it, you can auction it”, however, it is contradictory to Article 242 of the Contract law under which the lessor is entitled to get back the leased object when the lessee goes bankruptcy. The third is a ship may be arrested subject to certain conditions. Where the arrangements of ship financial leasing are in line with that of bareboat charter, the ship may be arrested by reference to Article 23 of the SMPL. Whereas there are different kinds of modes of ship financial leasing in accordance with Chapter 6 of Management Rules on Financial Leasing Company, among which some modes (i.e. trust lease) is not in line with bareboat charter, as such, it shall be decided according to different situations.
Our initial opinion is that ship financial leasing contract and bareboat charter shall not be placed in the same category in law regardless of their high similarity, therefore, provisions concerning arrest ship under bareboat charter in Article 23 of the SMPL and in The International Convention for the Unification of Certain Rules Relating to Arrest of Sea-going Ships (“Arrest of Ship Convention 1952”) and International Convention on Arrest of Ships (“Arrest of Ship Convention 1999”) shall not automatically be applied to arrest a ship under financial leasing. In fact, International Financial Leasing Convention has already given clear answer. The Article 7, section 1(a) provides that, the lessor’s real right in the equipment shall be valid against the lessee’s trustee in bankruptcy and creditors, including creditors who have obtained an attachment or execution, however in section 5(b), it provides that “this article shall not affect the priority for any creditor having any right of arrest, detention or disposition conferred specially in relation to ships or aircraft under the law applicable by virtue of private international law. Given that, the lessor of ship financial leasing retains, in name only, the ownership of the shipment as a protection to recoup its investment, but such nominal ownership is not enough to against maritime claims with priority. Under the current business mode of ship financial leasing in China, vessels are mainly leased by reference to arrangement of bareboat charter and are registered as bareboat chartered vessel in competent registration authority. On the basis of the exoteric effectiveness of registration and the principle of public notice and trust, under current legislation system, approval may be granted as to maritime claimant’s application to arrest a vessel under financial leasing in accordance with Article 23 of the SMPL.
2. The Distribution of Auction Proceeds of Ship under Financial Leasing.
According to Article 29 of the SMPL, after ship has been arrested, before the arrest period expires, if the respondent does not provide bailment and the ship is inappropriate for continuous arrest, the maritime applicant is entitled to apply to the maritime court for ship auction after an action or arbitration has been brought up. This article does not exclude ships that are under financial leasing, so ships under financial leasing can be auctioned in this situation as well, however, are all claims against lessee by maritime applicants entitled to distribution of ship proceeds? In regard of this, before article 3 of The Provisions of the Supreme People’s Court on Issues concerning the Application of Law in Handling Ship Arrest and Judicial Sale comes into force, it was basically confirmed in judicial practice that the relevant debts incurred by lessee in operation of the ship financial leased (except for debts enjoying priorities), are entitled to distribution of auction proceeds of the ship under financial leasing. However, after the introduction of this Provision, litigants claimed for distribution of auction proceed of the ship under financial leasing by virtue of the above article. Were it confirmed by judgment, the ship financial leasing industry would have been exposed to significant detrimental factors, and in terms of practice controversy also exists. As such, our court made a trial definition in specific case: ship financial leasing is fundamentally a financing service provided by the lessor to the lessee, although the ship under financial leasing is registered that the lessor is the owner and the lessee is the bareboat charterer, the legal nature of it is different from that of bareboat charter under the Maritime Code, and article 3 of The Provisions of the Supreme People’s Court on Issues concerning the Application of Law in Handling Ship Arrest and Judicial Sale does not apply here. Notwithstanding, whether the debts incurred by the lessee in operation of the ship under financial leasing are entitled to distribution of the auction proceeds of ship? Is this situation applicable to article 3 of the Provisions of The Supreme People’s Court on Issues concerning the Application of Law in Handling Ship Arrest and Judicial Sale? If applicable, are there any restrictions? All these question need to be cleared.
We think that, firstly, the nature of the claims shall be distinguished. All claims with maritime liens, possessory liens and mortgages are entitled to distribution of auction proceeds of the ship, without regarding to whether or not the creditor is the owner, and the rest claims are not entitled to. If general maritime claims are allowed to be cleared off, these claims would be rendered to have equal effects of maritime lien, and it is obviously against the principle of legality of maritime lien. By virtue of the principle that real rights prevail creditor’s rights, when auction proceeds of the ship under financial leasing is distributed, given that the property of lessor belongs to real right and the general claims of maritime applicant belong to creditor’s right, the protection of real right shall take priority over that of general claims of maritime applicants. Besides, that auction proceeds of the ship is confined to claims with priorities, such as maritime lien, is also consistent with the basic concept of action in rem.
3. Questions about the List of Litigants and the Range of Claims of Disputes over Confirming the Creditors’ Rights.
When ship under financial leasing has been arrested and auctioned, in process of confirming and registering maritime creditors’ rights, the litigant status of lessor and lessee is sometimes ambiguous. In some cases claimants made both lessors and lessees defendants, such as in (2015)Yong Hai Fa Quan Zi No.225; while in others claimants made only lessees defendants, such as (2015)Yong Hai Fa Quan Zi No.224 (these two cases are about debts incurred by the lessee of the same ship under financial leasing, basically same to each other). In cases where only lessees are listed as defendants, lessors would always apply for participating into actions as third parties by reason that the claims brought by claimants were untrue. So, the litigants shall be listed clearly. In the procedure of confirming and registering rights, based on the purpose involved, claims like “confirm that the above amount shall be entitled to distribution of proceeds of XX vessel” should be included, while in practice things were done in different way. In some cases just general claims were listed without claims for distribution, such as (2015)Yong Hai Fa Quan Zi No.227, while in other general actions were adopted, yet still claiming for distribution, such as (2015)Yong Hai Fa Quan Zi No.570. All these resulted difficulties in adjudication unificaiton.
We think that in the procedure of registering creditors’ rights after the ship under financial leasing has been auctioned, the court should do prima facie inspection over the nature of claims applied by the maritime applicants. If the claim belongs to those which have maritime liens, possessory liens and mortgage, a ruling allowing registration shall be issued. Contrarily, if the claim belongs to general creditors’ rights, denial for registration will be made and applicants shall be told to bring common actions instead. Accordingly, in the procedure of handling the dispute over confirming creditors’ right, the lessee of ship under financial leasing shall clearly be listed as defendant. Given that the outcome of judgment is legally connected to lessor, if the lessors make objections against the nature and amount of lessees’ debts, the lessors shall be granted as third parties to participate into the actions if they apply so. Notwithstanding, the regulations of the SMPL still apply to the disputes over confirming creditors’ rights of which the system that first trial is the final trial is adopted, without the consent of the lessor, the court should not initiate mediation or confirm the reconciliation agreement reached by the lessee and maritime applicant. With regard to the main body of judgment of dispute over confirming creditors’ rights, general judgment of rights confirmation shall be referred to, it shall hold that “it is confirmed that the claimant is entitled to the debt borne by the defendant with the amount of XX yuan, this debt possesses maritime lien/possessory lien/mortgage of ship XX and thus can be compensated with priority in the auction proceeds of this ship”.
ⅱFinancial Leasing of Ship under Construction and Its Risk Management
Can ship under construction be financial leased is a question that has been bothering the academic and practical fields for a long time. Although opinions have several bouts already, no final conclusion has yet been made. One opinion holds that ship under construction cannot be financial leased, the reason is simple that, by virtue of article 237 of the Contract Law “a financial leasing contract is a contract in which according to the choice of vendor and leasehold made by the lessee, the lessor buys the leasehold from the vendor and provide the leasehold to the lessee for use, and the lessee pays hire”, a financial leasing contract includes three parties (vendor, lessee, lessor) and two contracts (sale contract and financial leasing contract), while in the financial leasing of ship under construction there exists no sale contract, but only ship building contract reached between the lessor and the ship builder, so it does not conform to the definition of financial leasing contract made by the Contract Law, i.e. ship under construction cannot be financial leased. Another opinion holds that, given that the nature of a financial leasing contract is that for lack of capitals the lessee need the lessor to provide a special leasehold, the leasehold can either be a existing one that is purchased by the lessor, or be a specialized one that is customized by the lessor for the lessee (under circumstances that there exist no such leaseholds exactly satisfying the needs of the lessee in the current market), so the leasehold does not need to be existing ones, and items under construction can also been the leasehold of financial leasing, i.e. ships under construction can be financial leased. To say the least, even if a sale contract must exist in a financial leasing contract, whether the nature of a ship building contract is a contract of hired work or a contract of sale is still in the air, so the conclusion that a financial leasing contract comprising a ship building contract is not covered by the range of financial leasing contract cannot be made simply by the reason “a sale contract must be included”. For example, case (2015) Yong Hai Fa Shang Chu Zi No.1027, in which both a financial leasing contract and a ship building contract exited, was a typical dispute over financial leasing contract of ship under construction. The above two opinions resulted in different solutions when dealing with specific disputes in judicial practice, easily causing inconformity of judgment scales, so, to make clear whether the ship under construction can be financial leased or not hereunder is an urgent question that need to be solved.
We think that, comparing to financial leasing of ordinary device, the transaction of financial leasing of ship is a bit special. Since ships are different from ordinary devices, it is impossible for ship building factories to produce ships for consignment sale like other device manufactories, and they always start to design and build them under circumstances that orders have already been confirmed. Therefore, conducting financial leasing of ships under construction is an inevitable consequence of development of ship financial leasing market. From the perspective of honoring the intention of parties and promoting the trade of ship finance, given that there are no statutory mandatory regulations, it makes no sense to deny the validation of financial leasing contract of ship under construction. Under the circumstance that the lessee makes the choice of ship building factory for building a new ship, given that there is no explicit regulation of the Maritime Code with regard to the ownership of ship under construction, the stipulations as to the ownership of ship reached between the lessor and the building factory are always different in various cases. When the ship building factory breaches the building contract or does not perform the contract as agreed, or this ship building factory is bankrupted or incurs claims for compensation, the lessor will always be in predicament of losing both ship and money. At this point, there are several methods that can be resorted to by the lessor for preventing this kind of risk: first, require the ship building factory to provide bank repayment guarantee, the guarantee shall be issued by the bank that is recognized by the lessor, and it is agreed that if the ship building factory cannot finish the ship building as agreed under the building contract, the bank shall bear the responsibility which is borne by the ship building factory of repaying the ship-building money with no conditions; secondly, make the lessee provide guarantee against risks during the building period, for the lessee choosing the designed ship type and ship building factory independently, thus the lessee shall bear the corresponding risks; thirdly, if the lessor is unclear about whether or not the ship under construction has been mortgaged, the lessor can inquire the maritime administrative institutions which already carried out mortgage registration of ship under construction, so as to keep away the risk of new ship attaching mortgage.
ⅲ Registration of Ships Under Financial Leasing
The registration of ship financial leasing conducted by the maritime department is primarily in accordance with the regulation of the Announcement About Regulating the Domestic Ship Financial Leasing Management that was issued on March 28 2008 which provides that “with regard to the ships built or purchased under financial leasing by small or medium sized enterprise, the ship owner shall be the lessor of the ship financial leased by small or medium sized enterprise, the ship operator shall be the lessee of the ship financial leased by small or medium sized enterprise , the relationship between the lessee and lessor shall be registered as bareboat charter”, thus the ship under financial leasing is registered as bareboat charter and registration certificate is issued independently (some certificates have remarks of “financial leasing”). This registration mode is inclined to mix financial leasing and bareboat charter, and is not good for sorting out the real rights and duties of market participants, causing disputes in judicial practice. Therefore, ascertaining a registration mode conforming to the characteristics of ship financial leasing is a realistic need, and that how to establish is in urgent need to be cleared.
We think that the lessor is in lack of legal protection upon ownership of the leasehold, for our country having no specific leasehold registration institution nowadays. The laws and regulations, such as the Maritime Code, the Ship Registration Regulations, etc., stipulated independent registration institution for ship, they demand that the acquisition, transference and extinction of ownership of a ship shall be registered at the ship registration authorities; no acquisition, transference and extinction of the ownership of a ship shall act against a third party unless registered. If the shipowner rents the ship to other persons, the ship shall be registered as bareboat charter, so as to ascertain the shipowner (lessor) and ship user (lesser). In practice, according to the Announcement About Regulating the Domestic Ship Financial Leasing Management, the ship registration authorities allow the ship financial leasing to be registered and thus be able to act against a third party, by reference to the regulations of bareboat charter. With regard to ship financial leasing, the above registration institution makes sure that the ship will not be disposed arbitrarily by means of transference, mortgage, possessory lien, etc., under the circumstance where the ownership and usage are parted, so as to protect the ownership of ship of lessor to a great extent and guarantee the safety and performance of ship financial leasing trade in practice. However, financial leasing is different from the traditional charter, if registered as bareboat charter, its public trust and right that can be acted against a third party would be restricted to that of bareboat charter, so, externally, this kind of registration confuses the differences of financial leasing and bareboat charter in law, and leaves the interests of the lessor vulnerable. We think that, with due respect to the current registration institution of ship financial leasing, it is necessary to establish a separated registration institution of ship financial leasing which separates the registration of ownership and that of financial leasing, remarks the status of financial leasing on the certificate of ownership of ship and the certificate of ship registration on the basis of ship financial leasing contract, and inform both parties of leasing, so as to reduce the risk of trade and the corresponding disputes effectively.
Conclusion
With the fulfillment of the strategy of developing marine economic and strengthening the country by seas, our ship financial leasing industry will be inevitably going onto the fast traffic lane. Because that the process of ship financial leasing is complicated, the amount related is colossal and the risks involved are numerous, these cases will become more and more sophisticated. In the foreseeable future, considering that the improvement of registration institution of financial leasing needs quite a long period, from now on, maritime courts will undoubtedly confront new types of disputes over financial leasing, such as disputes over leveraged financial leasing, disputes over sublet financial leasing, etc. Our court will actively focus on the cutting-edge development of ship financial leasing, conclude experiences of trial constantly, and improve the judicial capability, so as to provide more powerful judicial guide and safeguard for the healthy and well-ordered development of the industry of ship financial leasing.