Ship Arrests And Maritime Liens In South Korea

Foreign shipowners and their creditors often ask whether ship arrests are possible or whether maritime liens are enforceable in the Republic of Korea (“Korea”). Due to the nature of the maritime shipping business, both privately-owned and chartered vessels inevitably enter foreign ports around the world, including that of Korea. When debtor-owned vessels are provisionally seized or maritime liens are invoked at Korean ports of entry, shipowners and their creditors have come to consider Korean law as an option to enforce their rights.

Ironically, while most countries, including Korea, grant creditors a powerful priority right that is senior to other security interests, the laws on exercising such maritime liens, including ship arrest, differ by country. This undoubtedly causes considerable inconvenience and difficulty when exercising maritime liens. This article will address some of the important points to note when a foreign party intends to initiate a ship arrest or enforce the maritime lien on a vessel in Korea.

Is ship arrest limited to the ships actually owned by the shipowner (debtor)?

As Korea is a civil law jurisdiction, Korea has a different position on ship arrests from that under Anglo-American common law jurisdictions. Korean law provides that the subject of any provisional attachment is limited to the debtor’s own property. With regard to ship arrests, it is possible to apply ship arrest on all ships owned by the debtor-shipowner. Thus, the general rule is that all ships owned (registered) by the debtor-shipowner may be subject to ship arrest. This means that the creditor may enforce its right of provisional attachment on all vessels owned by the debtor-shipowner at the time of the attachment.

Korea is not a party to either the International Convention on Arrest of Ships (1952) or the International Convention on Arrest of Ships (1999). In other words, the common law countries and the International Convention on Arrest of Ships allow ship arrest only for a maritime claim—which is based on the direct relationship between the ship and the claim. On the contrary, Korean laws apply the regular requirements for a provisional attachment to all types of claims, i.e., (1) the existence of preserved rights or claims protected by a provisional attachment, and (2) the necessity of preservation of the property. As long as these requirements are satisfied, Korean laws allow for provisional attachment on any debtor-owned property, regardless of the type of claim, in the absence of special circumstances. Accordingly, the Korean laws do not consider in principle the relationship between the ship and the claim occurrence. Under Korean laws, a ship owned by the debtor can be an easy target for ship arrest; therefore, even a ship that has not caused the maritime claims (a sister ship) can be subject to ship arrest as long as it is owned by the debtor. In short, Korean laws allow a very extensive scope of ship arrest for creditors.

However, ship arrest is not available for a ship chartered by the shipowner because provisional attachment is allowed only for the property owned by the debtor-shipowner. Even in a case of bareboat charter, wherein the charterer appoints and supervises the captain of the ship, the cargo owner, who is the creditor, should be mindful of the fact that the ship chartered and used for the voyage may not be subject to ship arrest.

Can a ship be arrested even if a maritime lien may be enforced against the ship?

The Supreme Court of Korea has consistently ruled that, where there is a maritime lien in place, the lien-holder (creditor) is not allowed to initiate a provisional attachment to preserve the claim because the lien-holder can secure its rights by receiving payments prior to other creditors by enforcing its right to initiate an auction of the ship, which can be initiated without any enforcement order. Therefore, a secured claim that is recognized as a maritime lien should only be enforced by means of an auction of the ship. As such, the creditor cannot apply for ship arrest in such a case.

In sum, a creditor who intends to invoke a ship arrest should first clarify the nature of the creditor’s claim at issue, and depending on the type of claim, should then decide whether to proceed with the procedures of ship arrest or to apply for an auction on the ship.

For reference, claims for which maritime liens are recognized under Korean laws include:

i. Claims for cost of litigation for the common interest of creditors, taxes imposed on the ship concerning the voyage, pilotage and towage fees, maintenance and inspection charges of the ship and its appurtenances after final entry into a port;
ii. Claims arising out of an employment contract for a crewman or any other ship employee;
iii. Claims for salvage charges incurred from rescue operations at sea and a claim concerning a share in general average; and
iv. Claims for damages for any loss and damage incurred due to ship collisions and other navigation accidents; loss of and damage to navigation facilities, port facilities and routes, and the lives and bodies of crewmen or passengers

Thus, any creditor of any of the above claims is granted by law a maritime lien on such claim and can enforce priority rights not only on the ship, its appurtenances, and the freight for the voyage in which the claim has arisen, but also the claims incidental to such ship and freight (Article 777 (1) 1 through 4 of the Korean Commercial Code).

Shall the laws of Korea be the governing law in relation to the enforcement of a maritime lien on a ship entering a Korean port?

Article 60 of the Act on Private International Law provides the list of affairs subject to the law of the country of ship registry, which include:

i. The ownership and the mortgage on a ship, the maritime lien, and other real rights on a ship; and
ii. The order of priority of the security interests on a ship.

Therefore, the nature and validity of a maritime lien and the status of such lien in relation to other property rights should be governed by the law of the country of ship registry.

In this regard, there will not be a problem if Korea is the country of registry for a ship entering a Korean port. On the other hand, if a ship is registered in a foreign country other than Korea, the lien-holder (creditor) must first consider whether its claim may be enforced as a maritime lien under the laws of the country of ship registry, instead of referring to Article 777 (1) of the Commercial Code of Korea.

Does this mean that the law governing the enforcement procedure of such maritime liens should be the law of the country of ship registry? The Supreme Court of Korea’s answer is “No.” The Korean Supreme Court has ruled that even if the governing law of a maritime lien is designated as the laws of the country of ship registry under the Act on Private International Law, the enforcement procedures (including the execution method, etc. as well as the execution period) must be subject to Korean laws, the law of the forum.

For example, under Article 786 of the Commercial Code of the Republic of Korea, a maritime lien expires if it is not enforced within one year from the date on which the claim arises. As such, a claim exceeding the one-year statute of limitation cannot be enforced in Korea even if the statute of limitation is prescribed otherwise in the laws of the country of ship registry.
Source: DR & AJU LLC