On 27th September 2009, Zhoushan Shipyard (hereinafter “Shipyard”) and Heng  Shipping Company (hereinafter “Shipping Company”) entered into the Contract on Transformation/Repair of M/V “Heng Yu” under which Shipping Company agreed to entrust Shipyard to repair the vessel as of 26th June 2010 to 10th May 2011 at an engineering cost provisionally set at 57,650,000 CNY. The contract also agreed on the term of payment. After that, the vessel put in the shipyard and Shipyard began the transformation and repair project on the vessel.

On 27th July 2011, ICBC Gulou Branch (hereinafter “Gulou Branch”) lodged a lawsuit with Ningbo Maritime Court, requesting the court to arrest “Heng Yu” so as to be secured by the ship mortgage. Gulou Branch also requested the court to support its application to enjoy the right of mortgage in the sum of 150,000,000 CNY against “Heng Yu” owned by Shipping Company and the right of preferred compensation. On 29th July 2011, Ningbo Maritime Court arrested “Heng Yu” at the dock of Shipping Company. On 21st February 2012, the court rendered a civil ruling, adjudging Gulou Branch to enjoy the right of mortgage against “Heng Yu” owned by Shipping Company within the sum of 150,000,000 CNY.

Considering that Ningbo Maritime Court had issued a notice for the arrest of “Heng Yu”, Shipyard and Shipping Company agreed to suspend the transformation and repair of “Heng Yu” as of 20th August 2011, as was set forth in the Contract on Settlement of Transformation/Repair of “Heng Yu” entered and concluded on 29th October 2011. It was also agreed that the ongoing project shall be deemed terminated on an “as is” basis in the event that Shipping Company failed to set a date to resume the project within six (6) months after signing the settlement contract. Under such circumstance, Shipping Company shall, before 29th April 2012, pay a lump sum of 70.36 million CNY, after being confirmed by both parties, for the project and the costs occurred due to the suspension. After signing the contract, however, Shipping Company did not set a date to resume the project, nor did it pay the due amount for the project and the costs during the suspension in accordance with the contract in spite of calls and urges from Shipyard.

In its claims filed with Ningbo Maritime Court against Shipping Company, Shipyard alleged: the said contracts entered by and between the Claimant and the Defendant were valid and effective under which the Claimant had undertaken the liability to transform and repair “Heng Yu” in accordance with the clauses of the contract but the Defendant defaulted on the contract by not paying the due amount. Therefore, the Claimant requested the court to rule: (1) the Defendant to pay 70.36 million CNY plus interest for the transformation and repair of “Heng Yu”; (2) the Defendant to pay for the port charge and electricity cost of the vessel during the suspension; AND (3) the Claimant to enjoy the possessory liens against “Heng Yu” owned by Shipping Company and the right of preferred compensation from the proceeds of the auction sale.

The Defendant did not make any defense, nor did it provide any supporting evidence against such claims.

The third party Gulou Branch held that: the arrest of ship did not constitute possession of the ship by the Claimant; namely, the arrest was not the constitutative requirement of possessory liens. Therefore, Gulou Branch requested the court not to support the Claimant’s right to possessory liens against “Heng Yu” owned by the Defendant.

On hearing the case, Ningbo Maritime Court judged: the contract concerning the transformation/repair of vessel entered by and between the Claimant and the Defendant was valid and effective, and both of the parties shall lawfully perform their obligations as agreed in the contract. The transformation and repair of the vessel concerned was real and most of the job had been effectively carried out. According to the Contract on Settlement of Transformation/Repair of “Heng Yu” entered and conclude between Shipyard and Shipping Company on 29th October 2011, and considering that the Defendant had failed to set a resumption date or to make due payment according to the contract, the contract for the transformation/repair of the vessel shall be deemed terminated and the Defendant shall be in debt for the transformation/repair of the vessel as of 29th April 2012. Therefore, the court supported the Claimant’s request for the payment of expenses plus interest for the transformation and repair of “Heng Yu” since such claim was valid and grounded.

The third party Gulou Branch was adjudged to enjoy the right of mortgage of “Heng Yu” within the sum of 150,000,000 CNY. According to the principles of the PRC Property Law and relevant provisions of the PRC Maritime Law, this court held that the contract on transformation/repair of ship, which had been established and performed before the third party excised the right of ship mortgage, shall not be affected and excluded by the ship mortgage. Especially, according to Article 11 of PRC Maritime Law, the major function of the right of mortgage of ship (the right of preferred compensation from the proceeds of the auction sale) only enjoys priority in compensation over other creditor’s rights during the allocation of the proceeds of the auction sale. Ship mortgage could not nullify other creditor’s rights. According to Article 25 of PRC Maritime Law, the possessory lien is the natural outcome of default on debts (the building or repairing cost of a ship) rather than a “consensual lien” prescribed in a contract. Ship mortgage and possessory lien only vie for priority with one another in the auction sale of a ship and the allocation of the proceeds of the auction sale, and the possessory lien has priority over ship mortgage. Neither of the rights can nullify the legal effect of the other. According to the legislative intent of the possessory lien (to conditionally and rationally recognize private remedy in a bid to maintain the normal legal order), the third party’s application for ship detention by exercising the right of ship mortgage in order to cause the lien holder’s loss of possession could not be admitted by this court, because such application was not supported by facts or legal grounds. In accordance with the relevant laws and provisions, arrest-auction procedure is a special procedure of the court to tackle all the creditor’s rights concerning a ship in a forced, collective and thorough manner. This special procedure is made to lawfully allocate the ship’s price in a settled, collective, and definite manner, which cannot and will not change the legal status of the creditor’s rights before such settlement. To conclude, the third party’s application for admitting the Claimant’s possessory lien against “Heng Yu” by causing the lien holder’s losing of possession through ship arrest shall not be supported by the court since such application had no factual or legal grounds.

In summary, the court supported the reasonable claims raised by the Claimant and overruled the application and request made by the third party for absence of factual or legal grounds. The court therefore ruled: (1) the Defendant to pay the Claimant 912,525 CNY for port charge, 37,500 CNY for electricity, and 70,360,000 CNY plus interest for the transformation and repair of the ship; AND (2) the Claimant to hold the possessory lien against “Heng Yu” so as to secure the sum of 65,848,633 CNY plus interest for the port charge, electricity fee, transformation and repairing costs (plus the prepaid material costs and others).