GLOBAL MARINE DRILLING CO v. TRITON HOLDINGS LIMITED
| OUTER HOUSE, COURT OF SESSION |
| A26/9/1999 | OPINION OF LORD MACFADYEN in the cause GLOBAL MARINE DRILLING COMPANY Pursuers; against TRITON HOLDINGS LIMITED Defenders: ________________ |
Pursuers: Glennie Q.C.; Henderson Boyd Jackson W.S.
Defenders: Currie Q.C.; Maclay Murray & Spens
26 January 2000
This is an admiralty action in personam in which the pursuers make very substantial monetary claims against the defenders. The dispute between the parties arises out of the sub-charter of a semi-submersible, self-propelled drilling rig "Maersk Vinlander". The dispute is the subject of arbitration proceedings in London. It is estimated that those proceedings will not be concluded until late 2002 or early 2003. The present action was signetted on 13 August 1999, and warrant was obtained inter alia for arrestment on the dependence. On 15 October 1999 in pursuance of that warrant arrestment was effected of the "Sovereign Explorer", a mobile offshore drilling unit belonging to the defenders. A motion for recall of that arrestment on the basis that the "Sovereign Explorer" is not a ship, and on the basis that the arrestment was nimious and oppressive, was refused by Lord Marnoch on 12 November 1999. A further motion for recall of the arrestment on condition that the defenders produce a guarantee from their parent company, Sedco Forex Holdings Limited, was also refused at the same time. The motion which came before me on 20 January 2000 was for recall of the arrestment on condition that the defenders provide a guarantee by Schlumberger Limited.
In moving the defenders' motion, Mr Currie intimated that for the purpose of the motion there was no issue as to the proper amount of the guarantee. The sum for which a guarantee would be provided if I granted the motion was US$140,000,000. The precise terms of the guarantee had not been agreed between the parties, and in the event of my being persuaded that recall on production of a guarantee by Schlumberger Limited should be granted, the terms of the guarantee would remain for negotiation between the parties, and failing agreement between them would require to be determined by the court. The issue on which Mr Currie sought a decision, however, was whether a guarantee by Schlumberger Limited (as distinct from a guarantee by a bank) afforded acceptable alternative security in place of the arrestment. Mr Currie further indicated that, if I held that a guarantee by Schlumberger Limited did not afford acceptable alternative security, he reserved his position as to the appropriate amount of the guarantee in the event of a motion being made for recall of the arrestment on provision of a bank guarantee.
At the time when the earlier motion for recall was heard by Lord Marnoch, the defenders were a subsidiary of Sedco Forex Holdings Limited, and both the defenders and Sedco Forex Holdings Limited were members of the offshore drilling division of the Schlumberger group of companies. In November 1999 that division was "spun off" from the Schlumberger group, and became part of the Transocean group. Despite its no longer being the ultimate holding company of the defenders, the guarantor proposed in the present motion was Schlumberger Limited. That was because the matter of recall of the arrestment was urgent, since negotiations for the future employment of the arrested vessel were being obstructed by the continuing subsistence of the arrestment. It was not practicable in the requisite short time-scale to obtain the necessary financial information about the Transocean group to enable them to be put forward as guarantors. The information was, however, available about Schlumberger Limited, and they were willing to provide a guarantee (subject, no doubt, to an indemnity acceptable to them from within the Transocean group). The defenders' reason for proposing a guarantee by Schlumberger Limited rather than a bank guarantee was that it was understood that a bank guarantee would cost US$1,000,000 a year.
Mr Currie submitted that in considering a motion for recall of the arrestment of a ship the court should proceed on broad equitable principles, and should be readier to modify or dispense with security than in the case of arrestment of other subjects (McMillan, Scottish Maritime Practice, pages 70-72). He also referred to Graham Stewart on Diligence, page 199, where it is said that where there are ample funds to meet the arrester's claim, and no prospect of its being defeated by other creditors, the court may recall the diligence as oppressive, and suggested that that test might be adapted to provide the criteria for determining whether a guarantee offered afforded adequate alternative security. He took issue with the view expressed by Lord Marnoch at page 5 of his opinion of 23 November 1999 that:
"in general ... the guarantor should be an independent lending institution with impeccable credentials".
There was, he submitted, no such general rule. The adequacy of alternative security offered was a matter of circumstance.
Mr Currie then presented material evidencing the financial standing of Schlumberger Limited. The company is registered in the Netherlands Antilles for reasons related to the mitigation of tax liability, a fact regarded as favourable by analysts. It is the leading provider of oilfield services. Its headquarters are in New York, with secondary headquarters in Paris and offices in the Netherlands as well. Its annual report for 1998 (No. 7/13 of process) contains the group consolidated accounts for the year to 31 December 1998. From that document it may be seen that its annual operating revenue is just under US$12 billion, its net assets over US$8 billion, and its market capitalisation of the order of US$32 billion. Mr Currie also relied upon a report by Mr Peter Farrelly dated 22 December 1999 (No. 7/25 of process). As Mr Farrelly's CV (which Mr Currie tendered at the bar) shows, he is a very experienced international banker, formerly a director of S. G. Warburg Group Management Limited, and now in practice as a banking consultant. He was asked to consider whether a guarantee by Schlumberger Limited in the amount of US$152 million for a period of up to four years would be equivalent in terms of security to a bank guarantee. It is unnecessary for me to recite here the views which Mr Farrelly expressed; I refer to his report for its whole terms. Mr Currie went on to submit that Schlumberger Limited had no history of failing to honour its liabilities, and in particular guarantees. Parent company guarantees were commonplace in the offshore oil industry, and any failure on the part of Schlumberger Limited to honour a guarantee would have a grave impact on its reputation. It was therefore inconceivable that they would seek to evade their liability under a guarantee. It was, in any event, difficult to see how they could do so. Although they were registered in the Netherlands Antilles, the guarantee could be enforced against them in New York, where they had their headquarters.
Mr Currie sought to anticipate the arguments to be deployed by the pursuers against the adequacy of a guarantee by Schlumberger Limited. He referred to the report by Ernst and Young dated 30 December 1999 (No. 6/18 of process). The questions which it addressed were whether the documents relied on by the defenders demonstrated the nature and worth of the operations carried on by Schlumberger Limited itself (as distinct from its subsidiaries), and the nature and worth of the assets held by Schlumberger Limited in the United Kingdom. Given the fact that the documents available were consolidated documents relating to the group as a whole, the answer given was, not surprisingly, that they did not provide answers to those questions. Mr Currie's submission was that it did not matter that it was impossible to distinguish between the assets held directly by Schlumberger Limited and those held by its subsidiaries, since control of the group as a whole rested with Schlumberger Limited. The location of the assets likewise did not matter.
Mr Glennie submitted that the proper test was that the arrestment should only be recalled if the pursuers were provided with alternative security as good as that provided by the arrestment. In light of the textbook references relied upon by Mr Currie, he submitted that in other jurisdictions the proposition that arrestment of a ship might be recalled on the ground that the debtor had ample funds did not find favour (The "Bazias 3" [1993] 1 Lloyd's Rep 101, per Lloyd LJ at 105; Lisnave Estaleiros Navais SA v Falcon Drilling Company Inc (High Court of South Africa, Case No. AC 120/99), and that this court should adopt the same approach. Mr Glennie submitted that since any award in the arbitration was unlikely to be forthcoming for three or four years, it was the sufficiency of the alternative security at that future date that required to be assessed. Group reorganisation might take place for all sorts of reasons, and it could not be assumed that in three years time the position of the Schlumberger group would be the same as it now is. Further, it was appropriate to assume for the purposes of a motion to recall an arrestment that proceedings would in due course be required to enforce the guarantee, so that the ease or difficulty of such enforcement was a consideration relevant to whether the guarantee was adequate. Moreover, the guarantee should be provided by a body which was not only amenable to the jurisdiction of the courts in Scotland or England, but also had assets in those jurisdictions against which enforcement could be executed. The matters focused in the Ernst and Young report bore on those considerations. There was in the present case no reason to suppose that if the present motion were refused the arrested vessel would be kept idle by virtue of the arrestment until the proceedings were concluded. Recall of the arrestment could readily be obtained if a bank guarantee were provided. The normal rule ought to be that an arrestment should only be recalled on the provision of security by an independent financial institution. It was not to be assumed that Schlumberger Limited would satisfy the guarantee without hesitation. The documents relied upon did not demonstrate that Schlumberger Limited had easily exercisable control over the assets of its subsidiaries, or that assets were so located as to be readily attached in enforcement proceedings. Separate proceedings in other jurisdictions might be required. In relation to Schlumberger's reputation, Mr Glennie submitted that it related to their activities in the oil industry, not to their financial probity. He produced a document emanating from the United States Department of Justice vouching that they had been fined $750,000 for criminal contempt by a US District Judge in Washington DC for forming a joint venture with another company in violation of a consent decree granted in 1994.
In my opinion the question for me to determine is whether the guarantee by Schlumberger Limited which is offered constitutes adequate alternative security to replace the security which the pursuers presently hold by virtue of their arrestment of the "Sovereign Explorer". This is not a case in which recall of the arrestment is sought on the basis that the defenders themselves have ample funds to meet the pursuers' claims. It is therefore not in my opinion necessary for me to attempt to resolve what might be thought to be a divergence of approach to recall on such a basis between the Scottish textbooks relied upon by Mr Currie and the English and South African cases relied upon by Mr Glennie. In this case the motion proceeds on the basis that alternative security is offered to replace the arrestment, and that the appropriate amount of security to be provided by way of guarantee is US$140,000,000. The question therefore seems to me to be whether, assuming the amount of the guarantee is appropriate, the identity of the guarantor is satisfactory. In determining that question, it seems to me that the primary question is whether the financial standing of the guarantor is such as to make the guarantee reliable. I do not consider that it is right that only a guarantee by an independent financial institution can be regarded as adequate. It is no doubt the case that in the context of motions for recall of arrestment alternative security is often provided in the form of a bank guarantee. That is no doubt the case simply because the court will be readily persuaded of the reliability of a bank guarantee, given the particular institution's individual reputation, and the stringent regulatory regime to which such institutions are subject. The defender who offers a guarantee by a party other than a bank must, in addition to tendering a guarantee for a sufficient amount, shoulder the additional burden of satisfying the court that the proposed guarantor is one of reliable financial standing. In the present case, I am of opinion that the material which has been placed before me enables me to conclude that Schlumberger Limited is of sufficient financial standing to be acceptable as a guarantor. I rely in particular on the analysis of the material put before him which Mr Farrelly set out in his report. I regard that report as sufficiently addressing, in addition, the consideration that the security may not be required for upwards of three years. Mr Farrelly's report addresses a four year period. I have considered the material emanating from the US Department of Justice, but do not consider that it would be appropriate for me to conclude that it undermines the financial probity of Schlumberger Limited.
It seems to me that the main issue between the parties relates not to the financial standing of Schlumberger Limited, but to whether the fact that the available material does not disclose (i) what assets the company has under its direct control as distinct from under the control of subsidiaries, and (ii) that it has assets in the United Kingdom, together or separately undermine the acceptability of the guarantee offered. I accept that these are relevant matters to bring into consideration. So far as the first of them is concerned, it is, in my view, a matter of degree. If the margin between the guarantor's assets and the amount of the guarantee were narrower, it might in my view be a matter of legitimate concern that the guarantor might not be able to have ready recourse to assets held through subsidiaries. The margin here is considerable. Having regard to that and also to the information about the lines of credit available to the group (see No. 7/13, page 32, and the comment thereon in No. 7/25) I do not consider that the fact that the information relates to the group position rather than the individual position of the guarantor is sufficient to render the proposed guarantee inadequate as alternative security in place of the arrestment. The location of assets is also, in my view, a matter of degree. It would, in my view, be appropriate that the guarantee should contain a clause prorogating the jurisdiction of either the Scottish or the English courts. I understand that there is no objection on the defenders' part to such a requirement. Beyond that, however, I do not consider that the absence of information about the location of the guarantor's assets is fatal to the adequacy of the guarantee. It might be different if it were clear that all relevant assets were secreted in jurisdictions in which enforcement would be particularly difficult. But here the guarantor is a substantial company operating in a worldwide industry with headquarters in New York and bases in Paris and the Netherlands. The possibility that the pursuers, who are themselves based in Texas, might have to take enforcement proceedings, for example, in New York, does not seem to me to be sufficient to render the security inadequate. It is, in my view, important to bear in mind that the relevant comparison is between the security afforded by the proposed guarantee and the security afforded by the arrestment, and not between the security respectively afforded by the proposed guarantee and a guarantee by a UK bank. The guarantee offered may in some respects be less attractive than a guarantee by a UK bank without being inadequate as a substitute for the arrestment. I bear in mind in that connection the point made by Mr Currie that the process of realising the security afforded by the arrestment might well be complicated, in three years time, not only by the state of maintenance of the vessel, but also by the possibility that by then advances in technology will have rendered it obsolescent. It would be wrong to speculate on that subject, but it is sufficient to illustrate that the arrestment does not necessarily provide a security the realisation of which will be entirely trouble-free.
I am therefore of opinion, having taken into account the considerations advanced on both sides of the argument, that a suitably framed guarantee by Schlumberger Limited for the sum of US$140,000,000 would afford adequate alternative security, the tender of which would justify recall of the arrestment of the "Sovereign Explorer" effected on 15 October 1999. I take the view that it is preferable that the form of the guarantee should be resolved before the motion for recall of the arrestment is granted, rather that the motion should be granted on a conditional basis. I have therefore continued the motion until 31 January 2000 to enable the parties to discuss the terms of the guarantee and present a draft to the court. If parties are unable to reach agreement, any dispute as to the terms of the guarantee may be presented to the court for determination on 31 January or at a further continued diet thereafter.