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Party offered reasonably satisfactory security following collision obliged to accept it

News / / London

MV Pacific Pearl Co Ltd v. Osios David Shipping Inc (Panamax Alexander) [2022] EWCA Civ 798
The Court of Appeal has confirmed that a party to ASG 2, the standard form Collision Jurisdiction Agreement, is obliged to accept reasonable security once it is offered and cannot choose to refuse that security and seek alternative or better security by arresting a ship. In such circumstances, there is no right to an arrest or any justification for it.

The standard forms

ASG 2 is a standard form Collision Jurisdiction Agreement produced by the Admiralty Solicitors Group. It provides for claims arising from a collision to be determined in the English Court in accordance with English law and for security for those claims to be given in order to avoid the costs and delays caused by an arrest.

Clause C of the standard form provides in relevant part:

"Each party will provide security in respect of the other's claim in a form reasonably satisfactory to the other…”

Clause F provides for English law and exclusive English Court jurisdiction.

ASG 2 is intended to be used in conjunction with ASG 1, which is a draft Letter of Undertaking (LOU) to be given by the parties' respective P & I Clubs. It provides essentially that in consideration of the beneficiary of the LOU giving up the right to arrest in order to obtain security, the P & I Club agrees to pay whatever is agreed or determined to be due.

The background facts

On 15th July 2018, three vessels, Panamax Alexander, Sakizaya Kalon and Osios David collided in the Suez Canal. On 16 August 2018, the Owners of the Panamax Alexander and Osios David, following consultation with their respective P & I Clubs, entered into a bipartite Collision Jurisdiction Agreement (CJA) on the standard terms of ASG 2.

The CJA provided, among other things, that each party's claim would be determined exclusively by the English Court in accordance with English law and practice, and that each party would provide security in respect of the other's claim in a form reasonably satisfactory to the other.Discussions followed as to the amount and terms of the respective security to be provided by each party. While those discussions were continuing, on 5 September 2018, the Owners of the Osios David arrested the Panamax Christina in South Africa. Panamax Christina was owned by a company which Osios David alleged to be associated with the Owners of the Panamax Alexander. The Owners of the Panamax Christina are contesting that arrest in South Africa.

On 7 September 2018, the Panamax Alexander’s P & I Club proposed a draft LOU wording to the Owners of the Osios David. The LOU wording was based on ASG 1 but with the addition of a sanctions clause which was drafted in wide terms. The sanctions clause was included even though the Panamax Alexander was carrying a non-sanctionable barley cargo. This was because it had been on a voyage to Iran and in view of the US sanctions against Iran in place at the relevant time, it was deemed good practice by the International Group of P & I Clubs to have a belt and braces sanctions clause in their LOUs where there was an Iranian nexus. Among other concerns, the Clubs envisaged potential practical difficulties in making or receiving payment in such cases.

The Owners of the Osios David and their P & I Club would not accept this LOU wording and refused to lift the arrest in South Africa until another LOU, without a sanctions clause, was provided by the Panamax Christina’s P & I Club on 10 September 2018. This LOU was governed by South African law and jurisdiction.

The Owners of the Panamax Alexander subsequently commenced English Court proceedings, seeking damages for breach of the CJA, together with declaratory relief. The damages claimed consisted of fees payable by the Owners of the Panamax Alexander to the Owners of the Panamax Christina for providing security in the form of the Club LOU in South Africa, together with out-of-pocket expenses in relation to costs incurred by the Owners of the Panamax Christina in connection with the arrest in South Africa.

The Admiralty Court decision

The judge identified the two key issues of principle as follows:

  1. whether the disputed LOU was in a reasonably satisfactory form (pursuant to Clause C of the CJA/ASG 2) notwithstanding the sanctions clause; and
  2. whether, if it was in a reasonably satisfactory form to the Owners of the Osios David, they were contractually obliged by the CJA to accept it.

The judge found that, in principle, it was reasonable to include a sanctions clause in a Club LOU to be provided pursuant to Clause C of ASG 2. However, on the true construction of Clause C, he found that a party to whom reasonably satisfactory security was offered was not obliged to accept it and to refrain from seeking alternative security by way of a ship arrest. There was no express wording in Clause C to this effect and such a term could and should not be implied.

The Court of Appeal decision

The Court of Appeal allowed the appeal by the Owners of the Panamax Alexander, disagreeing with the judge’s construction of Clause C. On the Court of Appeal’s reading of the Clause, the security to be provided by each party would be the "security in respect of the other's claim" and there was no room for seeking alternative security. If a party were free to seek alternative or better security, there would be no need to stipulate that the security to be provided under clause C should be "in a form reasonably satisfactory to the other".

Furthermore, the combination of clauses C and F meant that if there was a dispute about whether the security provided was "in a formreasonably satisfactory to the other", that dispute was to be determined not in the foreign court where a ship had been arrested (as would be the position absent the agreement), but exclusively in the English Court.

The Court of Appeal further stated that there was no right to arrest and no justification for an arrest once reasonable security had been provided and, if a ship had been arrested, it must be released. The judge's approach left a party which had been provided with reasonable security free to seek alternative or better security by arresting the ship (or a ship in associated ownership) in any jurisdiction in which it could be found, however unreasonable that might be and whatever the disruption to the ship's trading or the cost, delay and inconvenience of getting the ship released. In the Court of Appeal’s view, this turned well established Admiralty practice on its head and was contrary to the clear purpose and the language of ASG 2.

The Court of Appeal also rejected the judge’s reasoning that there was nothing in ASG 2 about giving up the right to arrest. In fact, the whole scheme of the agreement was that its provisions operated instead of an arrest in order to found jurisdiction, to enable a claim to be served and to provide for security to be given.

The Court of Appeal added that, had it been necessary to imply a term that a party offered security in a reasonably satisfactory form would accept that security within a reasonable time, it would have done so. Such a term was necessary as a matter of business efficacy and because such a term was so obvious that it went without saying.

In conclusion, the Owners of the Osios David were obliged to accept the security offered and were in breach of the CJA for refusing to do so.

Comment 

The Court of Appeal’s decision very usefully reflects what has always been understood to be a principal purpose of a CJA in the standard ASG 2 form, which is to avoid the unnecessary costs and delays associated with ship arrests in foreign jurisdictions where reasonably satisfactory security in the form of an LOU from a member of the International Group of P&I Clubs has been offered.

Ince & Co acted for the Owners of the Panamax Alexander. The Owners of the Osios David will not be seeking leave to appeal to the Supreme Court.

 

The article was co-authored by Paul Herring

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

Reema Shour

Reema Shour Professional Support Lawyer

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