Stella Kounakou, London-based Shipowners Club Claims
Executive, has written on the recent case of Pacific Pearl Co Limited v. Osios
David Shipping Inc [2022] EWCA Civ 798, in which it was decided that, when a
party to ASG2 is offered security “in a form reasonably satisfactory”,
it was obliged to accept it and could not seek alternative or better security
by arresting a ship.
Kounako noted that it was “common in collision
claims for Members to agree with the owners of the other vessel on an ASG2, the
standard form of a collision jurisdiction agreement (CJA)”.
On July 15th 2018 three vessels, the Panamax Alexander,
the Sakizaya Kalon and the Osios David, collided in the Suez Canal. On August
8th 2018 the owners of Panamax Alexander, entered with Britannia P&I Club,
and the owners of Osios David, entered with The Standard Club, agreed on a
bipartite CJA on the standard terms of ASG2.
On August 16th 2018, the agreement was signed. It
provided that each party’s claim would be determined exclusively by the English
Courts in accordance with English law (Clause F), and that each party would
provide security in respect of the other’s claim “in a form reasonably
satisfactory to the other” (Clause C).
However, while discussions were ongoing as to the amount
and terms of each party’s security, on September 5th 2018, the interests of
Osios David arrested in South Africa the Panamax Christina, which was owned by
a company associated with the owners of Panamax Alexander.
On September 7th 2018 Britannia proposed a draft LOU to
the interests of Osios David, which was based on the standard wording of ASG1,
but with the addition of a ‘sanctions clause’, relieving the Club from its
obligation to pay in certain circumstances. This clause was included because
the Panamax Alexander had been on a voyage to Iran and the USA had recently
announced the re-introduction of sanctions against Iran. Britannia was
therefore concerned that they might be unable to pay under their LOU if called
upon to do so without breaching the sanctions regulations.
However, the Osios David interests refused to accept such
an LOU and refused to release the Panamax Christina unless security was
provided without including a sanctions clause.
On September 10th 2018 the P&I Club of Panamax
Christina (UK Club) offered such security in the form of an LOU, which provided
for South African law and jurisdiction, and so the Panamax Christina was
released.
On July 15th 2019 the interests of Panamax Alexander
commenced proceedings against the Osios David interests, seeking damages for
breach of their CJA for the fees payable to the owners of Panamax Christina for
providing security, together with out-of-pocket expenses incurred by the owners
of Panamax Christina in connection with the vessel’s arrest in South Africa.
The Admiralty Court decision
There were two main issues raised for consideration
before the Commercial Court:
Sir Nigel Teare focused on the first issue and held that
the test for ascertaining whether a security was in a “form reasonably
satisfactory to the other” was an objective one, with the reasonableness
to be assessed by reference to the position of a reasonable person in the
position of the proposed recipient of the LOU.
However, he also stated that the inclusion of sanctions
clause in a Club LOU was typical in cases with an Iranian nexus and that the
legal and practical difficulties which had given rise to the insertion of such
clause should have been considered as well.
He further found that similar issues would have arisen
had a security been sought by way of an arrest instead of an LOU. Accordingly,
it was found that the security provided by Britannia on behalf of Panamax
Alexander was reasonable.
Regarding the second issue, it was held that, both as a
matter of construction and implication, no obligation could be inferred from
the ASG2 wording on the part of Osios David interests to accept the LOU offered
to them and to refrain from seeking alternative security by arresting a ship.
The Court of Appeal decision
On appeal, the Panamax Alexander interests (the
appellants) submitted that, under Clause C of the ASG2, the provision of
reasonable security was a unilateral act. Therefore, the appellants asserted,
the acceptance of the security by the other party was irrelevant.
Alternatively it was argued that, if necessary, as a
matter of business efficacy a term should be implied into the CJA that a party
offered reasonably satisfactory security should accept it.
On the other hand, the Osios David interests (the
respondents) submitted that the purpose of ASG2 was to provide only a framework
for negotiation, with the expectation that, if reasonable security was offered,
it would be accepted. The purpose of the ASG2 was not to create an obligation
on the recipient party to accept it.
It was also argued that there was no justification for
implying any such term, given that the right to arrest is such a fundamental
feature of Admiralty claims that any agreement to waive this right should have
been clearly express. However, there was no such wording in the ASG2 with that
effect as a matter of construction.
The Court of Appeal overturned the first instance court
decision by finding that the respondents were in breach of the CJA for refusing
to accept the appellants’ security. It was held that the wording of Clause C of
the ASG2 did not intend to allow parties to seek alternative or better security
by arresting a ship, when reasonable security has already been provided. It was
stated that the whole purpose of the ASG2 scheme was for the parties to reach
an agreement whose provisions would operate instead of an arrest in order to
found jurisdiction, enable a claim to be served and provide for security to be
given. Therefore a different conclusion would render the scheme pointless, as
the parties’ mutual objective to avoid the costs and delays caused by an arrest
would not be achieved.
For that very reason also the Court was prepared, if
necessary, to imply a term that a party offered security in a reasonably
satisfactory form would accept it within reasonable time.
Shipowners’ Kounakou observed that, following this
decision, the risk in the acceptability of security had now been transferred
from the offeror to the offeree, hence making it much harder to refuse it.
Therefore it was advised that, when Club members agree on
a CJA in the form of ASG2 and an LOU is offered to them in a reasonably
satisfactory form, they would need to think “very carefully” before
rejecting it, as they not only might be found in breach of their CJA, but in
the meantime they would also be deprived of taking any further action to secure
their claim.
“Members should further bear in mind that a Club LOU
including a sanctions clause can constitute a security in a reasonably
satisfactory form for the purposes of ASG2 and so, the exact wording of the CJA
should be carefully considered and drafted”. Most importantly, said
Kounaku, “it should be certainly reassuring to Members that the judgment
recognizes and supports the strength and security of the LOU offered by IG
P&I Clubs in an effort to expedite their Members’ disputes and prevent
their vessels from being arrested”.
