A P&I Club Letter of Undertaking subject to a sanctions clause remains a “reasonably satisfactory” security, though it need not be accepted - DAC Beachcroft

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A P&I Club Letter of Undertaking subject to a sanctions clause remains a “reasonably satisfactory” security, though it need not be accepted

Published 7 December 2021

M/V Pacific Pearl Company Ltd v. Osios David Shipping Inc (2021)[1]

An arrest of a ship is a means not only of establishing jurisdiction but also of obtaining security for a maritime claim. Where ships collide the owners of each ship will be concerned to recover for the damage suffered from the other ship. Of immediate concern will be the decision as to where to arrest in order to commence proceedings and to obtain security for the claim.

An arrest might not, however, be the ideal way of founding jurisdiction or of obtaining security. The ship to be arrested may be in a jurisdiction considered unsuitable for determining the claim. Moreover, the arrest will only provide adequate security if the market value of the ship, when sold, is sufficient to cover not only the claim for collision damage but also the claims of others, such as a mortgagee, who may have priority. Arrest is also a costly process.

For these reasons the owners of ships involved in collisions will usually agree upon a jurisdiction where the claims of each owner against the other will be heard, and they will also agree to an exchange of letters of undertaking from each owner's P&I Club (or hull underwriters) securing the claim of each owner against the other. A letter of undertaking (LOU) from an owner's P&I Club avoids the costs and uncertainty of an arrest and provides a reliable and trustworthy form of security.

Solicitors practising admiralty law in England, the Admiralty Solicitors Group, have devised two forms of agreement to assist the owners of ships involved in a collision. The first, known as ASG 1, is a draft form of LOU. The second, known as ASG 2, is a draft Collision Jurisdiction Agreement (CJA), in which the parties agree to litigate or arbitrate their claims in England. Clause C of ASG 2 provides that "Each party will provide security in respect of the other's claim in a form reasonably satisfactory to the other." 

The present case concerned collisions in the Suez Canal in July 2018 between three vessels, of which two were involved in this litigation, namely PANAMAX ALEXANDER and OSIOS DAVID. The owners of each vessel agreed to a CJA on form ASG2, submitting questions of liability for the collisions to the English Admiralty Court.

In the meantime, the then US President had announced the reintroduction of sanctions against Iran, in response to which many P&I Clubs sought to introduce sanctions clauses into their LOUs.  Accordingly, in September 2018 the Owners of PANAMAX ALEXANDER and their P&I Club, the Britannia, offered to the Owners of OSIOS DAVID an LOU containing a sanctions clause. That LOU was not accepted by the Owners of OSIOS DAVID, who instead elected to arrest an associated vessel, PANAMAX CHRISTINA, in South Africa (a jurisdiction where associate vessel arrests are permitted). In consideration of release of the PANAMAX CHRISTINA from arrest in South Africa, they obtained an LOU from the latter vessel’s club, The UK P&I Club, which did not contain a sanctions clause.

The Owners of PANAMAX CHRISTINA, having incurred expense in South Africa in "fronting" the provision of security, in due course received an indemnity for that expense from the Owners of PANAMAX ALEXANDER. The latter then sought to recover the same amount from the Owners of OSIOS DAVID, on the grounds that the expense was incurred as a result of a breach of clause C of the CJA agreed between those owners, namely, the refusal of OSIOS DAVID to accept the LOU offered by The Britannia.

The first question was whether an LOU with the sanctions clause constituted a “reasonably satisfactory” form of security for the purposes of the CJA. The OSIOS DAVID’s P&I Club, The Standard, had rejected the LOU because they said it transferred the risks generated by the fact that PANAMAX ALEXANDER had an Iranian nexus (namely, that the cargo was destined for Iran) from the Owners of PANAMAX ALEXANDER to the Owners of OSIOS DAVID. The latter could not accept the sanctions clause because their own trade was not related to any sanctioned entities. Moreover, they said, the Owners of OSIOS DAVID were to be the "money receiving party" (because OSIOS DAVID had been at anchor at the time of the collision) and so the risk of non-payment by reason of sanctions was to be run only by the Owners of OSIOS DAVID and not, reciprocally, by the Owners of PANAMAX ALEXANDER.

The court rejected these arguments. The fact that payments might not be made where there existed an Iranian nexus was, said the judge, a fact of commercial life. If the shipowner had arrested the wrongdoing ship and then sought a payment into court as the price for the release of the vessel from arrest the bank asked to make the payment might equally well have raised the sanctions issue and not made the payment. Similarly, if the shipowner had obtained judgment on the claim and sought to execute the judgment by having the arrested vessel sold, the claimant shipowner would be exposed to the same risk.

As to whether the OSIOS DAVID was to be the "money receiving party", this proved to be true but that could not have been known at the time when the LOU was offered. Liability was disputed by the PANAMAX ALEXENDER and continued to be disputed to the end of the trial in July 2020[2].

Having decided that the LOU offered with the sanctions clause was, objectively, a reasonably satisfactory form of security, the next question was whether owners of the OSIOS DAVID were in fact contractually obliged under the CJA to accept it, and thereby forego rights of arrest which otherwise they would enjoy. By clause C of the CJA each party agreed to provide the other with reasonably satisfactory security, but there was no express obligation on each party to accept the other’s security, as offered.  The court concluded that there was no need to infer such an obligation. The commercial reality is that each party to a CJA will generally accept security that is reasonably satisfactory to it, but that is a commercial decision rather than a legal obligation. In any given case, the party being offered the security was entitled to conclude that they could in fact obtain “better” security by arresting. Nothing in the CJA removed that right.


[1] [2021] EWHC 2808 (Comm)

[2] For the judgment on the substantive claims see Owners of the Vessel SAKIZAYA KALON v. Owners of the Vessel PANAMAX ALEXANDER [2020] EWHC 2604 (Admlty) 


Anthony Menzies

Anthony Menzies

London - Walbrook

+44 (0)20 7894 6948

Franc Gozalvez

Franc Gozalvez

London - Walbrook

+44 (0) 20 7894 6139

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