Difference between revisions of "M/V Pacific Pearl Co. Limited v Osios David Shipping Inc."

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'''COLLISION BETWEEN SHIPS: SECURITY AND JURISDICTION: STANDARD FORM WORDINGS OF ADMIRALTY SOLICITORS GROUP: ASG 1 - LETTER OF UNDERTAKING: ASG 2 - COLLISION JURISDICTION AGREEMENT: FORMS DESIGNED TO BE USED TOGETHER: UNDER ASG 2, SECURITY TO BE PROVIDED “IN A REASONABLY SATISFACTORY FORM”:  WHETHER PRESENCE OF SANCTIONS CLAUSE IN ASG 1 RENDERS IT NOT REASONABLY SATISFACTORY SECURITY UNDER ASG 2: RISK OF NON-PAYMENT: WHETHER A PARTY IS OBLIGED TO ACCEPT SECURITY THAT IS IN REASONABLY SATISFACTORY FORM'''
 
'''COLLISION BETWEEN SHIPS: SECURITY AND JURISDICTION: STANDARD FORM WORDINGS OF ADMIRALTY SOLICITORS GROUP: ASG 1 - LETTER OF UNDERTAKING: ASG 2 - COLLISION JURISDICTION AGREEMENT: FORMS DESIGNED TO BE USED TOGETHER: UNDER ASG 2, SECURITY TO BE PROVIDED “IN A REASONABLY SATISFACTORY FORM”:  WHETHER PRESENCE OF SANCTIONS CLAUSE IN ASG 1 RENDERS IT NOT REASONABLY SATISFACTORY SECURITY UNDER ASG 2: RISK OF NON-PAYMENT: WHETHER A PARTY IS OBLIGED TO ACCEPT SECURITY THAT IS IN REASONABLY SATISFACTORY FORM'''
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'''Note: This judgment is under appeal, with the hearing scheduled for 26 May 2022.'''
  
 
Case Note contributed by Sri Azali (BB in Human Resource Management and Business Law), Penningtons Manches Cooper
 
Case Note contributed by Sri Azali (BB in Human Resource Management and Business Law), Penningtons Manches Cooper

Revision as of 09:09, 26 May 2022

DMC/SandT/22/02

England

M/V Pacific Pearl Co. Limited v Osios David Shipping Inc.

High Court, Queen’s Bench Division, Commercial Court: Sir Nigel Teare: [2021] EWHC 2808 (Comm), 21 October 2021

Robert Thomas QC, instructed by Ince Gordon Dadds LLP for the Claimant

James M. Turner QC instructed by Reed Smith LLP for the Defendant

COLLISION BETWEEN SHIPS: SECURITY AND JURISDICTION: STANDARD FORM WORDINGS OF ADMIRALTY SOLICITORS GROUP: ASG 1 - LETTER OF UNDERTAKING: ASG 2 - COLLISION JURISDICTION AGREEMENT: FORMS DESIGNED TO BE USED TOGETHER: UNDER ASG 2, SECURITY TO BE PROVIDED “IN A REASONABLY SATISFACTORY FORM”: WHETHER PRESENCE OF SANCTIONS CLAUSE IN ASG 1 RENDERS IT NOT REASONABLY SATISFACTORY SECURITY UNDER ASG 2: RISK OF NON-PAYMENT: WHETHER A PARTY IS OBLIGED TO ACCEPT SECURITY THAT IS IN REASONABLY SATISFACTORY FORM

Note: This judgment is under appeal, with the hearing scheduled for 26 May 2022.

Case Note contributed by Sri Azali (BB in Human Resource Management and Business Law), Penningtons Manches Cooper

Summary

This case arose out of a collision in the Suez Canal in July 2018 between three vessels, PANAMAX ALEXANDER, OSIOS DAVID and SAKIZAYA KALON. The case concerns the refusal of the owners of the OSIOS DAVID to accept the terms of a Letter of Undertaking (“LOU”) on an ASG 1 form tendered to them by the P&I insurers of the PACIFIC ALEXANDER, in satisfaction of a Collision Jurisdiction Agreement (“CJA”) based on the wording of ASG 2, on the grounds that it contained a “sanctions clause” prompted by the Iranian “nexus” of the PACIFIC ALEXANDER. The present case held that (1) in the circumstances of this case, an LOU containing a sanctions clause was a reasonably acceptable security and (2) there was no implied term in the CJA that a party to whom such reasonable security was offered had to accept it.

Background

The owners of all three vessels agreed to liability for the collisions being determined by the English Admiralty Court pursuant to CJAs in the form of ASG 2. The Admiralty Court decided in October 2020 that PANAMAX ALEXANDER was solely responsible for the collisions.

In English law, an arrest of a ship is a means to establish jurisdiction and obtain security for a maritime claim. An arrest may follow after a collision as the owners of the vessels involved will be concerned as to where to commence proceedings and to recover damages from the other ship(s). However, an arrest may not be the ideal way of founding jurisdiction or of obtaining security as the ship to be arrested may be in a jurisdiction which is not regarded as suitable for determining the merits of the claim. Furthermore, an arrest is costly for both the arresting party and the owner of the arrested ship.

An LOU from the owners’ P&I Club is preferable to an arrest for the above-mentioned reasons and is usually provided before an arrest takes place. Owners of each ship involved in the collision will often agree upon a jurisdiction where the claims of each owner against the other will be heard and agree to an exchange of LOUs from their respective P&I Clubs securing the claim of each owner against the other. Solicitors practising admiralty law in England, the Admiralty Solicitors Group (the “ASG”), have devised two concise forms of agreement to assist the owners of ships involved in a collision when dealing with the choice of jurisdiction and the provision of LOUs. These standard forms of agreement provide simplicity and enable parties to agree them without delay. The first is a draft form of LOU known as ASG 1. The second is a draft Collision Jurisdiction Agreement (“CJA”) known as ASG 2, by 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”. ASG 1 is designed to be used in conjunction with ASG 2.

In the modern world, some countries (and international organisations) impose sanctions on other countries, the corporations registered there and their nationals, as part of their foreign policy. Under the operation of such sanctions, the performance of the obligations of P&I Clubs under LOUs can be rendered unlawful, thus creating complications in the performance of those obligations. As such, P&I Clubs have sought to introduce clauses into their LOUs to make provision for the operation of sanctions.

On 15 July 2018, three vessels, PANAMAX ALEXANDER (“PA”), OSIOS DAVID (“OD”) and SAKIZAYA KALON had collided in the Suez Canal. At the time of the collisions, OSIOS DAVID and SAKIZAYA KALON were at anchor. Around that time also, President Trump of the United States had announced the re-introduction of sanctions against Iran. The Owners of OD requested security in the sum of US$2.3 million and indicated that a LOU on the ASG 1 form would be acceptable. In September 2018, the Claimants, owners of PA and their P&I Club, Britannia P&I, offered the Owners of the OD a LOU in the form of ASG 1 containing a Sanctions Clause - see footnote 1 - as the intended voyage destination of the PA was Bandar Imam Khomeini (BIK) in Iran. The Owners of the OD rejected the LOU on the grounds that the presence of the Sanctions Clause created a risk of non-payment; its presence caused uncertainty for them in the recovery of their losses.

The Claimants argued that the Owners of OD were in breach of the CJA for refusing to accept the security offered in September 2018 and commenced proceedings, seeking damages and declaratory relief.

Issues of Law

Sir Nigel Teare considered two questions in determining whether the owners of the OD were indeed in breach of the CJA.

(i) Whether the LOU offered by the Claimants was in a form reasonably satisfactory to the Owners of the OD notwithstanding that it contained a Sanctions Clause?

(ii) If the LOU was in a reasonably satisfactory form to the Owners of the OD, were they obliged by the CJA to accept it?

Decision of the High Court

As to the first issue, the Court held that the LOU offered by the Claimants was indeed in a form reasonably satisfactory to the Owners of the OD. The Court first considered the meaning of “reasonably satisfactory” and found that Clause C gave rise to an objective test, but one that had to be assessed by reference to the proposed recipient, in this case the Owners of the OD. But the Court noted that one must also have regard to the legal and practical difficulties giving rise to the need for a Sanctions Clause. Based on the expert evidence of the Claimants, the Court accepted that where there was an Iranian nexus, the LOU with the Sanctions Clause was objectively considered to be reasonably satisfactory to the Owners of the OD. The Sanctions Clause recognized the risk of non-payment when an Iranian nexus was present – regardless of whether payment for losses was by means of a LOU or the proceeds of the sale of a vessel under arrest.

As to the second issue, the Court held that there was nothing in the CJA agreed by the parties about the right to arrest. If the parties had intended to impose an obligation upon an owner to accept security in a reasonably satisfactory form, and so lose its right to arrest, they would have mentioned it. On the true construction of the Clause, there were no express words in Clause C which indicated that a party was required to accept security. The Judge also concluded that there was no implied term in Clause C requiring a party to accept security as this would be inconsistent with the scheme of the CJA, which envisaged the right to arrest being lost at a later stage when the LOU was accepted. The CJA left the recipient of the offer of security with the choice of accepting the offer or not.

The claim brought by Claimants was therefore dismissed.

Comment

The judgment provides guidance and confirmation for P&I Clubs and other insurers, that even when it includes a Sanctions Clause, an LOU will still be in a “reasonably satisfactory form”. It also highlights that if the parties want to ensure that a “reasonably satisfactory” security is accepted, express wording to this effect should be included in the CJA, as there is no implied obligation to accept the security contained in the Agreement.

Footnote 1:

“We shall not be obliged to make payment under, nor be deemed to be in default of, this Letter of Undertaking if (i) doing so would be unlawful, prohibited or sanctionable under the United Nations resolution or the sanctions, laws, or regulations of the European Union, United Kingdom, United States of America or [the place of incorporation or domicile of your member] or the ship’s flag state (”the Sanctions”), or (ii) if any bank in the payment chain is unable or unwilling to make, receive or process any payment for any reason whatsoever connected with the Sanctions (including but not limited to a bank’s internal policies). If any such circumstance arises as described in (i) or (ii) herein, then we shall use reasonable endeavours to obtain whatever Governmental or other regulatory permissions, licences or permits as are reasonably available in order to enable the payment to be made.”