Security is paramount for marine claims

5th April 2024

Simon Tatham explains the importance of security: LOUs and guarantees covering shipping claims, salvage and wreck removal

“Security is nine-tenths of the law” was my first boss’s mantra. I explain this unique feature of maritime law with this analogy. A building has a lending bank, a builder, tenants, occupiers, suppliers, insurers and may store goods in transit.

However, next week it will not be in Rotterdam or Shanghai, is very likely to remain where it is for decades and is unlikely to come into collision or run aground.

Thus, international conventions were developed granting claimants in the shipping world the right to arrest or attach vessels, to secure a qualifying pending claim allowing the vessel then to continue its voyage.

Aligned with this is the fact that time limits in shipping are often very short, frequently one or two years, so early action is essential.

While jurisdiction for a claim may be in London for instance, courts elsewhere will generally allow an arrest in support of that claim.

This is a procedural matter in most countries, without either party submitting substantively to a different jurisdiction or interfering with the role of the chosen court.

Security comes in many forms. The London Admiralty Solicitors Group (ASG) wordings are often the basis for a letter of undertaking (LOU) here and abroad, while the Average Adjusters Association has its standard bond and guarantee wordings, as does Lloyd’s or the International Salvage Union when it comes to Lloyd’s Open Form (LOF) salvage claims. It is important in every case to get the wording right.

Property underwriters and P&I Clubs will usually provide an LOU, where they provide cover for the claim. Banks are generally not geared up to provide security and it will be time-consuming, expensive and complicated to persuade them to do so. Certain insurance-based institutions provide LOUs as a business, provided their liability is backed up by cash or acceptable counter security.

The objective of security is to allow the successful claimant to enforce its award, not against a vessel which may no longer exist, but directly against the institution. This would usually submit itself, under the terms of the LOU for the purposes of enforcement, to the court of the jurisdiction where the substantive proceedings are underway.

A simple written demand is then made, often upon settlement. As these institutions have a reputation to protect, they will pay up on what is essentially a promise. It is a neat system, however a claimant accepting a guarantee from a non-mainstream guarantor based in a legally awkward jurisdiction does so at its peril.

Currently, wording and enforcement complications are arising around sanctions, which is proving a nightmare to all concerned. One case has now gone to court over whether the introduction of wording in the LOU to protect the guarantor was reasonable.

Often the threat of a ship arrest, made a week or two before the vessel or sister vessel is due to call at a convenient port, will be enough to persuade a party to put up security for a claim, saving costs and ship detention.

Where an arrest is necessary, it does not follow that an insurer’s LOU will be forthcoming. These are usually provided by agreement between the parties outside of the court’s procedure.

There may, however, be no insurance cover and the vessel could remain under arrest until a court order is made for its judicial sale, after which the funds in court will serve as security.

That can get messy as agent’s and port expenses with priority claims may start to diminish whatever distressed sale value is achieved. In some places, the arresting party is obliged to pay the harbour dues which can escalate where a berth is being blocked. That said, for those looking for a quick settlement, this will be a good moment to negotiate.

The next question is how to quantify security. English law is generous in this respect, allowing a claimant to base his demand based on a best reasonable case, typically with 30% added for interest and costs.

Security in salvage cases can be contentious, but it will have no bearing on an award as an arbitrator will not be aware of the amount of security unless asked to adjudicate, in which case he should ignore that as it is not evidence.

Good claims handlers do not waste too much time quibbling over the amount of security, provided it is not wholly unreasonable.

Finally, there are agreements with standard terms for the provision of security, not for any claim, but simply guaranteeing the financial performance of a hirer, such as are found in many BIMCO charterparties including TOWCON and TOWHIRE.

Invariably, we find those clauses are struck through, the commercial leverage being with the hirer. The exception to that would be SCOPIC or one of the wreck removal agreements such as WRECKFIXED where no salvor will proceed without a P&I guarantee.

A version of this article first appeared in the publication “International Tug & Salvage” – Click here to read it.