Case law: M/V PACIFIC PEARL CO LTD V OSIOS DAVID SHIPPING INC [2021] EWHC 2808 (Comm)

Collision – Security –Collision jurisdiction agreement – Whether letter of undertaking containing sanctions clause is a reasonably satisfactory form – Whether offeree obliged to accept security

In July 2018, three vessels, the Panamax Alexander (PA), the Osios David (OD) and the Sakizaya Kalon (SK) were involved in a collision in the Suez Canal. Following the incident, the respective owners of the PA and the OD signed a Collision Jurisdiction Agreement (CJA) on the ASG2 wording, slightly amended.  The ASG2 provides that ‘Each party will provide security in respect of the other’s claim in a form reasonably satisfactory to the other.’

The dispute of this case was between the owners of the PA (claimants) and the owners of the OD (defendants) regarding whether security containing a sanctions clause would constitute reasonably satisfactory security under the CJA.

At the time of the incident, the PA was carrying barley, which was destined to Iran. This established an ‘Iranian Nexus’ in light of the re-introduction of sanctions against Iran by the US in September 2018. 

In response to the defendants’ request for security, the claimants  offered security in the form of a P&I club letter of undertaking (LOU), which contained a sanctions clause with an obligation to use reasonable endeavours to obtain whatever permits were reasonably available in order to enable a payment to be made. 

The defendants rejected this form of security due to concerns that their claim would be unsecured in view of the ‘Iranian nexus’ and the heightened risk of non-payment by banks. 

The judge considered the following issues: 

1. Was the LOU offered by the claimants with a sanctions clause reasonably satisfactory in accordance with the CJA?
2. If the LOU with a sanctions clause is considered reasonably satisfactory, was the defendant obliged to accept it? 

The court held that: 

1. The ‘Iranian nexus’ introduced a risk of non-payment by banks, irrespective of whether the security was provided by way of an LOU containing a sanctions clause or sale of the vessel under arrest.  Therefore, the inclusion of the sanctions clause reflected the reality of the banks’ low risk of tolerance to process payments with an ‘Iranian nexus’. 
2. In determining whether the security offered by the claimants was reasonably satisfactory, the court applied an objective test: Would a reasonable person consider the LOU with the sanctions clause to be reasonably satisfactory given the sanctions implications? In assessing the objective test, the court made reference to the position of the proposed recipient and the legal and practical difficulties that the clubs face in making payments that have given rise to the need for the sanctions clause. The court concluded that the LOU containing a sanctions clause was reasonably satisfactory under the CJA. 
3. Although the security offered by the claimants was reasonably satisfactory, the court found that there was no obligation under the express terms of the CJA for the defendants to accept it.  An obligation to accept security tendered in a reasonably satisfactory form could not be implied either, since an implied term is not necessary for the business efficacy or the commercial or practical coherence of the CJA.
4. If the parties had intended to impose an obligation on the defendants to accept the security offered, express and clear provisions should have been set out to this end. 

Comment

The judgment confirms that, prima facie, an LOU containing a sanctions clause can be ‘reasonably satisfactory’ security under the ASG2 form.  This is important for P&I clubs and their members to know.  However, in the absence of an express obligation to accept such security, and in light of the court’s refusal to imply such a term, there is no obligation for a defendant to accept such security, even if it is ‘reasonably satisfactory’. If parties wish to include such an obligation, they will have to expressly agree to it. 

Separately, the case also clarified that an obligation ‘to use all reasonable endeavours’ (for example, in the context of obtaining regulatory permissions or licenses) is effectively the same as ‘best endeavours’.

Link to judgment can be found here

Link to commentary by HFW can be found here 

カテゴリー: Caselaw