Commentary: Rule 12 Security for claims and certificates

12.1 General

As appears from the comments to Rule 2, P&I Insurance is based on the pay-to-be-paid principle. This makes the P&I Insurance an indemnity insurance. The Member is the sole party entitled to compensation from the Club. Third parties to whom the Member may be liable for injury or damage caused, have no such right unless it has been explicitly given to them by applicable law. See the comments under 2.9.

The posting by the Club of security, bail or guarantees has the effect that the pay-to-be-paid principle is set aside. Within the terms of the security, the Club commits itself to pay compensation direct to the beneficiary of the security who is generally the party who suffered the loss or his underwriter. Where the Club agrees to post security it will require the Member to pay the applicable deductible when the security is posted.

All Group Clubs state in their Rules that the provision of security is at the discretion of the Club. Although the Club has no obligation to provide security, it gives any such request high priority and consideration.

12.2 Nature of claim must be investigated before security is given

The purpose of security is for those who have suffered injury or damage to ensure that there is money available to meet the loss. The obvious asset present at the scene of an accident is the ship itself. Therefore, the request for security is generally coupled with an arrest of or threat of arrest of the ship. It follows that the arrest is often made early in the lifetime of a claim before the ship has been able to leave the port where the accident occurred or the damaged cargo was discharged. At that early stage, the information available as to the extent, nature and cause of the accident is still incomplete.

The Club cannot exercise its discretion to put up security until it has been reasonably satisfied that the accident is of a nature that is covered under these Rules and that none of its exceptions apply. The Club is unable to invoke the limitations and exceptions of the Rules against the beneficiary of any security once it has been provided. Furthermore, the Club may be left without reinsurance protection by the pooling of the claim within the Group if the Club, on the basis of insufficient information, provided security in a case where it was eventually found that one of the liability exclusions applied. A Member who has had his ship arrested must allow the Club a certain amount of time to investigate the matter before a decision on security can be taken. Should those investigations leave important questions unanswered or should even slight doubts remain as to the cover under these Rules, of the loss for which security is demanded, the Club must refuse to provide security.

12.3 Types of security

12.3.1 Club Letters of Guarantee

The traditional form of security provided by P&I Clubs and widely accepted is a Club Letter of Undertaking (“LoU”), otherwise referred to as a Club Letter of Guarantee (“LoG”). It is drafted as a promise to the named beneficiary, that the Club will pay, up to a specified amount of money, the amount for which the Member is found to be legally liable either by way of amicable settlement or by final judgment of a competent court. The amount specified should include any interest accrued as well as any recoverable costs. It often takes some time and negotiation to reach an agreement with the beneficiary as to an acceptable wording of the guarantee.

12.3.2 Bank guarantees

A Club LoU is preferable because there are no costs involved and the procedure of issuance is quick once the terms have been agreed. Sometimes claimants insist on bank guarantees. This will delay the procedure as there are two further parties to satisfy, the bank in the Club’s location and also the correspondent bank where the guarantee is to be issued. It can take days before all such formalities are completed. Further delay can be caused by time differences, local holidays etc. Additionally, a bank guarantee costs money, as commission is charged by the banks – usually on a quarterly basis.

12.3.3 Surety bonds

In the U.S.A. it is generally beyond the power of a bank to issue a guarantee. There you have to act instead through companies who provide corporate surety bonds financed by insurance companies. A premium is charged. The Club has established a working relationship with International Sureties in New Orleans for bonds to be issued quickly inside and outside the U.S.A.

12.3.4 Cash deposits

Even bank guarantees and bonds are not always accepted as sufficient security. A claimant may ask for a cash deposit equal to or exceeding the estimated loss at the place where the ship is arrested. The final payment required by settlement or by court judgment has a tendency to coincide with the amount deposited. Cash deposits often are no different to an agreement to make payment in full, from the moment that they are provided.

The Club has a firm practice not to provide cash security. The fact that under certain circumstances the Club may provide a deposit required to establish a limitation fund (see comments under 12.3.7) can be seen as an exception to that consistently applied principle. Exceptional situations may occur which are so similar to the providing of a limitation fund that the Club may consider to exercise its discretion under this provision. The request for cash security should then be contained in a final enforceable court order. The deposit must be held by the court or under its control by a first class bank. It should be released by the court only if and to the extent the Member is held liable by a final judgment. Before the discretionary decision is taken, the Club will fully evaluate the situation, explore the possibilities of alternative security and counter security and satisfy itself that the claim is of a nature to be covered under these Rules. In the meantime, the ship may be detained.

12.3.5 Payment on demand guarantees

Utmost care must be given to the wording of any security posted. Guarantees proposed are sometimes on “payment on demand” terms. This means that once issued, the beneficiary can cash it in, in full, on the first banking day. “Guarantees” on such terms will not be provided.

12.3.6 Anticipatory guarantees

Sometimes a guarantee is requested on behalf of a ship even before it has reached her port of call or before the full quantity of cargo has been discharged and with no known damage or loss. The stated purpose of the guarantee is to cover such claims as may arise. These are anticipatory guarantees. The Group has decided that Clubs should generally not provide such guarantees save for the issuance of certificates under certain legislation (see the comments under 2.9.2).

12.3.7 Limitation funds

As appears from the comments under 2.11, an Owner may be allowed to limit his liability under applicable law and convention. Where the loss or damage caused may exceed the limitation amount, the Owner can set up a fund equal to the applicable limitation. The fund is usually established under the supervision and directions of a local court. The Club will assist the Member to establish the extent of the fund and to comply with the applicable formalities. The Club will exercise its discretion to deposit the amount of the fund if it is reasonably clear that it is established in respect of liabilities covered under these Rules.

When the fund has been established, it serves as a substitute for the ship, as security for claims filed. Therefore, the ship should be free to sail. If the ship remains under arrest so that security will be provided in the event the Owner is denied the right to limit his liability, the Club will probably not provide additional security, as the denial of limitation may well also invoke exceptions from cover under these Rules.

12.4 Property arrested

12.4.1 Only property belonging to Member

The arrest action is generally against the ship itself being the Member’s most valuable asset within the jurisdiction. It is often described as an action “in rem” which means that it is directed against the ship as property. The purpose is to constitute security for the due payment of the claim. The security in the ship could be substituted either by alternative or more suitable security, or by payment of the claim. Should neither be forthcoming, the ship can be sold by public auction and the claim met from the proceeds. It is a reasonable request that assets used to meet claims are confined to those which are the property of the debtor. A ship other than that which caused the accident should only be arrested where the claimant can prove that both ships are under the same or closely related ownership.

It would follow from the same principle that the ship should not be arrested for claims against the Charterer. As appears from the comments under 12.5 this principle is not without exceptions.

12.4.2 Property other than the ship

An arrest is not always confined to the ship. A claimant can attach other property or assets belonging to an Owner or Charterer such as bank accounts, freight collected or total loss compensation paid by a Hull underwriter. If such assets are effectively arrested (for instance under the enforcement of what is known as a “Mareva injunction” or freezing order granted by an English court) the Club has to take the decision, based on the information to hand, whether to exercise its discretion under this Rule and provide security.

12.4.3 Arrest of persons

The Club does not put up bail or security to release crew members or other persons who have been arrested or put in jail. In such a situation the diplomatic or consular representative of the person’s home country should be approached to take the action necessary to defend and protect the citizen of the country they represent.

12.5 Security and counter security in charter situations

An arrest action may be directed against property which belongs to a Charterer. Under time charterparties the bunkers on board are often the Charterer’s property and can be the object of a separate arrest action. Security may be required to obtain the release of the bunkers. An arrest of this kind is sometimes undertaken more to put pressure on the Charterers than to obtain security in the value of the bunkers, which may be insufficient to meet the loss claimed. In such a situation a solution may be to pump the bunkers ashore and let the claimants keep them as security while new bunkers are taken on board which are clearly the property of the Owner.

Another situation where security is demanded from a Charterer is when security has been given on behalf of the Owner following an arrest for a casualty which under the charterparty conditions seems to be the Charterer’s ultimate liability. In such a situation, the Charterer’s P&I club usually provides a counter guarantee for the liabilities of its Member under the charterparty. The Inter-Club New York Produce Exchange Agreement 1996 (as amended September 2011) provides for a mechanism for the exchange of counter securities.

In some countries, such as Belgium and France, a court may not agree to lift the arrest of a ship until security has been posted on behalf of both the vessel Owner and its Charterer for their respective liabilities to the claimant. A security provided by or on behalf of the Owner for the totality of the liabilities and backed by counter security from the Charterer, may either not be accepted by the court or agreed by the Owner and his Club. If so, a charter Member should apply to the Club for separate security. The Club will exercise its discretion to provide security on the Member’s behalf along the lines described in the comments to this Rule.

12.6 Other situations of counter security

Another situation where an exchange of counter securities between Clubs is necessary, is when the Club which holds the entry when a ship is arrested, is asked to put up security in respect of a casualty which occurred while the ship was entered with another Club.

12.7 Arrests to change contractual terms

Arrests are often undertaken to force an Owner to agree to a jurisdiction more suitable to the claimant than that stated in the freight contract. Attempts to bypass terms of the contract already agreed upon should be opposed, if possible.

12.8 Repeated arrests

The providing of security does not exclude the possibility that the claimant attempts to arrest the ship or other assets a second time for the same claim in order to obtain cumulative or extended security or an alternative jurisdiction. It should be prevented by the wording of the guarantee first issued. It follows from the discretionary nature of the Club’s decision to provide security and also from Rule 17 that a decision by the Club to issue a guarantee to lift the first arrest does not prejudice the Club’s discretion in respect of further security.

12.9 Member’s obligations

If the Club agrees to put up security on behalf of a Member, the Club may make it a condition that the Member provides counter security in favour of the Club. The Club may wish to protect itself against the possibility that eventually the liability is found to fall beyond the Rules, its exceptions or limitations. In such a situation the Club has a right of recourse against the Member under the last part of this clause and under Rule 14. The counter security should be in the form of either a bank guarantee or a cash deposit.

Before the provision of security can be considered, the Member should have neither outstanding premiums nor other sums due to the Club.

As such security will bind the Club to pay any settlement amount to the claimant and since, according to Rule 2, the deductible is not included in the cover, the Club will ask the Member to pay the deductible to the Club before the security is posted.

12.10 Member’s reimbursement

The second paragraph of this Rule makes it a condition for the Member to reimburse the Club if payment under any bail, guarantee, certificate or security has been made in respect of liabilities, cost and expenses which are not recoverable from the Club.

There are a number of certificates issued under certain legislation by the Club that qualify as a guarantee under which the Club is obliged on behalf of the Member to discharge liabilities, costs and expenses arising as a direct consequence of a demand made under a certificate. Examples of such legislation are listed under 2.9.2. Regarding CLC certificates, see 6.1.3.1.7, an undertaking to the 1992 IOPC Fund in respect of STOPIA, see 6.1.3.2.3, certificates under the Bunker Convention, see 6.1.3.1.7.5 and certificates under the Wreck removal convention see 7.5.6. Notably, payments under MLC certificates should be reimbursed by the Member according to the Maritime Labour Convention (2006) Extension Clause in Appendix II.

The Member is obliged to indemnify the Club if the Club’s payment under any such guarantee, undertaking or certificate turns out to be recoverable under Member’s standard P&I war risk policy had the Member complied with the terms and conditions thereof.

Furthermore, the Member agrees (a) that any payment made under any such guarantee, undertaking, or certificate shall be regarded as a loan if the payment is recoverable under any policy of insurance or extension to the cover provided by the Club.

The Member further agrees (b) that the Club in its discretion shall be assigned all rights of the Member under any other insurance and against any third party, see also under Rule 14.