Commercial Court Provides Guidance on the Construction of ASG2

For many years, the Admiralty Solicitors Group (“ASG”) has prepared and maintained a number of standard wordings designed to assist vessel owners, salvors and other maritime interests and their insurers in relation to marine casualties, particularly regarding issues of security and jurisdiction. These wordings include ASG1, which is a draft LOU form, and ASG2, which is a draft collision jurisdiction agreement.

The recent decision in m/v Pacific Pearl Co. Limited v Osios David Shipping Inc [2021] EWHC 2808 (Comm) considered these two forms and, in particular, Clause C of ASG2, which requires parties to provide security in a “reasonably satisfactory form”. In his judgment, Sir Nigel Teare (sitting as a Judge of the High Court) dismissed the claim of the Owners of the PANAMAX ALEXANDER, and held that, whilst the wording of Clause C requires parties to provide security in a “reasonably satisfactory form”, it does not oblige a party to accept such reasonably satisfactory security.

The judgment provides guidance for P&I Clubs and other insurers, confirming 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 ASG2.

Background

On 15 July 2018, there was a collision between three vessels, PANAMAX ALEXANDER (“PA”), OSIOS DAVID (“OD”) and SAKIZAYA KALON (not a party to this case). At the time of the collision, the OD and the SAKIZAYA KALON were at anchor.

The case concerns the terms of the Collision Jurisdiction Agreement (“CJA”) agreed between the Owners of the PA and the OD. The Owners of the two vessels agreed in principle to a bipartite CJA on the terms of ASG 2. Clause C provided: “Each party will provide security in respect of the other’s claim in a form reasonably satisfactory to the other”.

Owners of the OD requested security in the sum of US$2.3 million and indicated that an LOU on the ASG1 form would be accepted. The Claimant Owners of the PA and their P&I Club offered security in the form of ASG1, which was amended to include a Sanctions Clause to reflect the fact that there was an Iranian nexus since the voyage destination of the PA was Iran. However, the P&I Club for the Owners of the OD rejected the LOU on the basis that:

1. Their member’s trade was not related to the sanctioned entities;
2. Given that the Bill of Lading was negotiable, it was not certain that the voyage would not become a sanctions problem; and
3. Given that their Member was likely to be the party receiving money, the sanctions related risk of non-payment would be run by their Member.

The Owners of the PA argued that the Owners of the OD were in breach of the CJA for refusing to accept the security offered on 7 September 2018 and commenced proceedings, seeking damages and declaratory relief.

Sir Nigel Teare considered two questions: firstly, whether the LOU offered on 7 October 2018 was in a form reasonably satisfactory to the Owners of the OD, and secondly, whether the CJA, and in particular Clause C, obliged the Owner to accept the offer of an LOU which was in a reasonably satisfactory form for them.

First Issue – Was the LOU in a “reasonably satisfactory” form for the Owners of OD?

The Court first considered the meaning of “reasonably satisfactory” and held that Clause C imports an objective test, which must be assessed by reference to the proposed recipient. But one must also have regard to the legal and practical difficulties giving rise to the need for a Sanctions Clause.

The Court accepted, based on the expert evidence of the Claimant Owners of the PA, that where there is an Iranian nexus, a Club will typically include a Sanctions Clause. The Sanctions Clause recognises the commercial reality; the risk of non-payment as a result of an Iranian nexus is present whether payment for losses is by means of LOU or proceeds of the sale of a vessel under arrest. 

The Court concluded that the LOU, was objectively, reasonably satisfactory.

Second Issue – Whether the CJA, and in particular Clause C, obliged the Owners to accept the offer of an LOU which was in a reasonably satisfactory form for them.

As to the second question, Sir Nigel Teare held that:

1. There were no words in Clause C capable of requiring a party to accept security on a true construction of the clause;
2. Implying a term into the CJA that each party was required to accept security which was objectively reasonably satisfactory, as soon as reasonably practicable, was not necessary to give business efficacy. To leave a party with a choice as to whether to accept the LOU or to arrest, gave commercial and practical coherence to the CJA. For these reasons, the Judge concluded that there was not to be a term implied into Clause C; and
3. For the same reasons, he concluded that an alternative term (an obligation not to unreasonably reject such security) could not be implied either.

Comment

The High Court’s decision provides an interesting analysis of the ASG2. It has important implications for P&I Clubs and insurers, confirming that an LOU will be in an objectively reasonable form within the meaning of the ASG2 if it includes a Sanctions Clause, even in circumstances where the Iranian nexus is negligible. It might be said that a Sanctions Clause is unnecessary as no guarantor could be obliged to pay under any guarantee if it were to be contrary to the law and to sanctions regulations. On the other hand, having a Sanctions Clause in the LOU that merely reflected what the law states would give comfort to the guarantor and would not put the recipient in a worse position, provided it simply reflected the true position as a matter of the law on sanctions. If it seeks to go wider than compliance with legal obligations, then a recipient may be within its rights to object.

However, at first glance, the judgment is at odds with itself. Having found that the LOU with the Sanctions Clause was objectively reasonable in this case, the Court then found that the recipient was not acting unreasonably in refusing to accept the same. This is because the wording of the ASG1 required the security to be in a form “reasonably satisfactory to the other”. The recipient was, therefore, entitled to reject the LOU with the Sanctions Clause as it was not considered reasonable to them. The recipient was entitled to seek alternative security by arrest as the ASG2 jurisdiction agreement did not provide any undertakings not to arrest. The party seeking to arrest would be at risk of not obtaining security if the Court in the arresting jurisdiction considered (as the High Court did) that the LOU offered was reasonable. There are still some jurisdictions that will not accept Club LOUs as satisfactory security.

Given that the Courts will be reluctant to imply a term into CJAs requiring an owner to accept an offer of an LOU, even if it is in an objectively reasonable form, it follows that, if parties wish to ensure that security in an objectively reasonable form is accepted, then the wording of the ASG2 should be amended to require this.

If you require clarification on any of the points discussed in this article, at Clyde & Co, we have extensive experience in assisting Owners and P&I Clubs with collisions, including the use of ASG1 and ASG2, and we will be happy to assist you.