IUMI 2022: Ships in Ukrainian ports: How might CTLs pan out?

Richard Neylon, partner at sector-focused legal firm HFW, said that he had a relatively optimistic view when it came to the prospects for ships still trapped in at least the three Ukrainian ports that are part of the Black Sea corridor – Chornomorsk, Odesa and Yuzhne.

Referring to the (in)famous ITC Clause war and strikes clause detainment clause 3, which deemed that a 12 months’ loss of free use meant that a ship could be deemed a constructive total loss, even if the ship were released a week later, Neylon observed that prior to this 1980s change, shipowners had to demonstrate on a case-by-case basis that they were unlikely to ever see their ship again. This requirement was considered too onerous, and as a result a marine version of a parametric trigger was brought in. The initial 12-month limit gradually reduced to six months, although the Somalian piracy situation saw it rise back up again in many cases to its original 12 months.

This meant that the ships that became trapped in Ukrainian ports after the Russian invasion of February 24th had been subject to a mixed bag of contracts, with some being six months and some 12 months.

Neylon noted that after a very short period when it was thought that Russia might overrun Ukraine, it quickly became clear that there would be no quick resolution.

Slowly discussions got underway and then on July 22nd the Black sea corridor was created, coming into use at the beginning of August, moving 500,000 tonnes of grain by mid-August, and more than 2.2m tonnes in the past month.

“To my mind this has been an enormous success. 122 voyages out and 144 vessels in to Ukraine by September 12th.”

Neylon said that he had represented 17 of the ships that were trapped and had been released, and he had been surprised at how smoothly things had progressed, given all the possible things that could have gone wrong.

Neylon noted that there were four categories of trapped vessel:,

  • Permitted cargo in permitted port. Most in that category have now left
  • Non-permitted cargo coal steal iron in a permitted port (or ballast)
  • Permitted cargo but in the wrong port
  • Non permitted cargo in a non permitted port.

August 24th saw the crystallization of claims at the six-month CTL.

The future prospect of CTLs on Feb 24th 2023 depended on a number of factors. One was that the claimant had to act throughout as a “prudent uninsured”.

An area of dispute over a claim could arise with vessels in permitted ports but with a non-permitted cargo. Neylon noted that, while there were admitted contractual and logistical complexities in, for example, unloading one cargo and reloading with a permitted one, this did not give the shipowner carte blanche to do nothing apart from wait out the 12 months.

Referring to the key phrase in clause 3 of “deprived of free use and disposal for a continuous period”, Neylon said that an insurer could dispute whether the vessel had in fact been deprived of such free use, particularly since there had been cases since February 24th when a vessel had swapped cargoes and left Ukraine unhindered.

“So we might not have a lot of CTLs come February 24th 2023”, he said.

However, assuming that there was going to be a valid CTL and that there had been a Notice of Abandonment. The insurer’s choice here is either to take over the vessel after payment – assuming all the legal liabilities, or to disclaim, which would in effect declare the vessel a “wreck” and hand the vessel back to the owner, without asking for any money back. The liabilities would then devolve to the P&I Club. A third “half-way house” would be when the vessel had some residual value —a so-called compromised CTL. The insurer says to the owner “I’ll give you a percentage and let you keep the vessel.”

Another possibility would be a sale to a third party “as is”. Private equity buys distressed book of business.

A complication here would be if you were not certain that you would eventually get the vessel back. The amount that private equity would be willing to pay if the certainty of getting the vessel back “eventually” was more of “will probably get it back eventually, but might not”, then the terms that private equity would be willing to offer would likely be considerably lower.

Looking forward, Neylon said that he was cautiously optimistic. “If category one vessels can get out, then I am quite confident hat we can get the vessels in permitted ports out. For the non-permitted ports, we shall have to wait and see. Three months ago it looked pretty bleak, with a possibility that the ships would never get out. Today I would say it’s more likely that all of those in the three permitted ports will get out.”