No counter-obligation to accept “reasonably satisfactory” security under ASG 2 collision jurisdiction agreement

In a complex case involving a three-way collision in the Suez Canal and three P&I Clubs, former Admiralty Judge Sir Nigel Teare, sitting as a judge of the High Court, dismissed a claim, brought by the Owners of bulk carrier Panamax Alexander (IMO 9233492) against the Owners of bulk carrier Osios David (IMO 9593361) for alleged breach of a Collision Jurisdiction Agreement (CJA).

In a judgment handed down on October 21st in the case of Pacific Pearl Co. Ltd. v Osios David Shipping Inc. [2021] EWHC 2808 (Comm) the Court recognized and supported the strength and security of LOUs offered by IG P&I Clubs and provided an important analysis of the widely-used CJA form “ASG 2”, published by the Admiralty Solicitors Group.

James M. Turner QC appeared for the Defendant, instructed by Richard Gunn at Reed Smith.

The case concerned collisions in the Suez Canal in July 2018 between three vessels, Panamax Alexander, Sakizaya Kalon (IMO 9749908) and Osios David.

The collisions occurred in the Suez Canal on 15 July 2018. At the time of the collisions Osios David and Sakizaya Kalon were at anchor.

All three owners agreed to liability for the collisions being determined by the English Admiralty Court pursuant to Collision Jurisdiction Agreements in the form of ASG 2.

The Admiralty Court decided in October 2020 that Panamax Alexander was solely responsible for the collisions; (The Panamax Alexander [2020] EWHC 2604 (Admlty)).

In September 2018 the Owners of Panamax Alexander and their P&I Club, the Britannia, offered to the Owners of Osios David an LOU which contained a sanctions clause. That LOU was not accepted by the Owners of Osios David, who had arrested a vessel in South Africa (the Panamax Christina), and obtained an LOU for their claim from The UK P&I Club which did not contain a sanctions clause.

In consequence the Owners of Panamax Christina incurred expense in South Africa in “fronting” the provision of security, and the Owners of Panamax Alexander had indemnified the Owners of Panamax Christina in respect of that expense.

That expense was sought to be recovered by the Owners of Panamax Alexander from the Owners of Osios David in the action on the grounds that the expense was incurred as a result of a breach of clause C of the CJA agreed between those Owners, namely, the refusal to accept the LOU offered by the Britannia.

Sir Nigel noted that in the context of litigation in the court the amount claimed was very modest, but it had been said that the arguments being advanced on behalf of the Owners of Osios David had profound implications for P&I Clubs and major insurers.

Sir Nigel noted that the claim raised at least two matters of principle.

  • The first was whether the LOU offered by the Owners of Panamax Alexander was “in a form reasonably satisfactory” to the Owners of Osios David, notwithstanding that it contained a sanctions clause.
  • The second was whether, if the LOU was in a reasonably satisfactory form to the Owners of Osios David, the Owners of Osios David were contractually obliged by the CJA to accept it.

These two issues of principle were reflected in the declaratory relief sought by the Owners of Panamax Alexander ,in addition to their damages claim;

(Cliff notes on previous paragraphs): PA and OD had been involved in a collision. In the CJA, they agreed to refer the resulting dispute to the English Court to be resolved under English law, and that each would supply the other with security “in a form reasonably satisfactory” to the party receiving it. PA had been en route to Iran at the time of the collision. It offered OD a P&I Club Letter of Undertaking ( the “LOU”) containing a sanctions clause – reflecting the Iranian nexus brought about by the destination of its cargo of barley. OD rejected it, having effected an associate ship arrest in South Africa.

PA claimed damages and declaratory relief for what it said was the breach of a reciprocal obligation on the part of the party offered security to accept it if it was “reasonably satisfactory”. OD defended the claim on the grounds that the security was not reasonably satisfactory to it and that the CJA imposed no obligation on it to accept security even if it was in a reasonably satisfactory form.

The Court rejected the first limb of OD’s defence, but upheld the second.

It was found that, in essence, the form of the security was reasonably satisfactory because:

  • it was tendered by an International Group Club, which could be expected to do all it could to honour an LOU, and
  • the potential impact of sanctions, including an excess of caution by any bank involved in effecting payment under the LOU, was unavoidable. The sanctions clause could not therefore be said to transfer any risk to OD, since it was risk that arose as soon as there was an Iranian nexus.

However, there was no obligation on OD to accept the security. In particular, there were no words in the relevant clause which could be construed as imposing an obligation, and the requirements for implying a term were not made out. It could not be said that the contract would lack commercial or practical coherence without it and “to imply the suggested term would in reality amount to re-writing the parties’ agreement.”

James M. Turner QC appeared for the Defendant, instructed by Richard Gunn at Reed Smith.

2001-built, Mexico-flagged, 38,298 gt Panamax Alexander is currently reported sold to an undisclosed interest. It is currently moored at Manzanillo Port, Mexico. At the time of the incident it was Cyprus-flagged and entered with Britannia.

2012-built, Marshall Islands-flagged, 31,538 gt Osios David is owned by Osios David Shipping Inc care of manager AM Nomikos Transworld Maritime Agencies SA of Athens, Greece. It is entered with Swedish Club (Gothenburg Team) on behalf of Osios David Shipping Inc. At the time of the incident it was entered with Standard Club.

2017-built, Panama-flagged, 44,425 gt Sakizaya Kalon is owned by Sakizaya Kalon SA care of manager Wisdom Marine Lines SA of Taipei City, Taiwan. It is entered with Swedish Club (Asia Team) on behalf of Sakizkaya Kalon SA, as it was at the time of the incident.

https://www.quadrantchambers.com/news/no-counter-obligation-accept-reasonably-satisfactory-security-under-asg-2-collision

https://www.quadrantchambers.com/sites/default/files/2021-10/cl-2019-000823_pacific_pearl_v_osios_david_judgment.pdf