Collision litigation and the ASG forms: if you’re offered proper security, take it and don’t argue.

A nice little ship collision decision from the Court of Appeal this morning.

Suppose you’re a collision defendant, and the claimant has nabbed one of your other ships in port elsewhere. You want your vessel back and agree collision jurisdiction in England under ASG1 and ASG2. Relying on ASG2 (“Each party will provide security in respect of the other’s claim in a form reasonably satisfactory to the other”), you put up reasonable security from your P&I Club. Straightforward? Er … not quite. The other guy sucks on his teeth, says that even if your security is reasonable he doesn’t like it, and on second thoughts he prefers to say “thanks but no thanks” and hold on to your ship instead. You’d be miffed, wouldn’t you?

That was essentially what happened in M/V Pacific Pearl Co Ltd v Osios David Shipping Inc [2022] EWCA Civ 798. After the ASG1 / ASG2 agreement had been signed, collision defendants Pacific Pearl put up security to obtain the release of another vessel of their then languishing under arrest in South Africa. But to their dismay, collision claimants Osios David refused it on the (now admittedly bad) ground that it contained a sanctions clause. Put to sizeable expense as a result of their declining to lift the arrest, Pacific Pearl sued them for damages for breach of contract.

Sir Nigel Teare, having held the security good, slightly surprised the profession by going on to decide that even if it was it made no difference. The ASG2 obliged both sides to offer reasonable security, but said nothing about any obligation on either side to accept it; from which it followed that Osios David had been entirely within its rights to say it preferred to maintain the arrest after all. He therefore dismissed the action: see M/V Pacific Pearl Co. Ltd v Osios David Shipping Inc. [2021] EWHC 2808 (Comm).

This decision has now been reversed by the Court of Appeal, which read the ASG2 undertaking as requiring reasonable security to be both provided and, once tendered, taken up. This was, said Males LJ, implicit in the nature of the ASG1/ASG2 procedure. In place of a collision being litigated potentially worldwide, with arrest being threatened almost anywhere and the rights and wrongs of such arrests being thrashed out wherever they happened to take place, the whole matter should be dealt with by sober argument in London. In short, the whole object of the ASG2 undertaking attached to ASG1 was that such proceedings should, if at all possible, replace arrest rather than leaving it up o a claimant’s discretion.

Alternatively, he would also have been prepared to read the ASG2 undertaking to offer security as comporting, even if it did not say so explicitly, an implied obligation in the offeree to accept it. It did not matter which line one took: in either case, Osios David was in breach of contract and thus liable in damages.

This blog is loath ever to disagree with Sir Nigel Teare. But in this instance, it is our view that the Court of Appeal must be right. This both for the reasons given by Males LJ, and also because, in an era where it is almost invariably envisaged that insurers – whether P&I or H&M or both – will argue the toss over collisions and pick up the eventual tab, arrest should be seen very much as a last resort. Ships are better employed sailing the seven seas earning freight than being used as pawns in expensive transnational litigation; in so far as this decision will in future make this more likely to happen, we welcome it.

One thought on “Collision litigation and the ASG forms: if you’re offered proper security, take it and don’t argue.

  1. Afrodite Dellaporta

    This decision by the Court of Appeal will do as much good for the shipping industry as sanctions do for trade. Unfortunately, this decision is not in step with today’s geopolitical and commercial realities and will create hardship to the industry, rather than provide certainty. This particular case, the offeror was carrying Iranian cargo, under a bill of lading where the notify party was an Iranian bank that was listed on the OFAC designated persons list. The Offeror’s P&I Club offered conditional security with a sanctions clause that would absolve them of any liability if their member was in breach of sanctions. Thus, the security was not unconditional, but conditional on whether offeror was in breach of sanctions or not. The onus was on the offeree to conduct sanctions due diligence check and determine under the circumstances and at that time, if the security being offered was adequate and unconditional security (which is ultimate purpose of security – otherwise it would not be security). The choice to accept security or not should be left with the party to be secured in order to give any commercial or practical coherence to the CJA. The right to arrest is a traditional and well recognized right under English and maritime law. There is nothing in the CJA about giving up that right. By implying such a term in the CJA, the party that is to be secured effectively loses its right to arrest once security has been simply tendered, even before it is accepted and even before it is lodged. There is nothing in the CJA agreed by the parties about the right to arrest. If the parties had intended to impose an obligation upon an owner to accept security in a reasonably satisfactory form, and so lose its right to arrest, they would have clearly specified it, in the same clear and unequivocal terms it is specified and promised in the security itself (Club LOU or Bank guarantee). The “promise” not to arrest is the consideration for the offer of security. However, there is nothing in the CJA that suggests that the right to arrest is lost at an earlier stage, ie: simply when security in a reasonably satisfactory form is offered. Unfortunately, the Court has opened a can of worms with far reaching consequences. Let’s see how “quickly” the UK legal system & Courts will (can) move in deciding whether security is reasonable and therefore must be accepted; or will this decision back-fire all-together and simply give rise to an increase in arrests for security after a collision, rather than negotiating and signing the CJA? No doubt there will be much commentary and debate on the issues raised by this decision.

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