RU

Application of a letter of undertaking of the P&I Club as a measure of securing a claim on the territory of Ukraine

November 17, 2020

In the practice of international maritime shipping, a letter of undertaking is widely used to guarantee the security of obligations and protect the debtor from possible actions of the creditor. On the maritime claim occurrence, there is always the risk of vessel arrest imposed to secure the maritime claim. To protect the business processes of the creditor, vessel arrest is often substituted for the posting of a security deposit, the issuance of a bank guarantee or the issuance of a letter of undertaking by a P&I Club.

Most often, courts use the obligation of the creditor to deposit a sum of money in the amount of the claim to the deposit account of the court as the substitution of the vessel arrest. This security measure is often commensurate with the claim and is considered a fair substitute, but not every creditor is willing to deposit thousands, and sometimes millions, of dollars into the court's account, which will remain in the account until a final decision is made on the case.

In the second case, the creditor is given the right to replace the arrest with a bank guarantee. It should be noted that in Ukrainian practice, issuing a bank guarantee requires sufficient time and extra funds. In addition, the courts of Ukraine recognize only the bank guarantee issued by the local Ukrainian bank as sufficient security, which must also be considered during such a process.

The most effective way for a debtor to secure maritime claim is to apply a letter of undertaking issued by the club. In fact, the Letter of Undertaking of a P&I Club is a form of guarantee issued by the Club – an obligation to pay the creditor the amount owed to him by the court decision, or the amount agreed on the terms of the settlement. This is a private security agreement between the parties, and the court does not participate in the process of establishing the terms of the obligation, which are agreed between the Club, on the one hand, and the Club Member. This is an important point, as only the Club, and not the authorized agents, representatives, or local correspondents of the Club, are entitled to issue such a Letter of Undertaking.

After accepting such a letter of undertaking, the recipient must release the ship from arrest and not detain it again, under the same claim (in most cases, such letter of undertaking is issued upon vessel arrest, or even in case of probable arrest).

The basis for the payment of the amount of the guaranteed obligation must be a final court decision, an arbitral award, or an amicable agreement. It is important that the Letter of Undertaking has a discretionary nature, that is, the Club is not obliged to issue letter of undertaking for each individual case, but does this solely at its own decision, guided by the situation.

There are a number of significant advantages for the Club, the Shipowner and the Recipient of such a letter of undertaking: first, the letter of undertaking has an easy and flexible form of content; and secondly, although the LOU is in writing, thanks to modern technologies, it can be delivered to any country in a matter of minutes. Due to the simple and capacious form of issuing a P&I Club`s letter of undertaking, the Owner minimizes, and in some cases avoids additional costs that could be incurred in connection with the vessel arrest and restriction of its commercial activities.

Mutual insurance covers the shipowner's liability insurance insofar as it is not covered by the contractual insurance. For this purpose, shipowners unite in mutual insurance clubs. These clubs are called mutual societies because all members of the club share responsibilities on a reciprocal basis. Mutual insurance means that shipowners, uniting in mutual insurance clubs, create an insurance fund to compensate for losses arising out of a particular shipowner`s case. Thus, mutual insurance does not compete with contractual insurance, but complements the latter, that is, with the help of mutual insurance, shipowners protect themselves from losses that remain at the risk of the policyholders themselves.

The first mutual insurance clubs were founded by English shipowners in the middle of the 19th century. At first, there were separate "Protection Clubs" and "Indemnity Clubs". Currently, these two types of clubs have merged into a single type of carrier liability insurance in the Protection and Indemnity Clubs – P&I Clubs. In most countries, these clubs are purely national, that is, only ship owners of a given country (USA, Scandinavian countries) are accepted. In the UK, where there are more than a dozen P&I Clubs, the latter are often international, with members from different countries.

Clubs analyze the reasons for insurance claims. If it is determined that the damage was the result of negligence, poor qualifications of the master and crew, this may lead to an increase in insurance premiums by clubs. The largest mutual insurance clubs are united in the International Group, the so-called pool, in which almost 90% of the world's tonnage is insured. The purpose of this association is to analyze the work of the clubs included in the pool. Based on the results of the analysis, conclusions are drawn about which of the clubs is the most financially stable, as well as proposals for a preferred mutual insurance club for shipowners.

At the same time, there is no single international act that would regulate the adoption of a letter of undertaking from the P&I Club. But despite this, the UK, Hong Kong, Australia, Italy, France, and Singapore – accept this type of document as security. 

Practice of applying a letter of undertaking of the P&I Club in Ukraine:

On April 29, 2020, a tanker owned by a shipowner from Singapore arrived at the port of Pivdennyi, Ukraine. An unintentional spill of a cargo of palm oil occurred during unloading.

During this incident, the P&I Club issued a Letter of Undertaking for almost 2.5 million US dollars – the entire amount of the claim of the Environmental Inspection and the Prosecutor's Office, and in less than a day, an amount equivalent to one million US dollars was deposited on the court's account as an additional guarantee to prove the fact that the Shipowner does not try to escape from responsibility.

In fact, no one was sure of the positive outcome of these actions, since until May 15, 2020, not a single letter of undertaking from the P&I Club had been accepted in the Ukrainian courts as a proper financial security for the claim.

A professional breakthrough was achieved when the court considered all the evidence provided by the defense and the relevant documents, the arguments of the prosecutor's office, as a result of which the arrest of the vessel was denied, and the letter of undertaking was accepted as a proper financial security.

Despite the decision issued in the commercial process, the State Environmental Inspection and the Prosecutor's Office made three attempts to arrest and detain the ship as long as possible, but all of them turned out to be illegal, and the ship left the port Pivdennyi.

As a rule, representatives of the Prosecutor's Office and government bodies do not understand the international practice of applying a letter of undertaking of the P&I Club. At the same time, they do not understand and do not realize what losses the Shipowner will incur in connection with the imposition of an unlawful vessel arrest. Such losses are reimbursed at the expense of the state budget, but this does not stop the representatives of governmental bodies.

Thus, the possibility of recognizing the letter of undertaking issued by the P&I Club, conducted in accordance with the requirements of the legislation of Ukraine, was reflected in the precedent decision of the Commercial Court of the Odessa region dated 15.05.2020, according to which the provided letter of undertaking issued by the P&I Club registered in the UK was recognized as a financial guarantee. The court also noted that in the systemic interpretation of Article 141 and other norms of the Commercial Proceeding Code of Ukraine, it is possible to accept as evidence a financial guarantee of a person in respect of whom there are no doubts about solvency.

In fact, this is the first case when the court describes and recognizes the international financial instrument - the Letter of Undertaking of the P&I Club, in the process of securing the maritime claim, and declares the possibility of its use, taking into account the fulfillment of all regulatory requirements.

We would also like to draw your attention to the fact that the court requested documentary confirmation of the status of the P&I Club as a financial organization, as well as a financially stable organization. The confirmation of the club's registration as an organization that provides insurance services obtained from the state register is sufficient evidence of the status of a financial organization. In case of issuing a letter of undertaking for a significant amount of security, it is also recommended to establish that the Club is a solvent organization, that is, financially stable. In the above case, the court accepted excerpts from the annual financial statements of the P&I Club, which contained information on the company's financial reserves and profits, as evidence of financial stability.

Thus, the application of the Letter of Undertaking of the P&I Club in securing maritime claims is a legal and effective practice. When considering maritime cases by arbitration tribunals, the arbitrators must provide the parties with the right to use all appropriate means of securing claims, including the Letter of Undertaking of the P&I Club.

As international practice and international laws show, the issue of securing a claim in an arbitration case can be resolved both by national courts and by the arbitration court itself, both when considering a case in an arbitration court, and at the stage of recognition of an arbitral award. For example, European Convention on International Commercial Arbitration, 1961 provides the possibility of taking interim measures by state courts. The UNCITRAL Model Law on International Commercial Arbitration (1985), as well as a large number of arbitration rules, is vested with appropriate powers by both the arbitration institution and the national courts. For an efficient and simplified consideration of the case, the arbitrators are recommended to pay attention to the practice of recognizing the Letter of Undertaking of the P&I Club as an appropriate form of securing a claim in maritime disputes.

In the process of recognizing the Letter of Undertaking as an appropriate measure of securing a claim, it is necessary to take into account the provisions of the applicable law, as well as the legal approaches that are applied in court practice.

Evgeniy Sukachev

Board member
The Ukrainian Maritime Bar Association

Senior Partner
BLACK SEA LAW COMPANY