Banking and Club Guarantees as Effective Tool for Settlement of Insurance Accidents
Every maritime lawyer and freight broker knows what P&I insurance is, because it is impossible to imagine a ship operating without a valid P&I policy in today’s world. It is well known that the abbreviation “P&I” stands for “Protection and Indemnity” and covers the main risks of a shipowner associated with the operation of a ship. Standard P&I coverage includes risks associated with the crew (so-called “crew claims”), which include illness and temporary disability caused by it; injury sustained on board as a result of an accident and permanent disability caused by it, death on board and missing at sea; liability to individuals who are not members of the crew; cargo claims, i.e. claims related to cargo, including loss, damage, or shortage of cargo that occurred during sea carriage; collision claims, i.e. the shipowner’s expenses related to collisions with other ships or floating objects; pollution claims, i.e. risks related to pollution of port waters or the open sea; unrecoverable general average contributions, i.e. contributions to general average that have not been reimbursed, and certain other risks. The world leaders in providing P&I coverage are the so-called ‘mutual shipowners’ liability insurance clubs’, which are united in the International Group of P&I Clubs, which includes 12 leading clubs: The American Club, Britannia P&I, Gard P&I, Japan P&I, The London P&I Club, NorthStandard, Shipowners Club, SKULD, Steamship Mutual, The Swedish Club, UK P&I Club та WEST P&I.
It should be understood that P&I policies can be issued not only by P&I clubs, but also by “classic” insurance companies. However, clubs, most of which were founded in the 19th century, have held the majority of the market share in this segment for over a century.
Insurance claims are impossible to predict. They occur unexpectedly for everyone and require a quick response in order to minimise losses. In commercial shipping, the main threat to a shipowner is the detention of a vessel by port authorities (the harbour master’s office) or judicial arrest to secure a maritime claim for the provision of sufficient security for the maritime claim. As in the case of “ordinary” (non-marine) insurance, the occurrence of an insured event must be immediately reported to the shipowner’s liability insurer. The insurer immediately appoints a correspondent in the relevant port where the insured event occurred, and the correspondent resolves all organisational issues with the participation of the club (insurer) and the shipowner (insured).
In most developed countries, so-called “club” letters of guarantee (or “LOGU”) issued by a mutual insurance club for shipowners’ liability in accordance with an agreed form are sufficient security for maritime claims. The content of the LOGU is that the Club, acting as the shipowner’s liability insurer, guarantees payment within the agreed amount against the presentation of an arbitration or court decision that has become final and is not subject to appeal, or against a settlement agreement signed by the parties. Having received a ‘club’ guarantee, the claimant of a maritime claim can be confident that his maritime claim will not remain unsecured and that the court or arbitration decision will be enforced without fail. The advantage of “club” guarantees is their relatively quick (compared to bank guarantees) processing, the reliability of clubs as financial institutions with high reliability ratings, and extensive experience in settling maritime claims.
Developing countries often do not trust “club” guarantees and prefer bank guarantees or cash deposits. It should be noted that obtaining bank guarantees takes much longer and requires the provision of a counter-guarantee in the form of a counter-guarantee from another bank (the guarantor bank) or the provision of other collateral (e.g., a deposit). In addition, unlike insurance clubs (which have managers on duty to handle claims), banks do not usually work on weekends and holidays and are restricted by legal acts of regulators (central banks) and internal procedures. As for cash deposits, they are the least popular form of security for maritime claims, as no shipowner wants to “take cash out of their pocket” and place it on deposit in a third country. Not to mention the political and other risks associated, for example, with the introduction of martial law in Ukraine.
Despite the legal regime of martial law imposed due to russia’s ongoing aggression, six seaports (Odesa, Chornomorsk, Pivdennyi, Izmail, Reni, and Ust-Dunaysk) continue to operate in Ukraine, and ship calls continue accordingly. According to our preliminary estimates, between 5 and 15 vessels are detained, arrested or released from arrest in Ukrainian ports each month, which adds to the workload of maritime lawyers and shipowners’ liability insurers. “Club” guarantees in Ukraine are critically perceived by port captains and ships, as they are effectively “outside the law”, since their legal status is not defined in the Insurance Law, the Merchant Shipping Code of Ukraine, or the Inland Water Transport Law. There are also difficulties with cash deposits: firstly, the Commercial Court of the Odesa Region, whose jurisdiction covers all six seaports of Ukraine, still does not have its own currency account; secondly, even if the shipowner has made a deposit in hryvnia (through a shipping agent), it is currently impossible to return this deposit abroad due to restrictions imposed by Resolution No. 18 of the Board of the National Bank of Ukraine dated 24 February 2022, which establishes a general ban on currency transfers abroad, with the exception of ‘critical import’ goods and services. Therefore, today, there is only one instrument that actually works as an alternative security for maritime claims in Ukraine, namely a bank guarantee, which causes additional hassle for shipowners.
This seems somewhat paradoxical and not fully consistent with state policy, which, on the other hand, recognises the shipowner’s current P&I policy as a prerequisite for compensation for damage caused by the Russian Federation’s armed aggression against Ukraine. This approach is enshrined in the procedures approved by Resolutions of the Cabinet of Ministers of Ukraine No. 548 of 26 May 2023 and No. 361 of 29 March 2024, which are reviewed annually taking into account the indicators of the approved state budget for the relevant year.
Instead, it is worth mentioning several examples from judicial practice where Ukrainian courts did accept bank or “club” guarantees as alternative security for maritime claims and subsequently considered the maritime dispute on its merits. Let us recall three cases involving the largest amounts of claims that were considered by the Commercial Court of Odesa Region.
m/v “THERESA SUCCESS” (IMO 9112753, Tuvalu flag) – palm olein spill in July 2013
Tanker “Theresa Success” flying Tuvalu flag has been arrested by the Commercial Court of Odesa Region in August 2013 following the maritime claim of the State Ecological Inspectorate for the amount exceeding USD 3 mio based on the fact of pollution of the water area of Pivdennyi port during discharging of palm olein. The Shipowner (Singapore based company “GLORIA SHIPPING”) has immediately notified its P&I insurer (NORTH P&I), which suggested to issue the “club” guarantee for the whole amount. However, ecological inspectorate refused to accept it and declared that they will be satisfied only with a bank guarantee of Ukrainian bank. Three weeks more have been spent for agreement of the “candidate” of the guarantor bank (the Club suggested ING Bank Ukraine while ecologists insisted on the bank headquartered in Odesa) and approval of the text of the bank guarantee. The Shipowner and its P&I Club suggested that bank guarantee to be released against the “final and non-appealable court judgement” (i.e. the Supreme Court), while ecologists insisted on “judgement, which gained legal force” (i.e. Odesa Appeal Commercial Court). Finally, the parties have reached the agreement and ecological inspectorate has accepted the bank guarantee of JSB “Pivdennyi” for the amount of USD 3,097,094 and the arrest of the vessel has been lifted.
m/v “STAVANGER” (IMO 9278507 flying Tuvalu flag) – palm olein spill in April 2020
Tanker “Stavanger” flying Tuvalu flag has been detained by the Harbour Master of Pivdennyi port for 72 hours following the maritime claim of ecological inspectorate due to pollution of the water area by palm olein during cargo handling operations. Thereafter ecologists applied to the Commercial Court of Odesa Region with an arrest motion, where they asked the court to arrest the vessel as a security of a maritime claim for the amount of UAH 65,174,542 (losses caused to the state as a result of pollution of internal waters). Without waiting for the arrest ruling to be issued, the Shipowner took the initiative and submitted its own application to the court for securing the claim, requesting the court to secure the claim with a cash deposit in the amount of UAH 26,679,200 (at that time equivalent to USD 1 million), which was subsequently replaced by a bank guarantee from JSC “Ukreximbank” in the amount of USD 1 million, issued in favour of the State Environmental Inspection of the South-Western District (Odesa and Mykolaiv regions). Besides, the Shipowner has submitted the Letter of Guarantee and Undertaking of The London P&I Club for the amount of USD 2,443,836, which has been taken into account by the court while examination of the arrest motion. As a result of examination of the arrest motion of ecologists, the court has declined it and issued relevant Ruling on 15th of May 2020 (Case No. 916/1287/20). The case with m/v “Stavanger” was the first case, where the court has provided legal assessment of the “club” guarantee and has taken one into account while resolving the issue on arrest of the vessel as a security of a maritime claim.
M/V “GRIFFIN T” (IMO 9390537 flying Barbados flag) – palm olein spill in May 2024
Tanker “GRIFFIN T” flying Barbados flag has arrived to Pivdennyi port on 13th of May 2024 with cargo of palm olein on board. During discharging operations part of palm olein got into the port waters. Ecological inspectorate has issued the Letter of Claim to the Shipowner requesting to pay USD 2,059,915 as losses caused to the state due to pollution of sea and simultaneously submitted the arrest motion to the Commercial Court of Odesa Region, which has been satisfied on 10th of June 2024 and the vessel has been arrested. Thereafter the Shipowner tried to replace the arrest by alternative security tools through suggesting the bank guarantee of Ukrainian bank and “club” guarantee from WEST P&I, where the liability of the Shipowner has been insured. In particular, in a week after the accident WEST P&I has issued the Letter of Guarantee and Undertaking (“club” guarantee) for the whole amount of ecologists Letter of Claim, where the Club has guaranteed to pay any amount within guaranteed amount in consideration of the court judgement, which is final and non-appealable. However, ecologists refuse to accept the “club” guarantee and insisted on granting the guarantee by Ukrainian bank. After long-term discussion between the Shipowner, the ecological inspectorate and the prosecutor office the Shipowner has provided the bank guarantee of JSC “Ukrsibbank” (Member of BNP Paribas Group) for the amount of USD 2,059,915 as well as additional guarantee letters from the Shipowner and its P&I Insurer (WEST P&I) with an undertaking to extend the term of the bank guarantee from time to time until examination of the case is in progress. As an outcome the bank guarantee of JSC “Ukrsibbank” has been accepted by the court as alternative security and the arrest of the vessel has been lifted by the Ruling of the Commercial Court of Odesa Region dd. 31.07.2024 (Case No. 916/3072/24).
The examples from court practice show that Ukrainian courts are slowly but surely moving forward in recognizing “club” guarantees as alternative tools for securing maritime claims. As for bank guarantees, it is worth recalling that, in accordance with Parts 4 and 5 of Article 143 of the Civil Procedure Code of Ukraine, the provision of a bank guarantee is a direct ground for cancelling a measure to secure a claim in the form of a ship arrest. Furthermore, procedural law does not require the candidate bank, the text and the terms of disclosure of the bank guarantee to be agreed with the applicant (plaintiff), leaving the assessment of the bank guarantee in the context of the circumstances of the case to the discretion of the court.
Draft Law No. 11431 and its Impact on the Subject Matter
Finally, it is worth recalling that Bill No. 11341, submitted by Prime Minister Denys Shmyhal, “On Amendments to Certain Legislative Acts of Ukraine Concerning Merchant Shipping and Navigation on Inland Waterways” (hereinafter referred to as “Bill No. 11431”). The aforementioned bill provides for amendments to the Water Code of Ukraine, the Merchant Shipping Code of Ukraine, the Law of Ukraine “On Transport” and Sea Ports Law. In the context of the issue under consideration, we would like to welcome the Government’s initiative to amend Article 44 of the Merchant Shipping Code of Ukraine, which proposes to recognize ‘club’ guarantees in Ukraine alongside other instruments for securing maritime claims (cash deposits, bank guarantees and other types of security provided for by the Civil Code of Ukraine). The adoption of Draft Law No. 11431 will bring Ukraine closer to the practices of developed countries and simplify the settlement of maritime incidents in Ukrainian seaports. Therefore, we hope that the Verkhovna Rada will not delay the adoption of this Draft Law and will pass it in the near future.