This case arose out of collisions in the Suez Canal in July 2018 between three vessels: the Panamax Alexander; the Sakizaya Kalon; and the Osios David. All three owners agreed to liability for the collisions being determined by the English Admiralty Court pursuant to Collision Jurisdiction Agreements (CJAs) in the ASG 2 form. The Admiralty Court decided in October 2020 that the Panamax Alexander was solely responsible for the collisions: see The Panamax Alexander [2020] EWHC 2604 (Admlty) (CMI1012).

At the time of the collisions, President Trump had announced the re-introduction of sanctions against Iran. In September 2018, the claimants, the owners of the Panamax Alexander, and their P&I Club, the Britannia, offered to the defendants, the owners of the Osios David, a letter of undertaking (LOU) containing a sanctions clause. They did so because the intended destination of the Panamax Alexander was Bandar Imam Khomeini (BIK) in Iran. That LOU was not accepted by the defendants, who arrested a vessel, the Panamax Christina, in South Africa, and obtained a LOU from the UK P&I Club which did not contain a sanctions clause. In consequence, the owners of the Panamax Christina incurred expenses in South Africa in 'fronting' the provision of security, and the claimants indemnified them in respect of these expenses. The claimants sought to recover from the defendants on the ground that these expenses were incurred as a result of a breach of cl C of the CJA agreed between the parties, namely, the defendants' refusal to accept the LOU offered by the Britannia.

The claim raised two issues. The first was whether the LOU offered by the claimants was 'in a form reasonably satisfactory' to the defendants, notwithstanding that it contained a sanctions clause. The second was whether, if the LOU was in a reasonably satisfactory form to the defendants, the defendants were contractually obligated by the CJA to accept it.

Held: First issue: yes. Second issue: no. The claim is therefore dismissed.

An arrest of a ship in English law (and in the law of many other maritime nations, though the details may differ) is a means not only of establishing jurisdiction but also of obtaining security for a maritime claim. Where ships collide causing damage, the owners of each ship will be concerned to recover that damage from the other ship. Of immediate concern will be the decision where to arrest in order to commence proceedings and obtain security for the claim. However, an arrest may not be the ideal way of founding jurisdiction or obtaining security. The ship to be arrested may be in a jurisdiction which, for one reason or another, is not regarded as suitable for determining the merits of the claim. The arrest will only provide adequate security if the market value of the ship, when sold, is sufficient to cover not only the claim for collision damage, but also the claims of others such as a mortgagee whose claims may have priority to that of the damage claimant. Furthermore, an arrest is costly, not only for the arresting party, but also for the owner of the arrested ship. For these reasons, the owners of ships involved in a collision will often agree upon a jurisdiction where the claims will be heard, and will also agree to an exchange of LOUs from each owner's P&I Club (or hull underwriters) securing the claim of each owner against the other. A LOU from an owner's P&I Club is preferable to an arrest. It avoids the costs and uncertainty of an arrest, and provides a reliable and trustworthy form of security. A LOU is therefore often provided before an arrest takes place: see The Alkyon [2018] EWHC 2033 [15] (Admlty) (CMI188).

Solicitors practising admiralty law in England, the Admiralty Solicitors Group (ASG), have devised two concise forms of agreement to assist the owners of ships involved in a collision when dealing with choice of jurisdiction and provision of LOUs. The first, known as ASG 1, is a draft form of LOU. The second, known as ASG 2, is a draft CJA, in which the parties agree to litigate or arbitrate their claims in England. Clause C of ASG 2 provides that '[e]ach party will provide security in respect of the other's claim in a form reasonably satisfactory to the other.' The advantage of these standard forms is their simplicity, which enables parties to agree them without delay, so that the costs and delays caused by an arrest can be avoided. The published notes to ASG 1 state that ASG 1 will generally be given by the P&I Club or hull underwriters of the vessels concerned, and that ASG 1 has been designed to be used in conjunction with ASG 2. ASG 2 is stated to be a flexible document capable of easy adaptation, whereas ASG 1 should not need adaptation.

As to the first issue, the objections raised by the defendants, both in 2018 when the LOU was tendered by the Britannia, and at the hearing, do not enable them to say that the LOU was not reasonably satisfactory to them. It is apparent that it was thought that the sanctions clause initially proffered might render the LOU 'useless'. But, however the defendants were to receive payment for their losses, whether by means of an LOU or by the sale of a vessel under arrest, the risk of non-payment as a result of the Iranian nexus was present. The sanctions clause recognised that reality. It was unreasonable for the defendants to expect the Britannia to be able in some way to avoid that risk. If the Club were unable to pay because of the Iranian nexus, that would be so whether or not the sanctions clause was included in the LOU. The sanctions clause recognised that risk and stated what all would expect, namely, that the Club would nevertheless endeavour to ensure that payment was made. Given the Iranian nexus, the LOU with the sanctions clause was, considered objectively, reasonably satisfactory to the defendants.

As to the second issue, the claimants argued that on the true construction of cl C of the CJA, it was at least implied that each party was required to accept security that was objectively reasonably satisfactory as soon as reasonably practical. The defendants denied that cl C was to be construed in that way. The defendants emphasised 'the commercial reality that a party-to-be-secured generally will accept security that is reasonably satisfactory to it' and submitted that 'the CJA works perfectly well as an agreement without the implication of a term placing an obligation on the party-to-be-secured to accept security'.

To leave the choice to accept security with the party to be secured gives commercial or practical coherence to the CJA. The right to arrest is a right well known to English law and to the law of maritime nations. There is nothing in the CJA about that right, and certainly nothing about giving up that right. Yet, if the suggested term is implied into cl C of the CJA, the party to be secured will effectively lose its right to arrest once security has been tendered in a reasonably satisfactory form. 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 said so. The scheme of the CJA no doubt envisages that the right to arrest will be lost when the security on offer is accepted, because the promise not to arrest is the consideration for the offer of security. But there is nothing in the CJA to suggest that the right is lost at an earlier stage, namely, when security in a reasonably satisfactory form is offered. That indicates that the omission of an obligation to accept the security in a reasonably satisfactory form was deliberate. Moreover, the implication of the suggested term would be inconsistent with the scheme of the CJA, which envisages the right to arrest being lost at a later stage when the LOU is accepted. There is another matter not stated in the CJA, namely, whether any acceptance of security is to be mutual or reciprocal. That is another indication that the CJA left the recipient of the offer of security with the choice of accepting the offer or not.

[For the successful appeal to the Court of Appeal, see M/V Pacific Pearl Co Ltd v Osios David Shipping Inc [2022] EWCA Civ 798 (CMI1899).]