John Habergham, Myton Law, Hull U.K.

Ref: Pacific Pearl Co Limited v Osios Shipping Inc

A recent case before the Court of Appeal has considered what security should be seen as acceptable either to avoid the arrest of a vessel or obtain her release. Although the subject matter was a collision action, the result will be of wider application where an arrest of a vessel to secure a claim in rem is concerned.

The London Admiralty Solicitors Group have drafted a portfolio of standard wordings which are designed to deal with issues regarding the provision of security and jurisdiction.

The wording in this particular case, being a collision action, read, where relevant:

“Each party will provide security in respect of the other’s claim in a form reasonably satisfactory to the other….”

The P&I Club of one vessel offered security which contained a clause to the effect that relieved the Club from its obligations to pay if such payment would contravene UN and other state sanctions and if any bank in the payment chain should refuse to process the payment for any reason connected with the issue of sanctions.

While the desire not to breach or be seen to be beaching any such sanctions is obvious enough, the recipient of the proposed security complained that it drove a cart and horses through the concept of security – in short it was rendered pretty much useless.

So, they refused the security and instead arrested a sister vessel elsewhere.

The key issue became – is “reasonable satisfactory” to be judged objectively or subjectively?

The Court of Appeal reversed the lower court decision and said that, on grounds of interpretation of the clause in question and / or by implication of an implied term, the objective test was the correct one to apply. Subjectivity doesn’t enter into it.

The consequence is that any party contemplating arrest of a vessel which may involve English law needs to be careful in deciding whether the security offered is acceptable or not – if it is standard form, it is going to be harder to refuse and the risk of wrongful arrest (the test of which is one founded in gross negligence or spite) and accompanying damages claim, should the objectively acceptable security be declined and security sought by way of arrest pursued is higher.”