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’s simply impossible to imagine a ship operating without a valid P&I policy in today’s world. It is a well-known fact 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 global 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, North Standard, 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 organizational 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/her 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 highly reliable 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 every single month, which adds to the workload of maritime lawyers and shipowners’ liability insurers. “Club” guarantees in Ukraine are perceived critically 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. Difficulties also exist with cash deposits. Firstly, the Commercial Court of 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, at the present time 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 consideration all 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’s look at 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

The “Theresa Success” tanker flying the Tuvalu flag was 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 million based on the fact of pollution of the water area of Pivdennyi port during the discharging of palm olein. The shipowner (Singapore based company GLORIA SHIPPING) immediately notified its P&I insurer (NORTH P&I), which suggested to issue the “club” guarantee for the entire amount. However, the ecological inspectorate refused to accept it and declared that they would only be satisfied with a bank guarantee from a Ukrainian bank. Three more weeks were spent on getting agreement on the “candidate” of the guarantor bank (the club suggested ING Bank Ukraine, while ecologists insisted on a bank headquartered in Odesa) and approval of the text of the bank guarantee. The shipowner and its P&I Club proposed that the bank guarantee be released against the “final and non-appealable court judgement” (i.e. the Supreme Court of Ukraine), while ecologists insisted on the judgement, which came into legal force (i.e. Odesa Appeal Commercial Court). Finally, the parties reached agreement and the ecological inspectorate accepted a bank guarantee issued by JSB Pivdennyi for the amount of USD 3,097,094 and the arrest of the vessel to be lifted.

M/V “STAVANGER” (IMO 9278507 flying Tuvalu flag) – Palm Olein Spill in April 2020

The “Stavanger” tanker flying the Tuvalu flag was detained by the Harbour Master of Pivdennyi port for 72 hours following the maritime claim of the ecological inspectorate due to pollution of the water area by palm olein during cargo handling operations. Thereafter, ecologists addressed 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 favor of the State Environmental Inspection of the South-Western District (Odesa and Mykolaiv Regions). Besides, the shipowner submitted the Letter of Guarantee and Undertaking of The London P&I Club for the amount of USD 2,443,836, which was taken into account by the court while examining the arrest motion. After examining the arrest motion submitted by ecologists, the court declined it and issued its Ruling of 15 May 2020 (Case No. 916/1287/20). The case with m/v “Stavanger” was the first case in which a court provided a legal assessment of a club guarantee and has taken one into account whilst resolving the issue of the arrest of a vessel as security in a maritime claim.

M/V “GRIFFIN T” (IMO 9390537 flying the flag of Barbados) – Palm Olein Spill in May 2024

The “GRIFFIN T” tanker flying the Barbadian flag arrived to Pivdennyi port on 13 May, 2024 with a cargo of palm olein on board. During discharging operations part of palm olein got into the port waters. The ecological inspectorate issued the letter of claim to the shipowner requesting payment of 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 was satisfied on 10 June 2024 and the vessel was arrested. Thereafter, the shipowner tried to replace the arrest by alternative security tools by proposing the bank guarantee of a Ukrainian bank and “club” guarantee from WEST P&I, where the liability of the shipowner had been insured. In particular, in the week after the accident WEST P&I issued the Letter of Guarantee and Undertaking (club guarantee) for the whole amount of the ecologists Letter of Claim, in which the club guaranteed to pay any amount within the guaranteed amount in consideration of a court judgement, which is final and not subject to appeal. However, the ecologists refused to accept the “club” guarantee and insisted on granting the guarantee from a Ukrainian bank. After lengthy discussions between the shipowner, the ecological inspectorate and the prosecutor’s office, the shipowner provided a bank guarantee from JSC Ukrsibbank (a 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. The bank guarantee of JSC Ukrsibbank was accepted by the court as alternative security and the arrest of the vessel was lifted by the Ruling of the Commercial Court of Odesa Region dd. 31.07.2024 (Case No. 916/3072/24).

These 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 should be recalled 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 direct grounds for cancelling a measure to secure a claim in the form of a ship’s 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 reminding ourselves of Draft 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 – Draft No. 11431). The aforementioned draft provides for amendments to the Water Code of Ukraine, the Merchant Shipping Code of Ukraine, the Law of Ukraine On Transport and Seaports 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 Bill No. 11431 would bring Ukraine closer to those practices present in developed countries and simplify the settlement of maritime incidents in Ukrainian seaports. Therefore, we hope that the Verkhovna Rada will not delay adoption of this Draft Bill and will adopt it in the near future.