The P & I Letters of Undertaking

The P&I Club letters of undertaking as a modern form of
security for the release of arrested ships
ELENI MELEKOU
Supervisor:
Pr. Ntovas Alexandros
Academic year: 2015- 2016
Number of Words: 14,658
Awarded Mark: 75 (Distinction)

T ABLE OF C ONTENTS
Table of Contents i
List of Abbreviations ii
Introduction 1
Chapter 1 3
- The action in rem 5
- Maritime and statutory liens 10
- Arrest 12
Chapter 2 20
- Bail Bond 25
- Bank Guarantee 27
Chapter 3 35
P&I Insurance 35
The P&I Letter of Undertaking (LOU) 36
- Conclusion 54
Findings 57
Bibliography 62
Books 62
Articles 64
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L IST OF A BBREVIATIONS
AJA Administration of Justice Act
CJEU Court of Justice of the European Union
CJJA Civil Jurisdiction and Judgements Act
CPR 1998 Civil Procedure Rules
LOU P&I Letter of Undertaking
P&I Protection and Indemnity
PD Practice Directions
SCA 1981 Senior Courts Act
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I NTRODUCTION
The arrest of ships is indispensable to maritime creditors in order to enforce
their rights over maritime property. Despite its continuous occurrence throughout
the centuries, the legal framework regulating arrest is relatively recent. Indeed, the
first relevant International Convention, namely the 1952 Convention for the Arrest
of Sea-going Ships (Arrest Convention) came into force in 1956, whereas the 1999
Arrest Convention aiming to supplement and improve the previous one, is not yet
in force. However, several countries are not signatories of the Convention, hence
their arrest procedures are governed by domestic laws. Problems emerge from the
fact that, as far as procedure is concerned, arrest conventions do not provide
uniformity in Civil Procedure Rules.
The aim of this dissertation is to focus on the prevention of arrest and the
release of arrested vessels through the providing of guarantees, emphasizing the
superiority of P&I Letters of Undertaking (hereinafter LOUs) over bail bonds and
bank guarantees. Through comparatively analyzing the latter and approaching
contemporary issues of equivalence and efficiency affecting LOU acceptability,
conclusions will be drawn in respect of whether their establishment and approval is
justified and necessary for tackling the uncertainty of the shipping market regarding
the release procedure and the forum-shopping practices from mala fide claimants.
Shipowners need to avoid arrest or release their arrested vessel as fast as
possible. LOUs could be their “deus ex machina” in terms of convenience and cost.
!1
Nevertheless, as theory differs from practice, there are many problems arising from
the actual use of LOUs. This dissertation examines those impediments in terms of
acceptability of LOUs from maritime creditors and several jurisdictions.
The first chapter will set the legal framework of enforcing maritime claims,
from the creation of lien, to the action in rem, and the arrest writ. In the second
chapter, the common forms of guarantees, namely the bail bond and bank guarantee
are analyzed and compared. Emphasis is placed to their weaknesses vis-à-vis
shipowners’ pecuniary interests and convenience, so as to support the need of an
alternative solution. The third chapter introduces LOUs, their advantages, and a few
potential shortcomings, and examines whether or not their standing should be
enhanced. Finally, the last part, based on the analysis’ findings, suggests solutions
for the amelioration of the LOU’s status.
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C HAPTER 1
i. The development of the Admiralty Court in England
The uniqueness of maritime law, which distinguishes it from the laws
governing other commercial law sectors, is mirrored to its historical background.
The foundation of marine customs dates back in ancient years, in the times of the
Rhodian Law in the Mediterranean sea, whereas the Black Book of Admiralty was
the last customary code in the 15th century forming the basis of the modern English
Maritime Law.1 From the oral tradition (Lex Maritima) to its codification, the
content of maritime law, despite its civilian origins, was influenced by both civil
and common law jurisdictions, and still changes incessantly by statutes and
international conventions that improve its efficiency by increasing its uniformity.2
England is the most marked example of State whose legal tradition has influenced
and still dominates the industry, as the most common applicable law in the
maritime contracts and practices.
Admiralty is a distinct body of law governing matters of maritime character,
ranging from shipping activities and navigation, to transportation of goods and
passengers by sea. Since the 1873 Supreme Court of Judicature Act, the Admiralty
Court constitutes part of the “branches” of English law together with common law
courts and equity.3 This amalgamation extinguished all the jurisdictional confines,
1William Tetley, International Maritime And Admiralty Law (Éditions Y Blais 2002) 9.
2Robert Grime, Shipping Law (2nd edn, Sweet & Maxwell 1991) 1.
3David C Jackson, Enforcement Of Maritime Claims (4th edn, LLP 2005) 14-5.
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without affecting the unique features of each court, thus promoting the development
of common notions and the most effective administration of justice. 4 Subsequently,
the Admiralty Court procedure, albeit founded on civilian principles, was
influenced by the continuously changing common law dicta over the years, and was
finally completed by the 1956 Administration of Justice Act (AJA), implementing
many Articles of the 1952 International Convention for the Arrest of Sea-going
Ships (Arrest Convention).5
Nowadays, section 6(1)b of the Senior Courts Act 19816 (SCA ) stipulates the
constitution of an Admiralty Court as part of the Queen’s Bench Division, while its
jurisdiction is regulated by sections 20-24. In addition, two sets of rules, Parts 58
and 61 of the Civil Procedure Rules (CPR) 1998, regulate the Admiralty
proceedings, followed by their relative Practice Directions (PD 58 and 61).7
ii. Special Admiralty Concepts
The most distinctive concepts of the common law admiralty jurisdiction are
the three components of enforcing a maritime claim, namely the claim in rem, the
lien and arrest. The former constitutes the mechanism of enforcement, the lien
4ibid 16.
5Alexandra Mandaraka-Sheppard, Modern Maritime Law (2nd edn, Routledge-Cavendish 2007) 7-8.
6 Previously Supreme Court Act but renamed following the replacement of the Judicial Committee
of the House of Lords by the “Supreme Court” on 1 October 2009 see Constitutional Reform Act
2005, s.59(5) and Sch 11.; Nigel Meeson, Admiralty jurisdiction and practice (4th edn, Informa
2011) 2.
7 Mandaraka-Sheppard (n 5) 322.
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mirrors the right of the claimant upon the ship, and the latter is a “powerful
weapon” offering an interim remedy. 8
- The action in rem
Admiralty jurisdiction can be exercised either in personam or in rem.9 The
fact that the maritime claimant can exercise the right to proceed against the res,
gave rise to many theories analyzing the substance of the action in rem, the most
important of which are the personification, the procedural and the conflict theory.10
The first, dating back to the Roman law hypothecation, has emerged from the
notion of the maritime lien. Its distinct trait is that it personifies the ship and gives
her a separate juridical entity, 11 whereby she becomes liable in contract or in tort.12
The vessel is regarded as a personified defendant,13 however if her owner or
whoever is interested in her takes part in the proceedings in rem by appearing to the
court or acknowledging service of the writ in rem, the action simultaneously
becomes an action in personam. 14 The second theory 15 supports that the action in
8 Jackson (n 3) 257.
9 Meeson (n 6) 85.
10D. R. Thomas, Maritime Liens (Stevens 1980) 7.
11 See Tucker v Alexandroff [1902] 183 US 424 (per Justice Brown at 438).; See SCA 1981, s 21(3)
(4):“.... may be brought ... against that ship …”.

12Thomas (n 10) 7.
13 See The Bold Buccleugh [1850] 7 Moo 267, p.282. per Sir Jervis.; Mandaraka-Sheppard. (n 5) 78.
15 It was supported by RG Marsden in Select Pleas in the Court of Admiralty, Vol 1. (Selden Society,
vol VI) p.lxxi; Thomas.(n 10) 7-8.
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rem is merely a procedure aiming to urge the person liable to appear before the
court and obtain personal liability that can exceed the value of his ship, when it is
inadequate to satisfy the claim.16 The procedural theory is predicated on the
assumption that ship arrest is a mechanism securing the furnishing of bail to the
court.17 The last theory, arisen out of the contention between the common law
courts and the High Court of Admiralty throughout Richard’s II era, when the
Admiralty in rem jurisdiction remained unaffected from the writs of prohibition,18
was supported in The Beldis. 19
It was after The Dictator20 judgment that the procedural theory prevailed.21 Its
pivotal facet was that the owner’s personal liability is not implicit in the action in
rem; it is rather introduced after his appearance,22 thereby rendering the action also
in personam.23 Subsequently, the value of the vessel constitutes the limit of the
maritime claim, save that the owner has submitted to jurisdiction. 24
16Mandaraka-Sheppard (n 5) 77.
17Thomas, Maritime Liens (n 10) 7.
18It was developed by Roscoe and evolved by Professor Edward Ryan; Thomas (n 10) 9.
19[1936] P 51; (1936) L1 LR 255 per Lord Merriman P at 73- 74; Thomas (n 10) 9.
20[1892] PD 304.
22Nigel Teare, ‘The Admiralty action in rem and the House of Lords.’ (1998) LMCLQ. 33, 35.
23 See The Tatry [1992] 2 Lloyd’s Rep 552.
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The House of Lords, in The Indian Grace (No2)25 , reevaluated the nature of
the in rem proceedings, and concluded that for the purpose of s.34 (res judicata) of
the Civil Jurisdiction and Judgements Act (CJJA) 1982 the real defendant is the
shipowner. 26 The ruling that the proceedings were against the shipowners
consequent to the service of the writ in rem, accumulated many criticisms. 27 Lord
Steyn supported his analysis on the preponderance of the procedural theory, the
repercussions of the sovereign immunity cases and the decision in The Maciej
Rataj28, where the Court of Justice of the European Union (CJEU) determined that
an action in rem and an action in personam were brought against the same
defendant, 29 in order for Art.21 of the Brussels Convention, having similar wording
to s.34 of the CJJA 1982, not to be infringed.30 In legal theory, The Indian Grace
(No2) decision has been characterized as problematic for various reasons.
Consequently, its application should be confined merely to the res judicata
question, impeding a claimant with a foreign decision in personam to re-litigate the
same matters bringing an action in rem in England.31
25Republic of India v India Steamship Co Ltd (The Indian Grace)(No 2) [1998] 1 Lloyd’s Rep 1.
26 Teare (n 22) 33; Mandaraka-Sheppard (n 5) 81.
27 Teare (n 22) 33.
28 [1995] 1 Lloyd’s Rep. 302.
29Within the EU jurisdiction there is no differentiation between actions in rem and in personam;
Yvonne Baatz, Maritime Law 3E (Informa Law from Routledge 2014) 477.
30 Teare (n 22) 37 and 41.
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Pursuant to the SCA 1981 in s.21, an action in rem is instituted only in
relation to two main categories of claims: “in any case in which there is a maritime
lien or other charge on any ship” under s.21(3) and the claims provided in s.20(2)
paras (a)-(c) and (e)-(s). 32 From those claims, only five categories constitute truly in
rem claims (per se): s.20(2)(a) to(c), s.20(2)(s); and maritime liens. 33
The claim in rem is divided in two categories: the in rem per se (truly) and the
quasi (non-truly) in rem claims.34 In the former, the claim may be only brought
against the relevant ship without consideration of her current owner or the existence
of liability in personam from his part at the commencement of proceedings (s.21(2)
and (3)),35 while the latter are subject to the satisfaction of certain conditions.
Considering that this claim connected with a ship is actually brought against her
owner or charterer, or the person in her possession or control at the time of the
disputed incident occurring,36 an in personam association between the claim and
the defendant, together with an ownership nexus between the person liable and the
particular vessel, are required when the claim is initiated, 37 since the in personam
liable person must owe beneficially the shares of the ship or be her demise charterer
(s.21 (4)(b)(i)). 38Quasi in rem claims pursuant to s.21(4)(b)(ii) are alternatively
33 Meeson (n 6) 96-7.
34 ibid. 85-6.
35 ibid 85.
36 ibid 98.
37 Mandraraka-Sheppard (n 5) 94.
38 Meeson (n 6) 99.
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enforceable against a sister ship upon the condition that at the time the action in
rem is commenced, the relevant person owns all the shares of the sister ship.39
Finally, s.21(1) SCA 1981 stipulates that “an action in personam may be
brought in the High Court in all cases within the Admiralty jurisdiction of that
court”, and therefore in claims established in s.20, a claim in personam differs from
that in rem, as it is not brought against the res but against the person liable,
normally the shipowner. Subsequently, the plaintiff cannot arrest the vessel and
obtain a security au lieu of his interest upon the vessel or enjoy a preferred creditor
status, as the general procedure for execution of judgement will be followed by the
competent court and not the Admiralty judicial sale of the ship.40 Additionally, he
should satisfy some territorial requirements to inaugurate jurisdiction.41 In
personam claims demonstrate considerable shortcomings underlying the supremacy
of the action in rem.42 Besides, the SCA introduces an “inter-relationship” between
those types of claims, as they can be brought synchronously without incurring
merge or losing their unique features, from the moment of acknowledgement of
service by the defendant of the in rem claim form.43
39Baatz (n 29) 481.

40 Jackson (n 3) 226.
42ibid.
43 Jackson (n 3) 279. See The Indian Grace (No2) [1998] 1 Lloyd’s Rep 1.; The Maciej Rataj [1992]
2 Lloyd’s Rep 552 per Neill LJ at 559; cf The Stolt Kestrel c/w Niyazi S [2016] 1 Lloyd’s Rep 125: A
hybrid claim form does not exist. Proceedings in rem and in personam must be commenced
separately, using the correct claim forms.
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- Maritime and statutory liens
The maritime lien is a sui generis notion in Admiralty law.44 Though not
expressly defined in English legislation nor in any International Convention, it is
created or recognized statutorily.45 Theory and courts accept it as a burden upon the
maritime property (the ship, cargo and freight), that can be arisen ex delicto or ex
contractu.46
Pursuant to the case law, the maritime lien constitutes a powerful tacit
security right in favor of the plaintiff.47 First of all, public policy dictates its
enforcement as an advantaged claim, 48 in terms of its priority over mortgages and
statutory liens. 49 Secondly, contrary to the common law possessory liens, it is
independent from the possession of the res, thus it “travels” with the asset like an
“invisible secret”,50 as there is no requirement for registration,51 since it is not
removed by the sale to a bona fide buyer, the owner’s death or insolvency, or a
winding-up order against the company owing the vessel,52 nor is it limited to the
44 Meeson (n 6) 17; See The City Of Mecca [1879] 5 PD 28 at 34.

46ibid 5.
47 See The Bold Buccleugh [1851] 7 Moo PC 267, 284-5.
49See The Halcyon Isle [1980] 2 Lloyd’s Rep.325 at 333; Simon Gault and Steven Hazelwood,
Marsden And Gault On Collisions At Sea (14th edn, Sweet & Maxwell 2016) 68.
50 Thomas, Maritime Liens (n 10) 14.
52 The Zafiro [1959] 1 Lloyd’s Rep. 359.
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owner’s financial interests in the asset.53 There are only a few reasons expunging
maritime liens, such as time-bar, 54 loss of the res, judicial sale, 55 laches,56 the
claimant’s consent57 or satisfaction. Finally, the lien binds the property from the
moment of the cause of action emergence, but it is considered “inchoate” until its
enforcement by an action in rem.58
Maritime liens occupy a small percentage of the claims in rem provided in s.
20(2) SCA.59 In summary, they were identified in The Ripon City60 and confined to
“bottomry, salvage, wages, master’s wages, disbursements and liabilities, and
damage”. The rest of the maritime claims constitute statutory rights in rem. 61
Juxtaposing both types of lien, one may conclude that maritime liens are
more powerful than statutory ones, especially with regard to their time of
crystallization and their higher priority over the latter. 62 On the one hand, the
statutory liens engender only quasi in rem claims, which are not substantially
53Marsden, Gault. (n 49) 68.

54 MSA 1995. s.190.
55 The Tremont [1841] 1W. Rob. 163, 164; 166 E.R. 534 per Dr.Lushington.
56 The establishment of the doctrine depends on its judicial recognition based on certain criteria like
negligence of the lien-holder,unjustified waste of time, frequently succeeded in the US.; see The Two
Ellens [1872] L.R. 4 P.C. 161, 169.

57 Jeremy Browne, ‘The extinction of maritime liens.’ (2003) LMCLQ 361,
58 The Tolten [1946] P 135 (CA).
60 [1897] P 226 .
61 Tetley (n 1) 482-3.
62 Jackson (n 3) 479.
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brought against the ship but against her owner.63 The Monica S64 decision illustrates
the perplexing nature of those claims, which can be established solely from the
moment of the issue of the in rem proceedings, whereby the claimant’s rights are
crystallized and irrevocably bind the vessel, surviving even after her bona fide
purchase.65 Consequently, the statutory liens are defined as a procedural remedy, for
they come into existence from the initiation of the action in rem. 66 On the other
hand, the statutory liens can be enforced against a “sister ship” (s.21(4)), whereas
the maritime liens are limited to the vessel in connection with which the claim
arises. 67
- Arrest
The issuance of an in rem claim form is the starting point of the action in
rem,68 which can be brought against only one vessel in relation to one cause of
action. 69 CPR 61 PD 3.6 regulates the procedural part of service.70 Before this
stage, according to CPR 61.3(6), the person in defense of the ship has the right to
submit an acknowledgement of service, thereby imposing himself to the judicial
63Meeson (n 6) 90.
64[1967] 2 Lloyd’s Rep 113.
66See The Monica S (n 64) per Brandon J at 768; Graeme Bowtle and Kevin Patrick McGuinness,
The Law Of Ship Mortgages (LLP 2001) 124.

67Jackson (n 3) 479.
68 ibid. 274.
69SCA 1981, S 21(8).
70Jackson (n 3) 276.
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effects, as if he had already been served with the claim form. Alternatively, after the
service, its acknowledgement is required in a 14-day time period,71 otherwise the
plaintiff may apply to the court for a default judgement and submit certifications
that the claim form was properly served, and material evidencing the validity and
the substantial underpinning of the claim.72 The service outside the English
territorial jurisdiction is not permissible. 73
The service of the claim form is not tantamount to arrest, therefore the
claimant must apply to the court for obtaining an arrest warrant.74 In The Varna,75 it
was held that the permission of the issuance of the arrest warrant is not a
“discretionary remedy” of the court; it forms an actual right, since a valid
application form, pursuant to formalities of CPR Part 61.5 and the relative Practice
Direction, has been made.76
The defendant, in order to avoid arrest, can file a caveat against arrest to the
Admiralty and Commercial Registry assenting to acknowledge the service and
furnish an adequate security entertaining the claim including interest and costs.77
The defendant cannot repudiate from offering bail, even if he transferred the vessel
to a new bona fide owner. Therefore, in case his solicitors have entered the caution
71 ibid 277.
72 Meeson (n 6) 149-150.
74 ibid 117.
75 [1993] 2 Lloyd’s Rep.253.
76Michael Tsimplis, ‘Admiralty claims and the new CPR Part 61’ (2002) LMCLQ 520, 523.
77 See CPR Part 61.7; Mandaraka-Sheppard (n 5) 117.
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on behalf of their client, they can be charged with the bail, provided their client
refuses or fails to pay it. 78 The caution does not constitute a method of giving in to
the court’s jurisdiction,79 therefore the warrant may be enforced. 80
Arrest performs three main roles. First, it constitutes an interim measure
pending the litigation on the merits. 81 This deterrent operation goes hand-in-hand
with the security function. In fact, the arrested ship forms a fund from which the
claim will be entertained, securing the plaintiff’s interest on the property in relation
to a consequent adjudication and its enforcement, through judicial sale.82 The
conceptualization of the arrested ship, detained by judicial authorities in a port
without being able to perform her commercial activities, constitutes a major threat
to the owner’s financial interests. Consequently, he is often compelled to furnish a
provisional security, normally a P&I Club letter of undertaking or bank guarantee
form, in order to avoid the harsh pecuniary consequences of a possible arrest.83 In
these cases, the security usually involves the condition that the defendant’s
solicitors should proceed to the unconditional acceptance of the service of the writ
in rem.84 Nevertheless, pursuant to the Brussels and Lugano Conventions and
Council Regulation 44/2001, the establishment of a jurisdiction basis in the states
78 Meeson (n 6) 157.
79 ibid; see PD 61.6.1.
81 Jackson (n 3) 393.
82 Meeson (n 6) 151.
83 ibid.
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where they apply, require the actual arrest of the asset, even if a provisional security
is offered to the maritime claimant au lieu of arresting, except that the litigants have
chosen the English judicial regime.85 Finally, under the common law system, arrest
serves as a jurisdictional ground on the merits,86 regardless of any intrinsic
connection between the claimant’s right and the specific jurisdiction. It is merely
founded on the advent of the vessel within its territorial competence.87 However,
the court may stay proceedings under some circumstances,88 namely when the
doctrine of forum non-conveniens applies, when a foreign court is more suitable to
adjudicate the claim, 89 or when another court claims exclusive jurisdiction, and
when the parties have agreed to submit their disputes to a particular foreign
jurisdiction90 or to arbitration under s.9 of the 1996 Arbitration Act.91
In the European Union, the joint application of Council Regulation 44/2001
(Brussels I Regulation) and the 2007 Lugano Convention provide the defendant92
resident of a Member State with the right “to be sued in the courts of that Member
85Meeson (n 6) 151.
86 See The Anna H [1995] 1 Lloyd’s Rep 11.
88 ibid 153.
89 ibid 159.
90 ibid 177.
91 ibid 189.
92 Article 60 of the Brussels I Regulation provides for companies and legal persons that the place of
their registration or central management is their seat; Meeson (n 6) 123.
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State”, 93 leading to the dismissal or stay of parallel proceedings. 94 In addition, Art.7
of the 1952 Arrest Convention regulates the basis of jurisdiction, exclusively upon
the actual arrest of the vessel.95 The provisions of the Arrest Convention are not in
clash with the Regulation and the Brussels Convention 96, where they apply, as
Article 71 of the former and Article 57 of the latter stipulate that Article 2 has no
effect on other conventions regulating jurisdictional questions on a specific matter97
as lex specialis. The foundation of the forum arresti on the linkage of the ship with
the territorial jurisdiction of a forum, under the 1952 Convention is a distinctive
jurisdictional basis either over merits or in respect to interim reliefs. 98 However, in
common law systems, and England in particular, the notion of forum arresti
conflicts with the dependence of arrest on the initiation of a claim in rem, therefore
it is the service of the in rem claim form, not the arrest, that establishes jurisdiction
on the merits. 99 Despite this antithesis, s.26 of the CJJA permits the court, in the
context of the interlocutory remedy, to detain the arrested assets or the security
given for the avoidance of the arrest or the release therefrom, pending adjudication
93Art. 2.
94Meeson (n 6) 120-122.
95Francesco Berlingieri, Berlingieri On Arrest Of Ships (5th edn, Informa Law 2011) 421; see The
Deichland [1989] 2 Lloyd’s Rep. per Neill L.J at 121

96See Article 7 of the Lugano Convention.
97Meeson (n 6) 131.
98Verónica Ruiz Abou-Nigm, The Arrest Of Ships In Private International Law (Oxford University
Press 2011) 178.
99 ibid 201.
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on the merits or, in case of arbitration and exclusive jurisdiction agreements, where
the court has ordered stay or dismissal of the action.100
iii. Comparative perspective
Admiralty jurisdiction does not present significant differences in common
law systems, 101 where its provisions are spread partially in acts and
jurisprudence.102 Australia, New Zealand, South Africa, Hong Kong, Singapore,
Canada, United States are some of the examples sharing almost identically the same
Admiralty concepts with England. This is due to the fact that, prior to their
emancipated legal development, they once were British colonies. Indeed, the U.S.
Federal Rules of Civil Procedure 103, the 1973 New Zealand Admiralty Act104, the
1988 Australian Admiralty Act105, the High Court (Admiralty Jurisdiction)106 in
Singapore and the High Court Ordinance 107 in Hong Kong, the 1985 Canadian
Federal Courts Act, the 1983 South-African Admiralty Jurisdiction Regulation
100 Jackson (n 3) 382.

101Damien J Cremean, Admiralty Jurisdiction (3rd edn, Federation Press 2003) 1.
103See Rule B,C and E .Thomas J Schoenbaum, Admiralty And Maritime Law (2nd edn, West 1994)
896 and 906-16; In comparison with other common law countries, USA law includes an extended
codification of maritime law Tetley. note 1. p.403-4; All maritime claims are considered maritime
liens but there is a further distinction to preferred and ordinary ones, especially for priority ranking
reasons.William Tetley (n 1) 112.

104 Cremean (n 101) 10-11 and 154.
105ibid 10-11, 22 and 154.
106ibid p.12.
107ibid 13.
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Act 108 furnish Admiralty Jurisdiction and consist of provisions relating to maritime
liens, maritime claims, proceedings in rem and ship arrest.
At the other end of the spectrum, civil law countries have incorporated their
respective maritime provisions and regulations into Maritime Codes. Another
civilian characteristic is the division of the provisions concerning the acquirement
of jurisdiction on the merits, stipulated in Civil Procedure Codes, from those
offering substantial relief to the litigants.109 Moreover, the concept of the action in
rem is unfamiliar to civil legal systems, where it is only action in personam that can
be instituted for the satisfaction of the maritime claim.110 The distinctive civilian
method of its enforcement is the conservatory attachment (saisie conservatoire),
functioning as an interlocutory security. 111 Therefore, there stands a requirement of
a substantive link between the cause of action and the specific jurisdiction, in order
for the latter to be invoked. 112
Finally, China has observed a remarkable accretion of ship arrests over the
last few years. 113 The 1999 Maritime Procedural Law influenced by the Hong Kong
legal system, includes many rules of the 1999 Arrest Convention, despite the fact
that none of the Arrest Conventions have been implemented to the Chinese
108The South African Admiralty law in the same way as English, but unlike Australian and New
Zealand, does not possess a statutory scheme identifying the maritime liens.
109Jackson (n 3) 1.
110 Tetley (n 1) 418.
111 ibid 508.
112 Mandararaka-Sheppard (n 5) 10.
113Jimmy Ng, ‘How closely does the Chinese law of ship arrest resemble international maritime
practice and the ship arrest conventions?’ (2006) 12 JIML 337
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legislation.114 Moreover, s 21 of the Chinese Maritime law lists the maritime claims
restrictively, 115 but there is no provision for enforcement with an action in rem,116
despite the paradox that the maritime claimant may submit an application for
arresting the vessel, when he is not able to identify her shipowner or the person
liable for his damage.117
114 ibid 339.

115 ibid 342.
116 ibid 344-5.
117 ibid 345.
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C HAPTER 2
i. The International Spectrum of Arrest
Shipping law cannot be restricted within the territorial limits of one State.
Indeed, since ships move consistently between disparate countries, a maritime law
case usually entails many different concurrent jurisdictions. This situation promotes
forum shopping from the claimant’s part and preserves uncertainty, given that
shipowners could not anticipate to which national law they would be subject.
Subsequently, the industry realized the need to secure the harmonic exercise of
rights and liabilities regardless of the vessel’s location, paving the way towards
International Conventions which would constitute the foundation of a multilateral
framework eliminating any ambiguities. 118
Ship arrest is one of the maritime practices which could not be left outside the
scope of an international regulatory regime.119 The 1952 Arrest Convention was
drafted120 in order to iron out the differences between civil and common law
jurisdictions regarding ship arrest as an interim measure. 121 Great efforts were made
for their reconciliation by adopting mainly the common law rationale, combined
118 Grime (n 2) 1-3.

119 Abou-Nigm (n 98) 5.
120Its initial framework was set out by CMI in 1933, while its adoption occurred on 10 May 1952 by
the Conference Internationale. See Francesco Berlingieri, International Maritime Conventions, Vol-
ume 2 (Informa Law from Routledge 2015) 197-9.

121 See Art.1(2) for the definition of arrest.
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with civil law practices, such as the right to arrest a sister ship.122 In fact, the notion
of arrest is not precisely the same in every country, however they encapsulate the
main features of the institution, namely its prejudgment remedy and security
nature.123
The application of international conventions often depends on the
incorporation process that each jurisdiction follows. Since the national lawmakers
often transpose foreign regulations by merely translating national terminology,124
they risk exacerbating international inconsistency and unpredictability against
shipowners. That said, the 1952 Arrest Convention did not have an easy ride in
achieving international uniformity as regards arrest procedure.
Art.6 of the 1952 Arrest Convention stipulates that: “the rules of procedure
relating to the arrest of a ship, to the application for obtaining the authority
referred to in Article 4, and all matters of procedure which the arrest may entail,
shall be governed by the law of the Contracting State in which the arrest was made
or applied for”. This provision complies with the private international law axiom
that the judicial procedure is regulated by the lex fori, implying that arrest is
contingent upon the national procedural provisions governing interim measures,125
the requirements and the procedure for release, and the accepted form or the
amount of security. Consequently, in order to avoid dissimilarity among
122Bowtle and McGuinness (n 66) 308.

123 Abou-Nigm (n 98) 6.
124Berlingieri, Berlingieri on arrest of ships (n 95) 16.
125 Abou-Nigm (n 98) 59.
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jurisdictions and abuse against the parties, this Article should be narrowly
construed, excluding from its sphere the conditions of the assessment of the
application for arrest by the court.
Some defections of the 1952 Arrest Convention were revisited and amended
with the 1999 International Convention on Arrest of Ships. 126 The new Convention,
albeit a lot similar to its precedent, is more accurate on certain matters. 127 For
instance, Art.3 of the 1999 Convention extends its benefits to all vessels within the
territorial jurisdiction of the Contracting Party regardless of flag, thereby enhancing
the aim of international unification. 128
ii. Security au lieu of Arrest
There are two situations where a security can be offered. The first one is
when the defendant enters a caveat (caution) against arrest, where a security is
given preventively, 129 and the second one is when the defendant provides an
acceptable form of security to the court for the release of the vessel, after it has
been arrested. 130
126 CMI assessing the initiative of the Assembly of IMO in 1984 to reexamine the 1952 Convention,
drafted a new one. For the history of the 1999 Convention see Berlingieri, International Maritime
Concentions (n 120) 274-280.

127Jackson (n 3) 396.
128Abou-Nigm (n 98) 51.
129CPR 61.7 (2).
130 Jackson (n 3) 427; See 1952 Arrest Convention, Art 3(3).
!22
Art.5 of the 1952 Convention provides that: “(1) The court or other
appropriate judicial authority within whose jurisdiction the ship has been arrested
shall permit the release of the ship upon sufficient bail or other security being
furnished… (2) In default of agreement between the parties as to the sufficiency of
the bail or other security the court or other appropriate judicial authority shall
determine the nature and amount thereof”, while Art.7 stipulates that “If the court
within whose jurisdiction the ship was arrested has no jurisdiction to decide upon
the merits, the bail or other security given in accordance with article 5 to procure
the release of the ship shall specifically provide that it is given as security for the
satisfaction of any judgement which may eventually be pronounced by a court
having jurisdiction so to decide…”.
Providing bail or security leads to the release of the arrested vessel, since the
former substitutes the latter, in terms of the subject matter against which the claim
is enforceable. By virtue of Art.5, for the conflicts relating to the title or between
co-owners, the court may grant permission to the possessor of the vessel having
given “sufficient bail or other security” to keep exploiting her commercially,
whereas the value of the guarantee is calculated in relation to the pecuniary benefits
from this activity. 131 In those cases, where the arrest is executed for a claim not
concerning a maritime lien and not against the shipowner, the latter may apply for
release of his vessel submitting a security, which nevertheless cannot enclose an
undertaking for payment from his part, even if the judgement on the merits is in
131Berlingieri, International Maritime Conventions (n 120) 258.
!23
favor of the maritime creditor. Consequently, the plaintiff should acquire a decision
against the owner, especially if the domestic law of the arresting State does not
confer liability upon shipowners for charterer’s wrongdoing, otherwise the plaintiff
may be liable for wrongful arrest. 132
Apart from “bail”, the Convention does not elaborate on the nature of “other
security”. Berlingieri133 concludes that it must secure and satisfy the claimant’s
rights on the asset, as if he would have executed any judgement on the merits
against the ship itself through its judicial sale. In other words, he must be able to
utilize the security in the forum where the arrest has taken place, and the defendant
must be creditworthy. As a result, the claimant has the right to deny any guarantee
not recognized and not amenable to enforcement proceedings within the country of
arrest or furnished by a person who seems financially incapable to entertain the
claim. In practice, the alternative options of bail accepted by courts and claimants
are the payment into court or the contractual guarantees, commonly supplied by
banking institutions or recognized P&I Clubs.134 The guarantee cannot be forfeited
upon request since it is conditional on the future adjudication of the case over the
merits. However, it offers a great advantage to the claimant, since his satisfaction is
subject neither to the financial situation of the defendant and the risk of his
insolvency nor to the priority ranking of his claim comparing to that of other
132Berlingieri, International Maritime Conventions (n 120) 232.; See Art.6(1) of the 1952 Arrest
Convention.
133Berlingieri, International Maritime Conventions (n 120) 259.
134 Jackson (n 3) 428.
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possibly existing creditors.135 Finally, despite the fact that the Convention does not
indicate the amount of security and there is a long debate whether it should reflect
the value of the vessel or the claim,136 the efficiency test will be assessed on the
basis of its capacity to cover at least the sum of the claim including several costs
and interests. 137
- Bail Bond138
The defendant, in order to release the vessel, can file a bail bond which
constitutes an engagement directed to the court instead of the plaintiff. 139 Under the
English Law practice, two sureties should agree to yield to the jurisdiction and
undertake the payment of the sum adjudicated, in case the former fails to execute it.
The sureties are answerable to a maximum amount reflected on the bond, up to
which they incur liability with their personal assets.140 Dr. Lushington in The
Kalamazoo141 supported that: “the bail represents the ship, and when a ship is once
released upon bail she is altogether released from the action”. Consequently, the
bail bond constitutes a means of extinction of the lien burdening the vessel, except
for under some circumstances, such as the lack of creditworthiness on behalf of the
135ibid.
136 See CPR 61.5(10).

137Mandaraka-Sheppard (n 5) 120. See The Moschanthy [1971] 1 Lloyd’s Rep 37 per Brandon J at
44.
138 See The Prinsengracht [1993] 1 Lloyd’s Rep 41, 44.
139Marsden., Gault. (n 49) 791.
141 [1851] 15 Jur. 885.
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sureties or the insufficiency of its amount. Normally, the bail is given for the value
of the vessel or the claim, however according to The Staffordshire142 decision, the
paralleling between ship and bail connotes that the latter is confined to the price of
the ship, provided that it is lower than the amount of bail.143 However, the bond
does not cover the claims of other maritime creditors or those arisen in respect of
different causes of action.144
Moreover, bail bond is usually provided only after the acknowledgement of
the service of the claim form in rem by the defendant. Although the bail can
explicitly state that it is issued “under protest”, meaning that its issuer maintains his
rights to question the court’s jurisdiction, pursuant to The Prinsengracht145 and The
Anna H146 decisions, a bail without reservations is a means for the person seeking
release and the sureties to submit to the jurisdiction in personam,147 thereby
becoming personally liable beyond the value of the vessel.
In spite of the fact that bail bond is no more a part of the English CPR Part 61
and PD 61,148 there are certain Common Law jurisdictions regulating this
institution. For example, r 9 of the Australian Admiralty Rules, r 777(3) of the New
Zealand High Court Rules, O 70 r 5(1)(b) of the Singapore Rules of Court and O 75
142 [1872] 1 Asp. M.L.C 365

143Jackson (n 3) 429.
144Thomas, Maritime Liens (n 10) 289-290.
145 [1993] 1 Lloyd’s Rep. 41. per Sheen J.
146 [1994] 1 Lloyd’s Rep. 287. per Clarke J.
147Jackson (n 3) 429-430.
148 Marsden, Gault (n 49) 792.
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r 6(1)(b) of the Hong Kong Rules of the High Court regulate bail given by
caveator.149 Likewise, r 54(1) of the Australian Admiralty Rules, O 70 r 15(1) of the
Singapore Rules of Court and O 75 r 16(1) of the Hong Kong Rules of the High
Court deal with the procedure of submitting bail bond, according to which its filing
can take place 24 hours after service of a notice of bail to the arrestor, including
details of the sureties, simultaneously with the filing of an affidavit as a proof of
proper service of notice.150 Under US Law, Rule E(5)(a)(b) of Federal Rules of
Civil Procedure provides the posting of special or general bond,151 while s 486(1)
and (2) of Federal Courts Rules recognize bond as an acceptable form of security in
Canada, which cannot be filed 24 hours prior to service of the notice of bail to the
claimant.
- Bank Guarantee
Nowadays, the person seeking release may supply the arrestor with a bank
guarantee, issued by a first class bank of the arresting State.152 This form of security
is contractual and the court intervenes only when the parties cannot find middle
ground to their dispute in respect of the form and the value of the guarantee. 153 All
the member States of the 1952 Arrest Convention accept bank guarantees from their
main national banks. Some of them do not deal with this matter individually,
149 Cremean (n 101) 238-9.

150ibid 251.
151Schoenbaum (n 103) 896 and 908.
152 Berlingieri, International Maritime Convention (n 120) 260.
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whereas in some other, such as Germany154 and Italy 155, their acceptance depends
on court discretion or claimant’s consent, as in Greece. 156 On the other end of the
spectrum, many non-signatory States of the 1952 Convention, such as Canada157,
recognize the guarantee from bank as an acceptable form of security.
In practice, the issuing bank undertakes to provide security for financial
remuneration by securing the creditor’s payment through the enforcement of a
forthcoming judgement. 158 Although it is referred as “guarantee”, judicial
guarantees resemble the notion of accessory “suretyship”. In other words, the
bank’s undertaking is not independent, but it exists conditionally on and
concurrently with the debtor’s. 159 The claimant, who is the beneficiary of the
guarantee, must submit to an award issued by an arbitral tribunal or to a judgement
confirming the defendant’s primary liability, in order to obtain payment from the
bank, which is not involved in the litigation.160 The bank will satisfy the creditor
after the production of the decision, either from a tribunal or a court, pursuant to the
terms of the guarantee set out by litigants. 161
154 Berlingieri, Berlingieri on Arrest of Ships (n 95) 341.

155ibid 342.
156ibid.
157Federal Courts Rules, S 486 (1)(a).

158Bertrams., Bank Guarantees In International Trade. 4Th, Rev. Ed (Kluwer Law International
2013) 43.
159 ibid 4.
160 ibid 56.
161 ibid. p.57.; see Jackson (n 3) 431.
!28
The shipowner, the charterer or their P&I Club will demand from the bank,
keeping their assets, to issue a bank guarantee according to their directions
(normally the terms that the litigants agreed or the competent court ordered). The
bank tends to protect its interest by requesting sufficient collateral, usually in the
form of counter-guarantee in its favor, 162 or proceeding directly to debiting the
client’s account.163 Moreover, the customer has a further obligation to pay
commission to the bank for the issuance of the security. 164
As the ship is moveable, it can be arrested anywhere in the world. Therefore,
the court of the arresting State, irrespective of being or not a signatory to the 1952
Convention, does not normally accept a guarantee from a foreign bank, nor does the
claimant for manifold reasons. Lack of reliability, ignorance of the financial
standing of the foreign institution, and difficulties for its execution, are the most
obvious. Nonetheless, in certain jurisdictions, it may be accepted provided that the
creditor consents. Subsequently, the party seeking release must obtain a guarantee
from a bank established in the country where the vessel is detained. The problem
arises when the defendant or his P&I Club does not possess assets in this territory
and faces the contingency of delay or failure to issue a bank guarantee. For this
reason, the defendant or his P&I ask their bank to arrange for a local first class bank
to issue the guarantee.165 The defendant’s bank has to pay all costs and issue a
162 ibid Bertrams118.

163 ibid 81.
164 ibid 122.
165 ibid 112.
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counter-guarantee in favor of the issuing bank, for which the former bank will be
indemnified by its client.166
If the defendant is American, then he will follow a different procedure. He
will make a direct request to a national bank of the arresting country for the
issuance of a guarantee. The foreign bank will execute his demand subject to an
engagement from an American bank guaranteeing its immediate reimburse in
default of the applicant.167 This “standby letter of credit” has a short term expiration
period of approximately one year. Given that legal proceedings may exceed such
period, the letter of credit usually incorporates an “Evergreen” clause, which
annually renews its validity. 168
iv. Conclusions
Arrest is the cornerstone for the enforcement of a maritime claim.
Nevertheless, it constitutes a severe threat against the shipowner, or the person
having interest on her, who would try to either avoid the detainment by providing a
guarantee before arrest, as a substitute for the property, or to furnish forthwith a
guarantee to release the already arrested vessel. As a matter of fact, release
compared with arrest is conditional on the discretion of the court or the
acquiescence of the claimant. 169
166ibid 169.
167ibid 16.
168Michael Marks Cohen,‘Restoring the Luster to the P & I Letter of Undertaking.’ (2011) 42(2) J.
Mar. L. & Com. 255, 256-7.

169 Meeson (n 6) 166-7.
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CMI took further steps to provide a Convention which promotes uniformity
of the arrest procedure, and attempts to strike a balance between the conflicting
interests of shipowners and their creditors. Indeed, on the one hand, the former used
to be abused from forum shopping practices from the part of the latter and the
uncertainty of the potential legal framework to which they would be imposed. It is
imperative for them that the ship be released and continue trading. On the other
hand, maritime creditors need to secure their rights, for the ship is a tangible asset
which can be sold or disappear, leaving them without award. However, as many
academics believe,170 the 1952 Arrest Convention and its successor, the 1999
Convention, have not accomplished their objective, namely to achieve universal
uniformity and satisfaction of both parties. Although they set the foundation for
certain similar rules relating to arrest, its procedural aspect is governed by the laws
of the forum arresti, thereby leading to differentiation concerning the procedure of
release and accordingly the form of guarantee approved by each court.
The most commonly accepted guarantees are the bail bond and the bank
guarantee. There are some marked differences between those two categories. First
of all, the bond constitutes a personal security given to the Court,171 whereas the
bank guarantee has contractual nature.172 Therefore, unlike bail bond, the
170 David Joseph Attard and Norman A Martínez Gutiérrez, Serving The Rule Of International Mar -
itime Law (Routledge 2010) 375.; see also Md. Rizwanul Islam, ‘The Arrest of Ship Conventions
1952 and 1999: Disappointment for Maritime Claimants.’(2007) 38 J. Mar L. & Com,. 75, 85.
171Meeson (n 6) 170.
!31
competent court on the merits does not have the authority to proceed to the
execution of the bank guarantee after a judgement in favor of the maritime creditor,
who has his own responsibility to enforce it against the bank.173 Secondly, the filing
of bail bond is usually possible, in common law countries after the
acknowledgement of the in rem claim form174 or generally results to submission of
the defendant to the jurisdiction of the court with all its legal consequences,175
while, regarding bank guarantee, the submission is not required beforehand or it
does not occur automatically upon providing.176
Another significant distinction between them is their effect as regards the
extinction of the lien encumbering the vessel. There is a conflict among several
authors concerning this topic. Thomas supports that bail, contractual guarantees and
payment into court lead to the destruction of the lien.177 Browne contends that
judicial guarantees, regardless of form, do not extinct liens.178 His reasoning is
based on the exceptions of The Kalamazoo ruling,179 which sets out the conditions
under which a claimant, after the supply of a bail bond, can effect re-arrest, and The
Daien Maru No.18180 case, where it was held that the claimant can rightfully arrest
173 ibid.
174 Jackson (n 3) 429.
175 See The Indian Grace. [1998] 1 Lloyd’s Rep 1; The Prinsengracht [1993] 1 Lloyd’s Rep. 41.
176 Jackson (n 3) 431.
178 Browne (n 57) 373.
179[1851] 15 Jur. 885.
180 [1986] 1 Lloyd’s Rep. 387 (Sing H.C.)
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the vessel, even if the court has adjudged on the substance of the matter.
Furthermore, he distinguished the payment to the court from securities, as the
former constitutes a fund which substitutes the ship, and its amount is deposited
directly to the court, thereby the ship becomes free from burdens. Guarantees, he
continues, merely ensure satisfaction of the claim, after adjudication. 181 It seems
that Jackson brings off a fair reconciliation of both theories. Based on The Ruta182
decision, where one of the maritime creditors had received an ineffective P&I letter
of undertaking from a, later insolvent, P&I Club in order to withdraw a caveat
against release, Jackson supports that the lien can be preserved only when the bail
does not reflect the value of the ship in full,183 whereas a contractual guarantee,
even if sufficient enough to entertain the claim, does not extinguish the lien, as its
function is solely to bar the claimant from re-arresting the same property for the
same cause of action. 184
Bail bond is acceptable nearly by all courts, nonetheless it is rigid and
therefore obsolete, since it does not correspond to the contemporary trade practices
and, in the same time, it depends on the financial condition of the guarantor and his
sureties.185 On the contrary, bank guarantee is a modern popular security enjoying
the same acceptance as bail bonds, inasmuch as the guarantor is a reliable national
181 Browne (n 57) 376.

182 [2000] 1Lloyd’s Rep. 359.
183 Jackson (n 3) 504.
184 ibid 505-6.
185 Meeson (n 6) 170.
!33
bank. However, both forms present drawbacks relating to the cost and the tardiness
of their issue, whereas shipowners and businessmen related to shipping underline
the need for the adoption of another form of security, overcoming the negative
aspects of the traditional ones.
!34
C HAPTER 3
P&I Insurance
P&I Clubs are organizations composed by shipowners, charterers and other
parties related to the Maritime sector, such as ship operators. Their primary role is
to insure the ex lege liability of their members which arises out of incidents during
the trading of an entered vessel. 186 Their concept, in contrast with common hull and
machinery insurance, is based on the mutuality of their members, in other words
each member is assured, but in the same time it contributes, through the annual
“calls”, to the insurance of the other members, acting in the same way as an insurer
does.187 The Club’s self-funding from its members, amalgamated with the essential
“pay to be paid” rule, according to which the liable person should have satisfied the
claim before being recompensed by the Club, leads to the conclusion that a P&I
assures mostly the indemnity, rather than the liability. 188 Each Club possesses its
own constitutional rules, regulating the member’s rights and duties regarding the
Club and its associates.189 Each year 190 the Club issues its Rule Book governing
various topics of P&I cover such as the conditions of a new member entry, the
186 Tetley (n 1) 591.

187Steven J Hazelwood, P & I Clubs, Law and Practice (4th edn, Lloyd’s of London Press 2000) 1.
188 Tetley (n 1) 592.
189 Hazelwood (n 187) 9-10; see 1906 Marine Insurance Act, s 85 for the definition of mutual insur -
ance.
190 Normally a policy year starts on 20 February per calendar year. See Michele White, ‘Arrest Of
Ships: Practical Aspects Of A P&I Club's Response’ (2003) 17(11) P&I Int 13.
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claim handling, the payment of premium, the cessation of membership and other
subjects the Club board needs to regulate. 191
The P&I Letter of Undertaking (LOU)
From their first conception on 1 May 1855 by P. Tindall,192 the Clubs have
evolved and adapted to the modern trends of Maritime Industry offering more
sophisticated services. Indeed, after World War II, the Clubs adopted a new method
for releasing the entered ships from arrest. Bail bonds lacked flexibility, and bank
guarantees were costly and sluggish. That being so, Clubs started furnishing direct
private securities to maritime creditors. 193
i. Conditions of their issuance.
Given that Clubs are mutual liability insurance associations, they condition
non-insurance related services to strict terms. Ordinarily, the Rule-books explicitly
state that the offering of an LOU is lied upon the discretion of the P&I
management 194 and they do not make a further reference on the topic. 195 The Clubs
have characterized that undertaking as an “act of friendship”, since they do not
wish to include it in their standard cover, 196 as it may lead to an excessive
191Hazelwood (n 187) 21.

192 ibid 6.
193 Cohen (n 168) 257.
194 Hazelwood (n 187) 256.
195White (n 190) 13; See Gard Rules 2016, Rule 88.
196 Hazelwood (n 187) 256.
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budgetary burden. According to the US case Mary J. Laundry, 197 provided that the
Club has no obligation to issue a security on behalf of its client, the latter is not
entitled to demand compensation for any pecuniary loss, he incurred because of the
Club’s denial to furnish an LOU. 198 In order to determine on that matter, the Club
may assess various factors, for example the creditworthiness of the member, its
fleet, the history of past claims and its general stance within the association, as
there is a category of shipowners changing Clubs regularly in order to pay less
premium. It is also required that the member has settled up all his due calls to enjoy
the P&I protection. 199
Moreover, the person requesting the provision of an LOU must be a member
of the Club and his ship must be entered. 200 In other words, the vessel must be
insured in the Club when the cause of action arises. In cases where the ship has
entered after the event raising shipowner’s liability but prior to arrest, the Club does
not bear responsibility and will not approve the issuance of an LOU.201
Subsequently, several problems may emerge in the case of cargo damage, when the
exact date of the incident cannot be verified, or in respect of containers whose
transport is usually long lasting and multi-modal, including partial water and inland
197 George A. Landry v The Steamship Mutual Underwriting Association Limited (“The Mary J.
Landry”) [1960] AMC 54.

198 Hazelwood (n 187) 256.
199 ibid 259.
200Hazelwood (n 187) 257; K.X. Li, ‘Acceptability of P&I club letter as security.’ (2000) Part 2
IJOSL 76, 78; see Steamship Mutual Rules 2015/2016, Rule 1 for the definition of an entered ship.
201 Hazelwood ibid.
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part. The Club will be responsible only if it can be proved that the damage occurred
at the sea leg.202 Similarly, it cannot issue LOUs for a non-entered sister-ship of an
existing entered vessel.203 Pursuant to common practice, when the vessel is trading
under a charterparty and is detained for a claim against the charterer, the shipowner,
through his club, provides the guarantee, without affecting the apportionment of
liabilities as the parties agreed in the charterparty clauses.204
In addition, a Club cannot accept to provide an LOU for a risk that is not
included to the member’s coverage. Generally, the risks are set out in each Club’s
Rule-book and the terms of entry, 205 the most common of which are claims arising
out of carriage of goods under Hague-Visby rules, personal injury or death of
passengers under the 1974 Athens Convention, environmental liability under the
International Convention on Civil Liability for Oil Pollution Damage, and salvage
claims for special compensation under the 1989 Salvage Convention. 206 Clubs
normally require their members’ compliance with international regulations and the
ISM Code, as well as the maintenance of the vessel’s classification. 207 Therefore,
they are critical of deliberate delinquencies by the member; for instance, when the
latter fraudulently neglects its duty of seaworthiness, or when he delivers the goods
202 White (n 190) 13-14.

203 Li (n 200) 78.
204 Hazelwood (n 187) 257.
205Li (n 200) 78.
206Baatz (n 29) 459.
207 White (n 190) 14.
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without the presentation of bill of lading, or the master of his ship signs an
inaccurate clean bill of lading against a Letter of Indemnity.208
Furthermore, the Club still offers security for liability arisen out of a non-
covered casualty, provided that the member asking has previously offered counter-
security.209 A common illustration is when, for a collision-related claim, where the
P&I only covers one fourth of the damage, an LOU is provided immediately,
covering the whole amount claimed, 210 under the precondition that the
underwriters, having insured the rest three fourths of the collision liability, would
have provided a counter security to the Club for their proportion.211 Generally, the
member having obtained an LOU for non-assured risk may be obliged to
compensate the Club in order for the latter to recover any outlay suffered.
Alternatively, he will have to pay a commission surcharge of 1% of the total claim
value for that service. 212 The Club may also demand a counter security normally in
a form of bank guarantee, if the deductible, in other words the percentage of the
liability for which the assured is responsible, is high. 213
Besides, the Club does not provide anticipatory guarantees for non-
established claims or for the prevention of a potential future liability. 214 The LOU is
208 Hazelwood (n 157) 257-8.

209 White (n 190) 14.
210Marsden., Gault. (n 49) 791-2.
211 Hazelwood (n 187) 259.
212 ibid 258.
213 ibid 259.
214 Li (n 200) 78.
!39
not tantamount to an undertaking on the Club’s part to reimburse the member for
the claim, or to acceptance of its liability. It should be merely treated as a security
serving for the rapid release of the arrested vessel.215
In conclusion, it is imperative that the shipowner or the charterer meet those
requirements, so as to be allowed to receive an LOU. Otherwise, they would be
obliged to look for an alternative form of guarantee with all the consequences,
advantages, and disadvantages discussed in the previous Chapter; or they would
have to pay commission for a service that, under different circumstances, would be
free of charge.
ii. Advantages for the Shipowner
Shipowners gain many advantages by choosing to supply the plaintiff with an
LOU for release of their arrested asset or prevention of arresting. In The Oakwell,216
the English Court underlined many positive aspects of LOUs. According to Walker
J, they are “speedy security in a negotiated amount”, they do not require “actual
payment of money or provision of a bank guarantee”, they include “a negotiated
choice of jurisdiction”, they prevent the Court intervention and they do not worsen
the claimant’s position, so that it would be more favorable for the latter to proceed
to arrest. However, their supremacy over other forms of security, from the
shipowners’ perspective, should be examined in terms of convenience and cost.
215 Hazelwood (n 187) 259.

216 [1999] 1 Lloyd’s Rep 249. at 253.
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First, if the member complies with the P&I rules, then the Club can issue an
LOU free of charge. This is a major difference from bank guarantees, which are
subject to various additional costs, such as soaring commission fees, if the amount
of the claim is high, amendment fees and other possible charges. 217 It is reported
that LOUs can spare, in favor of shipowners, the excessive amount of US$ 75
million in bank guarantee charges per year.218
Additionally, the LOU is a rapid method for the rescission of arrest.219
Commonly, each Club possesses its own standard form of LOU, which can be
issued rather shortly after the member’s request,220 and can be furnished even
during weekends, bank and national holidays. Indeed, the LOU is a contractual
security, therefore it is more flexible than the bail bond,221 which is regulated by
Court rules and requires the undertaking of personal liability from the sureties, and
certain time conditions for its submission to the court. Compared to bank
guarantees, also having contractual nature, LOUs are issued faster, since they
usually require neither the arrangement of counter guarantee, save in special
occasions, nor the member to have assets in a particular jurisdiction. The Club has
the power to provide an LOU globally via their associated correspondents in all
217 White (n 190) 15.

218 Li (n 200) 77.
219 ibid.
220 Hazelwood (n 187) 250.
221 Cohen (n 168) 257
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large ports.222 In The “Vainqueur José”, 223 it was held that correspondents do not
act as agents on behalf of the Club, therefore they cannot provide an LOU without
the Club’s approval. 224 Typically, the relative response is given promptly via
telephone, fax or email exchanges. 225
When their vessel stays arrested in a port, shipowners are threatened from
immense pecuniary losses and are burdened with liabilities against third parties.
When the vessel is traded under a time charterparty, then it may go off-hire after the
arrest. There is no uniformity among the off-hire clauses226 which depend on the
type of the standard time charterparty or the agreement of the parties, who, by
virtue of the principle of freedom of contracts, can amend any clause as they wish.
The effect of the Clause is that the charterer ceases to pay the hire as long as the
ship is under arrest and if the arrest period is unreasonably excessive, the charterer
may be entitled, under a clause, to cancelation of the charter. Some other clauses
regulate that the payment of bunkers,227 other functional expenses and crew wages
burden the shipowner during the off-hire period.228 Under voyage charterparties, the
charterer is not generally obliged to pay for laytime and demurrage, which are
222 Hazelwood (n 187) 15.

223 [1979] 1 Lloyd’s Rep 557.
224 Hazelwood (n187) 16.
225 Li (n 200) 77.
226 See NYPE 2015 cl.17. lines 374-375.; SHELLTIME 4, cl 21, lines 360-368.
227See NYPE 2015 cl.17, lines 384-385: “All bunkers used by the Vessel while off-hire shall be for
the Owners’ account.”
228D. R. Thomas, Legal Issues Relating To Time Charterparties (Informa 2008).137
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suspended, since there is a delay caused by the shipowner’s fault, depriving him
from the commercial purpose of the charter.229 Finally, under demise charterparties,
the charterer is entitled to indemnity from the shipowners, including all losses,
damages and various costs suffered because of the detainment, involving the hire
paid during that period. 230
The shipping market is extremely volatile and any delay may be harmful to
shipowner benefits. The holding of a vessel in a port may lead to further delays, for
example because of the missing of a tidal and the inability to enter in the next
nominated port. Subsequently, the following fixture may be lost, as the vessel may
not be delivered to the new charterers ready to load cargo within the agreed in the
charterparty lay-can, thereby entitling them to cancel the contract. 231 As a result, in
periods of economic recession, the shipowner may not find a substitute charter and
he may be obliged to trade on the spot market with higher risks of unemployment
or freight fluctuations. Finally, port charges, bunkers, master and crew salaries are
to be borne by the owners throughout the vessel’s anchoring.
iii. Acceptability
There is not a uniform international regime governing the acceptance of
LOUs. Roughly, there are three major categories of States with respect to their
229Julian Cooke, Voyage Charters (4t edn, Informa Law from Routledge 2014) 446-7; John Wilson,
Carriage Of Goods By Sea (7th edn, Pearson/Longman 2010) 74.

230see BARECON 2001, cl.17(b), lines 577-586.; Davis M. (2005). Bareboat Charters. 2nd ed.
London:LLP. p.99.
231 see NYPE 2015, cl.3, Laydays/Cancelling.
!43
approach towards P&I LOU. More precisely, there are jurisdictions holding that the
rejection of an LOU by the maritime creditor is unfair and malicious. 232 England,
Hong Kong, Norway, Australia, Saudi Arabia, Cyprus, Gabon, and Djibouti are
among them.233 LOUs are commonly accepted in Italy,234 Canada (despite the
opposite provision in the Federal Courts Rules)235 Ireland and Poland.236 The
Alna237 case in France confirmed that the arrest must be lifted upon the providing of
an LOU, which should not be rejected by the claimant for a bank guarantee.238 In
the Netherlands, The Elloba239 decision stipulated that an LOU constitutes adequate
security provided that it secures at least 99.9% of the claim, therefore the claimant
should not insist on a bank guarantee.240 The New Zealand case, The Pacific
Charger,241 where the court permitted the lift of arrest after the offering of an LOU,
was used as reasoning to other cases in common law jurisdictions. Indeed, in The
Arcadia Spirit, 242 the High Court of Singapore approved the release of the vessel
with a Club Letter, although the creditor has contented its insufficiency due to the
232 Li (n 200) 81.

233 ibid.
234Shiparrested.com Members, Ship Arrests in Practice (10th edn. Shiparrestedcom S.L. 2016) 160.
235 ibid. p.47.
236 Berlingieri, Berlingieri on Arrest of Ships (n 95) 342 and 344.
237 6 August 1998, case no 98003551.
238 Li (n 200) 82.
239 Reported in Gard News, No 88, p.8.
240 Hazelwood.(n 187) 248; and Li (n 200) 82.
241 [1988] 3 Malayan Law Journal. 263.
242 [1988] 3 M.J.L. 262.
!44
fact that the Club, established in Japan, did not possess assets in the country, while
in the South African cases, Lucky River v. Kalamos 243 and Bow Neptun,244 the court
reached a similar conclusion regarding the LOU’s efficiency.245
Furthermore, the acceptability of Club Letters in certain jurisdictions depends
on the court’s or the claimant’s consent. In Belgium, Greece, Germany, Latvia,
Slovenia, Spain, the Caribbean,246 India, 247 Turkey248 and the US,249 Courts do not
accept LOUs unless the claimant has given prior consent. In China, Courts were not
familiar with P&I LOUs until recently. Nonetheless, the current regime became
more favorable and parties now have the right to agree on the type of security they
prefer, including P&I Letters. 250 Nigeria, Haiti, Portugal,251 Egypt 252 and Brazil253,
are some of the States where P&I Letters are not acceptable at all.
In a nutshell, there is uncertainty as to whether the vessel would be arrested in
a country whose Courts recognize LOUs as an acceptable form of security. Said
243Cape Provincial Division, Case No. AC68/97, 8 May 1997, Law Letter, Garliche & Bousfield
Inc., September 1998.
244 Case No. A62/2005 (DCLD).
245 Hazelwood (n 187) 248; and Li (n 200) 83.
246 Berlingieri, Berlingieri on Arrest of Ships (n 95) 339 to 346.
247Shiparrested.com Members (n 234) 146.
248 ibid. 314.
249 ibid. 328.
250K. X Li and C. W. M Ingram, Maritime Law And Policy In China (Cavendish 2002) 33.
251Berlingieri, Berlingieri on Arrest of Ships (n 95) 342-4.
252Shiparrested.com Members (n 234) 92.
253 ibid 33.
!45
uncertainty may give rise to costly arrest-related delays and several charges for the
finding of an alternative security form.
iv. Claimant’s perspective
In some jurisdictions, a Club Letter requires the claimant’s consent. The
question arising is why a claimant may refuse an LOU. Usually, the advantages of
an LOU to shipowners constitute significant disadvantages for claimants and vice-
versa.
First of all, LOUs are a rather new form of contractual security, which some
jurisdictions are not familiar with. Besides, both arrest conventions do not
specifically mention that form of guarantee. Therefore, some claimants tend to be
skeptical against LOUs, especially due to the probable lack of assets of the issuing
Club in the forum arresti.254 As we previously discussed, the security substitutes the
ship until the final adjudication of the substantive claim, thus underlying the utmost
importance of the claimant’s feeling that his rights over the property are certainly
secured. Indeed, in case of Club insolvency, such as in The Ruta,255 the Club Letter
becomes valueless for the beneficiary.256
However, in case the Club forms one of the thirteen members of the
“International Group” of P&I Clubs, the Club’s solvency is undisputed. The Group,
created in the context of pooling arrangements in order to spread the risk of
254 Hazelwood (n 187) 248.

255 [2000] 1 Lloyd’s Rep 359.
256 Baatz (n 29) 468.
!46
immense claims among the Clubs and their members, covers approximately 90% of
the world fleet.257 Moreover, in order to face the contingency of future larger
liability risks, the Group established excess reinsurance cover, the General Excess
Loss Reinsurance program (GXL) and the Hydra258 reinsurance. For the Policy
Year 2016/17, pool retention is US$ 80 million to cover extraordinary claims, while
the Pool Reinsurance structure for each Club for claims shared with the other
participant Clubs, includes only two layers from February 2016, more specifically,
the first layer begins for claim in excess of US$ 10 million to 45 million and the
second for those soar at US$ 45 to 80 million. 259
Secondly, by virtue of the “Prinsengracht”,260 LOUs, as contractual
securities opposing to bail bonds, have the advantage of not requiring the
shipowner to appear during the action, thus becoming personally liable. This
authority delivers significant advantages to shipowners when they furnish an LOU
for the preclusion of arrest, but it may have negative impact on the maritime
creditor. However, the parties in negotiating the content of the Letter can regulate
this matter. In The Berny,261 it was specified that the Club having a relationship of
agency with the shipowner, has the authority to appoint lawyers to be served with
257 Hazelwood (n 187) 365-366.

258 The International Group’s reinsurer, based in Bermuda.
259IGP&I Annaul Review 2015/2016. (2016) <https://www.britanniapandi.com/assets/Uploads/doc -
uments/IGPI-Annual-Review-15-16-Online-v4.pdf> accessed 30 July 2016, 10.
260[1993] 1 Lloyd’s Rep 41.
261 [1977] 2 Lloyd’s Rep 533.
!47
the claim form and appear to the court on behalf of its member.262 Nonetheless, in
The Oakwell,263 the solicitor did not accept the service because the ship related to
the claim, after her release with a Club Letter, had changed ownership. The court
ruled that the Club has the obligation to acknowledge the service, otherwise its
denial amounts to breaching the LOU. The court focusing on the manifold
advantages of an LOU to the seaborne trade, concluded that: “it is inherent in the
claimant’s agreement not to invoke the process of the Court that the security should
place the claimants in no less favorable a position than if they had begun their
action in rem and arrested the ship”. 264
Furthermore, Art.7 of the 1952 Arrest Convention establishes jurisdiction to a
forum upon the arrest of the property. Nevertheless, within the EU, where the
Brussels I Regulation and the Lugano Convention apply, Art.71 thereof requires the
ship to be arrested in order for the courts to acquire jurisdiction from the 1952
Arrest Convention.265 Therefore, the preemptive providing of an LOU under threat
of arrest does not grand jurisdiction. 266 In that case, the creditor can secure its claim
by agreeing the submission to an exclusive jurisdiction, normally the English,
where the Admiralty jurisdiction is founded just upon the service of the writ in
rem.267 Finally, despite the fact that the Club’s lawyer has assured the claimant’s
262 Hazelwood (n 187) 262.

263[1999] 1 Lloyd’s Rep 249.
264 Baatz. (n 29) 468.
265Mandaraka-Sheppard. (n 5) 217.
266Marsden., Gault (n 49) 53-54.
267 ibid.
!48
lawyer for the providing of the LOU, in the end the Club may not approve its
issuing, resulting to the loss of the claimant’s chance to arrest the ship and enforce
his rights. For that reason, the claimant, 48 hours after the arrangements, must start
the Admiralty procedures, threatening the shipowner.268
However, the claimant’s refusal to accept an LOU may not always be justified
or bona fide. The “Kallang”269 illustrates that situation. A bill of lading was signed
by the Master, explicitly incorporating the English arbitration clause of the
charterparty. The cargo was delivered to Dakar, Senegal, where the cargo
underwriters (AXA Senegal) found it defective and requested security from the
carrier (Kallang Shipping). The shipowners’ Club (the American Club) accepted to
offer an LOU on standard Club terms for the amount claimed. However, AXA and
the cargo owners declined it as insufficient and arrested the vessel for 13 days,
insisting on the providing of a bank guarantee from a local bank, stipulating that the
Senegalese courts are competent on the merits to resolve the dispute in respect of
the cargo.270 Cooke J ordered an anti-suit injunction 271 against AXA and the
shipowners sued the cargo owners claiming damages for breach of contract and
268 Cohen (n 168) 265-6.

269[2008] EWHC 2761
270 James Crawford, Vaughan Lowe, (2009). The British Year Book of International Law 2008. Ox -
ford: Oxford University Press, (Oxford University Press 2009, 559

271 See Case C-159/02, Gregory Paul Turner v Felix Fareed Ismail Grovit and others [2004] ECR
I-3565, where the CJEU banned anti-suit injunctions in cases where the Brussels Convention ap-
plies.
!49
AXA in tort for causing breach of the arbitration clause. 272 The English Court
examining the facts and the involvement of AXA to numerous substantially same
cases, such as “The Dunden”, 273 concluded that AXA, by demanding a Senegalese
bank guarantee, tried to override and frustrate the arbitration agreement compelling
Senegalese jurisdiction, therefore it awarded damages as remedy for the losses
incurred to shipowners during the ship’s detainment. 274
v. Wording Issues
Each Club has drafted its particular LOU. Although, there is no uniformity to
their wording, there are some characteristic aspects always included therein. Firstly,
the Club Letter must indicate the beneficiary, the secured amount, the applicable
law and the jurisdiction over the merits. Secondly, it must state the claimant’s
relinquishment from arresting the vessel or any sister-ship of the same owner, and
subsequently, the Club’s undertaking to pay the claim, including interests and costs,
if the final judgement, after the exhaustion of all appeals, is in favor of the
claimant. 275 However, the Club does not bear liability for any excessive adjudged
amount over that referred in the LOU,276 nor does the contract’s enunciation
establish primary liability of the Club without a judgement or arbitral award
272 Hazelwood (n 187) 249.

273 [2009] 1 Lloyd’s Rep 145.
274 Hazelwood (n 187) 249; see Arbitration Act 1996, s.11
275 Cohen (n 168) 259.
276 Li. (n 200) 79.
!50
declaring its member liable.277 Moreover, other features of the LOU is the Club’s
undertaking to appear to the proceedings after the service of the claim form and the
declaration of the binding nature of the Letter regardless of the vessel’s sale or
loss.278 As held in The Oakwell,279 the LOU must expressly embody an
acknowledgement that the claimant’s position remains the same as if he had
arrested the asset and had obtained a bail bond to accept release. 280
Furthermore, the lawyers of the parties are free to negotiate the terms
governing the Club Letter in order to balance and satisfy both interests.281 They can
arrange the competent court on the merits, the applicable law to their substantial
dispute, whether they resolve their dispute through arbitration or they renounce the
arbitration agreement incorporated in the contract of carriage.282 The parties can
also agree the LOU to cover the costs of the arbitral proceedings and lawyers’
fee.283 In The Quest,284 the court had to decide whether the arbitration clauses in
four bills of lading, issued under charterparty, were varied by the arbitration clause
contained in a P&I LOU. Males J., invoking “business common sense”, held that
the latter clause is “perfectly capable of operating as a new and free standing
277 See The Rays [2005] 2 Lloyds’ Rep 479.; Hazelwood (n 187) 254.
278 Cohen (n 168) 260.
279 [1999] 1 Lloyd’s Rep 249.
280 Cohen (n 168) 260.
281 Hazelwood (n 187) 250.
282 ibid.
283 Cohen (n 168) 260.
284 [2014] EWHC 2654 (Comm).
!51
agreement”. 285 Additionally, in The Pia Vesta,286 the court decided that an exclusive
jurisdiction agreement included in the LOU, can replace the relevant clause in the
contract of carriage. 287
In addition, The Rio Assu (No.2)288 and The Spirit of Independence289
highlight certain problematics in respect of the Club Letter’s biding nature. The
former concerned the providing of an LOU on behalf of a member that had ceased
to exist when the competent court delivered its judgement on the merits. The Club
denied to satisfy its undertaking to pay the claimants, since the judgement had not
concerned the initial defendants, on behalf of whom the Letter had been issued, but,
instead, their successors. Clarke J, concluded in favor of the claimants, underlining
that the LOU must have the same effects as a bail and, subsequently, the Court of
Appeal added that the LOU must be enforceable in any case where the claimants
have received a judgement approving their claim.290 These dicta enforced the
position of the LOU, since the claimant can be satisfied by the Club in case of the
defendant’s insolvency after furnishing the security, and promoted the purposive
285 Ioannis Avgoustis , ‘The 'battle' of the clashing Arbitration Clauses:Does an Arbitration Clause in
a P&I Club's Letter of Undertaking override the Arbitration Agreement in the Charterparty?’ (2014)
20 JIML 399. 401

286 [1984] 1Lloyd’s Rep 169.
287 Hazelwood. (n187).251.
288 [1999] 1 Lloyd’s Rep 115.
289[1999] 1 Lloyd’s Rep 43.
290 Hazelwood. (n 187) 252.
!52
construction of its wording according to the “factual matrix” of each situation.291
The Spirit of Independence is related to an arrest for the satisfaction of a claim
against the bareboat charterers. However, since the security was furnished by the
vessel’s shipowner and the plaintiff had brought no action against the shipowner
and the ship, his Club’s Letter was not enforceable. This case emphasizes that the
claimant must be mindful of the person providing the security.
Moreover, the courts do not support the invocation of implied terms, as in The
Tutova.292 The Club requested the return of the LOU after four years since the
providing to an Italian claimant for the prevention of arrest, because the Italian
proceedings on the merits were progressing tardily, nonetheless it was never
returned. Subsequently, after two additional years, the final judgement was
delivered and the claimant tried to enforce the LOU. The Club sustained that the
plaintiffs had circumvented two implied terms of the contract, namely the
obligation to notify the club of the initiation, the advancement and the outcome of
the action, and the proper acquirement of a judgement executing the Club Letter.
The Court rejected the argument on the grounds that the LOU is a contract
negotiated between specialized lawyers; the parties could therefore explicitly
include the terms binding them, especially when English is not their native
language. 293
291 ibid 253.

292 [2007] 1 Lloyd’s Rep 104.
293 Hazelwood. (n 187). 264.
!53
Last but not least, despite the private nature of the LOU, the Court has gained
some powers over it. Generally, the Courts can intervene neither to the terms of the
Club Letter, nor to its enforcement, since, according to the doctrine of privity of
contracts, only the claimant is entitled to do so. 294 However, the Courts possess the
power to amend the wording in order “to protect the legitimate rights of the
defendants”,295 when shipowners under the threat of arrest assent to inequitable
Club Letter’s conditions.296 The competent Court has the authority to order the
security’s cancelation or surrender. Indeed, the Court in The Vasso297 found that the
claimants invoked the Admiralty jurisdiction, in order to procure a security for an
award in arbitration proceedings. Their behavior constituted violation of the CPR,
because the security was furnished for the substitution of the asset pending the
litigation on the merits. Consequently, the Court did not allow arrest and ordered
the release of the LOU already given preventively. 298
- Conclusion
The Club Letter is an instrument allowing shipowners to escape the onerous
state of arrest. Its concept was conceived to achieve rapid and cost free release,
overcoming the formalities, expenses and delays of the traditional securities.
294 ibid 247.

295 The Piya Bhum [1994] 1 S.L.R. 546.
296 Li (n 200) 80.
297[1984] 1 Lloyd’s Rep 235.
298 Hazelwood (n 187) 261.
!54
However, as theory differs from practice, many complexities came into surface
creating skepticism about its efficiency.
The commercial purpose of the LOU is to create equal terms between the
conflicting parties and avoid the drama related to ship’s immobilization. From the
shipowner’s perspective, the advantages of LOUs in terms of convenience and cost
are obvious. However, there is always the risk of rejection from the Courts of some
jurisdiction, and especially from the claimant, who feels that the owner tries to
deceive him.
Undeniably, there is much case law demonstrating the efficacy and reliability
of that controversial security. There is a tendency from the English Courts to
strengthen the position of LOUs and promote their use. Claimants’ difficulties and
doubts seem to be encountered with some more care from their lawyer’s part to the
terms agreed and the wording. LOUs are the product of negotiations between the
parties. As the arresting party has greater bargaining power against shipowners
threatened by arrest, the former can assert advantageous terms in their favor or at
least terms securing their interests. The contractual nature of LOUs renders the
Club’s location irrelevant in respect of its enforcement, since the plaintiff having
received a final judgement recognizing the other parties’ liability can enforce it
straightly in proceedings against the Club, in the same way as ordinary contracts.299
It is imperative that the controversy arising out of the use of LOUs be
eliminated. With shipowners being protected against unnecessary financial losses,
299 Li (n 200) 81.
!55
and claimants effectively securing their claim, even before their petition for arrest,
both parties efficiently avoid the drama of arrest.
!56
F INDINGS
Arrest procedure is inseparably connected with the enforcement of
maritime claims. Everyday, numerous ships are arrested worldwide. The
importance of this mechanism derives from the ship’s nature. Since she moves
continuously, entering in ports for a limited time period and then departs promptly
to pursue her arranged voyages, the claimant may not have but only one chance to
secure his rights over the property. In order not to jeopardize his right, when the
opportunity is present, he arrests immediately the vessel, until the providing of
security, substituting the asset pending the final adjudication of the substantial
liability, otherwise the ship will remain detained until being sold by the Court.
The procedural rules, in the majority of jurisdictions, and the 1952
Convention, recognize bail bond as an appropriate judicial guarantee leading to
release of the ship and the securing of the maritime claim. However, the lack of
flexibility and the undertaking of personal liability from the sureties led to its
characterization as old-fashioned and incompatible with the contemporary maritime
market. The parties turned their attention to contractual securities having similar
effects as bonds. Among them, bank guarantees are considered the most reliable,
since a first-class bank of the country, where the arrest occurred and possibly the
litigation on the merits will follow, undertakes to pay the claimant upon the
delivery of a final judgement in his favor. An other advantage of them and all
contractual securities, is that they do not require shipowner’s submission to the
jurisdiction. However, they have serious flaws making them less appealing to
!57
shipowners and their Clubs. The fees for their issuance and the need of a counter-
guarantee, the time wasted for their bank to make arrangements with the foreign
bank, causing delays, detrimental for the interests of shipowners who suffer
significant loses during the immobilization.
The Clubs recognizing the needs of their members introduced a new form
of contractual security, the LOU. Its use is relatively new and gathers contradictory
comments. On the one hand, shipowners are advantaged since they can either
prevent arrest or release their vessel fast and inexpensively, subject to the
discretionary approval of the Club. On the other hand, claimants reserve from
accept that form of security, insisting on bank guarantees. Indeed, under certain
circumstances the maritime creditor may become exposed to the danger of not
securing his claim. This contingency accrues mainly because of shortfalls or
ambiguities in the wording of the contract. Nonetheless, the case law grants the
same advantages to claimants, as to shipowners and place the former to same
position as if he had been secured with a bail bond. In any case, those problems of
construction can be solved through negotiations between the parties, and more
appropriately between their lawyers, as well as the incorporation of clauses
regulating the issues for which the parties want to feel ensured. Generally, both
parties enjoy the blatant advantages of LOU in terms of convenience and
effectiveness, even if the claimant needs to pay more attention to its terms and
conditions of enforcement. Of course, Club Letters, as every contract, cannot be
absolutely flawless and may hide pitfalls for the litigants, for example shipowners
!58
may agree to unjust terms to save money and time, while the claimant may accept
security from the shipowner for a claim against the charterer without being able to
execute it. The maritime community awaits the Courts to resolve the problems
impending the acceptability of LOU.
Despite the fact that English Courts strengthen the position of LOU,
especially after The Atlantik Confidence,300 where the Court of Appeal held that a
limitation fund can be established by a Club Letter, 301 there are jurisdiction not
accepting LOU as sufficient security or leaving their acceptance to the claimant’s
agreement. This situation creates uncertainty and unpredictability for the effect of
arrest to shipowners, since he would prefer to settle the situation with an LOU than
with traditional guarantees.
In addition, there is further work to be done in achieving the universal
acceptability of the Club Letter. One solution would be the Clubs to promote
uniformity to their letter wording, attempting to balance the clashing interests and
rights of the parties, thereby guaranteeing the clarity of terms and their
efficiency.302 The appropriate priority must be given to the commercial purposes of
the contract, which are not to deceive the claimant but to constitute a simple and
rapid mechanism for the prevention or lifting of arrest. Besides, the International
Club with its financial power, derived from the pooling and reinsurance
300 [2014] 1 Lloyd’s Rep 586.
301Thomas, D. (2014). Analysis and Comment:Establish limitation fund by producing a guarantee.
JIML, 20(2), p.80.

302 See Li (n 200)86.
!59
agreements, can reinforce its standing through the correspondents and brokers at
least at the important ports globally, increasing the trust of people involved to
seaborne trade towards itself and subsequently to its undertakings. 303
Alternatively, the potential application of the 1999 Convention could
reinforce the LOU’s status. Art. 4(1) of the new Convention stipulates that arrest is
ceased upon the providing of sufficient security in a satisfactory form, without
referring to bail as its predecessor, 304 reinforcing contractual securities. In The
Travaux Préparatoires, the Greek mission proposed that Art.4 specifically refer to
these securities, including the LOU. The other missions rejected that suggestion,
complaining that the form must be decided solely by the Courts.305 However, Abou-
Nigm, examining arrest from the sphere of private international law, concluded that
“in present times, this is a fertile field for unification of procedural law”,306 and
supported the accession of the EU in the 1999 Convention.307 According to her
view, this progress would promote judicial cooperation of the Courts of Member
States and the harmonization of the law regulating ship arrest.308 Besides, it cannot
be ruled out that the CJEU, in the context of a future preliminary question ruling,
construes the adopted Convention in favor of Club Letters, leading to their
acceptability by all Member-States, on the basis of the Four Freedoms.
303 ibid.
304 Berlingieri. Berlingieri on Arrest Of Ships (n 95) 362.
305ibid 700.
306 Abou-Nigm (n 98) 163.
307 ibid 254.
308 ibid.
!60
Nevertheless, this issue is currently mere speculation. 309
Finally, a clause could be incorporated to contracts like charterparties, bills
of lading under charterparties, and Lloyd’s Standard Form Of Salvage Agreement,
having the same logic as the Inter-Club Agreement, whereby the parties could agree
beforehand that in case of shipowner’s due liability, the maritime creditor au lieu of
arrest would receive an LOU. Such clause could constitute an explicit deliberate
relinquishment of the claimant’s right to arrest, and bypass the Court’s intervention.
However, if it were for the member to unilaterally agree its issuance, that would
lead to a vicious circle, whereby the Club’s liability would increase with
consequences mirrored to members’ premiums or to requirements of counter
security. Hence, the issuing of LOUs depends on the Club’s discretion and so
should the clause. Alternatively, the parties could include a bank guarantee
provision. This whole scenario could cause problems to the establishment of
jurisdiction over the merits, because the forum arresti special jurisdiction basis of
the Arrest Conventions would not be invoked. Thus, the parties should include an
exclusive jurisdiction or arbitration clause. Accordingly, shipowners would avoid
arrest and, in the same time, claimants could pursue their claim and claim damages
for breach of contract, if the former does not comply with those terms.
309AnthonyArnull and Derrick Wyatt, Wyatt And Dashwood's European Union Law (6th ed. Sweet
& Maxwell). 566; See C-60/00 Carpenter [2002] [39]
!61
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The P & I Letters of Undertaking

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The P & I Letters of Undertaking

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The P&I Club letters of undertaking as a modern form of

security for the release of arrested ships

Pr. Ntovas Alexandros

Academic year: 2015- 2016

Number of Words: 14,658

Awarded Mark: 75 (Distinction)

AJA Administration of Justice Act

CJEU Court of Justice of the European Union

CJJA Civil Jurisdiction and Judgements Act

CPR 1998 Civil Procedure Rules

LOU P&I Letter of Undertaking

P&I Protection and Indemnity

SCA 1981 Senior Courts Act

The arrest of ships is indispensable to maritime creditors in order to enforce

fact that, as far as procedure is concerned, arrest conventions do not provide

uniformity in Civil Procedure Rules.

release of arrested vessels through the providing of guarantees, emphasizing the

bank guarantees. Through comparatively analyzing the latter and approaching

contemporary issues of equivalence and efficiency affecting LOU acceptability,

conclusions will be drawn in respect of whether their establishment and approval is

Shipowners need to avoid arrest or release their arrested vessel as fast as

acceptability of LOUs from maritime creditors and several jurisdictions.

are analyzed and compared. Emphasis is placed to their weaknesses vis-à-vis

shipowners’ pecuniary interests and convenience, so as to support the need of an

potential shortcomings, and examines whether or not their standing should be

for the amelioration of the LOU’s status.

i. The development of the Admiralty Court in England

The uniqueness of maritime law, which distinguishes it from the laws

governing other commercial law sectors, is mirrored to its historical background.

international conventions that improve its efficiency by increasing its uniformity.2

maritime contracts and practices.

Admiralty is a distinct body of law governing matters of maritime character,

ranging from shipping activities and navigation, to transportation of goods and

of common notions and the most effective administration of justice. 4 Subsequently,

the Admiralty Court procedure, albeit founded on civilian principles, was

finally completed by the 1956 Administration of Justice Act (AJA), implementing

Ships (Arrest Convention).5

jurisdiction is regulated by sections 20-24. In addition, two sets of rules, Parts 58

proceedings, followed by their relative Practice Directions (PD 58 and 61).7

ii. Special Admiralty Concepts

weapon” offering an interim remedy. 8

- The action in rem

Admiralty jurisdiction can be exercised either in personam or in rem.9 The

The vessel is regarded as a personified defendant,13 however if her owner or

court or acknowledging service of the writ in rem, the action simultaneously

(4):“.... may be brought ... against that ship …”.

vol VI) p.lxxi; Thomas.(n 10) 7-8.

inadequate to satisfy the claim.16 The procedural theory is predicated on the

Admiralty in rem jurisdiction remained unaffected from the writs of prohibition,18

was supported in The Beldis. 19

maritime claim, save that the owner has submitted to jurisdiction. 24

(No2) decision has been characterized as problematic for various reasons.

Consequently, its application should be confined merely to the res judicata

question, impeding a claimant with a foreign decision in personam to re-litigate the

same matters bringing an action in rem in England.31

of liability in personam from his part at the commencement of proceedings (s.21(2)

disputed incident occurring,36 an in personam association between the claim and

(s.21 (4)(b)(i)). 38Quasi in rem claims pursuant to s.21(4)(b)(ii) are alternatively

should satisfy some territorial requirements to inaugurate jurisdiction.41 In

personam claims demonstrate considerable shortcomings underlying the supremacy

of the action in rem.42 Besides, the SCA introduces an “inter-relationship” between

those types of claims, as they can be brought synchronously without incurring

merge or losing their unique features, from the moment of acknowledgement of