South Africa - Club LOU Adequate Security For Release Of Vessel

December 2005

Finally there is a definitive answer from a High Court of South Africa as to whether a P&I Club letter of undertaking constitutes adequate security within the ambit of the Admiralty Jurisdiction Regulation Act¹ . Earlier this year, in the case of the mv "Bow Neptun" ² the Durban and Coast Local Division of the High Court of South Africa answered the question in the affirmative.

From the time the Act commenced in 1983, Club letters were frequently accepted as security to obtain the release of a vessel from arrest in South Africa. It was commonly believed that this could only be done by agreement with the arresting party. There were occasional instances where the release of a vessel was ordered by the courts against the provision of security by way of a P&I Club letter, but no written judgment was handed down³, or the letter was to be substituted with a bank guarantee in due course⁴.

On 26 May 2005, the Durban court granted an order for the arrest of the mv "Bow Neptun" as security for proceedings to be pursued by cargo interests by way of arbitration in London or an action before the Commercial Court in Antwerp, Belgium, and further stipulated that the vessel was to be released from arrest on the provision of security to the satisfaction of the claimants or the Registrar.

Prior to the arrest the security had been tendered for the claim on behalf of the owners in the form of a Club letter. This tender was rejected by the claimants. Following the arrest of the vessel an amended letter was tendered, which was also rejected. Although the letter responded to an arbitration award or judgment of a court of competent jurisdiction, cargo interests insisted that, in exchange for them agreeing to accept the Club letter, the owners and the Club should submit to Belgian law and jurisdiction in respect of the claims. The parties could not reach agreement and the owners and the Club sought an order for the urgent release of the vessel against the furnishing of the Club letter.

The Durban court, following the reasoning of the Supreme Court of Appeal which had held, in a different context that "security" under the Act included a bank guarantee⁵, stated that:

"…… both the bank guarantee as well as the P&I Club Letter of Undertaking are couched in similar terms. They are both private contractual undertakings given by either the bank or Club/insurance company to secure an Applicant's claim against a Respondent either before or after arrest."

Cargo interests in the "Bow Neptun" submitted that the letter could not constitute security under the Act because it was not enforceable in South Africa. The Club did not have any assets situated within South Africa. Therefore, if the Club failed to meet its undertakings in terms of the letter, claimants would have to institute proceedings outside South Africa in order to enforce them.

The Durban court was not persuaded and pointed out that in the unlikely event that a foreign bank does not honour its guarantee or undertaking, the cargo interests would also be obliged to proceed against the bank in that foreign country. Whilst it was conceded that there is indeed a certain amount of risk involved the court found that it is an acceptable risk in line with modern commercial practice.

In conclusion, the court was satisfied that the letter of undertaking tendered by the Club constituted sufficient security within the ambit of the Act.

With thanks to Victoria Hobson and Jenny McIntosh of Garlicke & Bousfield Inc, Durban, for preparing this article.

 

1. No 105 of 1983
2. mv "Bow Neptun": Star Tankers AS and the American Steamship Owners Mutual Protection & Indemnity Association Inc / Methyl Company Limited and Lojit Corporation, Case No. A62/2005 (DCLD)
3. mv "Amfiriti": The Owners and Insurers of the Cargo Lately Laden on Board the mv "Amphion" vs mv "Amfitriti", Case No.A84/1998 (DCLD), and mv "Agamemnon": The Owners and Insurers of the Cargo Lately Laden on Board the mv "Amphion" vs mv "Agamemnon", Case No. A256/1998 (DCLD)
4. mv "Alam Tenggiri" : Golden Sea Bird Incorporated vs Alam Tengirri SDN BHD and Another, Case No. 2001(4) SA 1329 (SCA)
5. mv "Merak S": Sea Melody Enterprises SA vs Bulktrans (Europe) Corporation, 2002 (4) SA 273 (SCA)