The importance of securities

The Importance of securities

The importance of securities

It is crucially important for cargo interests to seek assistance from the outset as any delays are likely to prejudice their recovery efforts. Security negotiations require in depth knowledge and understanding of the law and often involve discussions on complex matters such as conflict of laws, identity of carrier and title to sue.

The need for security

 It has long been the practice in the shipping industry to arrange for several ships which are financed by a common source and/or operated as a fleet to be registered in the names of separate companies whose only asset is the particular ship registered in its name. It is trite law that a properly formed registered company is a separate legal entity from its shareholders and has distinct rights and liabilities as an autonomous legal person. The so-called one-ship companies effectively prevent cargo interests from enforcing their claims against sister vessels and/or any other assets owned by the beneficial owner. This is of course on the assumption that there is no evidence of fraud and therefore the corporate veil is unlikely to be pierced.

It is therefore imperative for cargo interests to obtain adequate security usually in the form of a Club Letter of Undertaking (hereinafter “LOU”) from P&I Insurers in order to ensure that their claims are protected. In the absence of a security, there will not be any assets left for cargo interests to use in order to satisfy their claims in the event that the vessel is sold by the one-ship company.

Furthermore, there have been instances where large shipping companies declared bankruptcy and cargo interests were unable to recover their losses in full. For instance, the Korean company Hanjin Shipping filed for bankruptcy in September 2016, representing the largest bankruptcy in the shipping industry in recent years. Despite the bankruptcy, cargo interests would be able to recover their losses in full had adequate security been provided by Hanjin’s P&I Insurers.

Adequate security

Cargo interests are generally entitled to obtain security for their reasonably arguable case which includes not just the principal claim but also interest and costs (The Moschanthy [1971] 1 Lloyd’s Rep 37). Whilst P&I Clubs often insist upon arbitrary uplifts being added on top of the principal claim to cover interest and costs, the extent to which the security amount is adequate should be considered on a case-by-case basis.

Security wording

Cargo interests should also review the wording of the LOU offered by P&I Clubs. In particular, the law and jurisdiction clause in the security should be consistent with the terms of the contract of carriage in order to avoid any disputes over the correct forum and applicable law. It is also important to consider the identity of carrier and insist upon a suitably worded demise warranty being inserted in the LOU itself and/or in a supplementary Side Letter from Owners. Warranties of authority as well as clauses relating to the appointment of arbitrators and service of proceedings should also be considered before accepting an LOU.

If you are exposed to a cargo claim and wish to seek reimbursement from carriers / Owners, we would be delighted to assist in pursuing a recovery action on our usual No Win No Fee terms and deal with the security aspects of the case free of charge.

Neoclis Kleanthous

Casualty and Complex Claims Manager

LLB, LLM, LPC, Solicitor (Non-practising)


The importance of securities 19/02/2024
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