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1 The Association shall be under no obligation to provide any guarantee, certificate, bail or other security or undertaking (”security”) for or on behalf of a Member, or to pay the costs of such provision.
2 The Association may at its discretion provide security or pay the cost of such provision in relation to liabilities within the scope of a Member’s cover, and may recover any costs incurred thereby from the Member.
3 The Member shall indemnify the Association for any liability the Association may incur to a third party under or in connection with any security issued by the Association for or on behalf of the Member and for any payment made by the Association to a third party for or on behalf of the Member (irrespective of whether that liability was incurred, or that payment was made during or after the period of the Member’s insurance by the Association), save to the extent that, had that third party pursued its claims in respect of the relevant liability against the Member rather than against the Association, or had that payment been made by the Member rather than by the Association, the Member would have been entitled to reimbursement pursuant to these Rules.
(A) The Association shall be under no obligation to provide…security…or to pay the costs of such provision… (Rule 88.1)
The Association and all other P&I clubs that are members of the International Group of P&I Clubs provide indemnity insurance to their Members in accordance with the ’pay to be paid‘ principle.1 Consequently, if the Association were to be legally obliged to provide a guarantee, certificate, bail or other security to a third party, that would undermine the ‘pay to be paid’ principle since the Association would, thereby, become committed to pay compensation directly to the third-party beneficiary of the security. Rule 88.1 recognises the importance of this principle and emphasises that the Association does not have a legal obligation to provide security to third parties on behalf of the Member except in special and very limited circumstances. Similarly, all the other P&I clubs that are members of the International Group have adopted the same principle.
Furthermore, if the Member pays a fee to some other security provider to provide security to a third party claimant in the form of a bank guarantee or bail bond or some other form of guarantee, Rule 88.1 makes it clear that the Association is not obliged to compensate the Member for the costs that are incurred by him in this respect.
(B) The Association may at its discretion provide security or pay the cost of such provision in relation to liabilities within the scope of a Member’s cover… (Rule 88.2)
Notwithstanding the above, the Association recognises the importance to a Member of the ability to trade his Ship without any undue risk of arrest by claimants that are seeking security. Therefore, the Association may, as a service to the Member and on a discretionary basis,2 agree to provide security on behalf of the Member, or to reimburse the Member for the cost that he has incurred in order to provide security by other means, e.g. a commission paid for a bank guarantee.
Should the Association exercise its discretion to provide security, it will usually do so only for claims that are, or are expected to be, within the scope of the Member’s cover. The Association is less likely to provide security on behalf of the Member if there is doubt whether the claims fall within the scope of cover, or if the claims exceed any applicable limit of cover, or if they fall within the Member’s agreed deductible, particularly if a high deductible has been agreed pursuant to special terms of entry. Similarly, it is unlikely that the Association will provide security if the event or claim is likely to cause the Member to incur a liability that is specifically excluded under the Rules, e.g. liability for delivery of cargo without production of the original Bills of Lading.3
The Association will usually agree to provide security only in respect of claims that have already arisen, in the sense that an event has occurred that is likely to result in a claim or claims for which cover is available. In other words, the Association in common with all the other P&I clubs that are members of the International Group of P&I Clubs, will not, except in special and very limited circumstances,4 agree to provide security before a claim has arisen, i.e. they will not provide what is known as ’anticipatory security’.
The Member will normally request the Association to provide security for a claim that has already arisen when the claimant tries to enforce a claim by the arrest or threatened arrest of the Member’s Ship, or by an injunction or other legal measures that prevent the Member from drawing upon funds in bank accounts, collecting freight or hire, or obtaining payment from hull insurers. Such action may cause damage to the Member’s business interests since it may delay the sailing of the Ship, or affect the Member’s cash flow, or his ability to repay his financiers. Since the Association is not obliged to provide security in such circumstances, but has the discretion to do so, the Association will, when deciding whether to exercise such discretion, consider all the relevant circumstances including factors such as whether the Member has paid all premiums and other sums that are due to the Association. The Association will also take account of whether the Member has complied with his other obligations under the Rules. If the Member is in breach of such obligations, the Association is unlikely to exercise its discretion in favour of the Member at least until the Member has rectified such breaches, However, should the Member have failed to comply with those obligations that are considered to be fundamental Conditions of Cover for both P&I and Defence cover, such as those that are specified in Chapter 3 of Part 1 of the Rules (e.g. the obligation to classify or certify the Ship properly pursuant to Rule 8), it is almost certain that the Association will not exercise its discretion to offer security for claims that have arisen during a period when the Member is not fulfilling, or has not fulfilled, such obligations.
If the Association agrees to provide security, it will, in most circumstances, offer its own letter of undertaking (the so-called ’Club letter of undertaking‘), which is a form of security that is normally acceptable to claimants in most, but not all, countries. The provision of security in the form of a Club letter of undertaking has many advantages. It can be issued quickly once the amount and the terms and conditions of the security have been agreed. Furthermore, since the Association does not normally make any charge for providing a Club letter of undertaking, the Member does not incur the commission or other charges that a bank or surety bond provider would normally require, and his funds are not ’tied up‘ as collateral for the provision of such security.
If the claimant insists on receiving security in the form of a bank guarantee, surety bond or other financial guarantee rather than a Club letter of undertaking, the Association does have the ability to assist the Member by doing so. However, it is very unlikely that the Association will provide security in the form of a cash deposit, except where it is necessary to make a payment of cash into court in order to assist the Member to establish a limitation fund under the applicable law. Since such a limitation fund serves as security for all claims in respect of which the Member is entitled to limit his liability, the Association may exercise its discretion to make such a payment if it is mutually beneficial to the Member and the Association to establish a limitation fund promptly.
(C) The Member shall indemnify the Association for any liability the Association may incur to a third party under or in connection with any security…save to the extent that…the Member would have been entitled to reimbursement pursuant to these Rules. (Rule 88.3)
The fact that the Association provides security at the Member’s request is not to be treated as an admission by the Association that cover is available for the claim. Security may be, and often is, demanded shortly after the event that gives rise to the claim, e.g. upon discharge of the damaged cargo, or when the Ship reaches its next port of call after a collision. A detailed investigation of the circumstances of the event or casualty may not be feasible at such an early stage since it may delay the trading of the Ship. Consequently, security may be provided for a claim for which, at that stage, cover appears to be available.
However, further information may come to light during the course of subsequent investigation or litigation that casts doubt upon the Member’s entitlement to cover. For example, it may transpire that the claim arises as a result of a deviation that would deprive the Member of defences or rights of limitation that would otherwise be available to him.5 Consequently, Rule 88.3 requires the Member to indemnify the Association in respect of any liability that may arise under, or in relation to, any payment that has been made by the Association pursuant to any security that has been provided by the Association on behalf of the Member in circumstances where the Member would not be entitled to receive compensation from the Association for the particular claim if such claim had been enforced against the Member rather than against the security that has been provided by the Association.
It is important to the membership as a whole to ensure that membership funds are not used to pay claims that are not insured by the Association. Accordingly, in order to secure a Member’s potential liability to indemnify the Association in such circumstances, the Association may require the Member to provide counter-security as a condition of providing security to a third party on behalf of the Member. It will also require such counter-security if it is clear that only a part of the claim will be for the Association’s account, e.g. if the Member’s entry is subject to a large deductible or, in the case of collision claims, if the Association covers less than four-fourths of the liability.6
The Association has the right to determine the form of counter-security that is to be provided by the Member in such circumstances. For example, the Association may require a guarantee from a first class bank, or a surety bond from some other financial institution provided that it has an acceptable credit rating. The Association will also normally require such guarantee or surety bond to be issued in, and be subject to, the law and jurisdiction of, a country where the guarantee or surety bond can be easily enforced, e.g. guarantees or surety bonds that are issued in the United Kingdom or the USA and which are subject to English or US law and jurisdiction.
If, in the case of a collision or damage to fixed and floating objects, counter-security is to be provided by the hull underwriters, the Association will not normally accept separate security from each individual underwriter for their individual share of the overall risk that is covered under the Hull Policies. The Association will normally insist on the receipt of one, single, counter-security from one underwriter that secures the liabilities of all individual underwriters, e.g. from the ’lead underwriter‘ if that underwriter has an acceptable credit rating.
1 See the Guidance to Rule 87.1.
2 Such discretion can be exercised by administrative officers of the Association.
3 See the Guidance to Rule 34.1.i. Whilst the P&I clubs who are members of the International Group have jointly suggested the wording of a standard letter of indemnity that members of those clubs may wish to use if they decide to deliver cargo in such circumstances, the use of the suggested wording does not mean that cover for such risk is still available. The letter of indemnity is intended to provide alternative protection since cover is not available for the liability that members of the clubs may incur in such circumstances.
4 For example, by the provision of CLC and Bunker Convention certificates, as well as the STOPIA undertaking to the 1992 IOPC Fund. The Association may also in certain circumstances agree to provide confirmation of insurance cover to port authorities after an event has occurred, whereby the Association confirms that P&I cover is in place to pay compensation in accordance with applicable law as a condition set by the port authorities to accept that the port is used as place of refuge for the Ship following a casualty.
5 See the Guidance to Rule 34.1.b proviso xi.
6 See the Guidance to Rule 36.