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M/V Pacific Pearl Co Ltd v Osios David Shipping Inc  EWCA Civ 798
Key words: Security/Collision Jurisdiction Agreement (ASG 2 form)
This is a Court of Appeal decision following an appeal by the owners of the Panamax Alexander (PA) (the appellants) of the Commercial Court decision of December 2021. The club’s summary of that decision by Mr Justice Teare, including the background facts, can be found here. The key question remained whether security offered pursuant to a standard Admiralty Solicitors’ Group’s Collision Jurisdiction Agreement (CJA) needed to be subjectively reasonable (ie to the receiving party) or objectively reasonable. This is also in the context of security offered which contained a sanctions clause.
The Commercial Court held that:
- the security offered by the claimants was reasonably satisfactory, but
- there was no obligation under the express terms of the CJA for the owners of the Osios David (the respondents) to accept it. In other words,
On appeal, the appellants argued that:
- on the true construction of the CJA, the respondents were obliged to accept reasonably satisfactory security when it was offered,
- alternatively, if necessary, a term should be implied into the CJA that a party offered reasonably satisfactory security should accept it.
On the other hand, the respondents argued that:
- the CJA does not create any obligation on the party being offered security to accept it and
- there was no justification for implying such a term into the CJA.
The Court of Appeal allowed PA’s appeal and found that:
- the clear purpose and the language of the CJA is that once reasonable security is provided there is an obligation on the recipient to accept it; and,
- for purposes of business efficacy, it would imply a term that a party offered security in a reasonably satisfactory form should accept it, although this was not necessary in this instance.
In essence, following the appeal court’s decision and in the context of the CJA form, when parties have agreed to provide reasonably satisfactory security and this is offered, they must think very carefully before rejecting it. If the security offered is deemed to be ‘objectively reasonable’ then the party rejecting it is likely to be in breach of contract (ie the CJA).
The decision highlights once again the importance of agreeing clear terms in contracts as to the parties’ rights and obligations. If the parties wish to have the right to reject the offered security, for example, because it believes it can obtain better security via an arrest, it would be advisable to agree so in clear and express terms.
Moreover, the judgment reaffirms the fact that a Club LOU with a sanctions clause is security in a reasonably satisfactory form (this was not changed on appeal). It also underlines that if a payment under the security is caught by the sanctions clause in a Club LOU, the obligations under the security are not terminated, but suspended it until payment can be made. The finding at first instance that the obligation within a sanctions clause ‘to use all reasonable endeavours’ to pay (for example, in the context of obtaining regulatory permissions or licenses) is effectively the same as ‘best endeavours’.
- Link to the judgement can be found here
- Link to commentary by HFW can be found here
- Link to commentary by Reed Smith can be found here
- Link to club’s full summary on the Commercial Court decision can be found here