February 2024
By Yap Yeong Hui & Ch’ng Zhen Hon
This article touches on ship arrest in admiralty proceedings and discusses sundry alternative forms of security shipowners may put up to secure the release of their ships.
A. Introduction
Ship arrest plays an important role in admiralty proceedings, being one of the methods a potential plaintiff may use to secure their maritime claims. A ship can be arrested if it is within Malaysian territorial waters and if the arresting party’s claim is considered a maritime claim under the Malaysian maritime law. Once a ship is arrested, the ship will be prevented from leaving the Court’s jurisdiction. Ship arrest is therefore a powerful tool which can result in quick settlement of the claim or the sale of the arrested ship.
Due to the disruptive effects of ship arrest, shipowners are always keen to secure the release of their ships as soon as possible. The practice is for shipowners to furnish the plaintiff with alternative security in place of the arrested ship. Alternative forms of security to secure the release of the arrested ships in admiralty proceedings are crucial in ensuring uninterrupted international trade. Staring down the barrel of continued arrest, below are alternative forms of security shipowners may put up to secure the release of the ship.
B. Letter of Undertaking from a Protection and Indemnity Club
The most usual form of alternative security is a letter of undertaking (“LOU”) from a Protection and Indemnity Club (“P&I Club”) who is a member of the International Group of P&I Clubs. Such an LOU is essentially an undertaking by the P&I Club to pay to the plaintiff on demand such sums as may be awarded to the plaintiff in Court proceedings. An LOU issued by a P&I Club is arguably the most efficient form of alternative security in admiralty proceedings, except when the financial viability of the relevant P&I Club is successfully called into doubt based on credible information.
In The Arktis Fighter [2001] 3 SLR 394, the plaintiff objected to an LOU provided by a P&I Club on the basis that the Club’s credit ratings had recently been downgraded which arguably indicated vulnerable characteristics and could lead to insufficient ability to meet financial commitments. The Court agreed with the plaintiff and held that this was enough to warrant caution, and ordered that the defendant substitute the LOU with a bank guarantee (“BG”). When putting up an LOU from a P&I Club as alternative security, it is vital that the liquidity of the relevant P&I Club is not in question.
C. Bank Guarantee
The BGs issued by First Class International Banks are also a routine form of alternative security in admiralty proceedings. A BG is basically an undertaking by a bank to cover a debt or risk on a transaction. Banks, however, will often require some forms of security in return. Put another way, shipowners are required to deposit a fund with the bank, which would be tied up for the duration of the proceedings, in exchange for issuance of a bank guarantee. Like an LOU issued by a P&I Club, a BG is a desirable form of alternative security for plaintiffs due to its reliability, being an alternative security provided by an uninterested third party who has the financial viability to meet liabilities.
D. Bail Bond and Payment into Court
A defendant could also obtain release of a ship by entering a bail bond or paying the amount of security claimed by a plaintiff into Court. A bail bond was an undertaking to the Court given by the defendant shipowner and the latter is self-explanatory. However, both forms of alternative security are uncommon in Malaysia. As discussed above, the current practice is for parties to come to a private arrangement between themselves, whereby a defendant provides security to a plaintiff in place of the arrested ship by way of an LOU provided by a P&I Club or a BG.
E. Unconventional Alternative Securities
A caveat here is apposite: where a defendant attempts to furnish a corporate guarantee as opposed to a guarantee from a financial institution or P&I Club, it falls on the defendant to convince the Court and the plaintiff that the alternative security offered is adequate. In The Sovereign Explorer [2001] 1 Lloyd’s Rep 60, the Court observed that a defendant who offers a guarantee by a party other than a bank must, in addition to tendering a guarantee for a sufficient amount, shoulder the additional burden of satisfying the Court that the proposed guarantor is one of reliable financial standing.
The Ratu Enra [2023] 4 CLJ 147 is another case in point. In this case, the Court dismissed the defendant’s application for release of the ship from arrest on the issuance an LOU by the defendant’s holding company. The Court reasoned that a bank giving a BG or a P&I Club giving an LOU is uninterested in the outcome of the dispute and therefore, payment under a BG or P&I Club’s LOU is almost immediate, especially because the reputation of the bank/P&I Club is on the line. An LOU from the parent company however, the Court observed, is different and may necessitate enforcement proceedings in the event of a dispute. Therefore, where an unconventional alternative security is put up, shipowners should ensure that the alternative security is an adequate one as the Court is reluctant to order the plaintiff to relinquish a substantial security in exchange for a vulnerable one.
F. Conclusion
LOUs from P&I Club and BGs are the most common and efficient forms of alternative security shipowners may put up to secure release of their arrested ships. However, when other unconventional alternative securities are furnished, disputes as to their adequacies might arise which will in turn result in a delay of the release of the ship. It is therefore a counsel of prudence for shipowners to obtain legal advice in their attempts to secure a ship’s release from arrest.
This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at insights@chooi.com.my.