Right to counter security under the ICA 2011

By Sian Morris, Deputy Claims Manager, London Office

London Arbitration 18/18

A recent arbitration award brings welcome news for charterers in relation to the obligation to provide counter security to owners under the Interclub NYPE Agreement 2011 (“ICA 2011”.)

Readers may recall that the ICA 2011 incorporated a new provision, which sought to create an entitlement to counter security upon demand once one of the parties to a charterparty had put up security in respect of a cargo claim. Our Circular No 008/2011 contains a detailed analysis of the ICA 2011 including the Club’s position on cover.

In this instance, the vessel was chartered on an NYPE 1946 form with additional clauses by the disponent owners (“owners”) to the charterers. After discharge on one of the voyages, the cargo receivers and insurers brought a claim against the head owners for alleged damage to cargo amounting to US$900,000.

Following a threat of arrest, the head owners’ P&I Club gave security of US$900,000 in the form of a letter of undertaking (LOU).

The Head owners’ P&I Club then sought security for the same amount from the owners and this was given. Owners considered that the head owners were entitled to counter-security pursuant to the ICA 2011 which they understood was incorporated into the charterparty. The charterparties between the head owners and the disponent owners and the charterers were essentially back-to-back.

Clause 35 of the charterparty provided:

“ P&I Club/Cargo Claims

…Liability for cargo claims, as between Charterers and Owners, shall be apportioned/settled as specified by the Interclub New York Produce Exchange Agreement effective from 1996 and its subsequent amendments.”

Clause 9 of ICA 2011 provides:

“ Security

(9) If a party to the charterparty provides security to a person making a Cargo Claim, that party shall be entitled upon demand to acceptable security for an equivalent amount in respect of that Cargo Claim from the other party to the charterparty, regardless of whether a right to apportionment between the parties to the charterparty has arisen under this Agreement… “

Owners P&I Club contacted the charterers’ P&I Club (“the charterers P&I Club”) asking for counter security pursuant to clause 9 of ICA 2011 which they asserted was incorporated into the charterparty. The charterers P&I Club refused to do so.

Owners commenced arbitration against the charterers and applied, under section 48(5)(b) of the Arbitration Act 1996, for an order for specific performance for provision of counter security.

Charterers denied that they were obliged to provide counter security under the terms of the charterparty or ICA 2011, on the grounds that the words used in clause 35 did not incorporate the ICA 2011 in its entirety and particularly the requirement to provide counter security.

The charterers submitted that it was only the parts of ICA 2011 relating to apportionment and settlement of claims which could be relied upon by owners, as the wording of clause 35 of the charterparty did not incorporate the full text of ICA 2011. Owners conversely argued that clause 35 applied the ICA 2011 in full.

The tribunal agreed with charterers that as a matter of strict construction, clause 35 only related to apportionment and settlement of cargo claims and did not therefore include the requirement to provide security. There was no basis for applying clause 9 of ICA 2011 and clause 35 did not incorporate the full text of ICA 2011.

The tribunal further held that this did not undermine the purpose of the ICA, namely to provide a relatively simple mechanism for apportioning liability for cargo claims. Clause 35 of the charterparty would have been adequate prior to 2011 when clause 9 was added, but here the wording of clause 35 was restrictive and was limited to settlement and apportionment of cargo claims.

In support of their reasoning, the tribunal cited the proposition in Time Charters that the ICA

“was neither designed nor drafted to be incorporated into charters”.

It could not be assumed that the full terms of the ICA were incorporated into a charterparty without express provision. That was not the case with clause 35 since it was silent on the matter of security.

And in addition, the ICA 2011 was an agreement between the IG Clubs which they recommended their members to accept. The preamble states that

“The Clubs will recommend … that their Members adopt this agreement for the purpose of apportioning liability for cargo claims …”.

The preamble does not refer to security, which suggested that it was not updated when clause 9 was introduced. So, clause 9 did not apply to the charterparty on the wording of clause 35. Owners ought permission to appeal to the High Court but that was refused.

In conclusion,

  1. Charterparty wording should be checked carefully before agreeing to provide counter security.
  2. At least one IG Club has already cautioned its Members to review charterparty cargo handling clauses carefully, to ensure the 2011 ICA is clearly incorporated in its entirety.
  3. To eliminate any immediate entitlement to counter-security, Assureds should resist when possible the incorporation of ICA 2011 and insist on the unamended 1996 version of the agreement as per our Circular No 008/2011 .