The arrest was made on a Friday evening in Saint-Nazaire. By Saturday morning, the shipowner’s P&I club was offering a “standard” letter of undertaking. The creditor is tempted to accept: on the market, security from a club that belongs to the International Group is as good as a bank guarantee. Even so, one must read exactly what the club is promising, and on what conditions it will pay.
What the security replaces
A protective arrest does not pay the creditor: it immobilises the ship until a title is obtained on the merits. The security takes the place of the ship. If it is poorly drafted, the creditor will have given up its only leverage in exchange for a promise it will be unable to enforce. The moment of release is therefore when the balance of power is most favourable to the creditor; that moment will not come again.
The clauses that matter
The amount. It must cover the principal claim, interest and costs over a realistic duration of proceedings. An amount limited to the principal leaves the creditor exposed for two or three years of interest.
The claims covered. Does the letter refer to the claim as alleged in the application, or to any sum due “in respect of the casualty”? Narrow wording allows the club to argue that the final judgment does not correspond to what was secured.
The payment trigger. The club usually undertakes to pay what will be due under a final judgment, an arbitral award or a written agreement. The court or arbitral tribunal whose decision will bind the club must be identified, and the letter should state what happens if the decision is given by another court.
The forum for the merits. The letter is an opportunity to fix the court that will hear the merits, or to have the shipowner accept the jurisdiction of the French courts. Otherwise, the argument over jurisdiction resumes after release, on less favourable terms.
No re-arrest. In return, the shipowner asks for an undertaking not to arrest another ship in its fleet for the same claim. The clause is normal, provided it is not extended to separate claims.
Duration and governing law. Security limited in time must run beyond the likely duration of the proceedings, with automatic extension. The law governing the letter itself must be stated.
The shipowner’s side
For the shipowner, the aim is the opposite: to obtain release within the hour, without acknowledging the claim or accepting an unfavourable forum. The letter must state that it is provided “without admission of liability” and must preserve the right to challenge the arrest, in particular before the court that authorised it. Security that is excessive in relation to the actual claim may itself be challenged.
What the firm checks first
- The club: a member of the International Group or an insurer outside the Group.
- The wording of the secured claim, compared with the application.
- The court or arbitral tribunal whose decision will bind the club.
- The no-re-arrest clause and its scope.
- The duration, extension and governing law of the letter.
For the firm’s services, see Ship arrest.
Further reading
- Wrongful ship arrest: obtaining compensation for detention
- Arrested ship: the time limit for proceedings on the merits that creditors forget
- Has your yacht been arrested in a French port? What to do
This analysis is part of the firm’s work in maritime law.
Frequently asked questions
Is the creditor obliged to accept a P&I letter of undertaking?
It may negotiate the amount and the terms. Failing agreement, the court decides whether the security offered is sufficient to allow the ship to sail (Article L. 5114-21 of the French Transport Code).
Is a bank guarantee preferable?
Not necessarily. A letter from an International Group club is customarily accepted; a first-demand bank guarantee may be required where the proposed guarantor is less well known.
What happens if the security is too narrow?
The creditor may be unable to call on it for the judgment obtained. Hence the importance of aligning the letter with the claim and with the forum for the merits.