ICA Paper Stephen Grainger, Partner Mays Brown, …

1 ICA Paper Stephen grainger , Partner mays brown , London Inter-Club Agreement Security Issues As between an Owner and a Time Charterer, when a cargo claim arises which is subject to the ICA when does the right arise to demand security and to take conservative steps to obtain security? There are three alternatives: 1. From the date of the incident giving rise to a cargo claim and potential liability for it. 2. From the date when security is provided to the cargo claimants. 3. From the date when the cargo claim is paid. Why is this important? This is particularly relevant in cases where foreign arrest proceedings are initiated as a means of obtaining security for a claim arising under the ICA and where the foreign court is required to form a view as to the validity or not of the arrest.

2 In my experience foreign courts do not find this a particularly straight forward task and whilst the position as a matter of English law appears to be well understood it is not clear cut and therefore there is scope for competing legal opinions. Background The ICA provides a relatively simple mechanism whereby liability for cargo claims can be swiftly apportioned between Owners and Time Charterers as a means of avoiding litigation. The parties to the ICA are the IG P&I Clubs but it is frequently incorporated as a matter of contract in time charterparties. First produced in 1970 with three amendments/revisions in 1984, 1996 and 2011. The starting point ICA 2011 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 provided that: (a) written notification of the Cargo Claim has been given by the party demanding security to the other party to the charterparty within the relevant period specified in clause (6).

3 And (b) the party demanding such security reciprocates by providing acceptable security for an equivalent amount to the other party to the charterparty in respect of the Cargo Claim is requested to do so. Under ICA 2011 as soon as the party facing a cargo claim provides security for the cargo claim, that party (usually the Owner) is entitled to demand security for an equivalent amount from the Charterer in circumstances where the cargo claim has yet to be paid and therefore before it can be apportioned in accordance with the ICA. One important qualification Scope of application This Agreement applies to any charterparty which is entered into after the date hereof (1 September 2011) on the New York Produce Exchange Form 1946 or 1993 or Asbatime Form 1981 (or any subsequent amendment of such Forms).

4 (Preamble to the ICA 2011) The Issue Assuming the incorporation and application of ICA 2011 between an Owner and a Time Charterer by a reference to the ICA or any subsequent modification or replacement thereof or or any amendments thereto or similar wording, what is the position regarding the right to demand security under clause 9 in relation to cargo claims which arise AFTER 1 September 2011 but where the governing charterparty is dated BEFORE 1 September 2011? The Assumption If there is no addendum to the charterparty to the effect that the date of the charterparty is to be post 1 September 2011 or that ICA 2011 is to apply, ICA 2011 will not apply to claims arising before or after 1 September 2011.

5 Example: NYPE dated 1 January 2011 for a 3 year period. Substantial cargo claims are made against Owners in December 2012 who hold Charterers 100% responsible under the terms of the ICA and demand security. If the above analysis is correct Owners cannot demand or take conservative steps to obtain security from the Charterers other than by reference to the ICA 1996. Legal Rumblings From September 2011 expectations have been raised as to obtaining security from counterparts under the ICA in circumstances where security is provided to cargo interests. This combined with the fact that Owners are facing large cargo claims which have arisen after 1 September 2011 and which have been secured has caused Owners to question their entitlement to demand security where the ICA applies to charterparties dated prior to 1 September 2011.

6 Particularly relevant where (1) the cargo claims are expected to take many years to be resolved and (2) the Charterers are in financial difficulties. Two consequences: 1. The provisions of ICA 2011 are being scrutinized. 2. The right to demand security under ICA 1996 is being re-examined. Scrutiny of ICA 2011 Available arguments: (1) The Scope of Application only records the agreement as between P&I Clubs as parties to the ICA. (2) As a matter of contract a clause incorporating the ICA with or any subsequent modification or replacement thereof or or any amendments thereto or similar wording does just that. See Time Charters The parties are, of course, free to vary or supplement the Agreement, as it is to apply under their charter.

7 (3) If the intention was to apply ICA 1996 the parties could have specified this without inclusion of or any subsequent modification or replacement thereof or or any amendments thereto or similar wording. (4) As a matter of contract the Parties are free to amend or override the Scope of Application provision of ICA 2011. Re-examination of ICA 1996 security position Available arguments: (1) No direct English authority on point. See The Strathnewton [1983] 1 Lloyd s no finding of when a cause of action arose under ICA 1984. What it did decide was that a claim alleging breach of clause 8 could not be asserted and accrue independently of the ICA. (2) Purpose of the ICA is not to restrict parties rights and make recoveries more difficult.

8 (3) Clear words are needed to restrict rights of security to a date beyond the date of the incident or (in the case of other charterparty claims) breach especially where these is no restriction in relation to other non-cargo claims falling outside the ICA where a demand for security can be made from the date of the incident/breach. (4) ICA 1996 is silent as to rights of security. Para (4) Apportionment under this Agreement shall only be applied to cargo claims claim has been properly settled or compromised and paid. (5) The view that this provision is a condition precedent to a right to an indemnity and therefore an accrued cause of action for the purposes of demanding security is wrong.

9 See by comparison the express reference in ICA 1984 to condition precedent to settlement under the Agreement that cargo claims should have been properly settled or compromised. (6) The language of ICA 1996 suggests that a right to an indemnity and therefore an accrued cause of action for the purposes of demanding security arises when the events giving rise to the underlying cargo claim take place or when potential liability has been incurred but for obvious reasons the apportionment can only take place after the claim is compromised or settled. See The Genuis Star [2012] 1 Lloyd s Rep. 222 requirement to carefully consider the changes in the wordings of the different ICA regimes and their effects.

10 The confusion under ICA 1996 led to clarification in the ICA 2011. (7) The cause of action accrues when the cargo was or should have been delivered or alternatively when the potential liability has been incurred. See time bar provisions of the ICA where the time bar for bringing claims under the ICA runs from the date when the cargo was delivered or should have been delivered not from when the claim is compromised or settled. Why should the time from when an accrued cause of action be any different? Conclusion The prevailing view is that rights of security under the ICA are assumed only to arise where: (1) The governing charterparty is dated AFTER 1 September 2011; and (2) The underlying cargo claim arises AFTER 1 September 2011 unless the cargo claim has been settled and paid, as contemplated by ICA 1996.