UK: Changes To The Inter-Club Agreement And Security For Claims

Last Updated: 7 October 2011
Article by Ted Graham and Silvia Mahringer

Under the Inter-Club NYPE Agreement 1996, it was possible for a party to a charter, typically a charterer, to delay having to counter secure a ship owner in respect of a cargo claim made under a bill of lading until the cargo claim had been paid by the ship owner. In practice, this argument did not always work, but it did give rise to some costly disputes and it also meant that parties, typically ship owners, were sometimes exposed for many months after the charter had ended. The ship owner could not be sure if the charterer would still be trading by the time the claim under the bill of lading had been paid and the time came for the charterer to pay his share. As of 1 September 2011, this difficulty has been addressed by the International Group of P&I Clubs with the introduction of the Inter Club New York Produce Exchange Agreement 1996 (as amended September 2011).

Background

The Inter Club New York Produce Exchange Agreement ("ICA") was created and entered into by the International Group of P&I Clubs to provide an easy formula to apportion liability between Owners and Charterers for cargo claims arising under the NYPE or Asbatime charterparties. As such it is generally only of relevance to our readers working in the dry bulk and container trade. Liability is apportioned by reference to the cause of the loss or damage to the cargo. For example, in the case of a cargo shortage on discharge, liability is apportioned 50-50 unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or other of the parties. In Kamilla Hans-Peter Eckhoff KG v. A.C Oerssleff's Eftf. A/B ("The Kamilla") [2006] EWHC 509 (Comm), the Commercial Court described the ICA as a "form of rough and ready justice" to cut through the legal and factual problems that arose out of the interpretation of clause 8 of the NYPE charter.

The Security Problem

Clause 4(c) of the ICA 1996 requires that a claim is properly settled or compromised and paid as a condition precedent to any right to recovery or indemnity. This requirement was emphasised by the English Courts in a number of cases. As a result, in the event that a shipowner or a charterer had to provide security to a third party for a cargo claim, he was not entitled to obtain security from the other party to the charterparty because the claim had not crystallised in accordance with the requirements of the ICA. Security could only be obtained once the cargo claim had been properly settled or compromised and paid.

In practice, the situation was often not as straightforward as this and different jurisdictions interpreted the ICA differently. All that was important, from the view point of ship owners and their P&I Clubs, was it made it difficult, slow and expensive to obtain security from charterers and none of this was in keeping with the spirit and intent of the ICA.

The ICA 2011

The ICA 2011 addresses this issue by incorporating a new clause relating to security which reads as follows: :

"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:

  1. 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); and
  2. 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 if requested to do so.

Application and comment

The ICA only applies between owners and charterers if they incorporate it into their charters. Prior to 1 September, a typical clause in a charter might read: " Liability for cargo claims as between Charterers and Owners shall be settled in accordance with the Interclub NYPE Agreement 1996 or any subsequent amendments." Because the ICA 2011 is expressly described as an "amendment" (not a "replacement" – as happened in the change from 1984 to 1996) such wording will be sufficient to incorporate the new version of the ICA into a charter entered into after 1 September 2011. According to the circulars sent round by the P&I Clubs, the ICA 2011 will not apply to charters entered into prior to this date, even if the claims arise later.

Given the way it has been drafted, we expect the new ICA will be brought in to play, whether or not the parties turn their attention to this change in the security provisions. However, in this current tough market, we would not be surprised if some traders/charterers insisted on sticking with the old version of the ICA. Whichever version is agreed, if any, the most important thing for both sides remains: who are you contracting with and which P&I Club are they entered with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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