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Head of Maritime Law Practice,
ANK Law Office
ANK Law Office
P&I Club Guarantees? Never Heard of Them…
Every year, dozens of marine incidents occur in Ukrainian ports — from damage to moorings and portal cranes to spilled petroleum products and palm oil in port waters. Maritime lawyers are well aware that such cases are basis for so-called “maritime” requirements to appear, which give the right to arrest a ship and therefore could lead to inconvenient losses for the shipowner. The world maritime community has long developed a mechanism, which helps to avoid unnecessary delays (arrests) of ships and, at the same time, obtain adequate guarantees of compensation for the incurred losses. These are the so-called “club” guarantees or the guarantees of P&I clubs. In their broadest sense, P&I policies can be compared to vehicle liability insurance, which was introduced in Ukraine in 2004 and has since been successful in the market. However, the case with the P&I club guarantees in our country is much worse than at our closest neighbors’ in the Black Sea basin, such as Bulgaria, Romania, Turkey, not to mention the rest of the EU and the US.
A Bit of History and What IG P&I is
“P&I” literally stands for “protection and indemnity” and represents a special form of marine insurance on a mutual basis between shipowners. The first mutual insurance clubs appeared in England back in 1720 and have been further developed since the middle of the XIX century. Today there are about 70 mutual insurance clubs in the world, most of which are registered in England, Sweden, Denmark, Norway, Japan and USA. Herewith, the 16 mutual insurance clubs, which account for approximately 90% of global tonnage insurance, make up the so-called “International Group of P&I Clubs” (shortened to “IG P&I Clubs”). International Group of P&I Clubs is actively involved in the work of the International Maritime Organization (IMO), the Baltic International Maritime Council (BIMCO) and other reputable maritime associations.
The unity of the “International Group of P&I Clubs” is based on a multilateral reinsurance agreement. Each club in this group is responsible for insured risks for up to 5 million USD per case. Losses between 5 and 30 million USD are reimbursed by the club in accordance with the agreement.
The financial basis of P&I clubs are the contributions from their members-shipowners, from which cash funds are created to pay claims to shipowners in the event of marine incidents anywhere in the world.
Ukrainian Experience: a Try but to No Avail
Few people know that, back in the 90s, Ukraine attempted to create a legal basis for the work of Ukrainian shipowners liability insurance clubs: we are talking about Article 14 of the Law of Ukraine On Insurance of 7 March 1996 and the Provisional Regulations on Mutual Insurance Companies, approved in early 1997. When the new Civil Code was being approved, for some reason, the mutual insurance part was forgotten, and yet Part 3 of Art. 352 of the Commercial Code of Ukraine explicitly provided “economic agents” (i.e. business entities) with the possibility to create mutual insurance companies in the manner and under conditions stipulated by the legislation. Article 2 of the Insurance Law provides for exceptions from the prohibition on insurance activities in Ukraine by non-resident insurers. One of these exceptions is insurance activity solely for the purpose of insuring shipping risks, in the event that the object of insurance is the property interests associated with the goods being transported and/or the means of transport, by which they are transported, and/or any liability arising out of such transportation of the goods. Thus, the legal basis for the existence and activities of mutual insurance clubs (including P&I clubs) in Ukraine is laid down but in practice everything is the absolute opposite.
How P&I Clubs Work and What about Maritime Claims
Today, P&I clubs in Ukraine are represented through a network of their correspondents, which the clubs support in ports around the world. The main task of the correspondents is to provide on-site representation of the shipowners’ interests and lies in assisting the captains and crew members of vessels, shipowners in the process of settling insurance cases. The club rules include the obligation of the shipowner to immediately inform the club about the occurrence of the accident (pollution of sea, collision, invasion, cargo loss and damage, etc.). The club immediately assigns a correspondent at the local port for prompt settlement of issues related to the insured event. If a maritime claim arises as a result of an insured event, the P&I Club, in which the liability of the shipowner is insured, promptly issues a so-called “club” guarantee or a letter of guarantee (letter of guarantee and undertaking). The content of the guarantees, of course, may vary and depend on many conditions, but the main idea is that the club on behalf of the shipowner undertakes to pay a certain amount in exchange for a competent court’s decision against the shipowner, which becomes legally valid and is not subject to further appeal. The granted “club” guarantee is an unconditional ground for immediate release of the vessel (if the ship was detained by the port master or the court before the maritime claim was secured).
Further to the opinion on the legal basis for the introduction of “club guarantees” in Ukraine, we must note that the possibility to provide “adequate securing of maritime claims” in order to release or prevent detention of a ship is expressly provided for in Art. 44 and 80 of the Merchant Shipping Code. However, as shown by the professional experience of the authors, the Ukrainian authorities flatly refuse to accept “club” guarantees as proper security, referring to the lack of a direct indication of such a possibility in the legislation.
Association Agreement, EU Directives and P&I Clubs: What’s in Common?
By signing the Association Agreement of 2014, Ukraine has undertaken to adjust its legislation in the field of international maritime transport with the relevant standards adopted by the EU to the extent that such legislative approximation will contribute to the objectives of liberalization, mutual access to the markets of the Parties and the movement of passengers and goods (Art. 138 of the Agreement).
Thus, Directive No.2009/20/EC of the European Parliament and of the Council “On Insurance of Shipowners For Maritime Affairs” establishes the obligation of Member States to require holders of gross tonnage vessels of 300 tons or more to have present an insurance agreement, which would cover the risks associated with the operation of ships.
In this Directive, the appropriate insurance form includes insurance of reimbursement, provided by members of the International Group of P&I Clubs, and other effective forms of insurance, which provide similar coverage.
Another Directive No.2009/16/EC of 23 April 2009 “On Port State Control” lists the certificates and documents, which must be available on board and includes the certificates of insurance of owners, which comply with Directive No. 2009/20/EC.
As you may know, on 7 February 2019, the Verkhovna Rada of Ukraine finally secured in the Constitution of Ukraine the state’s strategic course for acquiring full membership in the EU and NATO. This step gives the maritime lawyers the hope that the practice of using P&I insurance and the circulation of “club” guarantees will be finally introduced in the legislation of Ukraine, and the authorities will accept the “club” guarantees of shipowners without unnecessary questions.
Example from Court Practice
Despite the lack of direct indication of the status of P&I clubs in Ukrainian legislation, the courts define the concept of a “P&I Club” in their decisions and investigate the role of their representatives in the process of interaction between marine agents (as representatives of the shipowner) and the authorities of the port (in particular, the ecological inspectors). The Judgment of Odessa Regional Administrative Court of 21 December 2018 in case No.1540/4724/18 could serve as an example, where the court noted: “A “P&I club” is a special form of an organization of marine insurance on a mutual basis between shipowners. A “P & I club” covers the claims of third parties against shipowners, when such claims are of the nature of private (civil) liability, that is, a liability of property. Such claims may be made by crew members. Introduction of the vessel to a “P&I Club” guarantees reimbursement to the shipowner as well as the crew member of the vessel.”
Marine Community Anticipating Legislative Changes
Given Ukraine’s irreversible strategic course for integration into the EU, it is evident that national legislation needs to implement the norms, which will determine the status of P&I clubs, and the introduction of “club” guarantees in Ukraine. Firstly, it concerns the Code of Merchant Shipping, the Rules for the Protection of Inland Sea Waters and the Fees for calculating the losses caused by pollution of marine waters of Ukraine. The introduction of “club” guarantees will be a significant contribution to increasing the attractiveness of Ukrainian ports in terms of predictability and comprehensiveness for foreign shipowners and operators.