Obtaining security for a party’s claim on the one side or security for a party’s costs on the other can be crucial remedies in times of a global pandemic where there may be issues with enforcement due to the closures of courts, delayed processes and a general lack of available assets.
Security and enforcement interact closely with each other where unless security has been obtained in advance, the process of issuing enforcement proceedings may be disproportionately expensive or time-consuming, particularly where it is difficult to locate assets. In practical terms, it is often pointless to arbitrate if the claim is not secured.
Security for a party’s claim
Security for a party’s claim is an interim measure that allows an applicant, either the claimant or the respondent in respect of its counterclaim, to secure, in advance of a final arbitral award, the amount that it is claiming against the opposing party (the respondent).
Security for claim can be sought when an applicant has real reasons to believe that the opposing party may be unwilling and/or unable to satisfy any award made against it at the end of the arbitration. As a general principle in arbitration the procedural powers vest in the arbitral tribunal with the court fulfilling a supportive “fall-back” role.
The Arbitration Act 1996 confers upon the tribunal a limited statutory power to make orders preserving the subject matter of the dispute under section 38(4)) and to make orders which have the effect of securing claims (section 44). These powers apply “unless otherwise agreed”. In the context of London maritime arbitration, the usual methods of securing claims are to apply to court under section 44 for a freezing injunction, (albeit this does not strictly secure the claim but merely prevents the dissipation of assets) or to arrest a vessel, or to obtain an attachment order against assets, including bank accounts in a foreign court.
Security for costs
The purpose of security for costs is to protect a party, usually the respondent, against the risk that they will win at trial and be awarded their costs, but then not be able to enforce a costs order against the other (losing) party, either within the jurisdiction or abroad. The order, if complied with, will provide a fund available within the jurisdiction, against which the party who has obtained the order can enforce any award of costs they may obtain.
Forms of Security
A Lien is a remedy to secure a claim which is often used at the outset of a dispute. Charterparties normally provide that for certain claims the owners may exercise a lien on the cargo or the freight. By way of example, Clause 18 of the NYPE form gives the owners two rights of ‘lien’ with which they can enforce their rights to hire and other sums due under the charter: first, a lien over the cargo on board and second, a ‘lien’ over any freights earned by charterers or sub-charterers during the period of the charter.
Letter of Undertaking (LOU)
In practice, security is often dealt with by agreement by the insurer or Club insuring the respondent’s liability and/or funding the arbitration proceedings, often against the background of the threat of arrest of vessels. Nevertheless, it may become necessary to apply to court in order to properly secure a claim.
In most cases, a Club LOU is issued on the threat of arrest or detention of a vessel in which case the terms of a Club LOU will include a provision that, once accepted by the receiver as security for his claim, he must release the vessel from arrest or detention and promise not to re-arrest the vessel or take any action against other assets to obtain security for the same claim.
A Club LOU is advantageous both from the perspective of the Club and member as it is easily issued and therefore provides flexibility, and the claimant’s perspective as the claimant obtains a right to recover his claim directly from the Club.
Arresting the respondent’s vessel represents another extremely common method of securing claims. The scope of the admiralty jurisdiction in England is defined by section 20 of the Senior Courts Act 1981 and includes claims in relation to damage to or by a vessel, loss or damage to goods carried in a vessel and agreements relating to carriage of goods in a vessel or for the use or hire of a vessel. It has long been recognised by the courts that commencing in rem proceedings for the sole purpose of obtaining security for the claims to be arbitrated will not be regarded as a breach of the arbitration clause (see Petromin SA v Secnav Marine Ltd  1 Lloyd’s Rep. 603). Similar admiralty jurisdiction to arrest a vessel exists in many other countries and is often based on one of the two international conventions, the 1952 Arrest Convention and the 1999 Arrest Convention, whereby states have agreed to rules that shall apply to the arrest of vessels of other contracting states present in the arresting state’s jurisdiction and may apply them to other vessels. The 1952 Arrest Convention is currently in force in over 70 countries. By contrast, the 1999 Arrest Convention only has 12 parties and its effect is therefore somewhat limited. The main difference between the two conventions is that the 1999 Arrest Convention has significantly expanded the list of claims for which arrest is possible, and provided a prospect of multiple arrests in relation to a single claim.
Once a vessel has been arrested, the owners of the vessel may, to replace having the vessel held as security for the claim, provide another form of security upon which the vessel may be released. Usually they will do so in the form of a Club LOU, a bank guarantee or a payment into court.
Then there may also be a number of situations where owners hold a letter of indemnity against their liability from charterers and where the letter of indemnity will usually provide that Charterers must provide the security to release the vessel or avoid the arrest.
Although letters of indemnity are standard practice in the shipping industry, a recent court case highlighted that reliance on such indemnities can be a two edged sword where the liquidity of the indemnifier is in question. In OCM Singapore Njord Holdings Hardrada PTE Ltd v Gulf Petrochem FZC , taking into consideration the specific context of the oil industry in which carriers often discharge their cargo without sight of the original bills of lading, Judge Pelling QC warned that by accepting a letter of indemnity, the owners take a credit risk, because the indemnity is only as strong as the creditworthiness of the provider of the indemnity.
Bank guarantees, or bank bonds, are an undertaking by a bank to cover a debt or risk on a transaction. Banks will invariably require some form of security or quasi-security in return.
In addition to the above set out forms of security, the Arbitration Act 1996 also provides a number of less common alternatives such as for example the appointment of a receiver. This can be a powerful remedy where enforcement of an award is problematic.
There is little point in bringing a claim when there are no assets to enforce the award or judgment against. If there is any doubt as to the liquidity of the counterparty, it is therefore always advisable to seek security as set out above.
The UK is party to a number of reciprocal treaties which ensure foreign awards and judgments can be both recognised and enforced without any special procedure being required. This means that on obtaining an award or judgment in England, it can be enforced against assets located in countries that are also contracting parties to the same treaty.
Awards and judgments are handled differently when it comes to enforcement and there are varying degrees of difficulty dependant on location. For example, parties can seek to enforce an arbitral award in the US with relative ease. As a signatory to the New York Convention, arbitral awards are readily recognised given all the pre-requisites for enforcement are met.
However, by contrast enforcing a judgment in the US is usually done by commencing a new action and then applying for summary judgment, which can be a potentially lengthy and costly process.
Difficulty of locating assets
Despite the relative ease with which awards or judgments can be enforced (depending on the country in which they are sought to be enforced), parties should bear in mind at the outset of a claim, that there may be difficulty in either locating or obtaining assets from the debtor. This is especially pertinent given the impacts of the global pandemic on the solvency and available cash/ liquidity of many companies. Pursuing enforcement against an insolvent debtor will be a costly and unrewarding process.
Parties should consider the following practical steps to identify and preserve a debtor’s assets before looking to enforce an award or judgment:
1. where there is a doubt as to a company’s liquidity, check whether a debtor is subject to any insolvency procedures against the local insolvency register, as well as relevant bankruptcy and companies court and company registries;
2. in appropriate circumstances a non-party disclosure order for example against a party’s auditors may be considered; and
3. where it is believed that a debtor may dissipate their assets, an application for a worldwide freezing order and an order for the detention, custody and preservation of property could be made.
Enforcement post Brexit
Although we have not yet seen any cases to this effect, Brexit will have an impact on the enforcement of English judgments and awards given the UK became a signatory to some reciprocal recognition treaties by virtue of its EU membership. This means for proceedings commenced after 1 January 2021, English judgments and awards will not automatically be recognised in other jurisdictions by virtue of EU regulations such as the Brussels Recast Regulation or the Lugano Convention.
However, whilst the terms of the EU-UK Trade and Cooperation Agreement (TCA) do not include specific provisions to preserve litigation processes, the UK is unlikely to forge a brand new and unfamiliar path. It has already acceded to the Hague Convention in its own right and has applied to re-join the Lugano Convention as an independent state. Similarly, the UK will continue to rely on its own bilateral treaties with specific countries such as those contained in the Foreign Judgments (Reciprocal Enforcement) Act 1933, and continue to receive recognition of awards under the New York Convention. What effect Brexit will therefore have on the UKs future litigation market and issues of enforcement, only time will tell.