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. 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); 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).

(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.

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.

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 20.49 The parties are, of course, free to vary or supplement the
Agreement, as it is to apply under their charter.

(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 Lloyds Rep.219 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.

(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
where...the 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.
 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 Lloyds Rep. 222 requirement to carefully consider the
changes in the wordings of the different ICA regimes and their effects.

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.

But this is open to debate pending clarification from the English Courts.

Stephen Grainger
MAYS BROWN SOLICITORS
66 Royal Mint Street
London E1 8LG
Tel: + 44 (0)207 264 0600
E: sjg@maysbrown.com
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