Ship arrest – one of the most effective tools to secure maritime claims in all jurisdictions. The arrest of a vessel always encourages the Shipowner to take measures to satisfy maritime claims to avoid additional financial losses. The Ukrainian jurisdiction is not an exception, and the arrest of the ship is one of the most powerful methods for reimbursement of bunker supply, ship repair and charter party disputes, as well on contracts of carriage, disputes on ownership of the ship, insurance compensation and claims of the government authorities.

This analytical review was prepared by the Black Sea Law Company Team in order to provide complete statistical information on the ship arrest in Ukrainian jurisdiction for 2018-2020, and contains key principles of ship arrest and release in Ukrainian jurisdiction, information on the number of cases related to the arrest of ships, as well as the dynamics of the practice of ship arrest.

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P&I CLUBS’ LETTER OF UNDERTAKING: PRACTICE IN UKRAINE

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International merchant shipping is undeniably a link for the global economy. Relations in the merchant shipping sphere are regulated not only by national systems of laws and codes, but also by international law, including the use of documents of a recommendatory nature and customs. In the process of transporting goods by sea, incidents are not uncommon, which may subsequently lead to claims and a dispute between the parties to the carriage. Since the ship is a permanent participant in such legal relations, the ship can become the first “hostage” of your dispute.

Ukraine has ratified the International Convention Relating to the Arrest of Sea-Going Ships of 1952 (Brussels Convention), which establishes the procedure for the arrest of a ship as security for a maritime claim. The Brussels Convention provides for 17 types of maritime claims. The main criterion for determining a claim as maritime one, is the emergence of a claim from legal relations related to the use of the ship.

To implement international provisions, each of the countries participating in the Brussels Convention additionally has its own legal instruments for the arrest of a ship in order to secure maritime claims, which are determined by national legislation. In Ukraine, such rules are contained in the Merchant Shipping Code of Ukraine, the Commercial Procedural Code of Ukraine and the Civil Procedure Code of Ukraine. It should be noted that the Brussels Convention clearly indicates that the arrest of a ship should only be imposed by a court or a judicial authority, which, in our deep conviction, excludes the possibility for any state authorities to exercise their authority to arrest a ship and impose restrictions on ship`s commercial activity.

As for P&I Club`s LOU – it is an incredibly powerful tool that clubs can provide to the shipowner when they are threatened with the arrest of their vessels by the plaintiff trying to secure a claim. LOU is not only a form of security recognized in the vast majority of maritime jurisdictions around the world, but also a form that can usually be issued much more easily than other forms of security, allowing the threatened vessel to resume sailing much faster.

A Club, a Shipowner and a Recipient of such a letter of undertaking, have a number of certain advantages: firstly, the letter of undertaking has the simple and flexible form of content, and secondly, the LOU, although it is made in writing, however, thanks to modern technologies, it can be delivered to any country in minutes. Due to the simple and capacious form of issuing a letter of undertaking from the P&I Club, the Shipowner minimizes, and in some cases avoids the additional costs that could be incurred in connection with the arrest of the vessel and the restriction of its commercial activities.

There is no single international act that would govern the adoption of a letter of undertaking from the Mutual Insurance Club. But despite this, UK, Hong Kong, Australia, Italy, France, and Singapore accept this type of document as security in common way. Most P&I Clubs note the effectiveness of using LOU, which is increasingly written in their publications and circulars. It is the concept of the Letter of undertaking of the Mutual Insurance Club that is to be considered in this article as a form of security, which must be fixed at the legislative level and introduced into widespread use for the territory of Ukraine in disputes over maritime claims.

Is it possible in Ukraine to use such a modern financial instrument as the Letter of Undertaking of P&I Club?

It would seem that Ukraine, as a maritime state, should not be an exception, however the using of a P&I Club`s LOU was not a common practice in our country, if not to say otherwise.

Chapter 49 of the Civil Code of Ukraine describes the basic terms, conditions, and requirements of the forms of security. According to Article 560 of the Civil Code of Ukraine, under a guarantee, a bank, other financial institution, insurance organization guarantees that the debtor will fulfill his debt to the creditor. The guarantee is valid for the period for which it is issued. The guarantee is valid from the date of its issue, unless otherwise specified in it. The guarantee cannot be revoked by the guarantor, unless otherwise provided in it, in accordance with Article 561 of the Civil Code of Ukraine.

It should be noted that LOU in its essence can be used in Ukraine and be recognized by state authorities of Ukraine without any restrictions. The validity and enforceability of LOU is indicated by its compliance with the requirements of applicable law. Also, LOU should be understandable and executable. The validity period of the document, as well as the procedure for its execution should be directly displayed in the content.

Analyzing the Ukrainian legislation, it can be confidently stated that a number of certain changes or rather, additions, should be introduced to the existing legal acts in order to clearly determine the procedure for its application in the commercial practice of Ukraine. However, it is important to note that the current regulations do not prohibit the use of such a security tool and recognize the existence of an extensive guarantee institution. The Commercial Code of Ukraine provides that, by agreement of the parties, the types of security for fulfilling obligations stipulated by law or those that do not contradict it may be applied. The provisions of the Commercial Code clarify such type of security as a “bank guarantee”, while pointing to the concept of a “letter of guarantee”, but only with respect to a document issued by a bank. The Civil Code clarifies the concept of “guarantee”, and also specifies the requirements and procedure for using this type of security.

Taking into account that all cases of the vessel arrest in one way or another relate to the authorities, it is also recommended to amend the Code of administrative legal proceedings of Ukraine. Undoubtedly, the norms of the Merchant Shipping Code of Ukraine require amendments and additions regarding the release of the vessel from arrest in the event that the maritime claim is secured in the form of the LOU from the P&I Club.

The possibility of recognizing the letter of guarantee of the Mutual Insurance Club, issued in accordance with the requirements of the legislation of Ukraine, was reflected in the decision of the Commercial Court of Odessa region dated May 15, 2020, where the letter of undertaking of the P&I Club was recognized as a financial guarantee against the State Ecology Inspection`s claim. The court noted that in the systemic interpretation of Article 141 and other Articles of the Commercial Procedure Code of Ukraine, it is possible to accept as evidence a financial guarantee of a person in respect of whom there are no doubts about solvency.

This decision of the Commercial court of Odessa region is inherently revolutionary and progressive. This is actually the first case when the court describes and recognizes an international financial instrument – the Letter of Undertaking of the P&I Club in the process of securing a maritime claim and declares the possibility of its use taking into account all regulatory requirements. This decision clearly explained the terms of use for the Letter of Undertaking in Ukrainian jurisdiction against the Maritime claims of State Authorities, Prosecutor’s office and other third Parties in Ukrainian courts, and the litigation proceedings became understandable for all shipowners, covered by P&I Clubs’ protection “umbrella”.

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SHIP ARREST

Ukraine ratified the 1952 Brussels Convention on 16 May 2012. The Civil Procedure Code of Ukraine and the Commercial Procedure Code of Ukraine, which regulates ship arrests in maritime claims, were adopted by the national legislative system.

The general practice used for ship arrests has become more stable. Changes to the procedural legislation have sped up the ship arrest procedure.
Parties have the right to apply for the arrest of a vessel at its scheduled port of destination in Ukraine. At the time of applying for registration, the vessel may be outside Ukrainian territory.

An application for arrest in respect of a maritime claim must contain:
• a description of the maritime claim;
• grounds for the need to arrest the ship; and
• evidence to prove that the vessel is registered in Ukraine or stands in the territorial waters of Ukraine or plans to move into the territorial waters of Ukraine.

The arrest of a sister ship is possible in Ukraine. An application for such an arrest is decided within two days of receipt by the court. The court is entitled to request counter-security from the party applying for an arrest to cover the possible loss. The type and amount of the counter-security are defined by the court considering the case. Ukrainian courts recognize bank guarantees as an appropriate form of counter-security.

A defendant is entitled to claim reimbursement of costs and for damages resulting from a wrongful arrest.

Letters of undertaking have not yet been regulated by Ukrainian legislation by special maritime law or code, but this question will be resolved in the near future.

The judicial sale of an arrested vessel may be initiated by:
• the claimant who suffered damage or injury in direct connection with the operation of the vessel;
• the creditor;
• a crew member;
• local port authorities; or
• the salvor.

The judicial sale of the vessel shall be public and accessible. The initiator of the judicial sale must issue a written notice to every party concerned within 30 days. The relevant parties to the judicial sale of a vessel are (1) the registered owner of the vessel, (2) the local authority in the country of registration of the vessel, and (3) all holders of the vessel’s encumbrances issued to the bearer and that have not been issued to bearer.
The written notice shall inform the parties concerned of the time and place of the judicial sale. When it is uncertain whether all concerned parties are known, a public announcement shall be made in the central state newspaper.

Generally, the right to ownership of the vessel arises from the moment of its registration in the State Register of Vessels. According to the procedure for the judicial sale of a vessel, the new owner of a vessel that has been forcibly sold will not be able to register it unless the previous owner has filed an application for removal of the vessel from the State Register. If this has not been done, the new ownership right to the vessel will not officially arise, in contradiction of Part 5, Article 12 of the International Convention on Maritime Liens and Mortgages 1993 (the Maritime Liens and Mortgages Convention), which came into force in Ukraine on 4 January 2003.

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Everything you need to know about ship fuel supply in 2020

The importance of protecting the environment from the effects of human activities has become the trend of the outgoing year. However, the shipping industry anticipated a trend for environmental standards to rise, as from January 1, 2020, new standards for the sulfur content in fuel are applied, which were approved long before the environmental movement was popularized.

Ukraine is a party to the International Convention for the Prevention of Pollution from Ships (“MARPOL”). MARPOL entered into force for Ukraine in 1994. On June 24, 2009, the Cabinet of Ministers of Ukraine adopted Resolution No. 631 on accession to the 1997 Protocol. This MARPOL Protocol is supplemented by Appendix VI “Regulations for the Prevention of Air Pollution from Ships”. Thus, Ukraine has been familiar with international requirements to limit emissions from ships since it joined the 1997 Protocol. The requirements set out in the original version of Appendix VI were not sufficient to ensure a clean atmosphere.

On October 10, 2008, the International Maritime Organization (“IMO”) adopted Resolution MEPC.176 (58) on Amendments to the Annex of the 1997 Protocol, which amended the International Convention for the Prevention of Pollution from Ships, 1973, in accordance with paragraph 16 (2 ) (f) (iii) of the Convention. The above mentioned referring to MARPOL article 16 on amendments. According to article 16, paragraph (2) of the Amendment after consideration by the Organization: (f) an amendment shall be deemed to have been accepted in the following circumstances: (iii) an amendment to an Annex to the Convention shall be deemed to have been accepted at the end of a period to be determined by the appropriate body at the time of its adoption, which period shall be not less than ten months, unless within that period an objection is communicated to the Organization by not less than one-third of the Parties or by the Parties the combined merchant fleets of which constitute not less than fifty percent of the gross tonnage of the world’s merchant fleet whichever condition is fulfilled.

According to the text of Resolution MEPC.176 (58), the above period was set until January 01, 2010. Thus, after the specified period has passed, amendments to Appendix VI “Regulations for the Prevention of Air Pollution from Ships” are adopted. The greatest resonance was caused by a change in the boundary standards for the sulfur content in the fuel used on ships. Regulation 14 of Annex VI establishes that the sulfur content of any fuel used onboard a ship must not exceed the following limits:

– 4.50% m/m until January 01, 2012;
– 3.50% m/m as of and after January 01, 2012;
– 0.50% m/m as of and after January 01, 2020.

Thus, from the deadline, participants of the international shipping market are required to make sure that the vessel is provided with the fuel of good quality with low sulfur content. It should be noted that Annex VI exclusively sets the boundary standards and defines the features of the application of such standards, but in no case does it concern sanctions for non-compliance with such standards. The decision to increase the standards for marine fuel requirements was preceded by lengthy preparation and discussion. The International Maritime Organization has considered the possibility of postponing the implementation of a toughened limit on sulfur content until January 01 2025 if the international community is not ready to meet the market demands for low sulfur fuel.

The maritime industry has formed a sufficient number of options for proper compliance with standards starting January 01, 2020.

The party responsible for the fuel supply must ensure that all supplied fuel meets the sulfur requirements in accordance with Regulation 14, for compliance purposes, fuel means any fuel delivered to and intended for combustion purposes for propulsion or operation onboard a ship, including distillate and residual fuels. According to Annex VI interpretation, fuel compliance must be proven and guaranteed by the supplier.

The ISO 8217: 20176 standard is used to ensure that the properties of the fuel that is supplied are consistent with the standard, which means that they comply with MARPOL Annex VI. The existing ISO 8217: 20176 standard for marine fuel takes into account the diverse nature of marine fuel and includes a number of categories, although not all categories may be available at each point of delivery.

It should be borne in mind that the purchase of appropriate fuel is not the only way to reduce emissions from the ship.

Regulation 4 of Annex VI stipulates, that the Administration of a Party may allow any fitting, material, appliance or apparatus to be fitted in a ship or other procedures, alternative fuel oils, or compliance methods used as an alternative to that required by this Annex if such fitting, material, appliance or apparatus or other procedures, alternative fuel oils, or compliance methods are at least as effective in terms of emissions reductions as that required by this Annex, including any of the standards set forth in regulations 13 and 14.

Thus, shipowners are given the opportunity to use alternative methods aimed at reducing emissions of pollutants into the atmosphere.

Guided by international practice, the use of a fuel with excess sulfur content in the case of using a scrubber on the vessel, namely, a device for cleaning gases from impurities, may be allowed. Based on their work, marine scrubbers can be divided into “wet” and “dry” scrubbers. “Dry” scrubbers use hard lime as an alkaline cleaning material that removes sulfur dioxide from exhaust gases. “Wet” scrubbers use water that is sprayed into the exhaust fumes for the same purpose.

“Wet” scrubbers are further subdivided into closed or open-loop scrubbers. In closed-loop scrubbers, fresh or seawater can be used as a cleaning fluid. When fresh water is used in closed-loop scrubbers, the quality of the water surrounding the vessel does not affect the performance and emissions of the scrubber wastewater. Open-loop scrubbers consume seawater during the cleaning process. Hybrid scrubbers can use both indoor and outdoor operating modes either simultaneously or by switching between them. Hybrid scrubbers with seawater can work both indoors and outdoors, and seawater is used as a flushing medium.

The most controversial is the use of scrubbers with an open-loop since as a result of their work, the water that was used for cleaning is discharged. The system is extremely efficient, but requires a large capacity since the required amount of seawater is quite large. An open-loop system works quite satisfactorily when the seawater used for purification has sufficient alkalinity. However, seawater with a high ambient temperature, fresh and even brackish water is inefficient and cannot be used. An open circuit scrubber for these reasons is not considered a suitable technology for areas such as the Baltic, where salinity levels are not high.

The fact of water discharge can be qualified by local regulatory authorities as a fact of pollution of the water area. Thus, the use of open-loop scrubbers in territorial and inland waters is associated with high risks for the shipowner. Many countries have already managed to impose bans or restrictions on the use of open-loop scrubbers in territorial waters. Despite the fact that the influence of the work of such scrubbers on the cleanliness of the water area has not been fully studied, certain states have adopted a policy to prevent possible pollution.

The European Commission’s 2016 note on the discharge of scrubber wash water, bans the discharge in ports and inland waters. China’s Ministry of Transport issued its ‘Notice on Regulating the Implementation of Supervision and Management of Ship Air Pollutant Emission Control Areas’ which states that from 1 January 2019 discharge of wash water from scrubbers is prohibited in the county’s inland waters and Bohai Bay waters. Discharge is prohibited in Singapore port waters from 1 January 2020. The official statement advises ships fitted with open-loop scrubbers to “carry out the switch to either closed-loop mode or to compliant fuel well in advance of the vessel’s arrival at the port waters”. The Irish authorities’ Notice № 37 of 2018 “Prohibition on the Discharge of Exhaust Gas Scrubber Wash Water” stipulates that discharge of wash water is prohibited in waters under Dublin port jurisdiction. Under the amendments of 1 March 2019 to Regulation № 488 on the environmental safety of ships and mobile offshore units, the use of open-loop scrubbers is prohibited in the Norwegian fjords.

Thus, in addition to the general requirements of MARPOL, shipowners must also take into account local legislative changes, which were entailed by toughening requirements for the sulfur content in fuel.

Shipowners also have the right to use liquefied natural gas (LNG) as fuel that complies with MARPOL requirements. It is considered the cleanest fuel, producing 30% less carbon dioxide than fuel oil, and 45% less than coal. Its environmental impact is also considered excellent because when it spills on land or water, it is said to evaporate quickly and leave no residue, essentially claiming it does not pollute waterways.

The vessel issues a “Fuel Oil Non-Availability Report” (FONAR), which is an approval for the continuous use of non-compliant fuels with a sulfur content of more than 0.5%, issued on the basis that there is not enough available fuel in which the sulfur content is below 0 5%, which is a way to avoid regulation. To prevent abuse of this right, the IMO committee issued a guideline requiring the vessel to provide detailed documentation for the release of the “Fuel Oil Non-Availability Report” (FONAR) to explain why it has fuel that exceeds the limits established by IMO 2020. The vessel must provide evidence that every effort has been made to obtain the appropriate fuel.

Thanks to the vigorous activity of the International Maritime Organization, the shipping industry entered into 2020 with new changes that would clearly entail a trend towards switching to LNG fuel, developing more efficient refineries, and conducting a detailed assessment of the environmental impact of the voyage.

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