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November 16, 2009

Shipowners told to exercise due diligence in investigating counterparty financial condition

The American P&I Club is telling its shipowner members to perform a due diligence investigation into the financial condition of their intended contract partners prior to entering into a fixture or other contractual engagement. Otherwise the Club may withhold support under FD&D cover.

In today's market conditions, shipowners have been showing a greater interest in Freight, Demurrage and Defense (FD&D) Insurance.

FD&D cover provides cover for legal costs -- and legal assistance -- in relation to a wide range of disputes arising from the building, buying, selling, owning and operation of an entered vessel. It does not provide insurance against any principal sum in dispute -- e.g. unpaid hire or deadfreight under a charterparty, but it does cover the cost of employing lawyers and other experts in the prosecution or the defense of such matters.

In a circular to members issued today, the American Club says its managers have noticed "a marked increase" in the number of new FD&D matters.

"In many cases," says the circular, "despite having strong merits in their favor, and in some cases even a favorable arbitration award or court decision already in hand, members have been unable to enforce their claims because their contract partners have gone bankrupt, or simply disappeared."

"When this happens," continues the circular, it is difficult for your Managers to justify FD&D support, regardless of the merits of the Member's claim, since the prospects for enforcement are so poor. Under the Club's rules the prospect of enforcement of any claim is an important consideration when the Managers decide whether or not to support an FD&D matter and, if so, the extent of that support.

"In order to limit the likelihood of such unfortunate circumstances occurring in the future, your Managers will henceforward require, as a condition of their exercising discretion on behalf of the Club to support a Member in an FD&D matter, that Members perform a due diligence investigation into the financial condition of their intended contract partners prior to entering in the fixture or other contractual engagement," says the circular.

It notes that this obligation can be satisfied by commissioning a corporate or asset investigation from one or more of the following companies: Dynamar, MRC/Lloyd's Maritime Intelligence Unit, Gray Page, and/or Dun & Bradstreet, or some other internationally recognized asset investigation company. The managers may also consider information obtained from other sources such as BIMCO and/or Intertanko in assessing whether a member has satisfied the obligation to perform due diligence in individual cases.

As mentioned above, such investigation will henceforward be a prerequisite to FD&D support for new matters involving claims for breach of contract. Prior to requesting FD&D support in these matters, Members will be required to provide the Managers with satisfactory evidence of having performed due diligence as well as the result of such inquiry.

If a member cannot furnish the requisite proof, or if an investigation revealed that the counterparty was in poor financial condition, the managersreserve the right to withhold support for any expenses incurred, or to be incurred, in the FD&D matter in question.

The managers may also, at their discretion, support the matter only to the extent that the Member is able to obtain security for the claim. Under the recent ruling of the United States Court of Appeals for the Second Circuit in The Shipping Corporation of India, Ltd. v. Jaldhi Overseas Pte. Ltd., the Rule B attachment in the US of electronic fund transfers (EFTs) is no longer available, and alternative measures to obtain security, including vessel or bunker arrests, are more costly. Members must always obtain the managers' written approval before incurring any expenses associated with efforts to secure their claims.

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