Legal Costs Cover (LCC) is often used by Members to support the recovery of unpaid hire or other sums from defaulting charterers. Sometimes there is a genuine dispute about whether the sums are due. Often, however, the real issue is getting the charterers to pay when they do not have visible assets or they are based in a difficult jurisdiction.
A good way for owners to improve their chances of being paid is to obtain a guarantee of the charterers’ performance from a third-party (the Guarantor). However, there are a number of pitfalls which may prevent a guarantee being enforceable. There are many points to consider when accepting guarantees.
Ensure that the Guarantor has the assets to pay
Where possible, it is preferable to obtain a guarantee from a company that has assets that can be verified, such as in published accounts.
Check the jurisdiction of the Guarantor’s assets
Even if the Guarantor has sufficient assets, this may not be enough if they are located in a jurisdiction that will not accept the guarantee. Therefore, Members should ensure that the Guarantor has assets in a jurisdiction with a fair and efficient legal system which will uphold the guarantee. Alternatively, enforcement may also be possible if the Guarantor owns vessels that could be arrested.
Consider the wording of the guarantee carefully
The wording of a guarantee should include:
- an appropriate law and jurisdiction clause (for example, English law and London arbitration will usually be suitable).
- a statement that it is unconditional and irrevocable.
- a statement that the Guarantor will remain liable even if there are amendments or other variations to the charterparty.
We recommend that Members consult Bimco’s standard form for ‘Charter Party Guarantee’.
Make sure that the Guarantor has signed the guarantee
Under English law, guarantees are still subject to the Statute of Frauds 1677. This states that, for a guarantee to be enforceable, it must be in writing and signed by the Guarantor or their authorised agent. In recent years the courts have decided that a guarantee given by email may count as being signed if the guarantor (or their agent) has written their name at the end of the email. However, for the sake of certainty, we recommend that the guarantee is agreed as a formal document, signed by both parties.
Ensure that the right party is agreeing the guarantee
For example, if a charter is being agreed through brokers, it may not be clear whether the charterers’ broker is authorised to give a guarantee on behalf of the Guarantor. Even when the Guarantor is giving the guarantee directly, it may be unclear as to whether the individual signing is authorised by the company to give guarantees. Therefore, Members should always check that the person signing is properly authorised before accepting a guarantee.
This article is not intended to be an exhaustive list of all the issues to consider when accepting a performance guarantee, but we hope that it offers helpful guidance on some of the key points to take into account.