When tendering a letter of undertaking (LOU) to an arresting party, a P&I Club cannot lawfully include terms that could cause the undertaking to expire according to the Australian Federal Court.
In the case of the “Yangze 22”, the court refused to release a vessel from arrest because the P&I Club’s LOU included an expiry clause that undermined the security offered.
The LOU tendered by the P&I Club of the Yangze 22’s owners to cover Mitsui OSK’s damages included a clause that allowed the LOU to expire automatically if a limitation fund was established “in any jurisdiction.” The court found that this wording did not offer sufficient and reasonable security under Australian Admiralty law.
Mitsui OSK chartered the mv Vega Dream. In December 2024, the mv Yangze 22 collided with the Vega Dream near Shanghai. Mitsui OSK and the owners of the Vega Dream suffered damages.
The Yangze 22’s owners sought to establish a limitation fund in China, a country which is not party to the 1976 Limitation of Liability for Maritime Claims Convention (LMCC).
In May 2025, Mitsui OSK and the owners arrested the Yangze 22 in Newcastle, Australia.
To secure the vessel’s release, the owners of the Yangze 22 offered an LOU from their P&I Club. While the amount and the P&I Club were acceptable to the arresting parties, a dispute arose on a clause that would cause the LOU to expire if a limitation fund was set up anywhere in the world and the claims were deemed limitable.
Two main concerns led the court to agree that the arresting parties could reject the LOU:
1 Automatic expiry vs. reduction
The clause did not reduce the LOU based on actual recoveries from a limitation fund; it terminated it entirely. This could leave arresting parties without effective security.
2 Jurisdictional risk
The clause applied to funds established “in any jurisdiction,” including those outside the LLMC framework. This created uncertainty and risk for claimants, especially in non-convention countries like China, where coordinated enforcement is not guaranteed.
The court held that security must not leave claimants worse off than keeping the vessel under arrest. The LOU’s expiry clause was too broad and did not ensure reliable recovery. Conditional security is acceptable, but only if it provides adequate protection. The application by the owners of the Yangze 22 to release the vessel was dismissed.
Key lessons for shipowners and insurers:
• Careful drafting of LOUs is essential in maritime arrest cases. Even where the amount and the issuing party are not in dispute, courts will closely examine the wording of the LOU’s conditions. Clauses that allow the security to expire automatically, especially when triggered by events in foreign jurisdictions, are unlikely to be accepted. Such provisions can undermine the reliability of the security and leave claimants exposed to unnecessary risk.
• To be effective, the conditions attached to an LOU should be linked to actual recoveries rather than hypothetical outcomes. Courts favour clauses that allow the security to be reduced in proportion to amounts recovered from a limitation fund, under judicial supervision. This approach ensures transparency and fairness, whereas blanket expiry clauses may prematurely terminate the claimant’s rights without any guarantee of compensation.
• The international legal framework plays a critical role. The LLMC provides a coordinated mechanism for handling limitation funds across member states. If a fund is established in a country outside this regime, such as China, courts may be reluctant to accept it as a basis for releasing a vessel. Without the safeguards of the LLMC, claimants may face enforcement challenges and limited access to recovery.
• Any substitute for a vessel under arrest must offer equal or better protection to the claimant. If the terms of the LOU allow it to fall away before the claimant has access to a dependable recovery process, the court is unlikely to approve the vessel’s release. Security must preserve the claimant’s position, not diminish it, and should be structured to reflect both legal standards and practical realities.
Parties should ensure that any proposed LOU aligns with the legal framework of the arresting jurisdiction and offers genuine protection to claimants.