25 September 2025
5 min read
#Transport, Shipping & Logistics
Published by:
The Federal Court of Australia has provided important guidance on the wording of a Letter of Undertaking (LOU) to secure the release a ship from arrest.
In Mitsui O.S.K. Lines Ltd v The Ship: Yangze 22 [2025] FCA 563, delivered on 29 May 2025, the Court dismissed an application by the defendant, Yangze 22 (Owners), to release the ship. The application was made on the basis that sufficient and reasonable security had been provided to the plaintiff, Mitsui O.S.K.Lines, in an LOU issued by an International Group P&I Club. The decision provides much needed guidance on a topic not previously entertained by Courts, being the wording of the LOU proffered to release the ship from arrest.
The arrest of the MV Yangze 22 followed a collision with the MV Vega Dream in the Beicao Fairway towards the port of Shanghai on 30 December 2024. A limitation fund was then set up by Owners in the Shanghai Maritime Court (SMC) in China. Under admiralty law, a shipowner is often entitled to limit their liability for a claim, either under international conventions or national laws. In this case, the laws of China provided for a lower limitation than under Australian law for the collision claim.
On 6 May 2025, Mitsui O.S.K Lines arrested the ship upon her arrival in the Port of Newcastle, to take advantage of the higher limitation calculation in Australia for their claim. This is a common feature of maritime claims, often referred to as ‘forum shopping’, and is generally permitted when used to obtain a legitimate jurisdictional advantage (such as a higher limitation figure).
On 23 May 2025, Owners proffered an LOU to Mitsui O.S.K. Lines to secure the ship’s release from arrest. While the amount of the LOU was never in dispute, Mitsui O.S.K. Lines rejected its wording. Three days later, Owners filed an application to the Federal Court for the release of the ship from arrest based on the proffered LOU.
Historically, Australian courts would only step in and determine whether the amount of security was reasonable, leaving the terms of security to negotiation between the parties. If the parties could not agree, the court would not make a determination on or endorse a proffered LOU. Instead, the party seeking release would have to pay the amount determined as reasonable into court or provide security by way of a bail bond secured by two Australian banks to secure the release of a ship from arrest.
In the Yangze 22 case, the Federal Court adopted a more commercial approach and recognised the international practice of providing security by LOU and the international standing of such instrument. The Court engaged on the terms of the LOU that would be accepted as reasonable and sufficient security to secure the release of the ship.
The LOU proffered by Owners contained a conditional clause that states that the LOU would automatically expire if Mitsui O.S.K. Lines established a limitation fund in any jurisdiction for the claim and it is either a) ordered by a competent jurisdiction or b) agreed in writing between the parties that the claims are limitable. Mitsui O.S.K. did not agree with this clause, particularly regarding the establishment of a limitation fund in any jurisdiction.
In response, Owners argued that the LOU wording meant that it would remain responsive to any claims that are not limitable and to the extent that the claims are not recovered by Mitsui O.S.K. Lines in another jurisdiction where a fund has been established. In other words, the LOU would merely reduce by the amount recovered against a fund constituted in another jurisdiction, such as China, and would thereafter be responsive for the remaining balance.
In reaching its decision, the Court stated that on a reading of the LOU, the right of Mitsui O.S.K. Lines to call for payment under the LOU automatically expired in the event that a limitation fund was established in any jurisdiction, and that the LOU said nothing about the value of the LOU being reduced or otherwise varied in that event – it simply expired.
As a result, the Court concluded that the proffered LOU did not provide Mitsui O.S.K. Lines with sufficient and reasonable security. However, rather than directing Owners to secure the release of the ship from arrest by way of a bail bond, the Court provided guidance on what it considered to be appropriate LOU wording by referring to an LOU used to secure the release of the MV Xin Tai Hai in the 2012 case of Atlasnavios Navegacao, LDA v The Ship “Xin Tai Hai” [2012] FCA 715 (Xin Tai Hai).
Following the order made by the Court, Owners proffered an amended LOU wording similar to that used in the Xin Tai Hai case to secure the release of the ship from arrest.
The Yangze 22 case provides some much-needed guidance on what can be considered sufficient and reasonable security through the wording used in an LOU. It is often the case that parties who put up security to secure the release of a ship from arrest will seek to protect their position as much as possible and impose conditions on how and when the security will respond to a claim.
The Court’s decision reiterates that there are limits on what conditions can be imposed and provides support for the notion that an arresting party is entitled to security for its claim, either in the form of an acceptable LOU or the ship under arrest. Therefore, parties seeking to secure the timely release of a ship from arrest must carefully consider the wording and any conditions imposed on the arresting party in an LOU, or risk being sent back to the drawing board while the ship remains under arrest.
If you have any questions about this article or what to do when your vessel is arrested, please contact us here.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
Published by:
