Please sir, I want some more

On May 10, 2016, Blair J delivered a judgement in the matter of FSL-9 Pte Limited Nordic Tankers Trading A/S v Norwegian Hull Club, a case where some controversial issues on the subject of Letters of Undertakings (LOU) issued by P&I clubs arose. These included whether a LOU beneficiary had a direct right of action against the P&I club, and whether it could apply for a court order to increase the value of the security provided.

In this case, damage had been done to a chemical tanker during the loading process, which resulted in the escape of some cargo; there was no pollution. In order to diffuse the various threats of arrest that were made by the owner against the charterer, in respect of vessels owned by a group to which the charterer belonged, and by the charterer against the owner, three LOUs were issued.

One LOU, in the sum of $3.5m, issued by the charterers’ P&I club on behalf of its members and in favour of owners formed the subject of the proceedings. The LOU contained the following provision: “It is agreed that both charterers and owners shall have liberty to apply if and to the extent the security sum is reasonably deemed to be excessive or inefficient to adequately secure owners’ reasonable claims.”

London arbitration was commenced, and, as the process progressed, the original sum provided under the LOU was deemed inadequate by the owner. A request was subsequently made to the charterer’s club for additional security. The request was refused, so the owner issued a summary judgement application asking the court to directly order the club to increase the level of security under the LOU. In turn, the club issued an application to strike out the owners’ claim for summary judgement.

The High Court

The judge indicated that there was no dispute about the fact that the owner was under-secured. He specified, however, that the issue revolved around whether the owner was entitled to look to the club directly under the terms of the LOU to make good the shortfall. Having reviewed the parties’ various detailed submissions, Blair J found the charterer’s club’s arguments more persuasive.

The owner had argued that the use of the words “liberty to apply” in the LOU meant that the Court had the power to require the club to vary the security. Blair J stated that “liberty to apply” was normally found in court orders, and it was difficult to give it a contractual meaning, especially one where there were no proceedings underfoot at the time. Notwithstanding the difficulty, “liberty to apply” was found to mean liberty to arrest, and that liberty would not offend the prohibition provision not to arrest or re-arrest, stated elsewhere within the LOU.

In addition, the word “charterers” could not be read as meaning “charterers and/or their club”, especially considering that elsewhere in the text of the LOU “charterers” only referred to “charterers and or associated companies/entities”.

The judge went on to state that the fact that English Admiralty procedure, which would provide the mechanism sought by the owner for applications to the court to be made for instance, might apply between the owner and the charterer, was not sufficient for it to apply against the charterer’s club, any more than it would apply against a bank if the bank had provided a bank guarantee. Adjustment would have taken place between the parties in dispute, namely the charterer and the owner.

The LOU stated the maximum that the club had agreed to provide, and the club’s commitment was set out. If that figure was not sufficient, the owner could ask charterer for an increase, which might be refused; but this was different from proposing that the court could order the club to give it.

On the owner’s construction, the owner would be entitled to an open-ended security resulting in an open-ended financial instrument, which Blair J could not envisage being provided, as it might have an impact on that institution’s capital requirements. While the court was entitled to review the pre-contractual correspondence, that review did not indicate that the terms being negotiated were being treated as a liberty to apply to the court to increase the charterer’s club’s liability.

Clarity sought

This judgment, therefore, holds that where there is a mechanism to increase the quantum of security, that needs to be expressed in clear terms, such that it binds the club to provide any increased amount ordered by the court, up to the total value of the claim; and it binds the underlying principal to the jurisdiction, to the appropriate court for any application in the first place.

If a court has jurisdiction over a dispute between claimants and defendants, and an LOU is offered, it does not necessarily follow that the rights the parties have within that court system will automatically apply as against their insurers. Otherwise, arresting parties who find adjustment provisions unenforceable will insist on sufficient security from the outset, even to the value of their most optimistic claim.

Martin Hall is head of marine casualty, associate legal executive and partner equivalent at Clyde & Co. He can be contacted on +44 (0) 20 7876 5000 or martin.hall@clydeco.com. David Handley, meanwhile, is a master mariner and solicitor at the same company. He can be contacted on +44 (0) 20 7876 4496 or david.handley@clydeco.com.