In St Maximus Shipping Co Ltd v AP Moller-Maersk A/S [2014] EWHC 1643 (Comm), the court construed a LOU provided by Time Charterers as obliging them to pay sums ascertained to be due from cargo interests in general average.

Facts

Owners declared GA after the vessel grounded. The parties agreed that the grounding was a GA event. Time Charterers provided permanent security in respect of cargo interests’ potential liability in GA in the form of a LOU which provided, inter alia, as follows:

“In consideration of the delivery to Cargo Interests or to their order on payment of the freight due of the cargo carried onboard the m.v. MAERSK NEUCHATEL at the time of the above mentioned casualty, we hereby undertake and agree as follows:

  1. To pay the proper proportion of any General Average and/or Special Charges which may hereafter be ascertained to be due from the Cargo or the Shippers or Owners thereof under an Adjustment prepared by the appointed Average Adjusters in accordance with the Charterparty, dated 16th August 2004, and/or the Bills of Lading issued by us or SCL.”

The Average Adjustment was issued. Owners argued that point 1 of the LOU, above, was a clear and unequivocal undertaking to pay such amount as may be “ascertained to be due” under the Adjustment. Charterers submitted that the undertaking was only to pay a “proper proportion” of the sum ascertained to be due, which meant a sum which was properly and legally due. On Charterers’ case this was less than the full sum ascertained to be due under the Adjustment.

Judgment

The court preferred Owners’ construction of the language of the LOU. It contained a clear undertaking to pay, and said nothing about the sum being either legally or properly due. The specific use of the word “ascertained” connoted a determination of the amount to be paid. There was also no suggestion that the sum as ascertained to be due under the Adjustment was only conditionally due, or that some further procedure had to be gone through before it became unconditional.

The word “proper” was used only in relation to “proportion”. That provided a particular context, which related to one aspect of GA (pro-rating) rather than the amount or sum due by way of GA. Charterers’ argument might had had more force if the words used had been “proper amount” or “proper sum”.

By way of authority supporting Owners’ case, the court referred to The Jute Express [1991] 2 Lloyd’s Rep 55. In that case, the agreement to pay the proper proportion of the GA which had been ascertained was qualified by the words “and which is payable in respect of the goods by the owners thereof”. The words “and which is payable” were determined to mean “and which is legally due”. They preserved the right of the cargo owners to challenge the amount said to be due to the vessel owners, and would have achieved the effect contended for by Charterers in this case. However, in the present case, there was no such wording.

It was held that the LOU did oblige Charterers to pay the sum ascertained to be due under the Adjustment. If it turned out to be an overpayment, they would have recourse against Owners. If it was an underpayment, Charterers would be free of further liability and Owners would have unsecured claims against cargo interests for the balance.

Comment

The court noted that the parties’ agreement exemplified by the terms of the LOU reflected a bargain between two commercial parties, with benefits and drawbacks for both sides. When interpreting a commercial bargain, the courts will generally give effect to the plain meaning of the words of the agreement, on the basis that those are the words which the parties agreed.

The court also made clear that the effect argued by Charterers could have been achieved, had additional wording been added to the LOU.

This exemplifies the importance of considering the precise effect which the wording of a LOU, or any agreement, will have, and the liabilities that wording will impose.