On 10 May 2016, Blair J delivered a judgment in the matter of (1) FSL-9 Pte Limited (2) Nordic Tankers Trading A/S v Norwegian Hull Club , a case where some controversial issues on the subject of LOUs issued by P&I clubs arose. These included whether an 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 the instant case, damage had been done to a chemical tanker during the loading process which resulted in the escape of some cargo; no pollution incident arose. In order to diffuse the various threats of arrest that were made by the owners against the charterers (in respect of vessels owned by a group to which the charterers belonged) and by the charterers against the owners, three LOUs were issued. One LOU, in the sum of USD 3.5 million, issued by the charterers' P&I club on behalf of their members, 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 [our emphasis] if and to the extent the Security sum is reasonably deemed to be excessive or insufficient to adequately secure Owners’ reasonable Claims.”
The full text of the LOU can be found in the judgment. Click here.
London arbitration was commenced, and, as the process progressed, the original sum provided under the LOU was deemed inadequate by the owners. A request was subsequently made to the charterers' club for additional security. The request was refused, so the owners issued a summary judgment application asking the court to order the club, directly, to increase the level of security under the LOU. In turn, the club issued an application to strike out the owners' claim for summary judgment.
The High Court
Judge indicated that there was no dispute about the fact that the owners were in fact under-secured, however, he specified that the issue revolved around whether the owners were 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 charterers’ club's arguments more persuasive.
Owners 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 owners (i.e. for applications to the court to be made), might apply between the owners and the charterers, was not sufficient for it to apply against the charterers' 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 charterers and the owners.
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 owners could ask charterers 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 owners’ construction, the owners 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.
Whilst 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 charterers’ club’s liability.
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.