While not a recent case the TUTOVA1 is a case that all P&I Clubs should keep in mind when issuing Letters of Undertaking and other Guarantees, particularly considering the current shipping market.

The background to the case is relatively simple. The Cargo Interests (Almatrans) petitioned for the arrest of the TUTOVA in Italy for alleged losses that they suffered as a result of delay to a cargo. The P&I Club for the Owners, via their Italian lawyers, issued a Letter of Undertaking in Ravenna on 27 March 1993.

On 15 September 1995, Almatrans sent a telex to the Owners claiming damages and threatening legal action. At about the same time the Cargo Interests sent a telex to the Owners’ Company Secretary and agents in the US.

On 14 July 1997, Almatrans’ lawyers wrote again setting out the claim and making it clear that the letter interrupted the time-bar. Then on 31 July 1997, Almatrans issued proceedings against Owners in Italy and asked the court to serve process on Owners and on its Company Secretary in Cyprus. There were difficulties in carrying out service in Cyprus.

On 27 May 1998, the P&I Club’s lawyers wrote to Almatrans’ lawyers requesting the return of the LOU as the limitation period had expired. Almatrans’ lawyers responded that the time bar had been interrupted by their letter of 14 July 1997. They did not mention that proceedings had been issued and served. After four hearings between 25 March 1999 and 6 July 2000 the Italian Court issued a judgment against the Owners.

In February 2001, the judgment was filed in the Italian Court and steps were taken to serve the Owners in Cyprus. On 10 June 2002, Almatrans’ Italian lawyers wrote to the Club’s Italian lawyers enclosing a copy of the judgment and requesting payment by the Club.

The Club refused to pay on a number of grounds, but in essence they argued that:

  1. There were implied terms and/or conditions precedent to the LOU that Almatrans would give adequate notice to Owners of the start of proceedings or any application to court, and that any judgment obtained by Almatrans would be obtained properly and with adequate notice to the Club; the Club alleged that there had been sharp practice by Almatrans in deliberately failing to inform the Club of the existence of the proceedings.
  2. As a result of the sharp practice of Almatrans, namely Almatrans’ and/or its lawyers’ deliberate decision not to inform the Club or its lawyers of the Italian proceedings, it would be contrary to public policy to allow Almatrans to call on the LOU.

The judge held that:

  1. The LOU was in conventional form and had been negotiated by lawyers to the parties who had the opportunity to consider carefully what the document should say. There was accordingly no justification, considering the wording of the LOU, to read into the LOU an implied obligation upon Almatrans to give notice to the P&I Club and/or their Italian lawyers of proceedings which Almatrans had brought against Owners.
  2. The allegation of sharp practice would be rejected. Had the litigation been conducted in London and an approach adopted similar to that used by Almatrans’ lawyers it would have been placed towards the bottom of the range of acceptable conduct. However, as the LOU was a common form of document used widely across the world often by those whose first language is not English the court had to be more cautious and had to take into consideration different legal systems and professional assumptions. In any event, in reviewing the case law2 there was no general principle that the law always provides a remedy where there had been sharp practice. Accordingly it was not contrary to public policy to allow Almatrans to enforce the judgment by calling on the LOU.

As a result the judge found in favour of Almatrans.

Implications of the TUTOVA

It is not difficult to think of further instances where the principles outlined in this judgment would be applicable. If for example a shipowning company registered in Liberia were wound up, then under Liberian law it would remain on the register for three years in order to prosecute or defend suits, notwithstanding that the company had been dissolved.

This means that if a Club has provided a standard LOU on behalf of a Liberian registered Shipowner and that Shipowner is wound up, then that dissolution would not prevent a Claimant from progressing a claim against the Shipowner. As a result, as long as the Claimants have followed the necessary steps required by the relevant law and jurisdiction to contact the Shipowner they are entitled to progress the Court/arbitration to judgment/award and can then enforce against the LOU provided by the Club.

Under the law as it now stands, the obligation to keep the Club informed of claims being progressed against a Member under a standard LOU therefore rests solely on that Member. As a result, if a Member is dissolved, it is important that the Club checks whether any LOUs or Guarantees have been issued and, if they have, then to contact opponents to ascertain the status of any proceedings. Better still would be for the Club to require, at the time any LOU were provided, the insertion of a clause requiring the Claimants to keep the Club informed of all existing or new proceedings undertaken against the Member relating to the liability that has been secured.