In St. Maximus Shipping Co. Ltd v A.P. Moller-Maersk A/S , the Commercial Court found that a letter of undertaking (LOU) issued by the Charterers as security for sums “ascertained to be due”, in a general average adjustment, bound the Charterers to pay under the LOU on the basis of the adjustment alone, and irrespective of whether or not the sums to be paid were legally due from cargo interests.
In July 2007, the container vessel “MAERSK NEUCHATEL” grounded off Tema, Ghana. It was agreed by the Owners and the Charterers that the grounding was a general average event. Average adjusters were appointed by the Owners.
The Charterers provided “bridging” security by way of an LOU issued to the Owners as security for sums due from cargo interests, undertaking:
“…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…”
The subsequent adjustment concluded that a total of USD 6,754,985.53 was due from cargo interests, and the Owners argued that the Charterers were obliged to pay that sum pursuant to the terms of the LOU. The Charterers disputed the conclusions reached by the adjusters, asserted that the proper amount “legally” due from cargo interests was only USD 3,517,580.31, and paid that lesser amount on account.
The Charterers argued that their undertaking was only to pay a “proper proportion” of the sum ascertained to be due, and that that meant a sum which was properly or legally due.
However, Mr Justice Hamblen felt that this placed too much weight on the term “proper proportion” in the LOU. In the Judge’s view, the term “proper proportion” related to the pro-rating of the various cargo interests’ liability in general average and not to the amount which might ultimately be legally due from them. The Court ultimately held that the Charterers were obliged to pay the amount ascertained to be due in the adjustment as published. The Judge concluded that, if that amount turned out to be an overpayment, the Charterers may have means of recourse against the Owners, whereas if it turned out to be an underpayment, the Owners would be left with unsecured claims against various cargo interests for the balance.
In a general average situation, parties should pay close attention to the wording of any LOU issued to secure the liability of cargo interests in subsequent adjustments.
If the LOU expressly states that the party issuing the LOU is only to pay out sums which are legally and properly due from cargo interests, this should preserve the rights of the party issuing the LOU to challenge the conclusions reached by the adjusters, and only pay the amount later ascertained to be properly and legally due. This is supported by the decision in the “JUTE EXPRESS” , which was mentioned by Mr Justice Hamblen in the St Maximus case.
If, on the other hand, the LOU does not refer to sums being properly and legally due (or words to that effect), the party issuing the LOU will have to pay out the sums ascertained to be due in the adjustment, with no right to challenge the conclusions reached in the adjustment prior to payment. In such a case, there may be a substantial delay between payment under the LOU of the adjusted sums and any recovery the charterers later make from other parties who are legally liable.