Charles Kimmins QC and Thomas Corby acted for the Norwegian Hull Club (“NHC”) on its successful application for summary judgment in a dispute over the construction of a P&I club letter of undertaking.

The Issue 

The issue in this case was whether the words “liberty to apply” in a P&I club letter of undertaking issued by NHC (“the LOU”) gave FSL-9 Limited and Nordic Tankers Trading A/S (“Owners”) a right to apply to the High Court in London to compel NHC to increase the level of security it had provided.

The Facts 

The LOU arose out of an incident in the Indonesian port of Padang in which Owners’ chemical tanker, m.t. “FSL NEW YORK”, was damaged during loading. At the time, the vessel was on charter to one of NHC’s members, ICOF Ship Chartering Pte Ltd (“Charterers”). Both Owners and Charterers asserted claims against each other and made threats of arrest. As a result, NHC provided Owners with the LOU in the sum of US$ 3,500,000. The LOU was subject to English law and jurisdiction. Further, it 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 insufficient to adequately secure Owners’ reasonable claims”

Owners and Charterers commenced arbitration in London. Owners subsequently decided that they were under secured and demanded a further US$ 4,000,000 security from NHC on the basis that the “liberty to apply” provision in the LOU entitled them to such an adjustment. NHC refused and Owners commenced proceedings in the High Court in London. Both parties applied for summary judgment.

The Parties’ Submissions

It was common ground that Owners’ claims in the arbitration were under-secured on the basis of their reasonably arguable best case (the test in The Moschanthy [1971] 1 Lloyd’s Rep. 37). The only issue was whether Owners had the right to compel NHC (as distinct from Charterers) to make up that shortfall.

Owners’ Submissions

Owners said that the most obvious meaning of the words “liberty to apply” was that they meant liberty to apply to court. They said that, pursuant to the jurisdiction clause in the LOU, this meant the High Court in London. Owners’ primary case was that this liberty gave them a novel right to apply to the court for an order compelling NHC to adjust the security upwards (akin to the rights in arrest proceedings governed by CPR Part 61); their alternative case was that it gave them a contractual right to such an adjustment, which NHC had breached in not agreeing to increase the security level and that Owners were therefore entitled to declaratory relief to the same effect.

NHC’s Submissions

NHC denied that the words “liberty to apply” conferred any special jurisdiction on the court to adjust the level of security which it otherwise would not have had. All that this provision conferred on Owners was a contractual liberty to apply for further security from Charterers (not from NHC). As such, if the security sum was subsequently deemed to be insufficient, NHC said that in those circumstances Owners could arrest Charterers’ assets in the normal way, notwithstanding the prohibition against otherwise doing so in the LOU.

The Judgment

 Blair J agreed with NHC and granted its application for summary judgment. The issue for the court was essentially a question of construction, and NHC’s construction was to be preferred.

As to the language of the LOU, although Blair J acknowledged that the words “liberty to apply” had a common meaning in court orders, they were much less easy to give meaning to when contained in a contract (such as the LOU). Owners said that they gave themselves and NHC a right to apply to court. The problem with that construction was that the liberty to apply was expressed to be given to Charterers and Charterers were not a party to the LOU. Blair J thought that it would be odd if the “liberty to apply” gave Owners a right against NHC but NHC no right to apply against Owners.

As to business common sense, this favoured Charterers’ construction for three reasons:

  1. Owners were wrong to say that the relevant factual matrix included the normal procedure in arrest proceedings under English admiralty law pursuant to CPR Part 61. If any country’s procedure was relevant, it would have been that of Indonesia. In any event, under English admiralty law, disputes as to the quantum of security took place between the parties to the underlying claim (i.e. Owners and Charterers). A P&I club would not be a party to those court proceedings any more than a bank would if security had been given by way of a bank guarantee instead of an LOU.
  2. A claim to increase the amount of an undertaking to provide security is a very different type of obligation from the obligation to make payment on the undertaking in accordance with the terms of an instrument. A claim for breach of that obligation would, of course, lie directly against NHC as the issuer of the LOU but that was not Owners’ claim because NHC was not refusing to pay. 
  3. Owners’ construction would have exposed the club to a potentially unlimited liability. There would be no upper limit to the amount by which NHC’s exposure could have been increased. It is inherently unlikely that a P&I club, or a bank, or other financial institution, would issue a financial instrument investing a court with the right to increase, without limit, its liability under the instrument upon the application of the beneficiary. Blair J said this was the “most significant factor” against Owners’ construction.

In summary, Owners sought to read too much into the “liberty to apply” provision in the LOU. If Owners wanted an unusual right to demand NHC (and not Charterers) provide further security for Owners’ claims against Charterers, Owners should have made sure that such a right was clearly set out.