Nice try — but an LOU means what it says.

In 2013 there was an incident in Padang, Indonesia involving a medium-sized chemical tanker, the FSL New York. Owners and charterers brought arbitration proceedings against each other: against mutual threats of ship arrests, LOUs were issued each way. That issued on behalf of the charterer was produced by the Norwegian Hull P&I Club, was explicitly limited to a maximum of $3.5 million, but contained the enigmatic boilerplate phrase “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.”

Matters were indeed more complicated than they first seemed, and it was at least arguably clear that the security was not reasonably sufficient. Owners, instead of taking the normal course of applying to the court against the charterers for permission to arrest other vessels with a view to increasing their security, latched on to the “liberty to apply” wording and applied directly against the P&I Club for an order increasing its potential liability under its existing LOU. The Club understandably objected. Its liability was, it observed, stated to be capped at $3.5 million all in, and it would be curious if the “liberty to apply” provision nullified that cap by giving the court a roving commission directly to increase its liability to an indefinite extent above that figure.

Blair J, rightly in this blog’s view, decided for the Club on the basis of its arguments. He also suggested, with a good deal of common sense, that the prohibition elsewhere in the LOU on further arrests should be read subject to a proviso that it should not apply where the owners applied to the court as against the charterers with a view to obtaining further security.

One can almost hear the concerted sigh of relief from the P&I world.

See FSL-9 PTE Ltd (t/a Nordic Tankers) v Norwegian Hull Club [2016] EWHC 1091 (Comm). available on BAILII.

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