FSL-9 Pte & Nordic Tankers Trading v Norwegian Hull Club - The FSL New York
FSL-9 Pte Ltd and Nordic Tankers Trading A/S v Norwegian Hull Club (The “FSL New York”)
English Commercial Court: Blair J:  EWHC 1091 (Comm): 10 May 2016
John Kimbell QC and Emily McCrea-Theaker (instructed by Reed Smith LLP) for FSL-9 and Nordic Tankers Trading
Charles Kimmins QC and Thomas Corby (instructed by Mills & Co) for Norwegian Hull Club
LETTER OF UNDERTAKING: P&I CLUB: WHETHER CLAIMANT OWNERS COULD APPLY TO HIGH COURT TO REQUIRE DEFENDANT P&I CLUB TO INCREASE LEVEL OF SECURITY AVAILABLE UNDER A LETTER OF UNDERTAKING ISSUED BY THE CLUB TO OWNERS: MEANING OF “LIBERTY TO APPLY” IN LETTER OF UNDERTAKING SUBJECT TO ENGLISH LAW AND EXCLUSIVE JURISDICTION OF HIGH COURT IN LONDON
The defendant P&I Club was entitled to summary judgment in its favour on the basis that the claimant Owners did not have “liberty to apply” to the High Court to require the P&I Club to increase the amount of its undertaking under a letter of undertaking issued to Owners, which was subject to English law and the exclusive jurisdiction of the High Court in London.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member, and International Contributor to DMC’s Case Notes
The “FLS New York”, a chemical tanker, was chartered by her Owners, FSL-9 Pte Ltd (“Owners”) to ICOF Ship Chartering Pte Ltd (“Charterers”) when an incident arose at Padang, Indonesia where the vessel was damaged during loading and some cargo escaped from her. Charterers and Owners, respectively, asserted claims against each other, leading to a threat by Owners to arrest a vessel owned by the group of which Charterers were a part.
The immediate impasse was resolved by the mutual provision of security by way of the issue of letters of undertaking (“LOU”), with Norwegian Hull Club (“Club”) issuing an LOU on behalf of their members, Charterers, in the sum of USD3.5m. Following commencement of London arbitration under the Charterparty, the Owners took the view that further security was required.
Owners demanded a further sum of USD4m (later reduced to USD2.26m to represent Owners’ best reasonably arguable case) on the basis that the LOU provided for adjustment of the security if this proved to be inadequate. The relevant provision of the LOU read:
“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.”
The Club declined to furnish the further security demanded, following which Owners commenced High Court proceedings in London. In those proceedings it was common ground that Owners were under-secured but the dispute focused on whether Owners were entitled to look to the Club directly under the LOU to make good the shortfall.
Having heard the submissions of the Club and Owners, the judge decided in the Club’s favour, on a summary judgment basis, for the following reasons:
1. The term "liberty to apply", in the English jurisdiction, is normally to be found in a court order, and is there to give parties to existing proceedings the right to come back before the court in particular circumstances, but it was much less easy to give meaning to these words when they were contained in a contract, particularly a contract in respect of which there were no proceedings at the time.
2. But the words "liberty to apply" were in the LOU, and so they had to be given a meaning.
a. Owners had argued that the clause gave symmetry to the LOU, by giving both Charterers and Owners the right to apply to the court to vary the security up or down. But, the judge pointed out, the Charterers were not a party to the LOU such that no application could be made against them; and
b. Further, there was no symmetry between Owners and the Club. As the judge said, the term “Charterers” in the LOU could not be read as meaning “charterers and/or the club”.
3. Owners objected to an interpretation of the words "liberty to apply" (advocated by the Club) as allowing them only to seek additional security through the arrest of vessels or other assets of Charterers, in the event that the sum secured proved to be inadequate. This, they said, ran contrary to the arrest prohibition in the LOU, which required Owners to refrain “… from arresting or interfering with any ships or assets belonging to or controlled by Charterers…”
But the judge held that the ‘no-arrest’ provision was necessary to enable the LOU to achieve its immediate purpose of lifting the threat of the arrest of the Charterers’ vessel. He also held that the "liberty to apply" provision could be read compatibly with the prohibition, as qualifying the prohibition against arrest or re-arrest of Charterers’ assets if the security provided proved to be inadequate.
4 As the case was one that seemed to concern language that could have more than one meaning, within the well-known passage of Rainy Sky v Kookmin Bank  UKSC 50, this called for a construction that was consistent with business common sense. But, as the parties took diametrically opposing views as to what constituted business common sense here, the judge considered that it was to be determined by weighing up three particular factors, as detailed below.
5. First, while Owners submitted it was standard English admiralty procedure for applications to the court to be made, meaning here that it was highly likely that the use of the term "liberty to apply" meant liberty to apply to the identified court in the LOU, the judge preferred the Club’s objections that:
a. English admiralty procedure was irrelevant here. Indeed, if the procedure of any jurisdiction formed part of the relevant factual matrix, it would have been that of Indonesia, where Charterers' assets were located; and
b. The Club was not a party to the dispute, which was between Owners and Charterers, and so would not be a party to the court proceedings anymore than a bank would have been, had security been provided by way of a bank guarantee instead.
6 Second, Owners could not identify a term of the LOU requiring the Club to increase the level of security upon Owners’ application, such that Owners could not identify any breach of contract by the Club. In the Club’s view, it was impossible to construe any obligation placed upon the Club to increase the amount of the security from a “liberty to apply” given to Charterers and Owners.
In response, Owners had argued that, if the provision was properly construed only as a “right to adjustment”, then the Club was in breach by not agreeing to increase the security to a level which corresponded to Owners’ best reasonably arguable case. This meant, said Owners, that they were entitled to refer the dispute to the court under the dispute resolution clause.
But the judge held that it was not a matter of identifying the court to which a dispute had to be referred. That was provided for in the LOU. The reference to the court of a dispute between Owners and Charterers did not imply that the Club had undertaken to increase security, should Charterers fail to do so. Increasing the amount of an undertaking was a very different type of obligation from the obligation to make payment under the undertaking in accordance with the terms of the instrument. A claim for breach of that obligation would, of course, lie directly against the Club as issuer of the instrument, and would fall within the exclusive jurisdiction of the English court, but Owners were not making it, because the Club was not refusing to pay.
7. Third, and in the judge’s view the most significant factor, Owners had argued that there was nothing odd about a P&I club agreeing to a possible future adjustment in the level of security up or down if circumstances changed. However, on Owners’ case there was no upper limit to the amount by which the Club's exposure might be increased by the court upon application under the “liberty to apply”.
Owners said that in practice this should not be a matter of concern, since the scope for liability was relatively constrained. But the judge disputed that on the facts.
He further held that Owners’ position that the cap was subject to the “liberty to apply” was not acceptable. The LOU stated the maximum sum that the Club had committed to pay to Owners. Owners could ask for an increase but any refusal would be at Charterers’ risk, in that, if they refused, their assets would again be exposed to attachment by Owners.
It was, in the judge’s view, a different matter altogether to propose that the court could order the Club to give the increase. The judge particularly considered this point to be a “powerful support to the view that the ‘liberty to apply’ subsists as against Charterers, and does not give a direct right against the Club to require it to increase the security”.
In his view, it was 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. If an increase were ordered, this could have possible implications for the institution’s capital requirements or reserves and/or increase unacceptably an institution’s exposure on an unsecured basis.
Given the above, the judge concluded that the "liberty to apply" in the LOU did not give Owners the right to apply to the court to require the Club to increase the amount of its undertaking but rather, in accordance with the Club’s construction of the LOU, the provision enabled Owners to arrest Charterers’ assets if the security provided proved to be inadequate, and notwithstanding the prohibition against arrest or re-arrest provided for in the LOU. Accordingly, the right to enforce an increase in the amount of the security lay against Charterers, and not against the Club directly.
While the judgment, based on a plain reading of the LOU, initially appears to be somewhat questionable, the detailed consideration of the wider three-party dynamic involved (Owners and Charterers under the Charterparty, and the Club and Owners under the LOU) justified the Judge’s more nuanced approach to the correct interpretation of the LOU.