'FSL NEW YORK' – High Court Sides With P&I Club Over LOU Dispute

On 10 May 2016, Blair J delivered a judgment in the matter of (1) FSL-9 Pte Limited (2) Nordic Tankers Trading A/S v Norwegian Hull Club [2016], a case where some controversial issues on the subject of LOUs issued by P&I clubs arose. These included whether an LOU beneficiary had a direct right of action against the P&I club, and whether it could apply for a court order to increase the value of the security provided.

Facts

In the instant case, damage had been done to a chemical tanker during the loading process which resulted in the escape of some cargo; no pollution incident arose. In order to diffuse the various threats of arrest that were made by the owners against the charterers (in respect of vessels owned by a group to which the charterers belonged) and by the charterers against the owners, three LOUs were issued. One LOU, in the sum of USD 3.5 million, issued by the charterers' P&I club on behalf of their members, in favour of owners, formed the subject of the proceedings.

The LOU contained the following provision:

"It is agreed that both Charterers and Owners shall have liberty to apply [our emphasis] if and to the extent the Security sum is reasonably deemed to be excessive or insufficient to adequately secure Owners' reasonable Claims."

The full text of the LOU can be found in the judgment. Click here.

London arbitration was commenced, and, as the process progressed, the original sum provided under the LOU was deemed inadequate by the owners. A request was subsequently made to the charterers' club for additional security. The request was refused, so the owners issued a summary judgment application asking the court to order the club, directly, to increase the level of security under the LOU. In turn, the club issued an application to strike out the owners' claim for summary judgment.

The High Court

The Judge indicated that there was no dispute about the fact that the owners were in fact under-secured, however, he specified that the issue revolved around whether the owners were entitled to look to the club directly under the terms of the LOU to make good the shortfall. Having reviewed the parties' various detailed submissions, Blair J found the charterers' club's arguments more persuasive.

Owners had argued that the use of the words "liberty to apply" in the LOU meant that the Court had the power to require the club to vary the security. Blair J stated that "liberty to apply" was normally found in court orders, and it was difficult...