FSL-9 PTE Ltd & Anor v Norwegian Hull Club

A letter of undertaking issued by a P&I club must be construed as a commercial contract, having regard to its commercial purpose. A clause giving the parties liberty to apply does not, without clear contractual language, confer a direct right to require the issuing club to increase its capped liability. Where the clause concerns adjustment of security between the parties to the underlying dispute, the right to seek further security lies against those parties, including by arresting assets where the contract permits it. A jurisdiction clause for disputes under the undertaking does not itself create an obligation on the club to provide increased security.

The owners of a chemical tanker and the defendant P&I club issued cross-summary judgment applications concerning a letter of undertaking for US$3.5 million. The undertaking secured claims arising from damage to the vessel and contained a clause giving the charterers and owners liberty to apply if the security became excessive or insufficient.

The owners contended that the clause entitled them to apply to the High Court to require the club to increase the security. The club argued that any adjustment was a matter between the owners and charterers, and that its liability remained capped. The central issue was whether the undertaking created a direct contractual right against the club to obtain increased security.

1. Summary judgment. The club was entitled to summary judgment. The owners’ claim to require the club to increase the amount of its undertaking was dismissed.
2. Nature and construction of the undertaking. A P&I club letter of undertaking is a commercial contract. Subject to its terms, it creates a primary obligation analogous to a bank guarantee and is construed having regard to its commercial purpose. The principles applicable to secondary suretyship liability do not apply: The “Rays” [2005] 2 Lloyd’s Rep 479; The “Elpis” [1999] 1 Lloyd’s Rep 606.
3. Meaning of liberty to apply. Although the words normally refer to an application to a court, their use in this contractual instrument was difficult to reconcile with a direct right against the club. The reference to “Charterers” could not be read as including the club. The clause permitted the owners to seek increased security from the charterers, including by arresting charterers’ assets if the security proved inadequate, notwithstanding the earlier prohibition on arrest or re-arrest. It did not confer jurisdiction on the court to increase the club’s liability.
4. Commercial context and liability cap. The undertaking expressly capped the club’s total liability at US$3.5 million. It was inherently unlikely that a P&I club, bank or other financial institution would issue an instrument allowing a court to increase its exposure without limit. This strongly supported the club’s construction. The ordinary English admiralty procedure did not assist the owners because such adjustment procedure operates between the parties to the underlying dispute, not against the issuer of security.
5. No contractual obligation to increase security. The jurisdiction clause enabled disputes under the undertaking to be referred to the High Court, but did not imply an obligation on the club to increase security. The club’s obligation to pay sums due under the undertaking was distinct from any proposed obligation to enlarge the undertaking itself. The quantum issues therefore did not arise for determination.