Hamblen J decides the proper construction of a letter of undertaking provided to “owners” by time charterers as security for the potential liability in general average of cargo interests: meaning of “proper proportion” and “ascertained to be due”: the nature of ‘on-demand guarantees’: State Trading Corp of India Ltd v Doyle Carriers Inc (The Jute Express) [1991] 2 Lloyd’s Rep. 55 considered.

Stephen Kenny QC and Jessica Sutherland successfully appeared for the Claimant in its claim to enforce the terms of a Letter of Undertaking provided to it by the Defendant (“Maersk”) by way of security for the potential liability in general average of cargo interests.

Maersk had time chartered the vessel from the Claimant. When the vessel grounded, general average was declared. It was agreed that, as a result of the grounding, the vessel and her cargo were imperilled and that the grounding was, therefore, a general average event. The Claimant appointed average adjusters (“SHH”), which provided Maersk with the terms of a draft letter of undertaking. Following negotiations involving SHH and solicitors for the Claimant and Maersk respectively, the terms of the letter of undertaking were agreed. On 25 September 2007, under cover of an email from Maersk’s solicitors (“H”), SHH and the Claimant’s solicitors were sent a scanned copy of the signed letter of undertaking dated 6 September 2007 (“the LOU”). Neither SHH nor the Claimant’s solicitors responded to H’s covering email. The principal undertaking given by Maersk in the LOU (Clause 1) was “1. To pay the proper proportion of any General Average and / or Special Charges which may hereafter be ascertained to be due from the Cargo or the Shippers or Owners thereof under an Adjustment prepared by the appointed Average Adjusters in accordance with the Charterparty, dated 16th August 2004, and / or the Bills of Lading issued by us or SCL.”

SHH duly produced an adjustment stating that (taking into account sums already paid on account) a further US$4,254,985.53 was due from cargo interests.

On Maersk’s case, the proper amount legally due from cargo interests was US$3.5 million and it argued that its only liability was to pay the sum which was properly and legally due from cargo interests. On this basis it was not bound, for the purpose of quantifying liability under the LOU, to accept as correct or binding, the ascertainment of that liability of cargo by SHH; or any legal or factual premise or determination leading to that ascertainment. Alternatively, Maersk argued that by “accepting” the signed LOU under cover of H’s email of 25 September, the Claimant was estopped from challenging Maersk’s construction of the LOU; alternatively that the LOU fell to be rectified to reflect Maersk’s construction.

The Claimant contended that the LOU was akin to an ‘on demand guarantee’ and that Maersk was obliged to pay the full amount stated in the adjustment, provided only that the adjustment was prepared in accordance with the York Antwerp Rules 1994, and that Maersk was bound by (1) the findings of fact made by SHH in the adjustment and (2) by SHH’s assessment of their own costs.

The court was required to determine preliminary issues as to the proper construction of the LOU and Maersk’s estoppel and rectification arguments.

Determining the preliminary issues in favour of the Claimant, Mr Justice Hamblen held: (1) As a matter of language, the Claimant’s submission that Clause 1 of the LOU was an unconditional and absolute undertaking to pay such an amount as might be ascertained to be due under the adjustment was to be preferred. The payment was to be of a sum “ascertained to be due”, and to “ascertain” meant to make certain, while “due” connoted due and payable; there was no suggestion that the sum ascertained to be due under the adjustment was only conditionally or provisionally due. Nor was there any procedure or mechanism laid down as to when and how it became unconditionally due; and the clause said nothing about the sum being legally due, State Trading Corp of India Ltd v Doyle Carriers Inc (The Jute Express) [1991] 2 Lloyd’s Rep. 55 considered. Accordingly, the proper construction of the letter of undertaking was that it obliged Maersk to pay the sum ascertained to be due in the adjustment. That sum might in fact be an overpayment or an underpayment. If it was an overpayment, then Maersk might have means of recourse against the Claimant; if it was an underpayment, then Maersk was free of any further liability and the Claimant was left with unsecured claims against various cargo interests for the balance. (2) The Claimant was not estopped by representation from asserting that Maersk’s construction of the LOU was incorrect. (3) Maersk’s claim for rectification of the letter of undertaking on the basis of common mistake was rejected. (4) Maersk was bound by SHH’s determinations, including determinations of their proper fees and of the sum due from cargo interests under a non-separation agreement.

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