UK: Scope Of LOI And LOU Given To Port For Damaged Vessel And Containers

Yilport Konteyner Terminali Ve Liman Isletmeleri AS v. Buxcliff KG and others (CMA CGM Verlaine) [2012] EWHC 3289 (Comm)

The dispute in this case arose following a collision that caused damage to a vessel and a number of its containers while it was en route to Turkey. The vessel interests were required to, and gave, a letter of undertaking ("LOU") and a letter of indemnity ("LOI") to the Turkish discharge port authorities in view of the condition of the vessel and containers, but the parties subsequently disagreed as to the scope of both the LOI and the LOU. Given the frequency with which LOUs and LOIs are given in a shipping context and the tight timeframe within which they are normally negotiated and issued, this decision highlights the importance of giving careful consideration to the wording used to ensure that they achieve the effect intended by the parties and that they do not expose the party giving the LOI or LOU to any greater liability than originally expected.

The background facts

The original Turkish discharge port would not allow the vessel to discharge its containers there without the vessel interests agreeing to what was effectively a penalty payment. Agreement was therefore reached with an alternative Turkish port to discharge the containers destined for Turkey there, together with any damaged deck cargo. At a meeting between representatives for both sides, there was no discussion as to the port's costs for discharging the vessel, although it was agreed that the time charterers and vessel managers would provide a LOU, and the vessel's Club would provide a LOI, in view of the fact that the port might have to take additional precautions and safety measures.

Under the LOU, in consideration of allowing the vessel to berth and discharge some of its containers, the port would be paid:

Under the LOI, the Club undertook to indemnify the port as follows:

The time charterers and vessel managers subsequently refused to pay part of the discharge costs claimed by the port on the grounds that they exceeded what the port was entitled to charge under the LOU and were unreasonable. The Club denied liability on the basis that all claims put forward by the port fell outside the scope of the LOI.

The Commercial Court decision

The LOU

The LOU did not specifically provide for the port to charge an uplift on the standard tariff provided for in the its terms and conditions. Those terms and conditions did, however, provide for an additional percentage (which was not specified) to be charged over the standard rates for containers with dangerous cargo, and also for the tariff for damaged containers and/or vessels to be determined by the port depending on the type of operations required.

The judge held that it was commercially unrealistic that a standard basic tariff applicable to undamaged vessels and containers should apply to this particular discharge. It was also not commercially surprising, in his view, that the parties had adopted a "wait and see" approach to charging for the job in circumstances where they had not initially had a clear idea as to the severity of the damage to the vessel, or its containers, or what difficulties such damage might pose to the process of discharging the vessel.

He did, however, agree with the defendants that there was an implied term that the port charges would be reasonable. What was reasonable would depend on the circumstances of each case. This did not mean, however, that the port had to prove and vouch in detail each item of extra work that it sought to charge. That was not a reasonable expectation in an emergency situation such as this, dealt with on very short notice, where the port could not assess the scope of their task properly until after the ship had arrived and where the nature of the task changed fundamentally during the course of the operation.

The judge therefore found in favour of the port and allowed it to recover a substantial part of its outstanding claim.

The LOI

The judge rejected the argument that the LOI operated, in effect, as a guarantee by the Club of the time charterers'/vessel managers' payment of the port's charges. Had that been intended, the Club could have been made a party to the LOU, or there could have been some cross-reference in the LOI to the LOU, or the LOI could have used the language of the LOU, in particular the words "all charges, dues and expenses".

The judge also agreed with the Club that the LOI did not impose on it a direct liability for the port's charges. Rather, the indemnity given by the LOI was in respect of fortuitous consequences, liability, loss or damage that the port might incur or that might arise as a result of the discharge, rather than the cost of discharge itself. As the judge put it, in circumstances where the parties well knew that there would have to be a charge for what the port was doing, "the silence of the LOI on that aspect is a deafening one".

The judge dismissed the argument that, to construe the LOI as not covering the port's bill would be uncommercial as, had there been an arrest of the vessel for non-payment of the port's bill, the Club would have put up security so that the vessel could trade. He commented that it was not for him to rewrite the parties' bargain and, on its wording, the LOI in this case could only apply to the port's charges in respect of damage to its equipment and installations.

Comment

This case underlines the importance of careful drafting in the wording of documents creating obligations, such as letters of undertaking or indemnities. The Club in this case was sufficiently protected by the wording of the LOI. On the other hand, the time charterers and vessel interests were potentially exposed to significant liabilities under the LOU, although admittedly the court did imply a term of reasonableness to what the port sought to charge. More certainty might have been achieved, however, had reference been made in the LOU to some external standard by which the uplift on the standard tariff could be measured or if a certain percentage of uplift had been agreed upfront (admittedly this is difficult where the scope of the task was uncertain at the outset).

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