“Liberty to apply” means “liberty to arrest / re-arrest”

In the recent case, FSL-9 PTE Ltd and another v Norweigan Hull Club [2016] EWHC 1091 (Comm), the Commercial Court had to consider the meaning of the phrase “liberty to apply” when included in a P&I Club letter of undertaking in the context of a vessel damage claim.

The LOU included an agreement that “Charterers and Owners shall have liberty to apply if and to the extent that the security sum is reasonably deemed to be excessive or insufficient to adequately secure owner’s reasonable claims”. The “consideration” for the security was said to be owner’s agreement to refrain from “arresting or re-arresting” ships or assets belonging to charterers.

It was accepted that the security provided was insufficient to meet owner’s best case but charterer’s P&I club (which had issued the LOU) disputed whether the court could order them to provide further security.

Mr Justice Blair in the Commercial Court held that:

“The “liberty to apply” in the letter of undertaking does not give owners the right to apply to the court to require the defendant P&I club to increase the amount of its undertaking. I accept the club’s construction that this provision enables owners to arrest charterer’s assets if the security provided proves to be inadequate, and notwithstanding the prohibition against arrest or re-arrest provided for earlier in the instrument.”

Mr Justice Blair’s conclusion was influenced, he said in his judgement, by the nature of the LOU as a commercial contract, which was to be construed with regard to its commercial purpose. Of particular significance were the following factors:

1. The LOU created a contract between owners and charterer’s P&I club (not charterers themselves) meaning the obligations under it were not reciprocal as between charterers and owners.
2. The club wouldn’t be a party to any subsequent court proceedings and any application for further security would more appropriately fall against charterers, rather than their insurer.
3. Insurers were “inherently unlikely” to commit themselves to potentially unlimited liability.

The effect of this judgement is that an LOU incorporating a “liberty to apply” provision will give the securing party only a temporary reprieve, leaving open the possibility of future operations being interrupted through further vessel arrests should the secured party consider their security is inadequate.

The judgement is likely to lead to a significant reduction in the use of “liberty to apply” clauses with securing insurers and their insureds wanting to avoid ships being arrested and secured parties seeking to ensure their right to increased security is actionable against the (usually) more financially reliable insurer.