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Web alert: Arbitration clauses and club letters of undertaking (LOUs): a warning

30 October 2014

In the recent case of The QUEST[1], the English High Court was asked to decide whether an arbitration clause in a P&I club letter of undertaking replaced the arbitration clauses incorporated into the relevant bills of lading for the carriage of a bagged rice cargo. 
Cargo interests’ claim arose from the carriage of bagged rice from Thailand to Nigeria on board The QUEST, carried under four separate bills of lading. The bills of lading incorporated the terms and conditions of “…the Charterparty”; however the bills did not identify which charterparty was to apply. There were three charterparties involved in the carriage of the cargo, as follows:
1.       A period time charter;
2.       A trip time charter; and
3.       A voyage charter.
The time charters specified London arbitration and English law, and for the L.M.A.A. Small Claims Procedure (“SCP”) to apply to claims with a value up to US$100,000. The voyage charter provided for Singaporean arbitration and English law, but did not make reference to the SCP.
Cargo interests requested security for its claims under the bills of lading. Security was issued by the shipowner’s P&I club in the form of a single letter of undertaking (“LOU”). The LOU made the claims “…subject to London Arbitration (under the written auspices of the L.M.A.A.)…” and for English law to apply, specifically also referring to the Hague-Visby Rules and COGSA 1992. The LOU went on to specify three arbitrators, as well as the time limit within which arbitrators were to be appointed. 
Arbitration was subsequently commenced by cargo interests for all of their claims (including those under $100,000) in accordance with the LOU. The shipowner contended that the correct procedure was for claims of less than $100,000 to be dealt with by the SCP, in line with the time charters. An application to determine the jurisdiction of the tribunal was subsequently made, under s. 32 of the Arbitration Act 1996. 
Court’s View
The High Court stated that there was no reason why the terms of a letter of undertaking should not operate as a complete replacement of an existing dispute resolution clause. It was held that the provision in the LOU was “…perfectly capable of operating as a new and freestanding agreement…”. The High Court also stated that the clause in the LOU was comprehensively drafted and dealt with all of the key issues including the seat of the arbitration, the procedure to be followed, the number of arbitrators and the law to be applied.
In The QUEST, the High Court found compelling reasons why the parties must have intended for the arbitration agreement in the LOU to have replaced the agreement in the charterparties. Amongst other reasons, the LOU removed uncertainty regarding which charterparty terms would apply to the bills of lading and the lack of logic in having four separate arbitrations for similar disputes, which would be the result under the relevant charterparty clauses.
Members should be aware that it is possible for the wording of a letter of undertaking issued as security for a claim to count as a new and/or separate arbitration agreement which overrides the terms in a charterparty or other pre-existing contract of carriage. This can of course act to member’s advantage in having continuity of jurisdiction and/or decision-making up and down a contractual charterparty chain.


[1] Viscous Global Investment Limited v Palladium Navigation Corporation (The “Quest”) [2014] EWHC 2654 (Comm)