Emerald Shipping v. Elmhirst

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DMC/SandT/07/33
Emerald Shipping Corp. v. Elmhirst Pte., Ltd, as Owner of the "Neptune Dorado"
United States of America: New York Arbitration Award: Howard M McCormack, Chairman, David W Martowski and Louis P Sheinbaum, arbitrators: Interim Ruling, 4 May 2007
Thomas L Tisdale, of attorneys Tisdale & Lennon, LLC, for the Charterer, Emerald Shipping
Charles S Cumming, of attorneys Chalos, O’Connor & Duffy, for the Owner, Elmhirst
ARBITRATION: SECURITY FOR CLAIM: CLUB LETTER OF UNDERTAKING: PROVISION REQUIRING CLUB TO PROVIDE BOND AS SUBSTITUTE SECURITY: WHETHER TRIBUNAL HAD AUTHORITY TO ORDER CLUB TO PROVIDE SUBSTITUTE SECURITY: PARTIES TO THE ARBITRATION: INTERPRETATION OF SUBSTITUTE SECURITY PROVISIONS IN CLUB LETTER
Summary
In course of this arbitration, the panel issued an Interim Ruling, denying a request by the Charterer to order the Owner’ P and I Club to provide – in accordance with the Charterer’s interpretation of the Club’s letter of undertaking - a bond as substitute security for the Club’s own undertaking. The tribunal based its denial on the point that the Club was not a party to the arbitration and the tribunal had accordingly no authority over it. The tribunal commented, however, on Club Letters of Undertaking in general and on the position taken by the Owner’s Club in this particular case in response to the request to issue a bond.

DMC Category Rating: Confirmed

Background
The Charterer had commenced arbitration proceedings in New York against the Owner under a voyage charterparty on the EXXONVOY 90 form dated 3 August 2000. The Charterer claimed expenses incurred as a result of delays in discharging arising from the detention of the ship by the US Coast Guard at San Francisco in September 2000.

As security for its claim, the Charterer had obtained a letter of undertaking ("LOU") from the American Steamship Owners Mutual Protection and Indemnity Association (the "American Club"), in the amount of US$1 million. Under paragraph 1 of that letter, the Association agreed to file an appearance on behalf of the Owner in any suit the Charterer commenced against the Owner in the US District Court for the Southern District of New York "to confirm an arbitration award pursuant to the Charter". Under paragraph 3 of that letter, the Association undertook "upon demand by you, to cause to be filed a bond in form and sufficiency of surety satisfactory to you or the Court in the above amount [namely, US$ 1m.] securing your claim against the Vessel in said proceedings".

After hearings on the merits on the Charterer’s claims had been held in April 2007 and the evidentiary phase of the arbitration proceedings on liability and damages had been closed, Charterer applied to the arbitral tribunal to order the American Club to post a bond in accordance with paragraph 3 of its LOU. The Owner submitted to the tribunal a letter from the American Club in which it rejected the demand for a bond on a number of grounds. First, the Club was not a party to the arbitration clause¹ of the charterparty and was not, therefore, subject to the tribunal’s jurisdiction. Second, the language of paragraph 3 of the LOU was clear, in that the Charterer might request a bond only in the event an action were commenced in the US District Court for the Southern District of New York to confirm an arbitration award (emphasis added); the Charterer had no right under the letter unilaterally to demand substitute security for any other reason.

The Interim Ruling
The tribunal held that it did not have authority to order the American Club to post a bond in accordance with paragraph 3 of the letter, since the Club was not a party to the arbitration. The enforceability of the letter presented, the tribunal said, "an issue between the Club and Charterer and is clearly one for determination by the Court…" This ruling was, in the circumstances, unsurprising.

The tribunal went on to comment on club letters of undertaking in general and the position of the American Club in this case in particular. It said:

"LOUs issued by members of the International Group of P&I Clubs [of which the American Club is one] are considered gold-plated security instruments and have been afforded worldwide acceptance for well over a century. Vessel arrest or detention is a most serious matter and LOUs present a prompt, efficient and inexpensive means of avoiding damaging consequences. LOUs are in every day use and this Panel has had more that 130 years of collective experience in their drafting, issuance and receipt in all manner of maritime disputes. The American Club’s interpretation of its obligations to post a bond is novel and contrary to this Panel’s understanding and we await with interest the possible decision on this important issue by the Court."

The tribunal accepted that it did have authority to order the Owner (emphasis added) to provide security for Charterer’s claim in appropriate circumstances but, without prejudice to Charterer’s rights, it declined to do so, one reason being that the Owner had said that it would not comply with any such order. The tribunal’s conclusion accordingly was that the Charterer’s "most appropriate, expeditious and cost-effective course under the circumstances would be to promptly seek summary enforcement of the Club’s LOU by way of specific performance before the US District Court for the Southern District of New York, as the American Club suggests."

[1] The arbitration clause read: “Any and all differences and disputes of whatsoever nature arising  out of this Charter shall be put to arbitration….The arbitrators may grant any relief which they… deem just and equitable, including but not limited to , specific performance”

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