GA Security - "Pay now Argue Later" Provisions

A recent case of St Maximus Shipping Co Ltd -v- A P Moller-Maersk A/S is the latest in a run of Judgments regarding the effect of guarantee instruments. In the context of general average "GA" the judgement of Hamblen J will be of interest of all lawyers who are involved in negotiating - not only GA security - but any other form of security arising out of causalities. The case turned on the wording of a latter of undertaking ("LOU") as a result of which the Judge decided that Maesrsk  should have paid at the time of the demand and argued about it later.

The critical provisions of the LOU provided by Maersk read as follows:-

"We hereby undertake and agree as follows:-

To pay the proper proportion of any GA 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 adjuster in accordance with the charterparty dated 16th August 2004 and/or the bills of lading issued by us or SCL …"

The Claimant's position was that the LOU was now in effect a demand guarantee and the wording of the LOU obliged Maersk to pay up once the triggering event specified in the LOU occurred. This was regardless of the rights and wrongs under the adjustment.

On the other hand Maersk are only bound to pay what was properly due from the cargo interests. The underlying basis of their arguments seem to be that GA adjustments were not binding on the parties to the maritime adventure and they were entitled to challenge the adjustment.

However the Judge found the words "proper proportion" when used in the context of GA to be understood as the reference to cargo interest pro-rated general average liability ie its appropriate proportion of the overall liability. He also took the view that if there was an overpayment, or indeed an underpayment, by Maersk appropriate recovery could be carried out. However, it was his firm view that payment should have been made on demand and not as Maersk had claimed later in the day.

The case demonstrates the Court's eagerness to hold parties to their contractual bargain and for commercial sense to prevail.

It is also lesson for those drafting security documentation and care should be taken as to the form of GA security wording - whether or not standard forms are used, these should be reviewed carefully. Indeed the Judge made reference to the fact that clarity could have been obtained by a few extra specific phrases or words in the GA security document.

Accordingly as with all security documentation each word and phrase should be carefully analysed before the parties sign up to terms in order to avoid the very real exposure to further expense in refusing to pay at the right time.