Pleading Limitation As a Defense in an Answer May Result in Double Lou’s

April 23, 2014

When an in rem suit is filed against a vessel, arrest of the vessel can be avoided by the Owner putting up a special bond or a Letter of Undertaking issued by its P&I Club insurer.  A Letter of Undertaking (LOU) is the functional equivalent of a bond and, in the maritime industry, will avoid an arrest of a vessel and provide security for the Claimant.

A special bond or LOU given as security for a specific claim is different from a general bond or LOU posted by a Shipowner when it files a Limitation of Liability proceeding to force all Claimants regarding the same incident to file their claims in the same court.  A general bond, under Admiralty Rule E(5), requires court approval and is “conditioned to answer the judgment of the Court in all or any actions that may be brought.”

When filing an LOU in a specific claim where limitation of liability may be pleaded as a defense, the Shipowner should consider whether to file a limitation of liability proceeding to cover all possible claims, otherwise it may end up filing two LOU’s.

In a ruling issued by the E.D. of Louisiana, the Court held that an LOU posted as security in a specific suit to avoid arrest of a vessel could not also be used in the Owners’ later filed Limitation of Liability proceeding.  A second LOU would have to be filed in the Owner’s limitation proceeding to cover the same limitation amount (value of the vessel after the accident plus any pending freight). El Paso Production GOM, Inc., et al. v. Lathan C. Smith (406 F. Supp. 2d 671).