P&I club letter of undertaking (LOU)

A container ship is arrested in Rotterdam at the request of a shipper claiming three million dollars for damaged cargo, and the ship, due to sail within twenty-four hours, is stuck. The solution is a letter of undertaking, which the owner's P&I club sends to the claimant's lawyer within the day. The club undertakes, in the terms of the letter, to pay the claimant any sum the court or arbitrator orders or that is agreed, up to a ceiling, which generally includes interest and costs. In return, the claimant lifts the arrest, no longer arrests the ship or her sister ships, and agrees to pursue the claim in the agreed jurisdiction or arbitration. The letter is fast, carries no commission, and ties up no capital of the owner, which sets it apart from the bank guarantee, which costs a commission and requires a counter-guarantee. The courts of many countries accept it, to varying degrees: English, Singaporean, Dutch and German courts broadly recognize it, others require a bond or a cash deposit. It is good only for risks covered under P&I: the club does not guarantee a yard or supplier claim, which falls outside the rules. It rests on the club's signature, whose strength, through the pool and its reserves, is itself a guarantee.