Letter of undertaking means an agreement by which a ship-owner undertakes the following:
to employ security on the ship;
to enter an appearance acknowledge ownership; and
to pay any final decree entered against the vessel whether it is lost or not.
The main purpose behind creating a letter of undertaking is to avoid the creditors from sezing the ship and releasing it on bond. A traditional letter of undertaking provides that, in consideration of the vessel not being seized and released on bond, the vessel owner will file a claim to the vessel and pay any judgment rendered against the vessel even if the vessel itself is subsequently lost. Letters of undertaking may secure a claim even without the formal arrest of a vessel.
The term letter of undertaking is also commonly used in Central Excise when goods are permitted for export without payment of duty. A manufacturer instead of giving the bond can give only letter of undertaking to pay duty in cases where the goods are not exported.
In Koch Ref. Co. v. M/V Jennifer Boudreaux, 1993 U.S. Dist. LEXIS 3739 (D. La. 1993), the court observed that “ A plaintiff in limitation is permitted to submit as security a letter of undertaking on behalf of an underwriter which is not an authorized surety on the condition that no claimant objects to that surety. It is the intent of this provision that any claimant have an absolute right to reject the unauthorized surety, in which event this ad interim form of security comes automatically to an end.”