Legal Article- Obtaining Security under Letters of Indemnity

Date: 07/03/2019
Author: Lyall Hickson
Legal Article- Obtaining Security under Letters of Indemnity

HARMONY INNOVATION SHIPPING v CARAVEL SHIPPING [2019] 2 WLUK 370

On 21 February, in another positive decision on the wording of the International Group (IG) standard Letter of Indemnity (LOI), the English High Court in an unreported judgment of HARMONY INNOVATION SHIPPING v CARAVEL SHIPPING [2019] 2 WLUK 370 ordered charterers to provide security for the release of a ship under an LOI given to enable cargo to be delivered without production of the original bills of lading.  

A cargo of coal from Indonesia was discharged at an Indian port under a Letter of indemnity (LOI) as the original bills of lading were not available.  Nine months later, a Dubai bank claimed to be the lawful holder of the bills of lading and demanded over US$5 million from the ship’s owner as security for a misdelivery claim.  The bank commenced arbitration against the owner and arrested the ship. Demands for counter security were passed down a chain of LOIs from sub-charterers but none had been provided.  The owner (and a disponent owner in the chain) sought an order (an injunction) from the English Court that the charterers provide security as promised under the LOI.

The LOIs provided that the cargo was to be delivered to an agent, P, or to such party as was believed to be or to represent or be acting for P.  The sub-charterers argued that delivery had not been made to P and therefore the LOI did not engage.  A number of agents, sub-agents and representatives had been appointed by various parties in the charterparty chain and the party attending on board at the time of discharge did not make it clear (as evidenced by the visitor’s log) that they were representing P.  However, it was the Master’s evidence that he understood that person attending on board represented P.

The Court ordered the charterers to provide security.  The court was satisfied that delivery had been made to the correct party named in the LOIs and, in any event, that the master had reasonably and honestly believed that the cargo was being delivered to P or to someone acting on its behalf within the terms of the LOIs.  The Court thought that clause 3 of the IG standard LOI should provide a swift remedy in the case of arrest for alleged misdelivery and that a failure to perform this promise could not properly be met by damages.

 Comment

It is clearly a positive development that the Court interpreted clause 3 of the IG standard LOI favourably for shipowners and required the charterers to provide security as promised.  However, it is still troubling that there continues to be disputes under LOIs which illustrates the inherent risks with such operations.

Disputes arising under LOIs have typically centred on the critical issue of how and to whom the cargo has been delivered.  This is because the indemnities and protections the Owner receives under the provisions of the LOI will only be triggered if the Owners have performed the operation requested of them.  This is set out in the opening paragraph of the LOI.  Setting out clearly how and to whom delivery of the cargo is to be made is of critical importance.  It is in the interests of all beneficiaries of an LOI under the charterparty chain (Owners and Disponent Owners) to avoid ambiguity and scope for argument in this respect.

Members are reminded that P&I cover for misdelivery claims is prejudiced if cargo is delivered against an LOI in lieu of production of original bills of lading.  The LOI is therefore a substitute for such cover and care must be taken to ensure that it provides the necessary protections and remedies for the receiver of an LOI in the unfortunate event of a misdelivery claim.  The Club is regularly consulted on  LOI wordings and members are encouraged to contact their regular club contact who can assist with advice.

Finally, the Club has been notified of a number of similar cases involving banks claiming misdelivery of coal cargoes at Indian ports.  If any members are concerned that they may have carried one of the affected shipments or would like advice on carrying such cargoes, please contact you regular club contact.

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