Obligations with regard to security under intermediate LOIs - Miracle Hope
TRAFIGURA MARITIME LOGISTICS PTE LTD v CLEARLAKE SHIPPING PTE LTD and CLEARLAKE SHIPPING PTE LTD v PETROLEO BRASILEIRO S.A.
[2020] EWHC 995 (Comm)
Summary
On 27th April 2020, the English High Court (Mr Justice Teare) gave guidance on the requirements imposed by International Group LOI wordings and the position of intermediate parties in an LOI chain, in circumstances where an LOI is given to enable cargo to be delivered without production of the original Bill of Lading.
Trafigura time chartered the MIRACLE HOPE and sub-chartered it out to Clearlake, who in turn sub-chartered it out to Petrobras for a carriage of Brazilian crude to China. The terms of the C/Ps were back to back and permitted discharge without the production of the original Bs/L against Owners’ standard LOI wording. Petrobras exercised this option and requested Clearlake to deliver the cargo without production of the original Bs/L, and this request was passed up the line. Trafigura acceded to the request and LOIs on standard, unamended IG wordings were issued by Petrobras to Clearlake, and by Clearlake to Trafigura. The cargo was discharged and subsequently the receiver’s Bank, Natixis, arrested the vessel in Singapore and claimed damages of USD 76m for misdelivery of the cargo.
In accordance with the terms of the LOIs, Trafigura demanded Clearlake put up security for the claim, and in turn Clearlake demanded Petrobras put up the security. No security was provided by either party, and so Trafigura obtained an urgent mandatory injunction against Clearlake, who in turn obtained an injunction against Petrobras, ordering the parties to establish security in accordance with the promises made in their respective LOIs. The injunctions ordered that security be provided “forthwith.”
Both Clearlake and Petrobras engaged in separate discussions with Netixis in order to establish suitable security, but there were a number of sticking points between the parties that prevented security from being finalised. One concern Clearlake had was that any security provided should be capable of being substituted by Petrobras’ security. Netixis’ position was that it would only agree to substitute security on identical wording issued by a Singapore bank, which was problematic because different banks have different own preferred wordings and there was a risk that Petrobras would be unable to obtain a guarantee on an identical wording. Natixis also wanted a bank guarantee with no expiry date, which neither Clearlake or Petrobras’ banks were willing to provide, and furthermore Natixis wanted the bank guarantee to respond to a judgment from a court other than the Singapore courts. This was a difficult issue because it was understood that Singapore does not allow the Singapore admiralty jurisdiction to be invoked in aid of foreign court proceedings or judgments.
As a consequence of these difficulties neither party was able to establish security “on demand” as called for in the LOIs; an issue further disturbed by the Covid 19 pandemic which resulted in the Singapore courts being unable to convene a hearing until 18th May to decide upon the issues at stake. Thus the position was that the vessel remained under arrest notwithstanding the issue of injunctive relief by the Court. Trafigura, (and therefore Clearlake) sought an amendment to the terms of the orders, and in issuing his judgment Mr Justice Teare considered three issues of construction:
1) The time frame within which security must be provided;
2) What form of security was to be provided to Natixis; and
3) If the terms of a bank guarantee cannot be agreed, what are the parties obliged to do.
As to the first point, the court looked at what was the meaning of the word “forthwith.” The court found that whilst a dictionary defintion of forthwith is “immediately, at once, without delay or interval” it would be unrealistic to construe “forthwith” as meaning instantaneously. Referring to legal textbooks, Mr Justice Teare said that where something is to be done “forthwith” or “as soon as possible” it is to be done in the shortest practicable time having regard to the circumstances surrounding the making of the contract. Accordingly it was ruled that the word “forthwith” in the present context envisages that security will be provided in the shortest practicable time.
The second issue of construction was the meaning of the words in the LOI “Bail or other security as may be required… to secure the release of the vessel.” In his judgment Mr Justice Teare commented that there appear to be three meanings of the phrase “as may be required.” Firstly, it may mean as required by the arresting party. Second, it may mean as may be required by the court of the place of arrest. Third, it may mean as may be required by the court under which the parties to the LOI have agreed jurisdiction.
The judge held that where there is a dispute as to the reasonableness of the security offered the vessel will only be released if the court of the place of arrest considers the security sufficient. This is reflected by the 1952 Arrest Convention, Article 5. On that basis the judge reasoned there is a “powerful case” that the meaning which the phrase “as may be required” would convey to a reasonable person having knowledge of the context is that it refers to the security required by the court of the place of arrest to release the vessel from arrest.
Whilst reaching a conclusion on this point, the judge commented that ordinarily one would just need to look at the judgment of the court in the jurisdiction where the vessel was arrested to establish what that court deems was reasonable or sufficient security. However, in the present circumstances and where the Covid 19 pandemic has resulted in the Singapore Courts being unable to reach a decision on this point, it was left to the English Court to decide in cicumstances where the wording of a bank guarantee could not be agreed, what the indemnifier is obliged to do under the terms of the LOI. In his judgment Mr Justice Teare commented that a charterer who gives the undertaking must be expected to provide security, not just by means of a bank guarantee, but, if a bank guarantee cannot be swiftly provided, by other available means. Payment into court is the obvious alternative. Whilst the charterer may not wish to incur the cost of paying a sum into court, particularly the sum of $76m in the present matter, Mr Justice Teare reasoned that a charterer is hardly in a position to complain of having to do so since it is the charterer who instructed the shipowner to discharge cargo otherwise than against presentation of a bill of Lading and so exposed the shipowner to the risk of arrest.
In the circumstances, in order to ensure that the court’s injunctions are effective and achieve their aim, the judgment ordered that the required payment into court be made within 8 days of the judgment being handed down, to take into account the practical difficulties of arranging for payment of such a large sum.
Comment
The judgment affirms the view that under the IG LOI wording the indemnifying party is only required to put up such security that the court in the arresting jurisdiction requires and that there is no obligation to accede to unreasonable demands. The judgment also gives good guidance on what is a reasonable time frame to establish suitable security, and makes it clear that the indemnifying party is to put up security in the shortest practicable time. Inevitably this will be dependent on the circumstances of the matter but the court has signalled an expectation that the indemnifying party must act swiftly and not drag its feet.
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 may in effect be 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. It is also a useful reminder that the indemnity down the LOI chain is only as good as the charterer who gives it, and even when parties act in good faith problems can still arise. If any Members wish to discuss LOI issues in general or anything covered in this article, Members are encouraged to contact their regular club contact who can assist with advice.
