Article: English courts clarify parties’ obligations in a chain of letters of indemnity
02 July 2020
Trafigura Maritime Logistics v Clearlake Shipping and Clearlake Chartering USA v Petroleo Brasileiro  EWHC 995 (Comm) &  EWHC 1073 (Comm)
The English Court handed down a judgment on two related actions which provided guidance on the requirements imposed by the International Group of P&I Clubs’ Letter of Indemnity ('LOI') wording and the position of parties in a back-to-back charterparty chain.
The ship, Miracle Hope, was time chartered to Trafigura. Trafigura sub-chartered the vessel to Clearlake, who then sub-chartered to Petrobras on back-to-back terms for a voyage of crude oil from Brazil to China. A clause in the charterparties allowed for the discharge of the cargo without the production of bills of lading against owners’ standard LOI wording.
This clause was activated when Petrobras required the discharge of the crude oil cargo without production of the bills of lading in November 2019. The request was passed on from Clearlake onto Trafigura, who passed on to the Head Owners, who complied with the request. In March 2020, Natixis, the bank which paid for the cargo under a letter of credit but had not received the cargo, arrested the ship in Singapore and claimed damages of US$ 76 million for misdelivery against Head Owners.
Trafigura made a demand for security for the ship’s arrest to Clearlake, who then passed the demand down the charterparty chain to Petrobras. As no security was put up, Trafigura obtained an urgent mandatory injunction requiring Clearlake to 'provide forthwith such bail or other security as may be required'. Clearlake obtained the same mandatory relief against Petrobras.
Despite the grant of the injunctions, both Clearlake and Petrobras were unable to reach an agreement with Natixis on the terms of the bank guarantee required for the ship’s release.
The meaning of the word 'forthwith', which was treated as the requirement to put up 'on demand' found in the club LOI wording, was established to mean in the shortest practicable time. This does not mean immediately and is dependent on the circumstances of the case.
The second issue of construction concerned the LOI wording which required 'bail or other security as may be required… to secure the release of the vessel'. Teare J considered three potential meanings, concluding that in ordinary circumstances it would be the security required by the court of the place of arrest of the ship and not whatever security is demanded from the arresting party. In this case, the relevant application was made to the court in Singapore and the English courts would not determine whether the security offered was such to allow the ship’s release.
Noting the difficulties both encountered whilst trying to reach an agreement on the wording of the security, Clearlake and Petrobras were ordered to make a payment in the Singapore Court within the shortest practicable time, found to be eight working days.
In a further judgment dated 6 May 2020, the Court rejected, based on the facts, Clearlake’s argument that payment obligations should be staggered. Whilst it was recognised that there may be potential wasted costs, Clearlake was ordered to put up security within the same deadline as Petrobras on the basis that Trafigura’s contractual rights outweighed that consideration. The Court further considered the issue of costs and held that the sole existence of a breach of a contractual indemnity does not justify a costs award on an indemnity basis, which requires some behaviour out of the norm. Petrobras was required to pay costs incurred in the related proceedings which occurred due to their refusal to put up security.
The Miracle Hope provided a useful reminder that whilst Charterers should be able to pass demands under a letter of indemnity up and down the charterparty chain, the Court will still hold them liable for the specific indemnity they initially agreed to give.
Members should pay particular attention to the clarification given by the Court on the International Group of P&I Clubs LOI wording. The words 'forthwith' and 'on demand' do not mean immediately and require the indemnifying party to do everything practicable to put up security without delay. The type of security the indemnifying party is required to put is that of the arresting court as opposed to the court with the jurisdiction over the LOI or whatever security is demanded by the arresting party.
The decision as to whether staggered payment obligations should be imposed is fact dependent and considers whether the potential wasted costs outweigh the disponent owner’s rights. In different circumstances, perhaps with a greater number of indemnifying parties, the potential costs could outweigh the claimant’s interests.
When considering the consequences of a breach of any LOI terms, this case shows that the existence of a contractual indemnity or a breach alone is insufficient to justify a costs award on an indemnity basis. The Court requires the party’s conduct to be out of the norm.
Lastly, the Court confirmed, what had already been recognised in The Vimeira (No 2), that the charterer at the end of an LOI chain can be ordered to pay for the costs incurred in relation to proceedings caused by their refusal to put up security. Members at the end of an LOI chain should be mindful of these potential costs when refusing to put up security.