Key takeaways
LOI beneficiary
Should check carefully creditworthiness of party giving LOI.
Charterparty chain
Party in middle should ensure LOIs are back-to-back so liability can be passed along.
P & I cover
Where circumstances surrounding LOI prejudice cover, LOI will not reinstate cover.
Letters of indemnity (LOIs) are regularly issued as a solution to problems that arise in shipping and international trade but, too often, insufficient consideration is given to their potentially serious consequences.
It is therefore worthwhile reflecting on the lessons that can be learnt in this regard from Trafigura Maritime Logistics PTE Ltd -v- Clearlake Shipping PTE Ltd (Miracle Hope), which resulted in five English court judgments that highlighted some potential pitfalls when giving and receiving LOIs.
Significantly in 2023, partly perhaps as a result of the Miracle Hope, the International Group of P & I Clubs issued revised versions of their standard LOI wording.
The background facts
In August 2019, the head owners time chartered the Vessel to Trafigura Maritime Logistics Pte Ltd (Trafigura). Trafigura voyage chartered her to Clearlake Chartering USA Inc (CUSA). CUSA voyage chartered her to Petroleo Brasileiro S.A. (Petrobras) on back-to-back terms for a voyage carrying a cargo of crude oil from Brazil to China.
Under clause 33(6) of the Shellvoy 6 form used for the voyage charters, owners were obliged to comply with charterers’ orders to discharge cargo without bills of lading in exchange for an indemnity from charterers. The clause had been amended to incorporate the International Group of P & I Clubs standard form LOIs (the IG wording).
On 14 October 2019, Clearlake Shipping PTE Ltd (Clearlake) requested the template LOI wording from Trafigura, which was duly provided.
On 30 October 2019, Petrobras invoked clause 33(6) when it gave instructions for the crude oil to be delivered to Hontop Energy (Singapore) Pte Ltd (Hontop). Clearlake passed those instructions on to Trafigura.
On 2 December 2019, an addendum to the Clearlake charter was agreed, substituting Clearlake as the charterer on the basis that the fixture recap had incorrectly named CUSA as the charterer.
In March 2020, the Vessel was arrested in Singapore by Natixis, a bank that claimed that it was the lawful holder of the bills of lading and that the crude oil cargo had been misdelivered to Hontop. Petrobras had sold the crude to Hontop and Natixis had paid Petrobras on Hontop’s behalf under a letter of credit. Hontop had not, however, reimbursed Natixis, having become insolvent.
The Commercial Court decisions
The injunction applications
Trafigura applied to the English Court for an injunction compelling Clearlake to provide security to enable the Vessel’s release and supply head owners with sufficient funds to defend Natixis’s claims, in accordance with the clause 33(6) indemnity. Clearlake and CUSA sought the same injunction in relation to Petrobras.
The Court granted the applications, ordering both Clearlake and Petrobras to provide security ‘forthwith’ and ‘as may be required’ to Natixis in order to procure the Vessel’s release. The following interesting points arose:
Clearlake had argued that any indemnity given was given by CUSA, who was the charterer at the relevant time. Clearlake was not substituted as the charterer until later. The Court rejected the argument that this meant Clearlake was not liable to indemnify Trafigura. It was Clearlake that had requested the Club indemnity wording and that had passed on the discharge instructions. Furthermore, the Addendum to the charterparty had clearly been intended to place Clearlake in CUSA’s shoes for all purposes, including any outstanding liabilities that had already arisen. As a result of the Addendum, Clearlake at the very least assumed all the charterer's obligations required to be performed thenceforth, whether or not they arose out of events which had previously occurred. The obligations to provide security, defence funds and an indemnity all fell to be performed following the arrest of the Vessel, which post-dated the Addendum.
Clause 33(6) required an ‘LOI as per Owners' P&I Club wording to be submitted to Charterers before lifting the ‘subs’, ie before the conclusion of the fixture. Clearlake argued that, as Trafigura had not submitted the LOI wording before the fixture had been concluded, the terms of the indemnity clause had not been complied with, and it had not had the opportunity to agree to the indemnity wording. The Court disagreed. Clearlake had specifically invoked the indemnity clause in conjunction with instructions to discharge the cargo without production of the original bills of lading. It must be taken to have consented to the LOI wording and to have waived any purported breach of clause 33(6).
Clearlake contended that the indemnity clause required the provision of a separate LOI, not merely the invocation of clause 33(6). However, the Court decided that the clause construed as a whole envisaged that the indemnity arose under the clause itself without the need for a separate letter containing the indemnity. Furthermore, the parties had conducted themselves on the basis that no separate LOI needed to be provided.
Petrobras relied on a gap in the contractual chain which, it alleged, meant that Trafigura’s claim against Clearlake could not flow down to Petrobras. The Court, however, clarified that Clearlake and Petrobras’s obligations to provide security and funds to defend proceedings were triggered by the Vessel’s arrest and were additional to the indemnity obligations. Unlike the indemnities given, they did not depend on the LOI recipients, Trafigura and CUSA, suffering loss. It did not therefore matter if there was a break in the chain of the contracts between Clearlake and CUSA.
Those judgments are here:
Clearlake Chartering USA Inc & Anor v Petroleo Brasileiro SA [2020] EWHC 805 (Comm) (31 March 2020)
The return date
On the return date of the two mandatory injunctions, security had still not been posted some three to four weeks later. Petrobras and Clearlake had failed to reach agreement with Natixis as to the terms of the bank guarantee to be provided.
Trafigura sought an amendment to the injunction, compelling Clearlake to provide the guarantee in the form required by Natixis within two days after the hearing, failing which the funds should be paid into the Singapore Court within seven working days. Clearlake sought a similar amendment to the order against Petrobras.
The two issues for the Court were as follows:
What did ‘forthwith’ mean in the context of the injunctions? The Court decided it meant in the shortest practicable time. What was practicable depended on the circumstances of the case.
What did ‘as may be required’ mean? The Court decided that this meant the security required by the court of the place of arrest i.e. Singapore. However, in this case, it would take too long to hear an application to determine the adequacy of the security provided (this was during the Covid-19 pandemic). The Court decided that as a bank guarantee would take too long to finalise and issue, a payment should be made into the Singapore Court of US$76 million within eight working days. The standard LOI wording was not limited to a bank guarantee.
That judgment can be found here:
Consequentials judgment
In a subsequent consequentials judgment, the Court refused Clearlake’s request that the payment obligations should be staggered, so that Clearlake had more time to provide security if Petrobras failed to comply with the order within the deadline.
The Court recognised the potential for wasted costs and the duplication of expense if both had to make the payment into court by the same date. However, the obligations under the LOIs in the chain were independent of one another. Clearlake had undertaken obligations to Trafigura, and it was not entitled to say that it would only perform them if Petrobras did not perform its own obligations to Clearlake.
There were only two parties in this particular charterparty chain. Query whether a contractual chain involving multiple parties might result in a different view being taken by the Court with regard to wasted costs.
That judgment is here:
The trial of the claims
The Court upheld the indemnity claims along the charterparty chain.
The Court dismissed the argument that clause 33(6) required the LOI wording to be provided before the fixture was concluded.
It also rejected the contention that a separate letter of indemnity was required. The Court thought it would be commercially absurd to suggest that Trafigura’s failure to supply the LOI wording before subjects were lifted meant that Petrobras could demand delivery of the cargo without presentation of original bills without having provided an indemnity.
The Court further dismissed any distinction between discharge and delivery in the particular circumstances of this case. Petrobras had sought to argue that it had given instructions to discharge the cargo, not to deliver it and that the owners should have discharged the cargo at the discharge port but retained control of it. In the Court’s view, Petrobras could not be taken to have drawn any such distinction. Among other things, such an arrangement was not possible at this discharge port. Furthermore, Petrobras had invoked the indemnity clause but if owners were to retain control of the cargo, such an indemnity would have been unnecessary.
As to the alleged gap in the contractual chain, the Court decided that the charterparty had been successfully novated to Clearlake, which had assumed all the liabilities under it. The Court also found there was an implied internal indemnity from CUSA to Clearlake to allow liabilities to pass down the contractual chain. The Court noted that the Clearlake parties asserted that they had entered into an internal charter on Asbatankvoy terms on the same day as the novation.
The judgment is here:
Revised IG wording
In September 2023, the IG updated its standard LOI wordings from the previous 2010 version.
The revised wordings incorporate the warnings that:
the circumstances giving rise to the issue of an LOI will prejudice a member’s P&I cover, and that use of the LOI will not reinstate that cover, and
it is important to confirm the creditworthiness of the party giving the LOI because the LOI is only as good as the party giving it.
A key change provides protection for parties other than the vessel owners against arrests or other interference with their vessels (eg charterers who receive an LOI as part of the charter chain.
There is also a new express obligation on the party issuing the LOI to provide substitute security or counter security if the LOI beneficiary has already provided security. This applies even if the security which has been put in place exceeds the value of an arrested vessel.
Whilst the previous wording provided for English law and jurisdiction, the wording has been tightened to make it clear that it provides for exclusive English jurisdiction. The wording of other provisions has also been generally tightened and clarified.
Comment
As noted by the IG when issuing the revised LOI wording, the Electronic Trade Documents Act, which came into force in September 2023, should reduce the need for LOIs and see a decline in LOI disputes because electronic bills of lading are legally equivalent under English law to paperless bills. Nonetheless, it will be some time before electronic bills entirely replace the traditional version.
It is, therefore, worth keeping in mind that LOIs will be strictly interpreted by the English Court. Consequently, in order to be able to rely on the LOI, the beneficiary should comply with the request made under it (eg delivery to the specified party).
Furthermore, a party in the middle of a charterparty chain should ensure that the LOIs it gives and receives are back-to-back, so that liability can be passed along the chain.
Finally, LOI beneficiaries should remember that an LOI may be unenforceable if it is given to facilitate a fraud (eg if it is obvious that the receiver is not entitled to possession of the goods).
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