MIRACLE HOPE: guidance on parties’ obligations under a chain of letters of indemnity

Trafigura Maritime Logistics v Clearlake Shipping and Clearlake Chartering USA v Petroleo Brasileiro [06.05.2020]

The Commercial Court has provided important guidance about the requirements imposed by the International Group of P&I Clubs’ standard letter of indemnity (LOI) wording and the position of intermediate parties in an LOI chain.

Background

Trafigura was the time charterer of the Vessel, MIRACLE HOPE. Trafigura sub-chartered the vessel to Clearlake, and Clearlake sub-chartered to Petrobras on back-to-back terms for a voyage carrying crude oil from Brazil to China.

In accordance with the terms of the charterparties, Petrobras requested discharge of the cargo to receivers without production of the bills of lading against owners’ standard LOI wording. Clearlake passed the request on to Trafigura who passed it on to head owners, who complied with the request. The receivers’ financing bank, Natixis, subsequently arrested the vessel in Singapore and claimed damages of US$65 million for misdelivery against the head owners.

A demand for security to release the vessel was made by Trafigura to Clearlake and Clearlake passed the demand down the chain to Petrobras. No security was provided and so Trafigura obtained an urgent mandatory injunction against Clearlake requiring the provision of security forthwith. Clearlake obtained the same urgent mandatory relief against Petrobras a week later.

The issues

In light of the apparent four week delay (from the date of the injunction until the return date) Trafigura argued that Clearlake must have breached the injunction to provide security “forthwith” and sought an order for Clearlake to put up security in whatever form was required by Natixis within two business days. Alternatively, Trafigura sought an order that cash be paid to Natixis (this was subsequently modified to a payment into Court). An equivalent application by Clearlake was made against Petrobras to maintain its back-to-back position.

Clearlake resisted the variation and both Clearlake and Petrobras explained that (among other things) Natixis’ unreasonable demands as to the terms of bank guarantee required to release the vessel from arrest had resulted in their delay in posting security and necessitated intervention by Clearlake and Petrobras in the Singapore arrest proceedings in order to obtain the court’s ruling on the guarantee terms.

The court’s findings

Judgment was given at the return date in both actions and at a hearing of consequential matters, which was the culmination of no fewer than five remote court hearings before three different judges over a five week period.

The judgments provide helpful clarification of five points on which there was limited authority:

1. Where the International Group LOI wording applies, the indemnifying party will only be required to put up such security as is required by the court of the arresting jurisdiction (as opposed to the court with jurisdiction over the LOI) and not whatever security may be demanded by the arresting party. This aligns the International Group LOI wording with the Arrest Convention, meaning that there is no obligation to agree to unreasonable demands by the arresting party.

2. The words “forthwith” and “on demand” require the indemnifying party to do everything practicable to put up security that the arresting court requires without delay. This does not mean the party will be required to put up security immediately or within a particular time frame and without regard to the practicalities of putting it up. In meeting such a demand, consideration should, if necessary, be given to making a payment into Court and/or asking the arresting court to determine the sufficiency of the security.

3. The court was persuaded with “some hesitation” to reject Clearlake’s argument that the payment obligations should be staggered, so as to allow them additional time so as to respond only in the event that Petrobras failed to meet the deadline, thereby avoiding Clearlake having to incur unnecessary costs in putting up cash security in parallel with Petrobras. The Court recognised the potential for wasted costs (put at over US$1 million) but considered that Trafigura’s independent contractual right to have security provided “on demand” (or “forthwith”) by Clearlake outweighed that consideration. However, here may come a point on different facts (such as where there is a greater number of parties in the contractual chain with potential for commensurately higher wasted costs) where the claimant’s interest may be outweighed by such considerations.

4. The mere existence of a contractual indemnity or breach of it will not be enough to justify a costs award on an indemnity basis. The court will require some conduct out of the norm, such as where the breach itself constitutes a misuse of court resources as occurs where a party commences proceedings in breach of an exclusive jurisdiction clause (e.g. NatWest v Rabobank (2007)). However, the claimant will retain an indemnity claim to recover reasonable costs incurred as a result of the delivery of the cargo without production of the bills of lading.

5. A charterer at the end of a LOI chain can be required to pay costs incurred in related proceedings which have been caused by their refusal to put up security. This is helpful clarification of the position as previously confirmed in The Vimeira (No 2) (1986).

Comment

In principle, back-to-back charterers should be able to pass demands up and down the charterparty chain and recover their costs of doing so from the indemnifying party. However, this case highlights the difficulty they may find themselves in an LOI case with the court ultimately holding them to their independent contractual promise, meaning the indemnity down the LOI chain is only as good as the charterer who gives it.

Kennedys acted for Clearlake in this matter.

Read others items in Marine Brief - July 2020