Law Bites – May 2020

LAW BITES – MAY 2020

The “MIRACLE HOPE” – The Security Obligations of Parties Under a Chain of LOIs

1. To what extent will security in charters be enforced in these unprecedented times? At all costs, it seems.

2. The recent English High Court’s decision of Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd [2020] EWHC 995 (Comm) provides insights for parties interposed in back to back charter agreements, where the International Group of P&I Clubs standard form letters of indemnity (“LOI”) has been incorporated in the current climate. JTJB’s Deputy Managing Partner, Mr. John Sze gave evidence on Singapore law in the proceedings.

Factual Background

3. The case concerned the “MIRACLE HOPE” (the “Vessel”) which was time chartered by Trafigura from its registered owners, Ocean Light. The Vessel was sub-chartered to Clearlake and was then sub-sub-chartered to Petrobras on back-to-back terms. Petrobras voyage-chartered the Vessel to carry crude oil from Brazil to China and required that the cargo be delivered without production of the bills of lading (“B/L”). The form of indemnity applied for such delivery was alleged to be in accordance with the International Group of P&I Clubs LOI standard form.

4. Petrobras’ request to discharge cargo to receivers without production of B/Ls was passed to Ocean Light as the registered owners and they complied with the request. In March 2020, the financing bank, Natixis, who paid for the cargo under a letter of credit but did not receive the cargo, arrested the Vessel in Singapore. Natixis claimed damages of US$76 million for a breach of Ocean Light’s obligation to deliver cargo against production of the bills of lading.

5. The arrest led to the proceedings before the English High Court to enforce the provisions of the indemnity, as England was the chosen jurisdiction under the alleged LOIs issued through the charterparty chain. Injunctive relief was ultimately obtained to enforce the obligation to provide security as may be required to secure the release of the vessel from arrest. Both Clearlake and Petrobras sought to comply with the injunctions but failed to reach an agreement with Natixis as to the terms of the bank guarantee required to secure the release of the vessel from arrest.

6. As a result, the issue of providing security for the release of the Vessel came before Teare J. in the English High Court.

Holding

7. The English High Court found that the wording of the injunction required the parties to put up security for the Vessel’s release in the shortest practicable time and was dependent on the circumstances of the case.

8. The form of security to procure the release of the vessel was an issue the English High Court had to grapple with. Teare J highlighted that there were three potential meanings of the phrase “other security as may be required” used in the injunction and LOI, and determined that the standard wording of the LOI required the indemnifying party to procure security as was required by the court of the place of arrest. Thus, the argument made that Clearlake and Petrobras had to procure security pursuant to Natixis’ demands was rejected.

9. The application made in Singapore to determine the adequacy of security, among other issues surrounding the arrest, was to be heard on 18 May 2020. However, the English High Court was of the view that the circumstances required security to be provided as soon as possible and was prepared to order suitable security to be provided notwithstanding the pending application in Singapore. Teare J found it necessary to address the question of whether the security offered for the release of the Vessel matched that which would be required by the Singapore Court. He held that because the charterer owes an obligation to the owner to provide security to secure release of the Vessel, and because the owner wished to enforce that obligation, the English High Court should exercise the jurisdiction conferred upon it to deal with the provision of security.

10. The question before the English High Court was therefore whether Clearlake and Petrobras should be ordered to put up security in the form of a bank guarantee, in line with Natixis’ demands. However, the adequacy of the terms of the guarantee were held to be a matter of Singapore law and Teare J was reluctant to opine on the same. He also rejected the suggestion that security in the form of a bank guarantee could be put up under protest, as it would be unrealistic to expect a bank to put up such security where it objected to its form. This argument, raised by Mr. John Sze, was found to have force by the English High Court.

11. While the position on the bank guarantee was held to be a matter for the Singapore Court to decide, the English High Court was reluctant to leave parties deadlocked while awaiting the hearing of the Singapore application. The application was due to take place three and a half weeks after the English proceedings. Teare J found it appropriate to order Clearlake and Petrobras to make payment into the Singapore Court to expeditiously secure the Vessel’s release.

12. In an article published in the Straits Times on 5 May 2020, it was suggested that the English High Court was able to move quickly to determine the issue of security, while the Singapore Court with admiralty jurisdiction was hampered by delays caused by the Covid-19 restrictions. While Teare J did indicate that the issue before the English High Court was one that required expediency, this was a consideration that arose from the LOIs, and the LOI terms was not an issue before the Singapore Court. The party that sought the urgent injunction in England was not even party to the Singapore proceedings. Therefore, this was simply not a case of the Singapore Courts being hampered by the pandemic as disappointingly suggested.

Conclusion

13. This judgment indicates that the English High Court will take steps to order effective and urgent injunctions aimed at ensuring that the obligation under LOIs to provide security are effective and achieves its fundamental aims. The indemnifying party is required to take prompt practical steps to ensure that security is provided to secure the release of arrested vessels. Further, issues of comity will be carefully balanced against the necessity to act expeditiously in providing security, and comity will generally not be departed from without strong underlying reasons.

John Sze

Partner

E: johnsze@jtjb.com

T: (65) 9062 8575

 

Jolene Tan

Associate

E: jolenetan@jtjb.com

T: (65) 6220 9388

 

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This update is for general information only and is not intended to constitute legal advice. JTJB has made all reasonable efforts to ensure the information provided is accurate at the time of publication.