UK: The MIRACLE HOPE – Who Has To Put Up Security In A Chain Of LOIs, How Much And When?

In April and May 2020, Teare J handed down two judgments in two related actions: Trafigura Maritime Logistics v Clearlake Shipping and Clearlake Chartering USA v Petroleo Brasileiro. The judgments provide important guidance about the requirements imposed by the International Group of P&I Clubs' standard letter of indemnity ("LOI") 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 subchartered to Petrobras on back-to-back terms, for a voyage carrying 1 million barrels of crude oil from Brazil to China. The charterparties permitted the charterers to order discharge without production of bills of lading against owners' standard LOI wording.

Petrobras requested discharge to receivers without production of the bills, which Clearlake passed on to Trafigura and Trafigura passed on to head owners, who complied with the request. The receivers' financing bank, Natixis, then arrested the MIRACLE HOPE in Singapore and claimed damages of US$76 million for misdelivery against the head owners.

Trafigura demanded that Clearlake put up security to release the vessel, which Clearlake passed on to Petrobras. No security was put up and so Trafigura obtained an urgent mandatory injunction against Clearlake requiring the provision of security forthwith [2020] EWHC 726 (Comm). Clearlake obtained the same urgent mandatory relief against Petrobras [2020] EWHC 805 (Comm).

The Judgments

Teare J gave judgment at the return date in both actions [2020] EWHC 995 (Comm), 4 weeks after the Trafigura injunction and 3 weeks after the Clearlake injunction. Clearlake and Petrobras explained the delay in posting security on the basis that Natixis, the arresting party, was making unreasonable demands as to the terms of the bank guarantee to be provided as security in Singapore. Trafigura argued that Clearlake breached the injunction to provide security "forthwith" because it had been ordered to do so 4 weeks earlier and had not done so. Trafigura therefore sought an order that Clearlake put up security in whatever form was agreeable to Natixis within 2 business days, alternatively paid cash to Natixis (subsequently modified to a payment into court). Clearlake resisted that variation, but made an equivalent application against Petrobras to maintain its back-to-back position.

The first issue that the Court considered was the meaning of the term "forthwith" in the injunctions, which was treated as equivalent to "on demand". The Court rejected Trafigura's submission that "forthwith" meant immediately (as a dictionary might suggest) and without regard to the practicalities of doing so. Instead, the Judge held that the wording required the indemnifying parties to put up security "in the shortest practicable time", which "will inevitably depend upon the circumstances of the case" [16].

The other construction issue was as to what security was required to provide forthwith. The standard LOI wording provided for "security as may be required" to release the vessel. The Judge considered that there were three potential meanings: (1) the security required by the arresting party, (2) the security required by the court of the place of arrest, or (3) the security required by the court with jurisdiction over the LOI. The Judge held that, consistent with Article 5 of the Arrest Convention, the standard LOI wording required the indemnifying party to put up such security as was required by the arresting forum to secure the vessel's release [28]. Trafigura's argument that Clearlake was required to put up whatever security Natixis demanded was rejected.

The Judge noted that in ordinary circumstances it was the arresting court that would determine whether the security offered was acceptable. However, the Court was unwilling to wait for the Singapore Court to resolve the issue in late May [29] – [30].

The Court was therefore required to decide whether Clearlake and Petrobras should be ordered to put up security by agreeing to Natixis' demands as to the terms of a bank guarantee. The Court was not satisfied that Natixis' security demands were reasonable or that it was possible to provide a guarantee in the terms required, particularly in so far as it required the bank guarantee to respond to the judgment of a foreign court and was "evergreen" in nature. He also rejected Trafigura's suggestion that security be put up under protest because, whatever the position in Singapore, it was unrealistic to expect a bank to put up security under protest in a form to which it objected [64]. The proper way to determine whether the security offered by Clearlake or Petrobras was acceptable was to make an application to the Singapore Court, as Clearlake had done [65].

Nevertheless, the English Court was unwilling to leave the parties at the impasse created by the guarantee negotiations between Natixis and Clearlake / Petrobras and the Singapore Court's inability, in the extraordinary current circumstances, to decide the amount of the guarantee more swiftly. Therefore, the Judge ordered Clearlake and Petrobras to make a payment into the Singapore Court with a view to securing the release of the vessel [67] – [75]

In the consequentials judgment, the Court with "some hesitation" rejected Clearlake's argument that the payment obligations should be staggered, with Clearlake allowed further time if Petrobras failed to comply [22]. The Court recognised the potential wasted costs if Clearlake were ordered to put up security within the same deadline as Petrobras, but considered that Trafigura's rights outweighed that consideration [20] – [22].

As to costs, the indemnity basis was inappropriate because Clearlake had exhibited "responsible behaviour" in acting as it had [33] and "the existence of [the indemnity under the LOI] does not assist in enabling Trafigura to show that Clearlake's conduct of the proceedings is out of the norm" [38]. Petrobras was ordered to pay the majority of both Clearlake's and Petrobras' costs.

Robert Thomas QC and Ben Gardner appeared for the Clearlake parties in the middle of a chain of LOIs, instructed by Andrew Purssell and Karnan Thirupathy of Kennedys.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.