Oil & Gas: Delivery without bills of lading

In Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd & Anor; and Clearlake Shipping Pte Ltd v Petroleo Brasileiro S.A. [2020] EWHC 995 (Comm) the Commercial Court dealt with the arrest of a vessel transporting crude oil from Brazil to the Far East arising out of a letter of credit financed by a bank, Natixis. In ordering a payment into a foreign Court by the seller, the Commercial Court has demonstrated:

1. the Shellyoy 6 model form together with the usual International Group of P&I Clubs indemnity language creates the risk, where payment is by letter of credit, and the cargo is discharged without bills of lading, to the seller of having to repay the consideration to the bank in the event that the buyer does not reimburse its bank the original purchase price;
2. an obligation (along the chartering chain) to secure the release of a vessel must be given effect and the Court will identify ways of doing so; and
3. a back-to-back, ‘piggy-in-the-middle’ charterer may find itself in an difficult position: whilst it should be able to pass obligations up and down the charterparty chain (and rely on the relevant indemnities), the Court will hold it to its obligations under the relevant contract and, at a time of low oil price, an indemnity may only be as good as the creditworthiness of the entity next along the chain.

Facts

On 26 April 2019 Trafigura Maritime Logistics Pte Ltd (“Trafigura”) time chartered the vessel Miracle Hope (the “Vessel”) from its owners, Ocean Light Shipping Inc (“Ocean Light”).

On 21 August 2019, Trafigura voyage chartered the Vessel to Clearlake Chartering USA Inc (later substituted to Clearlake Shipping Pte Ltd) (“Clearlake”). On the same day, Clearlake sub-voyage chartered the vessel to Petrobras on back-to-back terms under an amended Shellvoy 6 form to transport a cargo of Crude Oil from Brazil to the Far East pursuant to a trade between the buyer, Hontop Energy (Singapore) Pte Ltd (“Hontop”) and seller, Petrobras Global Trading BV PGTBV with payment to be made via letter of credit, financed by the bank Natixis.

Petrobras ordered the cargo to be delivered without a bill of lading. The order was followed up the chain: during the voyage, on 30 October 2019, Clearlake emailed Trafigura with discharge orders without production of the bill of lading and Trafigura subsequently ordered discharge of the cargo on this basis on 13 November 2019 and the cargo was released.

The relevant indemnity provision was set out in both voyage charters in identical form and stated:

“Notwithstanding any other provision of this Charter, Owners shall be obliged to comply with any orders from Charterers to discharge all or part of the cargo provided that they have received from Charterers written confirmation of such orders.

If Charterers by telex, facsimile or other form of written communications that specifically refers to this clause request Owners to discharge a quantity of cargo …:

(a) without bills of lading …then Owners shall discharge such cargo in accordance with Charterers' instructions in consideration of receiving an LOI as per Owners’ P&I Club wording to be submitted to Charterers before lifting the “subs”. Following indemnity deemed to be given by Charterers on each and every such occasion….” (our emphasis).

It was common ground that the International Group of P&I Clubs indemnity language was as follows:

“In consideration of you complying with our above request, we hereby agree as follows…If in connection with the delivery of the cargo as aforesaid, the ship … should be arrested … to provide on demand such bail or other security as may be required to prevent such arrest … or to secure the release of such ship … and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest …” (our emphasis).

In March 2020, Natixis arrested the vessel in Singapore in support of a claim for damages for breach of the shipowner's obligation to deliver the goods against production of the bills of lading. It claimed damages of around USD 76,050,000, essentially, the value of the cargo of oil.

That arrest led to Ocean Light immediately demanding an indemnity from Trafigura which, in turn, lead to the proceedings in the Commercial Court seeking mandatory injunctive relief to enforce the provisions of the above indemnity.

Injunction claimed by Trafigura against Clearlake

Ocean Light demanded that Trafigura provide the security for release of the Vessel, who in turn called upon Clearlake to provide security pursuant to the terms of the letter of indemnity. Clearlake failed to provide the security and Trafigura applied to the English Courts to seek a mandatory injunction.

On 24 March 2020 an ex parte on notice injunction was issued against Clearlake by Henshaw J. The order provided that:

“The Defendant must provide forthwith such bail or other security as may be required to prevent such arrest or detention or to secure the release of the vessel. For the avoidance of doubt, the Defendant is required to provide the aforementioned bail and/or security directly to the Bank.”

Injunction claimed by Clearlake against Petrobras

Following the order against Clearlake on 24 March 2020, Clearlake, as ‘piggy-in-the-middle’ sought an equivalent order against Petrobras, compelling it to provide security to enable the release of the Vessel or alternatively substitute security to replace the security which could have been put up to secure the Vessel’s release.

On 31 March 2020, Mr Justice Jacobs granted the injunction in favour of Clearlake “in principle and subject to further consideration” pending a further return date which “should be at the same time as the return date of the Trafigura injunction”.

The Dispute

Clearlake and Petrobras sought to comply with the injunctions, but they failed to reach an agreement with Natixis in relation to the bank guarantee required to secure the release of the Vessel from arrest. Clearlake and Petrobras sought to resolve the impasse by a decision of the Singapore Admiralty Court but, due to the coronavirus pandemic, the Singapore courts would not be sitting for a number of weeks. As the original orders became unworkable, the matter came back to the Commercial Court in London.

Relief sought

Trafigura sought an amendment to the terms of the order against Clearlake to require Clearlake to provide, by 24 April 2020 (two days after the hearing), a bank guarantee in the form required by Natixis, failing which there should be a payment into the Singapore Court within seven working days of the security demanded.

Clearlake resisted any variation to the injunction, but, if it was to be varied, sought the same variation against Petrobras. Petrobras not only resisted any variation but also protested at the lack of notice given of the proposed variations.

Decision

The amended order sought by Trafigura raised two questions of construction:

1. The meaning of the word “forthwith” in the mandatory injunctions issued; and
2. the meaning of the phrase “bail or other security as may be required …to secure the release” of the vessel which is also to be found in the mandatory injunctions issued and repeats the language of the letter of indemnity required by the International Group of P&I Clubs.

The Commercial Court concluded that the use of the word “forthwith” indicates that the action required to be taken must be taken with some urgency however that it would be unrealistic to construe ‘forthwith’ as meaning instantaneously. The court found that in the present context, the use of the term “forthwith” envisaged that the security would be provided in the shortest practicable time (which depends on the facts of the case).

“Bail or other security as may be required …to secure the release of the vessel” could have at least 3 possible meanings:

1. First, it may mean as may be required by the arresting party to secure the release of the vessel from arrest.
2. Second, it may mean as may be required by the court of the place of arrest to secure the release of the vessel from arrest.
3. Third, it may mean as may be required by the court which the parties have agreed has jurisdiction to determine disputes arising under the Charterparty.

Typically, an Admiralty Court, faced with an application to release a valuable vessel from arrest, would determine whether the security offered was such as to allow the release of the vessel from arrest without delay. However, the Singapore Court was not able to hear the application to determine the adequacy of the security offered until 18 May 2020.

The Commercial Court was unable to make the suggested variation to the injunctions concerning the provision of a bank guarantee on the terms acceptable to Natixis because the suggested option of issuing a guarantee under protest did not assist Trafigura’s application to vary the injunction and risks prejudging the issue in the Singapore Court.

The Commercial Court decided that the more sensible, and practicable course, was for an application to be made for the release of the Vessel against the provision of the guarantee which the bank was willing to give. That was in effect the application which Clearlake made in Singapore and the correct way of obtaining the Court’s ruling on the question whether the proposed guarantee provides adequate security.

As an alternative, security in the form of payment into Court was contemplated in order to ensure that the Court’s injunctions were effective and achieved their aim. In terms of the time frame for payment, the Commercial Court decided that it was appropriate to order that the required payment into Court be made within eight working days.

Natixis objected to payment into Court, and it was unwilling to release the vessel. The Commercial Court found this surprising in circumstances where Natixis had suggested a payment in but in any event clarified that it is the Court which releases the vessel, not Natixis.

The Court ordered “payment in to the Singapore Court of the sum demanded as security, some $76 million, within 8 working days” and awarded costs to Clearlake and Petrobras.

Commentary

The trigger for this chain of claims was that Hontop, the ultimate purchaser of the crude, did not reimburse its bank, Natixis, for the payment made by Natixis to Petrobras. Natixis had sought delivery of the cargo from Ocean Light, who did not respond having already, in Natixis’ view, mis-delivered the cargo. In consequence, Natixis applied to the Singapore Court for and was granted the arrest of the Vessel to secure its claim, which triggered the indemnities found in the chain of charterparties.

It is well established practice that mandatory injunctive relief is appropriate to enforce the obligation to provide bail or other security as may be required to secure the release of a vessel from arrest – see e.g. Harmony Innovation Shipping Ltd v Caravel Shipping Inc [2019] EWHC 1037 (Comm) at [30].

The charters in these cases were all on variants of Shellvoy forms and the key provision was the commonly used P&I Club indemnity. This case demonstrates the risks that can affect a chartering chain founded upon an ultimate buyer in breach of obligations to its financing entity. In the current low-oil price environment, the risk of buyer default can be very real.

The eventual order is perhaps rather unusual (being an order to make payment into a foreign court) but accounts for the fact that, due to the current COVID-19 pandemic, the Singapore courts cannot sit until mid-May – and with tanker rates sky high as they are at present, this would not be workable.

As the Commercial Court noted:

“the aim of the P&I Club undertaking is to ensure that the shipowner is not exposed to the loss necessarily caused by being unable to trade the vessel whilst it is under arrest or that such losses are kept to a minimum the charterer who gives the undertaking must be expected to provide security, not just by means of a bank guarantee, but, if a bank guarantee cannot be swiftly provided, by other available means. Payment into court is the obvious alternative…”

The judgment underlines that the English courts will take security clauses (and the obligation to release security) in charters very seriously and the courts will be inventive in enforcing them.

Other points of note from the cases include:

• Drafting indemnities – if an entity is a ‘piggy-in-the-middle’ the indemnities up and down the chain should be substantially the same to enable obligations to be passed down the chain. It remains important to ensure that the indemnitor is financially stable and would be able to provide the security required.
• Injunctions – the case reaffirms the principle that an injunction must be drafted clearly and that the urgency and time frame for payments will depend on circumstances of the case.
• Release of assets in judicial proceedings – this is a matter for the Court not for the entity that has arrested the vessel.
• COVID-19 – The English Courts are still sitting (albeit remotely) and producing judgments, whilst seeking to promote business continuing by adapting solutions to the global impacts of the pandemic.
• Oil price - (i) an indemnity only has the financial strength of the person(s) giving it; in the current climate, this truism bears all the more importance; and (ii) buyer defaults are of general concern during a downturn, but the case reminds us that in the complex arrangements around the transport and sale of commodities, liability may be visited on a seller, and other entities in a chartering chain, by virtue of the standard indemnity provided in the event of discharge without a bill of lading.

Judge: Mr Justice Teare