In The Bremen Max , the High Court considered whether the wording of a standard form letter of indemnity (LOI) required security to be provided by the charterers when the vessel had already been released from arrest by the vessel's owners providing security. The decision also highlights the importance of the ship-owner delivering cargo to the correct party as identified in the LOI. 

Facts

On April 18 2007 the Bremen Max was chartered by its owners to COSCO Bulk Carriers Co Ltd (Cosbulk). The vessel was then sub-chartered under back-to-back charters to:

•  the claimant, Farenco Shipping Co Ltd;

•  the defendant, Daebo Shipping Co Ltd;

•  the third party Dampskibsselskabet Norden A/S; and

•  the fourth party Deiulemar Shipping SpA.

In March 2008 a cargo of iron ore was loaded at Tubarão , Brazil for carriage to and delivery at Bourgas , Bulgaria . Bills of lading were issued by the owners in respect of the cargo with named consignee "to the order of HSH Nordbank AG, London ". The notify party was Kremikovtzi, a Bulgarian steel producer, and its agent at Bourgas.

On arrival at Bourgas in late March 2008, the bills of lading were unavailable and the owners were requested to deliver the cargo without production of the bills. Clause 68 of each charterparty imposed an obligation on the owners "to allow discharge and release the cargo on board" without production of bills of lading, against an LOI issued by the charterer. An LOI was provided by each charterer to its disponent owner in the following terms:

" The above cargo was shipped on the above ship by …. but the bill of lading has not arrived and we … hereby request you to deliver the said cargo to KREMIKOVTZI AD, SOFIA – BOTUNETZ at PORT OF BOURGAS , BULGARIA without production of the original bill of lading.

In consideration of your complying with our above request, we hereby agree as follows:

•  To indemnify you…in respect of any liability, loss, damage or expense… which you may sustain by reason of delivering the cargo in accordance with our request.

2. If, in connection with the delivery of the cargo as aforesaid, the ship…. should be arrested or…. the arrest or detention thereof be threatened... to provide on demand such bail or other security as may be required to prevent such arrest or detention or to secure the release of such ship or property…

3. If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or facility, or another ship, lighter or barge, then delivery to such terminal, facility, ship, lighter or barge shall be deemed to be delivery to the party to whom we have requested you to make such delivery. "

The cargo was discharged at Bourgas, but there was no evidence that the cargo was in fact delivered to Kremikovtzi. Subsequently Stemcor UK Ltd informed the owners that it was the holder of the bills of lading and that it intended to commence proceedings against the vessel/owners in order to obtain security for its mis-delivery claim in the amount of $11 million. The owners informed Cosbulk of that threat and the information was passed down the line of charterers. In breach of their obligations, neither Cosbulk nor any of the other charterers provided security. As a result of this, on August 23 2008 Stemcor arrested the vessel in Australia . On the same day the owners put up security for $11 million to secure the vessel's release. The owners subsequently obtained a Rule B attachment against Cosbulk's assets pending provision of substitute security by Cosbulk to Stemcor/owners. In order to prevent its assets being similarly attached by Cosbulk, Farenco put up substitute security directly to Stemcor and called upon Daebo to do the same. It was Daebo's failure to do so that resulted in Farenco issuing proceedings against Daebo on October 24 2008 (which in turn issued Part 20 proceedings against Norden), claiming a mandatory injunction compelling Daebo to provide security pursuant to an LOI.

Justice Aiken granted interim mandatory relief on October 30 2008, requiring Norden, failing which Daebo, to provide the substitute security. He also ordered that various preliminary issues be heard, including: (i) whether the obligation in clause 3 of the LOI to provide such bail or other security was no longer a current obligation, the release of the vessel having already been secured; and (ii) whether the undertakings provided were conditional upon delivery to Kremikovtzi.

On receipt of the court's order, Norden brought Part 20 proceedings against Deiulemar. The preliminary issues were heard before Justice Teare on November 6 2008. 

Decision

Was obligation to provide such bail or other security a current obligation?

Deiulemar argued that the obligation to provide security had been discharged when the owners put up security to release the ship. It submitted that since the owners had provided security, it was not possible for any charterer to put up "such bail or other security as may be required to prevent such arrest… or to secure the release of such ship", and that an order for specific performance should not be made because the court should not order a person to do the impossible.

The court rejected Deiulemar's submission that the right to specific performance had expired and held that it remained under an obligation to put up security. The intention and commercial purpose of clause 3 of the LOI was that the owners should not have to suffer the arrest of the vessel, and that any bail or other security to prevent the arrest of the vessel should be put up by the charterer and not the owners. While the owners' action in putting up security had the effect of ending the detention of the vessel, and to that extent mitigated the loss caused by the charterers' breach, the charterers' obligation to put up bail or other security had already accrued and the owners' action could not discharge that obligation or provide the charterers with a defence to their breach of that obligation.

However, the court did add that this analysis might be different in circumstances where the owners, without making a demand of the charterers to provide bail or other security to prevent an arrest or secure a release, themselves provided bail for that purpose. In that situation, no obligation of any charterer to provide bail or other security would have accrued before the vessel was released from arrest.

Were undertakings provided conditional upon delivery to Kremikovtzi?

Having established that the obligation in the LOI to provide security remained current, the next issue was whether the owners were entitled to such specific performance without proving that that they had delivered to the entity named in the LOI. The court agreed with Deiulemar, saying that clause 68 imposed an obligation upon the owners to "allow discharge and release the cargo" against the LOI. Under the charter party it was the charterer's responsibility to discharge the cargo; however, it was the owners' responsibility to release, in the sense of deliver the cargo ashore. The court explained that 'discharge' and 'delivery' are different concepts – 'discharge' is the movement of the cargo "over the ship's rail" and 'delivery' is the transfer of possession of the cargo to a person ashore.

The person to whom the cargo was to be released or delivered without production of the bills of lading was to be found in the LOI. The LOI contained a clear request to deliver the cargo to Kremikovtzi and an equally clear agreement by the owners to comply with that request in return for the undertakings given by the charterer. Since the undertakings were given in return for the owners complying with the charterer's request that the cargo be delivered to a named receiver without production of the bills of lading, and not to anyone else without production of the bills of lading, it follows that if the owners delivered to anybody else without production of the bills of lading, the charterer's undertakings were not engaged. This principle was underlined by the opening words of the undertakings in clause 3, which required the arrest or threatened arrest to be "in connection with the delivery of the cargo as aforesaid". 

Comment
In light of this decision, shipowners should assess what measures need to be taken to obtain appropriate verification from charterers that the person to whom delivery is to be made is the person named in the LOI and be able to show that they did so. They should also ensure that appropriate demands have been made to charterers before security is provided to bill of lading holders. Those issuing LOIs may want to state clearly what is to happen when shipowners take emergency action to secure the release of a ship.