Against this background, the High Court expedited the hearing of an urgent application by an intermediate charterer, for relief under a Letter of Indemnity (“LOI”) given in return for delivering cargo without production of the original Bills of Lading. The application arose out of a claim for misdelivery of the cargo, for which security of US$11 million had been sought and which the intermediate charterer had agreed to provide directly.  

Most importantly, the applications involved the High Court’s determination of three questions on the construction of the subject LOI. As the LOI was based on the standard wording recommended by the International Group of P&I Clubs, the Court’s decision on the construction issues, handed down on 7th November 2008, will be of interest to the industry.  


Each of the four parties was an intermediate charterer of the MV “Bremen Max” in a long line of time charterparties. A cargo of sinter feed was loaded at Brazil. Prior to arrival at the discharge port (Bourgas, Bulgaria), a request was made that the cargo be delivered to Kremikovtzi AD – Bulgaria’s largest steel producer, now bankrupt – without production of the original Bills of Lading. The shipowners agreed, subject to provision by charterers of an LOI based on the International Group approved wording.  

Back-to-back LOIs were given by charterers up the charterparty chain. Each of the LOIs recorded charterers’ request that the owners “deliver the said cargo to Kremikovtzi AD, Sofia…”, at Bourgas and without production of the Bills, and that the undertakings in the LOI were agreed by charterers “in consideration of your complying with our above request”. The Bills of Lading stated that the cargo was consigned to order of a bank. The notify party was described as “G&M-5, Bourgas, Bulgaria as agent and Kremikovtzi AD, Sofia, Botunetz”.  

The vessel arrived at Bourgas in late March 2008. In late July 2008, a third party, Stemcor UK Ltd, informed the vessel’s head owners that they were the holders of the Bills of Lading and asked for confirmation that owners were ready, willing and able to deliver up possession of the cargo or otherwise advise in what circumstances they had parted with possession of the cargo. Security of US$11 million was requested, failing which Stemcor threatened arrest of the vessel. The request for security was passed down the charterparty chain by head owners under clause 3 of the LOI, which provides: “If, in connection with the delivery of the cargo as aforesaid, the ship… should be arrested or detained and should the arrest or detention thereof be threatened… [Charterers] 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…”  

Owners’ request for security was refused by each charterer in the chain. Charterers argued that the LOI did not oblige them to post security to the cargo claimant but only to the addressee of the LOI, and that in any event the LOI did not respond as, on charterers’ information, the cargo had not in fact been delivered to Kremikovtzi at Bourgas.  

In August 2008, the vessel was arrested by Stemcor. In order to secure her release, head owners posted security of US$11 million. They then commenced High Court proceedings against their charterers and also filed a Rule B attachment against them, pursuant to which funds were arrested by a New York bank.  ARN

The Claimant in the subject High Court proceedings, Farenco, was an intermediate charterer. They had reached an agreement with their immediate owners in the charterparty chain, as well as head owners and Stemcor, that they would post security of US$11 million in favour of Stemcor as replacement security for that already provided by head owners, and US$500,000 in favour of head owners as security for their costs, by payment into an escrow account. They then, on 24th October 2008, commenced High Court proceedings against their immediate charterers, Daebo, seeking a declaration that they were entitled to indemnity under the LOI and urgent, interim relief (pending trial or further order) requiring Daebo to pay US$11.5 million into the escrow account. Daebo put their immediate charterers, Norden, on notice and indicated that they would seek back-to-back orders against Norden at the hearing, which was to take place on 30th October. In the event, the Court granted the urgent, interim relief sought, ordering that Norden pay US$11.5 million into the escrow account by 4th November, failing which Daebo were to pay US$11.5 million into the escrow account by 5th November. The matter was then listed for an expedited hearing on 6th November on the issue of the construction of the LOI.  

Subsequently, ex parte orders were obtained by Norden against their immediate charterers, Deiulemar, who were effectively at the bottom of the charterparty chain although also intermediate charterers. As a result, by the time of the hearing on 6th November on the construction of the LOI, most interested parties in the charterparty chain were before the Court, and three of the parties each had US$11.5 million sitting in escrow, as security for a US$11 million claim, pending further order.  

Decision on the construction of the LOI

Three issues of construction were argued before the Court.  

The first was whether clause 3 of the LOI obliged the party giving the indemnity (charterers) to provide security directly to the cargo claimant rather than the addressee of the LOI. By the time of the hearing, the parties were in agreement on that point. The LOI did so oblige charterers.  

The second issue was whether the obligation in clause 3 of the LOI to provide bail or other security was no longer a current obligation, release of the vessel from arrest having already been secured. The Court answered this question, “no”, effectively in favour of owners. The Court said that the intention and commercial purpose of clause 3 would otherwise be frustrated. If charterers had failed to provide security in breach of their obligation in clause 3 of the LOI, and head owners had provided security to cargo claimants in order to secure the vessel’s release from arrest, charterers were not thereby discharged of their obligation under clause 3. That obligation was a continuing one.  

The third issue determined was whether the undertakings provided in the LOI were conditional upon delivery having been made “to Kremikovtzi”, in accordance with charterers’ request. Significantly, the Court answered this question, “yes”, effectively in favour of charterers. An LOI given in return for delivering cargo without production of the original Bills of Lading will therefore not respond unless delivery has been made to charterers’ requested receiver. The Court said that the owners need not enquire as to whether the requested receiver is in fact entitled to possession of the cargo. Owners only need to know that the person to whom they are delivering the goods is the person to whom charterers have requested that delivery be made. If owners are in doubt, they may ask charterers to identify the intended receiver.  

Interim Relief

An application was made by Farenco that the relief granted on an interim basis be made permanent notwithstanding the Court’s findings on (in particular) the third construction issue. The Court refused their application.  

One to watch

The decision sends a warning to other intermediate charterers to be very careful when agreeing to provide security up the charterparty chain under a LOI without first ensuring a back-to-back position has been adopted down the charterparty chain.  

Permission to appeal the Court’s findings on the second and third issues of the LOI’s construction has been granted.