It has been common in shipping for charterers to use the charterparty against their obligations under the LOI. A recent case (The “Miracle Hope” – [2020] EWHC 726 (Comm)) where the court construed the charterparty wording and supported the owner’s claim with the remedies of waiver and equitable estoppel should serve as a reminder for shipowners to protect their rights when making charterparties.

I.    Details of the case

Company A the claimant time chartered the vessel from the owner and then sub-chartered her to Company B the defendant on an amended Shellvoy6 form. Company B voyage chartered the vessel to Company C on the same day.

Clause 33(6) of the charterparty between A and B provided:

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 either:

(a) without bills of lading and/or

(b) at a discharge place other than that named in a bill of lading and/or

(c) that is different from the bill of lading quantity

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”.

No Club LOI wording was provided to B the defendant before the “subs” were lifted. But before the discharge of cargo without presentation of OBL, B sent an email to A requesting owner templates for LOI wording and A responded later providing LOI wording in standard Club form. Pursuant to the LOI and in the event that the vessel is arrested due to discharge of cargo without OBL, the charterer has obligations to provide security, defence funds and indemnity to enable the release. B hereby forwarded C’s order requesting A to discharge their cargo without presentation of B/L.

Subsequently, the receiver’s bank as the legit holder of the B/L arrested the vessel and claimed against the shipowner for misdelivery. The owner then demanded A put up security for the claim and A in turn demanded B who then denied the request. A sought an urgent mandatory injunction against B, ordering it to establish security in accordance with the promises made in the LOI.

II.    Decisions regarding the argument

B filed a short argument on four grounds and two of them were about the LOI:

(1)  The terms of the indemnity clause relied upon had not been complied with because the owners’ Club indemnity wording was not provided to the charterer before the fixture was concluded, as required by clause 33(6) of the C/P.

(2)   No separate LOI was provided to the claimant as required by clause 33(6) therefore no indemnity had in fact arisen.

First, as to whether the LOI wording had been provided in time, B submitted that it had not been informed of the wording as the LOI was provided before the conclusion of the fixture. The claimant was not able to tell straightforwardly which IG standard form – Group A or C – should be used and neither was provided to B. As B has a right to negotiate the wording, it probably wouldn’t had agreed to “put up security to enable the release of the vessel” or “provide funds to support the owner’s defence” if the wording was provided in time.

The judge (Mr. Justice Henshaw) held that it was the defendant who requested the indemnity wording and gave discharge instructions in accordance with clause 33(6), the action indicates that B had been aware of the LOI before the cargo was discharged without presentation of the B/L and further agreed to such wording when giving the order. Failure to provide the Club wording before lifting of “subs” would be a breach that could be waived. Also, the defendant’s action in requesting and receiving the wording and then proceeding to give discharge instructions invoking clause 33(6) constituted an estoppel by convention.

Second, as to whether a separate LOI was required, B submitted that clause 33(6) positively required the provision of a separate LOI, by the words “in consideration of receiving an LOI as per Owners’ P&I Club wording”. The claim should be made in accordance with a separate document constituting the LOI, but B had not issued such a document.

The judge recognized that the clause itself can be construed in two ways: (a) a separate LOI should be provided before the invocation of the clause, had the Club wording been provided; (b) the Club wording provided before lifting of “subs” can be applied to invoke the discharge of cargo without presentation of the B/L. By looking at the entire clause, the judge held that the indemnity arose under the clause itself without the need for any separate letter to contain the indemnity. Moreover, the parties conducted themselves on the basis that the indemnity under clause 33(6) operated without the need for any separate LOI to be provided.

Accordingly, the judge held that there had been a valid LOI before the discharge of cargo without presentation of the B/L, and the claimant would succeed on its claim on the merits.

III.   Advice to Members

This is a typical situation where the charterer argues its obligations under the LOI based on the C/P clause. Members are reminded that care must be taken when setting down C/P clauses even if a LOI is incorporated and the Club wording is in favor of the owner. On circumstances where the effectiveness of the LOI is compromised, or the validity of claim, jurisdiction, and applicable law is affected by the C/P clauses, owners may not be provided with necessary protections and remedies.

Even if the defendant’s argument were rejected in this case, it highlights some litigation risks that the owners should be aware of. Therefore, the Club advises that:

1.      Attach the Club’s standard form of LOI to the C/P and refer to it in relevant C/P clauses (see Rules 2020/2021 Appendix 3-6 for the standard form LOI, which is identical to the IG standard form).

2.      Make it clear in the C/P that the LOI shall be in the form of Club wording, and is automatically effective when the charterer give instructions by invoking the charterparty clauses.

3.      Any clause in the LOI is independent in validity and takes precedence over the charterparty.

For more information, please contact your manager at the Club.