Farenco Shipping v. Daebo Shipping (The "Bremen Max")
CHARTERPARTIES: DISCHARGE OF CARGO WITHOUT PRESENTATION OF BILLS OF LADING AT CHARTERERS’ REQUEST: MISDELIVERY OF CARGO: ORDER OF SPECIFIC PERFORMANCE TO REPLACE OWNERS’ SECURITY FOR RELEASE OF VESSEL FROM ARREST WITH CHARTERERS’ SECURITY: PROPER CONSTRUCTION OF LETTER OF INDEMNITY: WHETHER CHARTERERS OBLIGED TO INDEMNIFY OWNERS
Stephen Hofmeyr QC and Sarah Martin (instructed by Holman, Fenwick and Willan) for the Claimants, Farenco
Lawrence Akka (instructed by Mays Brown) for the Defendants, Daebo
David Mildon QC (instructed by Mills and Co) for the Third Party, Dampskibsselskabet Norden A/S
Robert Bright QC (instructed by Reed Smith) for the Fourth Party, Deiulemar Shipping SpA
1. Where the Charterers had undertaken by a letter of indemnity to put up security for the release of the vessel in case of arrest following the Owners complying with the Charterers’ request to deliver the cargo without production of the bills of lading, an order of specific performance, requiring the Charterers to replace the Owners’ security, was an appropriate remedy because this would fulfil the commercial purpose and intention of the letter of indemnity.
2. Where the Charterers had given an undertaking to indemnify the Owners in return for the Owners complying with the Charterers’ request to deliver the cargo to a named party without production of the bills of lading, the Charterers’ undertaking was not engaged in circumstances where the Owners delivered the cargo to another party without production of the bills of lading.
Case note contributed by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Trainee Solicitor of Hill Dickinson LLP, Singapore and International Contributor to DMC’s CaseNotes
In March 2008 a cargo of sinter feed ("the cargo") was loaded on board the vessel at Tubarao for carriage to and delivery at Bourgas. Ten bills of lading ("the bills") were issued by Pavey in respect of the cargo.
On the vessel’s arrival at Bourgas the bills were not available. The Owners were requested to deliver the cargo without production of the bills by the Charterers. Clause 68 of the charters providedfor the Owners to allow discharge and release of the cargo on board against a Letter of Indemnity ("LOI") in the following terms:
"In case original Bills of Lading are not available at discharge port(s), Master/Owners to allow discharge and release the cargo on board against Charterers' single Letter of Indemnity signed by Charterers only with wording as per Owners' Protection and Indemnity Club recommendation."
A LOI was provided by each of the Charterers to their respective counterparty. Each LOI was in the same form. The LOI provided by Daebo to Farenco provided as follows:
"The above cargo was shipped on the above ship by COMPANHIA VALE DO RIO DOCE and consigned to THE ORDER OF HSH NORDBANK AG, LONDON for delivery at the port of BOURGAS, BULGARIA but the bill of lading has not arrived and we, DAEBO SHIPPING CO., LTD, 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:-
1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability, loss, damage or expense of whatsoever nature which you may sustain by reason of delivering the cargo in accordance with our request.
2. In the event of any proceedings being commenced against you or any of your servants or agents in connection with the delivery of the cargo as aforesaid, to provide you or them on demand with sufficient funds to defend the same.
3. If, in connection with the delivery of the cargo as aforesaid, the ship, or any other ship or property in the same or associated ownership, management or control, should be arrested or detained or should the arrest or detention thereof be threatened, or should there be any interference in the use or trading of the vessel (whether by virtue of a caveat being entered on the ship's registry or otherwise howsoever), 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 or to remove such interference and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest or detention or threatened arrest or detention or such interference, whether or not such arrest or detention or threatened arrest or detention or such interference may be justified.
4. 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.
5. As soon as all original bills of lading for the above cargo have come into our possession, to deliver the same to you, or otherwise to cause all original bills of lading to be delivered to you, whereupon our liability hereunder shall cease.
6. The liability of each and every person under this indemnity shall be joint and several and shall not be conditional upon your proceeding first against any person, whether or not such person is party to or liable under this indemnity.
7. This indemnity shall be governed by and construed in accordance with English law and each and every person liable under this indemnity shall at your request submit to the jurisdiction of the High Court of Justice of England."
There was no evidence as to whom the cargo was delivered. Following discharge of the cargo, Stemcor UK Ltd ("Stemcor") informed Pavey that they were the holders of the bills and asked Pavey to deliver the cargo. Pavey informed Cosbulk of this and called upon them to honour their obligations under the LOI. Similar messages were passed down the line of Charterers. The Charterers having failed to put up security to avoid an arrest threatened by Stemcor, the vessel was arrested in Australia on 23 August 2008, forcing Pavey to put up security. Procedural remedies were successfully used by Pavey against Cosbulk which led to Farenco putting up security to avoid disruption to its business operations.
Farenco then issued proceedings in the Commercial Court against Daebo and sought injunctive relief. Daebo informed Norden that it would seek the same relief against Norden. Aikens J. granted interim mandatory relief requiring Norden, failing whom Daebo, to provide the funds necessary to replace those deposited by Farenco. Aikens J. also ordered an expedited trial of several issues of construction, including the following:
1. Whether clause 3 of the Letter of Indemnity obliges the party
giving the indemnity to provide
2. Whether the obligation in clause 3 of the Letter of Indemnity
to provide such bail or other security
3. Whether the undertakings provided are conditional upon delivery to Kremikovtzi.
This case note focuses on issues 2 and 3 above, which are ones of general interest and importance.
The judge stated that 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 security to prevent an arrest should not be put up by the Owners but by the Charterers. The action of the Owners 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 but the Charterers nevertheless remained in breach of their obligation.
Under such circumstances the judge held that an order of specific performance, here requiring Daebo to replace Farenco’s security, was an appropriate remedy. While it was correct to say that the Owners would have an alternative remedy in damages for the cost of putting up security, specific performance would fulfil the commercial purpose and intention of clause 3, thereby putting the Charterers and the Owners in the position they would have been in had the Charterers complied with their obligation - no more and no less.
The judge therefore found in favour of the Owners on issue 2.
Issue 3: Whether the undertakings provided in the LOI are conditional upon delivery to Kremikovtzi
The judgestated that the obligation upon the Owners in clause 68 of the charters "to …. release the cargo on board" against the LOI obliged them to release, in the sense of deliver, the cargo to another person against the LOI. The person to whom the cargo was to be released/delivered without production of the bills was to be found in the LOI, because clause 68 did not identify the intended receivers of the cargo. The judge was unable to accept the Owners’ submission that the obligation of the Owners was to release the cargo to the Charterers so that the Charterers might deliver the cargo, because delivery (the transfer of possession of the cargo) is an activity performed by the Owners. This was reflected in the terms of the LOI: the Charterers had requested the Owners to "deliver the said cargo to Kremikovtzi". In addition, clause 4 of the LOI would be unnecessary if, upon discharge, the cargo was to be released to the Charterers in any event.
Since the undertakings were given in return for the Owners complying with the Charterers’ request that the cargo be delivered to Kremikovtzi without production of the bills and not to anyone else, it followed that if the Owners delivered to anybody else without production of the bills the Charterers’ undertakings were not engaged.
The judge therefore found in favour of the Charterers on issue 3.
In addition to the above, the judge usefully stated that shipowners need not enquire into whether the party to whom they are requested to deliver is entitled to possession of the cargo. Shipowners only need to know that the party to whom they deliver the cargo is the party to whom their charterers have requested that delivery be made. If shipowners are in doubt as to that, they may ask their charterers to identify the receivers. If shipowners then comply with such representations as their charterers make as to the identity of the receivers, the charterers will be estopped from asserting that the shipowners delivered the cargo to the wrong party.
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