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Letters of Indemnity and Interim Injunctions

Introduction

Maritime letters of indemnity (“LOIs”) are commonly employed to provide the indemnified party (typically the carrier) with assurance that they will be protected should they suffer a loss as a result of complying with requests made by the indemnifying party (normally the shipper of the cargo or the charterer of the carrying vessel). Such requests include, for example, delivering the goods without presentation of the original bills of lading, or delivering the cargo at a different discharge port.

Even if an LOI is properly drafted and is engaged by the circumstances, this is no guarantee that the indemnifying party will honour their obligations when the time comes. Time may be of the essence. In such cases one option, assuming the LOI is governed by English law and is subject to the jurisdiction of the English Courts, is to seek an interim injunction from the Court requiring the indemnifying party to comply with their obligations.

This can be an expensive and time-consuming path to take, but it may be the best or only option available, and it can potentially resolve the underlying dispute without the need for a full trial.

This article is intended to be a brief general overview of the territory.

Factors the Court will Consider

Before granting any interim injunction the Court will consider a number of factors including:

Likelihood of Success:

• The Court must be satisfied to a high degree that the indemnified party would succeed should there be a full trial, otherwise it would be unjust to grant them the interim remedy sought.

Damages are not an Adequate Remedy:

• It must also be the case that the indemnified party cannot be adequately compensated by damages – i.e. by a monetary award – instead of the interim injunction.
• The general rule in maritime LOI cases is that damages are not an adequate remedy. For example, Christopher Hancock QC sitting as a Judge of the High Court in NaviG8 Chemicals Pool Inc v Aeturnum Energy International Pte Ltd [2022] 1 Lloyd's Rep. 277 said:
• “It is settled law that the obligations imposed on the indemnifier under a maritime contract of indemnity are amenable to enforcement by a mandatory injunction / order for specific performance: see Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd [2020] EWHC 726 (Comm) (Henshaw J) at [31], Harmony Innovation Shipping Ltd v Caravel Shipping Inc [2019] EWHC 1037 (Comm) (Sir Ross Cranston) at [30], The Bremen Max [2009] 1 Lloyd’s Rep. 81 (Teare J) at [21] and The Laemthong Glory (No. 2) [2005] 1 Lloyd’s Rep. 632 (Cooke J) at [51]-[52].”
• The first instance decision of Cooke J in The Laemthong Glory (No. 2) [2005] 1 Lloyd’s Rep. 632  provides another useful illustration:
  • The owners chartered their vessel to the charterers.
  • The receivers wished to take delivery of the goods carried without production of the bills of lading.
  • This was allowed, but only once letters of indemnity had been issued by the receivers to the charterers, and then separately by the charterers to the owners.
  • After discharge the vessel was arrested by a bank which had paid the charterers under a letter of credit, but which had not been paid by the receivers due to a dispute with the charterers. The owners commenced Court proceedings against both the charterers and the receivers.
  • One question for the Court was whether the owners were entitled to an order compelling the charterers and / or the receivers to provide bail or other security to secure the release of the vessel. The charterers and receivers argued that no such remedy was appropriate as damages were an adequate remedy.
  • On this issue Cooke J decided that, given the nature and purpose of LOIs, the owners were entitled to specific performance and that damages were not adequate:
  • “Where damages may constitute an adequate remedy for failure to perform many primary obligations, the whole point of the letters of indemnity was to replace secondary liability under any suit for damages for detention by the primary performance of the obligation to ensure release of the vessel, so that such a suit was unnecessary. It would, in such circumstances, be inequitable not to grant specific performance to require fulfilment of that obligation and then to leave the Owners to a remedy in damages for detention, or even damages for the loss of the ship, which was the very thing that the letters of indemnity were intended to avoid.”

Balance of Convenience:

• The Court must also be satisfied that the balance of convenience falls in favour of the indemnified party seeking the interim remedy, i.e. that granting the injunction involves a smaller risk of injustice than not granting it.

Contracts (Rights of Third Parties) Act 1999

In the context of maritime LOIs it is also important to keep in mind that the indemnified party may be entitled to be indemnified under LOIs which are not addressed to them by virtue of the Contracts (Rights of Third Parties) Act 1999 – though each case will turn on its own particular facts and circumstances.

This possibility was established by the Court of Appeal in The Laemthong Glory (No. 2) [2005] EWCA Civ 519, on appeal from the decision of Cooke J discussed above.

In that case the LOI issued by the receivers and addressed only to the charterers was issued with wording which is recommended by most P&I Clubs, as quoted below.

• '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. (…) (3) If in connection with delivery of the cargo as aforesaid the ship or any other ship … in the same or associated ownership … should be arrested or detained … 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 the ship … and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest or detention … whether or not such arrest or detention or threatened arrest or detention or interference may be justified.”
• In short, the Court of Appeal held that:
  • The owners had acted as the charterers’ agents in complying with the receivers’ request to deliver the cargo without presentation of the original bills of lading. The reference to “agents” in the LOI was primarily intended to refer to the owners, conferring a direct benefit upon them within the meaning of the 1999 Act.
  • There was nothing in the LOI issued by the receivers to the charterers which indicated that the parties did not intend the relevant terms to be enforceable by the owners against the receivers. The whole purpose of the LOI was ultimately to protect the owner from action which may be taken against them by the original bill of lading holder(s).
  • Given the requirements of the 1999 Act, and the circumstances of the case, this was sufficient for the Court of Appeal to find that the owners were entitled to an indemnity from the receivers.

A Recent Example

In Bunge Asia Pte Ltd v Aetos Agro Merchants Private Ltd [2024] 7 WLUK 297 the Commercial Court was satisfied that a mandatory injunction should be granted:

• Cargo had been delivered to the receivers without presentation of the original bills of lading, against the provision of an LOI by the receivers to charterers of the carrying vessel.
• A bank subsequently claimed to be unpaid, and to be the lawful holder of the bills of lading. They alleged the cargo had been misdelivered and arrested the vessel.
• The disponent owners and the charterers applied for a mandatory injunction under the terms of the LOI requiring the receivers to indemnify them against the various losses which had been or might be suffered in relation to the bank’s claim and / or the arrest (the disponent owners relying on the 1999 Act discussed above).
• The Court granted the claimants’ application:
  • They were satisfied to a high degree that the claimants would succeed at trial. The LOI was engaged on delivery of the cargo and both claimants had well established rights to enforce its terms.
  • It did not matter that the claimants had not yet suffered a loss, as the terms of the LOI required security to be provided on request.
  • The fact that the receiver had already paid for the cargo made no difference to the position under the LOI, even if that would dispose of the bank’s claim. The claimants remained entitled to instant relief.
  • In the circumstances damages were not an adequate remedy, and injunctions had been issued in similar circumstances.
  • The balance of convenience fell in favour of the claimants, and not granting the injunction would unjustly defeat the entire purpose of the LOI. This was the case even though the receiver claimed to be in extreme financial difficulty. Although the Court would not generally grant an injunction to do the impossible, that threshold was not met.