Keep your word! Hong Kong Court enforces indemnity for delivery of cargo without original bills

Shipowners are well aware of the perils of releasing cargo without production of an original bill of lading. In particular, they are likely to lose P&I cover in the event of a misdelivery claim.

However, for various reasons original bills of lading do not always arrive at the discharge port in time.  This can lead to long delays during which hire or demurrage will mount up.  Such commercial pressures sometimes mean that owners can be persuaded to deliver cargo against a letter of indemnity (LOI) instead.  Such LOIs typically contain undertakings to put up security to release the vessel from any arrest, to pay owners' legal costs, and so forth.

The High Court of Hong Kong has recently shown that it is ready and willing to enforce the obligations under such LOIs by way of mandatory injunction¹.

Background

Loyal Base Development Ltd ("LB"), as buyers of the cargo, issued an LOI to Cargill (their sellers) for delivery of the cargo at Rizhao, China without original bills of lading. 

In turn, Cargill issued a back-to-back LOI to their sellers, who had chartered the vessel, and who issued an LOI to the shipowners. The Vessel arrived at the discharge port in September 2014 and the cargo was delivered without production of the original bills.

Almost a year later, in August 2015, Bank of China (the "Bank") arrested the vessel in China.  The Bank alleged that it was the lawful holder of the bills of lading and that the cargo had been misdelivered. 

Demands were made along the chain of LOIs and Cargill called on LB to provide security for the release of the vessel.  LB failed to respond.

Ex Parte Application

Cargill made an application to the Hong Kong Court for a mandatory injunction and/or an order for specific performance against LB (a Hong Kong company), to compel them to comply with their undertakings in the LOI. 

The LOI was on terms familiar to the reader, and provided inter alia, as follows:

"If, in connection with the delivery of the cargo as requested, the ship, or any other ship or property in the same or associated ownership, management or control, should be arrested or detained… to provide on demand such bail or other security as may be required… to secure the release of such ship or property… whether or not such arrest or detention or threatened arrest or detention or such interference may be justified." 

On 26 August 2015, the Court granted the mandatory injunction requiring LB to honour the terms of the LOI. 

LB applied to discharge the Order on several grounds, including that:

• Cargill had misled the Court regarding the merits of the Bank's claim;
• Cargill had failed to inform to the Court that it had already arranged for security to be provided for the release of the Vessel; and
• Cargill failed to inform the Court when the Vessel was released on 31 August 2015. 

Decision

As a starting-point, drawing on similar authorities in England² , the Judge highlighted that:

• The purpose of an LOI for discharge without original bills of lading is to avoid the detention of the vessel in the event of a claim;
• Damages are therefore not an adequate remedy for the shipowners; and
• It would be "inequitable" not to order specific performance of the obligations under the LOI.  

As to LB's complaints, the Judge held that the merits of the Bank's claim were irrelevant to LB's undertaking to provide security.  To go into the merits of the Bank's claim would defeat the purpose of the LOI.  Indeed, the LOI itself required LB to provide security "whether or not such arrest… may be justified".  

It was sufficient that the arrest of the vessel was "in connection with" the delivery of the cargo to trigger LB's obligations under the LOI. 

With regard to disclosure, the Court affirmed that there is a duty on the applicant to make full and frank disclosure in its application.  This is an ongoing duty for as long as the proceedings continue without the defendant being heard. 

By the time the inter partes summons to continue the injunction was heard (and adjourned) on 28 August 2015, Cargill knew that security was being arranged to secure release of the vessel.  Cargill should therefore have disclosed this information at that time, as it was relevant to the Court's decision whether to continue, extend, or amend the injunction order.  

However, such non-disclosure was not sufficiently material to justify the discharge of the injunction. 

Comment

This decision is a welcome reconfirmation that the Hong Kong Court will enforce by injunction LOIs for delivery of cargo without original bills of lading, and will not permit obligations to be avoided on technicalities. 

In doing so, the Court recognised the commercial importance and purpose of such LOIs.  In particular, it is clear that obligations will be triggered regardless of the underlying merits of a claim which results in the arrest, or threatened arrest, of the vessel. 

The Court's decision is also a helpful reminder that full and frank disclosure is necessary in applications for ex parte relief, and the duty does not come to an end when the injunction is granted.  Failure to comply risks the Court discharging the injunction. 

Written by Steven Wise and Camelia Tang