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Payment for bunkers not remitted down the C/P chain - a risk for owners

It is common to have a string of contracts in the bunker supply chain, which creates a risk of ship being arrested if the payment for bunkers is not remitted down the chain – precisely what happened in The Gema [2019].

Shipowner entered into a bunker supply contract with Praxis, who then sub-contracted it to IFS and they to WBT, who assigned all their rights to IFS. Around the time of bunker supply, a dispute developed between Praxis and IFS/WBT unrelated to bunker contract. Owners withheld payment out of concern that WBT could arrest the vsl as a result of Praxiss’ failure to remit payment. Owners settled the outstanding Praxis invoice in exchange for a LOI in which Praxis promised to indemnify them in the event of vsl’s arrest. Existence of IFS in the chain was not disclosed to owners. IFS arrested the vsl and owners had to pay cash security for her release and also settled with IFS. They were now looking to Praxis for re-imbursement ($388k), who argued that LOI was not enforceable.

NY court found LOI to be a valid modification of the bunker contract, and held that there was fraudulent inducement as owner was misled into believing that Praxis had contracted directly with WBT. They allowed for reformation of LOI to include indemnification for demands by IFS too.

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