UK: Enforcing A Letter Of Indemnity

Last Updated: 16 June 2011
Article by Michael Volikas and Reema Shour

Great Eastern Shipping Company Ltd v (1) Far East Chartering Limited and (2) Binani Cement Ltd [2011] EWHC 1372 (Comm)

In The Laemthong Glory (No 2) [2005] 1 LLR 688, the Court held that the provisions of a letter of indemnity ("LOI") issued by receivers to voyage charterers requesting delivery of cargo without presentation of original bills of lading purported to confer a benefit on the ship-owners in their capacity as the agents of the charterers for the purpose of delivering the cargo. Consequently, the owners were entitled to enforce the LOI in their own name pursuant to section 1(1) of the Contracts (Rights of Third Parties) Act 1999 (the "Act") which allows a third party to enforce in his own right a term of a contract if the contract expressly provides that he may do so or if the term "purports to confer a benefit on him". In the present case, His Honour Judge Mackie QC considered that the LOI issued by receivers was in terms identical to the LOIs in The Laemthong Glory except in minor respects. He concluded that the ship-owners in this dispute were entitled to enforce the LOI.

The background facts

An FOB sale contract for shipments of coal was entered into by a Swiss company, VICAG, as buyer and an Indonesian company as seller. One of those shipments was sold on by VICAG to Binani Cement Ltd ("Binani") on CIF terms. The on-sale contract provided for VICAG to make a prior arrangement with ship-owners to permit unloading against Binani's LOI in the event that bills of lading were not available on the vessel's arrival at discharge port.

VICAG was part of a group of companies whose chartering arm was Far East Chartering Limited ("FEC"). FEC entered into a voyage charter with the owners for the carriage of the coal from Indonesia to India. The charterparty recap provided for owners to discharge cargo against charterers' LOI in owners' P & I Club format in the event that the bills of lading did not arrive in time.

Owners issued bills of lading, naming the Indonesian seller as shippers. Shortly before the arrival of the vessel in India, FEC requested and obtained from Binani an LOI in the P & I Club standard form. The LOI was addressed to "The Owners/Disponent Owners/Charterers of the MV JAG RAVI" and was expressed to be an indemnity to "you, your servants and agents..."

Upon arrival of the vessel at the Indian port, owners issued a delivery order to the Port Authority in favour of Binani pursuant, it seems, to an instruction from FEC. The entire cargo was discharged, Binani removed a part of the cargo from the port and had it inspected by surveyors who determined that the cargo was below the specification required in the on-sale contract. Binani wrote to VICAG rejecting the consignment and thereafter, the shippers put owners on notice of a claim for damages for delivery of the cargo to Binani without presentation of the bills of lading. Owners sought to but were unsuccessful in revoking the delivery order to the Port Authority. Ultimately, Binani reached agreement with VICAG to take the cargo at a reduced price. Owners obtained an injunction against the Port Authority and Binani to prevent removal of the rest of the cargo from the port but this was set aside in due course and Binani removed the remaining cargo. Binani then retained part of the reduced purchase price it had agreed to pay to VICAG on the grounds that VICAG had not supplied the bills of lading. However, at this stage, both FEC and VICAG were in liquidation and took no part in the proceedings.

The owners commenced proceedings in the English court to enforce the LOI against Binani primarily on the ground that they were acting as charterers' agents in delivering the cargo to Binani and, under the terms of the LOI, the indemnity was extended to "the servants and agents" of charterers. Therefore, owners argued that they were entitled to enforce the Act. The judge agreed.

The Commercial Court decision

Parties to the LOI

The judge dismissed receivers' argument that there was no indemnity agreement between Binani and FEC because the LOI was not expressly addressed to FEC and therefore no contract in respect of which the Act could be invoked. Rather, he said, the LOI was addressed generically to charterers and it was clear from its terms that it was issued to charterers. The judge also gave short shrift to the argument that FEC were not intending to rely on the LOI themselves but were merely acting as a conduit for passing on a draft document to owners.

Delivery of the cargo

The judge also dismissed Binani's argument that there had been no delivery of the cargo to them within the meaning of the LOI and that, therefore, the contractual indemnity did not come into play. Binani had argued that owners had not delivered the cargo into Binani's possession but had instead physically delivered it to the Port Authority which received it not as Binani's agent but as bailees for owners. The judge held that in issuing the delivery order to the Port Authority in the receiver's favour and discharging the cargo, the owners had done what they needed to do to enable Binani to claim the goods. According to the judge, "In the context of the LOI, and in any ordinary use of the English language, a cargo which has reached a port, been discharged and collected by the receiver has been delivered".

Owners' "deliberate wrongdoing"

Binani also argued that the delivery of the cargo which took place after owners had been put on notice of shippers' claims was wrongful to the knowledge of owners and that, as a matter of public policy, owners could not rely on their own wrong to obtain and enforce rights under the LOI. The judge disagreed and said that this was not a public policy case but simply a bona fide commercial dispute. In the judge's view, there were no relevant acts in this case which could fairly be described as manifestly unlawful or known to be unlawful by the parties in this action. In particular, it had not been shown that the instructions given to owners to deliver the cargo without the bills of lading were given for an illegal purpose.

Unilateral contract

Owners had an alternative argument, namely that they could enforce the LOI directly against Binani because it was addressed to them as well as to charterers. As owners had been unaware of the LOI having been issued at the time it delivered the cargo, this raised the issue of whether a party is able to claim under the terms of a unilateral contract if he performs the requested act but does so in ignorance of the offer. The judge did not however decide this point because he had already found in favour of owners on their main case.

Comment

In his conclusion on the issue of construing the LOI, the judge emphasised that LOIs, particularly those in standard form, are important commercial instruments which need to be interpreted robustly in a straightforward way. He also took into account that they are often issued and relied on (as in this case) by parties for whom English is not their first language. In his view, therefore, an overly close textual analysis of the wording is not therefore appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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