UK: Enforcing A Letter Of Indemnity: Court Of Appeal Upholds Owners’ Rights Under LOI Issued By Receivers To Charterers

Last Updated: 22 March 2012
Article by Stuart Shepherd and Reema Shour

(1) Far East Chartering Ltd (formerly known as Visa Comtrade Asia Limited) and (2) Binani Cement Limited v. Great Eastern Shipping Company Limited (MV Jag Ravi) [2012] EWCA Civ 180

In our July 2011 Legal Update, we reviewed the Commercial Court decision in this case where the judge held that the ship-owners were entitled to enforce a letter of indemnity ("LOI") issued by the cargo receivers to allow for delivery of the cargo without presentation of original bills of lading. The Court of Appeal has now dismissed the receivers' appeal and confirmed that the ship-owners can claim under an LOI issued by the receivers and given to the voyage charterers on the basis that the owners were acting as the charterers' agents in delivering the cargo. Whilst the ship-owners had their own LOI from the voyage charterers, that LOI was useless to them in circumstances where the voyage charterers had gone into liquidation and the shippers had been successful in their claim for damages against the owners for delivery of the cargo without production of original bills.

The background facts

In brief, an Indonesian company, PTH, sold a consignment of coal on FOB terms to VICAG. VICAG subsequently on-sold some of that coal to Binani. The VICAG-Binani contract provided that VICAG was to make prior arrangements with the ship-owners to allow unloading of the cargo against Binani's LOI in the event that Binani had not received original bills of lading by the time the vessel arrived at the discharge port.

The cargo was shipped on board the MV Jag Ravi, which was chartered by VICAG's associated company, FEC, pursuant to a voyage charterparty which provided among other things that, in case of non-availability of original bills of lading at discharge port, the ship-owners would allow discharge of cargo against the charterers' LOI in the owners' P & I Club standard form.

The LOI that was ultimately issued by the receivers at the request of charterers was in the International Group of P & I Clubs' ("IG") standard form except in one important respect: the IG standard form envisages that the name and address of the owners will be inserted as beneficiaries, whereas this LOI was addressed to "The Owners/Disponent Owners/Charterers of the MV JAG RAVI" and extended the indemnity to "you, your servants and agents". The charterers then issued their own LOI in identical terms except in that it was addressed to the ship-owners only.

At the discharge port, the owners issued a delivery order to the port authorities requesting them to deliver the cargo to the receivers. After Binani began removing the cargo from the port, a dispute arose under the sale contracts as to the specification of the cargo and the ship-owners were put on notice by the sellers/shippers, PTH, that they intended to make a claim against the ship-owners for discharging and delivering the coal to the receivers without production of the original bills of lading. The ship-owners' subsequent attempts to prevent the port authorities and Binani from removing the remainder of the cargo from the port area ultimately failed. FEC went into liquidation and the ship-owners sought to claim an indemnity from Binani for the damages they had been found liable to pay to PTH in court proceedings in Singapore.

The ship-owners succeeded in their claim before the Commercial Court. The receivers appealed.

The Court of Appeal decision

Parties to the LOI

It was common ground that the ship-owners could not claim under the LOI as a party to the LOI as they had known nothing about it being issued and therefore could not be a party to it. Accordingly, the ship-owners' primary argument before the Commercial Court was that they had been acting as the charterers' agents in delivering the cargo to Binani and that, under the terms of the LOI, the indemnity was extended to the charterers' servants and agents. Relying on Section 1(1) of the Contracts (Rights of Third Parties) Act 1999, which provides that a third party can 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", and citing with approval a 2005 case, The Laemthong Glory, the judge agreed with the ship-owners that they could do so.

In the Court of Appeal, Lord Justice Tomlinson rejected the receivers' argument that the LOI was not intended to be given to the voyage charterers but only to the owners and thus the owners could not rely on the LOI as an agent of the voyage charterers. Rather, the appeal judge highlighted the fact that the LOI issued by the receivers expressly named "The Owners/Disponent Owners/Charterers" and concluded that it was intended to provide an indemnity to the charterers. The owners could therefore claim under it in their capacity as third party agents of the charterers in delivering the cargo.

Delivery of the cargo

The Commercial Court judge rejected the receivers' argument that there had been no delivery to them of the cargo by the ship-owners within the meaning of the LOI. The LOI stated that the receivers "request you to deliver the said cargo to BINANI CEMENT LIMITED at NAVLAKHI SEAPORT, INDIA without production of the original bill of lading". The receivers had sought to argue that the ship-owners had delivered the cargo physically to the port authorities who had received the cargo as the owners' bailees rather than as Binani's agents. According to the Commercial Court judge, however, the ship-owners had done what they needed to do to enable Binani to claim the goods, namely by issuing the delivery order to the port authorities that enabled discharge of the cargo.

In the Court of Appeal, Lord Justice Tomlinson agreed with the receivers' counsel that delivery in this context is a legal concept and should not be confused with discharge. He added, however, that delivery did not mean that the ship-owners must themselves physically hand over the cargo to the receivers. What was required was that the ship-owners must have actually surrendered possession and divested themselves of any power to deal with or in the cargo. Whilst the appeal judge disagreed with the Commercial Court judge that issuing the delivery order and discharging the cargo was sufficient to amount to delivery (because the delivery order could be revoked), in the present case the ship-owners had failed in their attempts to revoke the delivery order and Binani had been successful in obtaining possession of what was in effect the entire cargo (although, in the appeal judge's view, the LOI would have offered an indemnity in respect of such delivery as was effected, even if it was only part of the cargo). As regards the receivers' argument that the LOI required a "prompt" transfer of possession, the appeal judge did not disagree but added that what was a reasonable time to transfer possession might vary with the nature of the cargo, whether it is perishable and so forth. In this case, it was the existence of the contractual dispute between the parties to the sale contract which led to delayed delivery and not the actions of the owners.

Owners " deliberate wrongdoing"

The Commercial Court judge rejected the argument that the ship-owners had been wrong to permit delivery of the remainder of the cargo after they had been put on notice of PTH's claims and that public policy meant that the owners should not be able to rely on their own wrong to enforce any rights they had under the LOI. In the judge's opinion, this was a bona fide commercial dispute, not a public policy issue and he could not identify any acts which could be described as manifestly unlawful or known to be manifestly unlawful by the parties.

The Court of Appeal agreed. Lord Justice Tomlinson highlighted that when the ship-owners had surrendered possession of the cargo and issued the delivery order, they had known nothing of the dispute between the sellers, PTH, and the intermediate buyer, VICAG, as to the entitlement to receive original bills. When the owners did learn of the dispute, they were in no position to assess whether delivery or further delivery of the cargo would be manifestly unlawful. In any event, they had tried but failed to intervene to prevent Binani taking delivery of the remainder of the cargo. In conclusion, public policy did not prevent enforcement of the LOI by either the charterers or the owners against Binani.

Comment

It is commonplace for ship-owners to be asked to deliver cargo to the ultimate consignee without production of the original bills of lading and to be offered an indemnity in respect of complying with such a request. We suggest that the approach taken by both the Commercial Court and the Court of Appeal in this case to the construction of the wording of the disputed LOI, both in terms of the identity of the parties to the LOI as well as on the meaning of delivery of the cargo within the context of the LOI, reflects the commercial reality in such cases and what commercial men would understand the rights and liabilities under such an LOI to be.

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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