UK: The Jaq Ravi

How effective is a Letter of Indemnity issued under charterparty terms by a party who is not the charterer?

In Great Eastern Shipping Co Ltd v Far East Chartering Ltd ("The Jaq Ravi") the English Court has addressed the effectiveness of a Letter of Indemnity which was issued by receivers to ensure that cargo could be delivered in the event that original bills of lading had not arrived at the discharge port.

The Jaq Ravi had been chartererd in to carry a shipment of coal from Indonesia to India. That shipment was being carried to fulfil a sale contract between the shippers who were Indonesian and a Swiss Company Visa Comtrade. A subsidiary company of Visa Comtrade – FEC were the named charterer of the Jaq Ravi.

The charterparty provided that if original bills of lading were not available at the discharge port the owners of the Jaq Ravi were to allow discharge the cargo against the charterers Letter of Indemnity (LOI) in the owners PNI club format. The clause also provided that a fax copy of the LOI was to be acceptable and that a copy of the bills of lading were to be attached with the LOI.

On completion of loading in Indonesia five bills of lading were issued on 30 September 2008. The vessel then sailed for India – and arrived at Navlakhi on 12 October. In the interim on 22 August the original buyer Visa Comtrade had on sold the cargo to another company – Binani on CIF terms. The on sale contract provided that in the event the vessel arrived at the discharge port before the buyer had received the bills of lading – the seller Visa Comtrade would make arrangements with the vessel owners to allow unloading against the Buyers – Binani's LOI.

On 6 October the charterers FEC sent a draft LOI which was in the PNI club standard form to Binani to issue. This they duly signed and returned to FEC – agreeing to hold harmless the owners/disponent owners/charterers of the Jaq Ravi in respect of any liability,loss,damage or expense of whatsoever nature which "you" may sustain by reason of delivering cargo in accordance with our request. It is clear from the case report that the owners of the vessel did not see this particular LOI before allowing discharge. It is unclear what they were given a copy of by the charterers pre discharge and whether the charterparty terms had been followed.

The LOI also included an extra clause providing that delivery into barges was to be deemed to be delivery to the party "to whom we have requested you to make such delivery."

Discharge commenced in Navlakhi on 14 October into barges and was completed on 16 October. On 21 October the discharge port surveyors advised that the cargo was below specification and on 23 October Binani wrote to its seller Visa Comtrade rejecting the entire consignment. By this time a substantial part of the coal cargo had already been removed from the port vicinity.

Unbeknown to the owners of the vessel and the end buyers Binani – the original parties to the sale contract the shippers and Comtrade Visa were in dispute about matters related to the original sale contract. This resulted in the shipper's lawyers putting the owners of the Jaq Ravi on notice of a claim for damages for delivering the cargo to Binani without presentation of the bills of lading. This was in and around 12 November.

Understandably the owners took immediate steps to try to prevent the balance of the cargo from being removed from the port vicinity – including an application to the local court for an injunction. They appear to have received little support from the Indian Courts on this issue and the upshot of their efforts was that Binani eventually removed all of the cargo from the port.

Meanwhile the shippers started proceedings against the owners in Singapore and were given judgement in their favour against the owners. The details of that legal action are unfortunately scant.

The owners then commenced legal proceedings against Binani under the Letter of Indemnity for an indemnity in respect of their liability to the shippers. The charterers FEC had by this stage gone into liquidation so there was no direct recovery possible from them.

The owners claimed they had a direct contractual right against Binani because of the wording of the LOI which was addressed to the owners/disponent owners. The problem for the owners though was they were unaware of the Binani LOI when they agreed to discharge the cargo without bills of lading. Binani therefore argued that the owners could not rely upon it because their conduct was in ignorance of the offer – and was therefore incapable of being an acceptance in law. Mackie Q.C sitting as a Judge of the High Court found for the owners on other points and did not unfortunately need to consider this argument- although he indicated Binani had the better argument on it.

The owner's primary argument was that they had a right to bring a claim against Binani under the LOI relying on the Contracts (Rights of Third Parties) Act 1999.

They argued that the charterer FEC had instructed the owners to deliver cargo to Binani and to that extent owners were acting as charterers agents. The LOI stated that it was intended for the "servants and agents" of charterers and the owners were therefore entitled to enforce under the 1999 Act.

Binani denied the owners were entitled to rely on the 1999 Act on three grounds.

1. There was no direct contract between the charterers FEC and Binani which allowed the Act to be relied upon.

2. The owners did not deliver the cargo in accordance with the terms of the LOI. Delivery of the cargo had been given to the port authorities. The owners had issued a delivery order prior to delivery which gave possession of the cargo to the owners own bailees with authority to them to deliver to Binani. This did not constitute delivery to Binani.

3. Even if the cargo had been delivered the owners should be prevented on public policy grounds from enforcing their rights under the LOI. Binani argued that from 12 November any delivery to them by the owners was wrongful because the shippers had claimed the cargo had belonged to them. In those circumstances Binani argued its liability should be restricted to the 7,400 mts of cargo that had been delivered before the 12 November.

The Judge decided that the owners were entitled to enforce the LOI under the 1999 Act. This was on the basis that the LOI had been addressed to FEC and its servants and agents, that the cargo had been discharged to Binani. There were were no public policy considerations in the case to prevent enforcement. The judge described the case as a commercial transaction with some complex aspects going wrong!

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