Gard News 207, August/October 2012
English Court of Appeal upholds owners' right to enforce a LOI issued by receivers to charterers.
Readers may recall the LAEMTHONG GLORY case from 2005,1 in which the English courts decided that the shipowner could enforce against the receiver the terms of a letter of indemnity (LOI) given by the receiver to the charterer for delivery without production of bills of lading, even though the shipowner was not, directly, a party to that LOI.
In a similar recent case, The MV JAG RAVI,2 the English Court of Appeal has upheld an owners' right to enforce a LOI issued by receivers to charterers for delivery of cargo without production of bills of lading, even though the receiver's LOI was not addressed to a named charterer, but addressed more generally to "owners/disponent owners/charterers". The importance of the decision in this latest case was clear, since although the charterers had issued their own LOI to the shipowners in name, the charterers were in liquidation.
In The MV JAG RAVI the shipowners were able to rely on the Contracts (Rights of Third Parties) Act 1999 which, in certain circumstances, allows a party who is not party to a contract (i.e., a third party) to enforce part or all of that contract. Since, in that case, the International Group of P&I Clubs' (IG) standard form LOI for delivery of cargo without production of bills of lading had been used, which provides that the indemnifying party is "to indemnify you, your servants and agents", it was decided that the shipowners were in fact the "agents" of the charterers in delivering the cargo. In this latest case, the shipowners' reliance on the same Act was challenged by the receivers on the basis that their LOI was addressed solely to the "owners". This seemed a rather odd argument, for were it correct then surely the owners could rely on the LOI on a direct basis (i.e., they did not need the Act); however, it was common ground that the owners did not know of the existence of the LOI until months after discharge - and under English law an offeree cannot accept an offer of which it is ignorant. As this article will outline, the receivers also had other grounds to challenge the owners' reliance on their LOI, which raised some interesting issues.
The receivers, Binani, bought a consignment of coal from intermediate sellers Vicag, who themselves bought coal from original sellers PT Harkat. The sales contract between Binani and Vicag provided that Vicag would make prior arrangements with the shipowners to allow unloading against Binani's LOI should the vessel reach the discharge port prior to Binani receiving original documents.
For the purpose of fulfilling the sales contracts it had entered into, Far East Chartering (FEC), an associated company of Vicag, chartered the JAG RAVI. The voyage charterparty had a similar provision to the above sales contract in that it provided for discharging cargo against production of a LOI from FEC. This LOI was duly issued by FEC to the shipowners in name and issued on the IG standard form at the material time (2008).3 This LOI was issued on the very same date as the LOI issued by Binani to FEC and substantially in the same wording, logically amended, save that it was addressed more generally to "owners/disponent owners/charterers of the JAG RAVI". Both LOIs provided for delivery to receivers Binani.
In October 2008 the vessel discharged her cargo to barges at anchorage in India and those barges subsequently discharged to yards at the port. The shipowners issued a delivery order to the port authority requesting them to deliver the cargo to the receivers Binani. Very shortly after Binani began removing the cargo from the port, they notified intermediate sellers Vicag that it was rejecting the cargo as being off-specification. A few weeks later, the original sellers PT Harkat (who also had a similar sales contract dispute with Vicag) put the shipowners on notice that they were the bill of lading holders and that they had a claim for loss caused by delivery without production of the original bills.
The shipowners then revoked their delivery order, but without success - the receivers Binani took delivery of further cargo in January and February 2009 following an agreement with intermediate sellers Vicag. Court action in India by the shipowners in February failed to prevent further delivery of the cargo by the port authority, which obtained its own LOI from receivers Binani. In June 2009 a sister ship of the JAG RAVI was arrested by original sellers PT Harkat in Singapore and in 2010 PT Harkat obtained a judgment from the Singapore courts finding the shipowners liable for their claim.
This ultimately led to the shipowners seeking to enforce Binani's LOI (of which they became aware in the Indian court proceedings). The English Commercial Court decided that the shipowners could do so, by relying on the Contracts (Rights of Third Parties) Act. The receivers Binani then appealed this decision.
Court of Appeal decision
The first issue for the Court of Appeal to address was whether or not Binani's LOI was issued only in favour of the shipowners, thus preventing the shipowners from relying on the LOI as an agent of the voyage charterers. The court concluded that the natural and proper meaning of the words "owners/disponent owners/charterers" was that the LOI was addressed to both the owners and the charterers, thus the shipowners did have a valid claim under the Contracts (Rights of Third Parties) Act. It was unclear why Binani had addressed their LOI in a way which departed from the IG standard from LOI, in that it was not addressed to a named party, but as the appeal court judge observed, it would be normal practice for a charterer to rely on a receiver's LOI in circumstances similar to those in this case and which only served to reinforce the view that it was capable of acceptance by the charterers themselves, as well as by others.
The second issue to be addressed by the court was Binani's argument that there had been no delivery to them of the cargo by the shipowners and so no fulfilment of the request to deliver under Binani's LOI. This line of argument had several strands, one of which was that the delivery order to the port authority was no more than an authority to deliver and that what was required was physical delivery of possession from the port authority.
Although it was accepted that Binani had taken delivery of the first part of cargo, subsequent delivery had been achieved without any co-operation by the shipowners and in fact despite their efforts to prevent delivery. The LOI referred to "the said cargo" which it was submitted must mean the entire cargo, not part of it. Binani further contended that the LOI required a "prompt" transfer of possession, which in their view had not been the case.
The Court of Appeal rejected all these arguments. The leading appeal judge made reference to previous case law indicating that delivery does not necessarily involve physically handing over the cargo, but in a wider context involves divesting or relinquishing of the power to compel any dealing in or with the cargo which can prevent the consignee from obtaining possession. Whilst the court disagreed with the judge at first instance that the delivery order and discharge of the cargo was sufficient to amount to delivery (since the shipowners may subsequently revoke the authority under the delivery order, as they attempted to do in this case), the fact was that the shipowners did not succeed and, even though the port authority required a LOI from Binani, the discharge and delivery order had enabled Binani to obtain possession without production of the original bills of lading. Furthermore, Binani had, through this process, taken possession of the entire cargo, subject only to some small and inconsequential losses. In any case the leading appeal judge's view was that the LOI would have been valid in respect of such delivery as was effected, even if it was only part of the cargo. As for the timing of delivery, the leading appeal judge did not disagree that prompt delivery may be implied under the LOI, but there was no suggestion in this case that delivery was delayed by the shipowners. It was apparent that the delay was caused more by the existence of an underlying sales contract dispute, or limitations as to the speed at which Binani could physically remove the cargo from the port.
The third and final issue for the court to decide was whether the shipowners had acted unlawfully in permitting delivery, which as a matter of public policy should have the consequences of making the LOI unenforceable. This argument raised by Binani was also rejected by the court since it was clear that there was at all material times a bona fide dispute as to the amount payable for the cargo under the sales contracts on account of it being off-specification. At the time the delivery order was issued, the shipowners had no knowledge of that dispute and when they subsequently came to learn of it they were in no position to assess whether further delivery without productuion of the bills of lading would have been unlawful. One of the appeal judges also made the point that there was no evidence to suggest that the bills would never be forthcoming and that it was Binani themselves who were pressing for delivery against the LOI.
No doubt many shipowners learning of this case will be relieved that the Court of Appeal took a sensible approach, perhaps in light of commercial realities. The case nevertheless reflects the risks involved with LOIs and the lengths to which the indemnifying party may go to challenge their enforceability. The case also serves to demonstrate, yet again, the potential value of the Contracts (Rights of Third Parties) Act 1999 in relation to LOIs other than those issued directly to the shipowner.
Members are again reminded that, unless Gard otherwise determines, there is no cover in respect of liabilities arising out of the delivery of cargo without production of the original bill of lading (or for that matter delivery at a port other than that stated in the bill of lading). Therefore, the LOI will often act as the Member's "insurance" and its best value will often depend on the willingness of the party giving it to honour their obligations thereunder and on their financial ability to so do.
Members may wish to contact Gard should they need further advice.
1 See articles "The unusual case of the enforceable letter of indemnity" in Gard News issue No. 178 and "The unusual case of the enforceable letter of indemnity - Court of Appeal upholds High Court decision" in issue No.179.
2Far East Chartering Ltd (formerly known as Visa Comtrade Asia Limited) and Binani Cement Limited v. Great Eastern Shipping Company Limited (The MV JAG RAVI)  EWCA Civ 180.
3 The standard form wording was revised in 2010 (see P&I circular No. 13/2010) and it does not appear that the slight revision would have had any material effect on the decision in this case.
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