The Risk of LOIs

September 2011

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Risk of LOIs - Jag Ravi

In the Commercial Court decision of Great Eastern Shipping Company Ltd v (1) Far East Chartering Ltd and (2) Binani Cement Ltd (The “Jag Ravi”) [2011] EWHC 1372 (Comm), an opportunity arose to consider the application of the principle set out by the “Laemthong Glory” (No 2) and English Public Policy law summarised by Lord Wrenbury in Weld-Blundell v Stephens [1920] AC 956 (at page 997) as follows:

“It has, I think, long been settled law that if an act is manifestly unlawful, or the doer of it knows it to be unlawful, as constituting either a civil wrong or a criminal offence, he cannot maintain an action for contribution or for an indemnity against the liability which results to him therefrom.”

Perhaps the most well know example of this policy applying  to Letters of indemnity  (“LOI”) is Brown Jenkinson v Percy Dalton [1957] 2 Lloyd’s Rep 1 In which the carrier agreed to issue  clean bills of lading in exchange for an LOI. However, it is important to note that not all LOIs will be unenforceable; for example, where there is a bona fide dispute as to whether goods are damaged or not, or where the defect is trivial, LOIs are likely to be enforceable. In theLaemthong Glory” (No 2) [2005] 1 Lloyd’s Rep 688 owners were allowed to rely on the indemnity provisions of an LOI given by receivers to charterers for the release of the cargo without presentation of the bills of lading since the owners acted as “agents” of the charterers for the purpose of delivering the cargo. The Court of Appeal outlined the commercial purpose of such LOIs, adding that it would not make commercial sense if such LOIs were not given such an interpretation.

Bearing in mind the Public Policy principle and the conclusion reached in the “Laemthong Glory” (No 2), the Court in the “Jag Ravi” had to consider whether owners were able to rely on the indemnity provisions of an LOI given by the on sale buyers of a cargo for the release of the cargo without presentation of the bills of lading.

Facts of the Case

The Indonesian shippers (“Shippers”) entered into a sale contract with Visa Comtrade AG (“VICAG”) for the supply of a cargo of coal. Far East Shipping Company Limited (“Charterers”), the chartering arm of the group of companies  of which VICAG was part, chartered the “Jag Ravi” for the transport of these shipments from Indonesia to India. VICAG sold on the “Jag Ravi” shipment to Binani Cement Limited (“Binani”).

In the meantime, a dispute arose between Shippers and VICAG. VICAG was not going to pay to take up the bills of lading. Owners and Binani were not aware of this.

The cargo was loaded in Indonesia in September 2008 and five bills of lading had been  issued by Owners. The vessel arrived in India on 12 October. Charterers instructed Owners to deliver the cargo to Binani. Owners issued a delivery order to the Port Authorities in favour of Binani and discharge of the cargo, initially into barges, was completed on 16 October. The vessel sailed. Binani started to remove the cargo from the port but on 23 October rejected the consignment alleging it was below specification.  On 12 November Shippers, in turn, put Owners on notice for a claim in damages for delivering cargo to Binani without presentation of the bills of lading.  Owners then sought unsuccessfully to revoke the delivery order and after Binanai and VICAG had resolved their dispute, VICAG removed the remainder of  the cargo from the port.

During the course of the Indian proceedings pursued by Owners, in which they sought to prevent delivery to Binani, it transpired that Binani had given an LOI to Charterers for the discharge of the cargo without presentation of the bills of lading. The LOI had been addressed to “The Owners / Disponent Owners / Charterers of the MV JAG RAVI”. Owners, in the English proceedings, invoked the principle set down by theLaemthong Glory” (No 2) to seek indemnity from Binani in respect of Shippers’ claim against them. Shippers had arrested a sister vessel of the “Jag Ravi” and held security of just over US$2 million. They also obtained judgment against owners in Singapore.

The Decision

In the course of the proceedings, Binani  attempted to distinguish this case from the “Laemthong Glory” (No 2) on the basis of the facts of the case. They argued that since the LOI had been provided in response to a request by Charterers, and that the email request had said” “please send us the LOI duly executed to enable us to take owners’ confirmation on the LOI”    Charterers were merely the conduit for the provision of an LOI and were not going to rely on it. As such, the LOI could not become a binding contract between Charterers and Binani, following which Owners could not rely on its terms as agents of Charterers. The Court disagreed: “As I see it this is too elaborate a perception of the situation.” ( HHJ Mackie QC) and that while the LOI was addressed generically to charterers as opposed to (as was the case in The “Laemthong Glory” (No.2)) the charterers by name, the covering email from Charterers added “nothing as I see it”. The email did not indicate that Charterers were not going to rely upon the LOI itself and it was clear from the terms of the LOI that it was issued to Charterers.

Binani also argued  that the requirement “to deliver the said cargo to Binani” set out in the LOI had not been satisfied because the cargo had been delivered to the Port Authority as bailee for Owners and thus, because the consideration for Binani’s request that the cargo was delivered  to them had not been complied with, there was no binding contract (i.e. the LOI) between Binani and Charterers .  However, the judge was not persuaded and preferred Owners’ position, that the meaning of delivery under the LOI is derived from the purpose of the document. That is to enable the receivers to get the goods and to protect the owners from any claims that they may be exposed to by delivery of the goods without production of the bills of lading.

Binani remaining point was the Public Policy principle. They argued  that from 12 November, when Owners were aware of the shippers claim, delivery would have been wrongful to Owners’ knowledge and that, even if the they was no contract between Binani and Charterers, the LOI was from that time unenforceable.

The Court held that the Public Policy did not apply in this instance since there was nothing manifestly unlawful. The parties did not knowingly attempt to defraud each other or carry out an illegal act and this was merely a common saga of a straightforward commercial transaction gone wrong. The Court stated:

VICAG believed that nothing further was due to the shippers and that they were entitled to possession of the bills of lading. The shippers believed otherwise. Unless Binani is able to establish that there was no genuine dispute and that VICAG's stated position was not genuinely held, public policy is not engaged at all. It contends that the question of whether or not the shippers were in the right having regard to the terms of their sale contract with VICAG is not the question. The issue is simply whether the instructions given to owners to deliver the cargo without the bills of lading were given for an illegal purpose.

Therefore, because an LOI had been issued to Charterers by Binani, and Charterers had instructed Owners to deliver the cargo to Binani, when the Owners complied with that instruction they were for that purpose acting as Charterers’ agents. As such, since under the terms of the LOI the indemnity is extended to the “servants and agents” of the charterers, Owners were entitled to enforce the indemnity provided by Binani under the Contracts (Rights of Third Parties) Act 1999:

1. (1) Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if:

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

Conclusion

The Courts will approach each case on the specific facts and circumstances. The requirements set out by the LOI were found to have been met on the facts of the case. Further,  though the Public Policy principle was found not be applicable in the “Jag Ravi”, it was due to the fact that the parties did not at any stage carry out an attempt to defraud each other. The case may have been decided against Owners if any such intention had been noted by the some of the parties involved or if the facts had differed slightly.

As ever, and while the owners ultimately succeeded in enforcing the LOI, the fact that they were involved in proceedings in India, Singapore and England, and that one of their vessels was arrested, demonstrates the need for extreme caution where LOIs are proposed to persuade an owner to act otherwise that in compliance with their contractual obligations. Indeed, under the Club’s P&I Rules it is likely that a Member has no P&I cover against liabilities in these circumstances “Unless and to the  extent the Directors shall in their absolute discretion otherwise determine ... ” (Rule 25 (viii).