Delivery Without Bills of Lading - Can Owners Enforce Receivers' LOI to Charterers?

August 2005

It frequently arises that a vessel arrives at the discharge port ready to discharge its cargo, but the bills of lading in respect of such cargo have not yet been finally negotiated to the ultimate receivers. In this situation shipowners often come under pressure to deliver the cargo without the production of the original bills of lading. Apart from acting as a receipt for the cargo into the hands of the carrier and evidencing the terms of the contract of carriage, a bill of lading functions as a document of title operating to transfer ownership in the goods. In this capacity it is "the key to the warehouse" and it is a simple working rule that an owner who delivers cargo without production of the relevant bill of lading does so at his peril, and thereby exposes himself to claims for misdelivery of the cargo which can be potentially ruinous. Because of the risks involved, and owing to the mutual nature of the insurance provided by P& I Clubs, the rules of all the P&I Clubs in the International Group exclude from the scope of standard P&I cover claims arising out of the delivery of cargo carried on an entered ship without the production of the relevant bill of lading, subject always to the exercise of discretion by the Board of the relevant Club to allow claims. 

Whilst not condoning the practice, but in recognition of commercial reality, the Clubs have however approved a standard form of wording for a letter of indemnity to be offered to shipowners in return for delivering cargo without production of the original bill of lading. This wording is set out in the Club's Circular B.354 .

In the case of Laemthong International Lines Co. Ltd v ARTIS & Ors, the English Court of Appeal considered the wording of the P&I Club standard letter of indemnity ("LOI") and in its judgment handed down in May 2005 held that the shipowners could enforce an LOI given by receivers to charterers, directly against the receivers, by reason of the terms of the Contracts (Rights of Third Parties) Act 1999. The Court held that the shipowners were the agents of the charterers for the purposes of effecting delivery of the cargo to the receivers and that there was nothing in the LOI to indicate that the parties did not intend its terms to be enforceable by owners.

As a result of the decision owners may have fresh possibilities for enforcing LOIs given on standard P&I Club wording against third parties. However, as the Court was at pains to emphasise, each LOI will be construed according to its own terms. If Members are in any doubt as to their rights they should seek advice from the Managers.

The facts were as follows:

The vessel was voyage chartered for the carriage of a cargo of sugar from Brazil to a port in Yemen. The Charterparty provided that, in the event the original bills of lading were not available at discharge port on the vessel's arrival and if so required by charterers, the owners were to release the cargo to receivers on receipt of a faxed LOI issued by charterers in accordance with the usual P&I Club wording.

At the time the vessel arrived at the discharge port, the original bills of lading had not come into the hands of the receivers. They accordingly requested the charterers to issue an LOI to owners and to ask the owners to instruct the ship's agents to allow the vessel to commence discharge and deliver the cargo to the receivers without production of the original bills of lading. It appears that the charterers in turn required an LOI from the receivers, as back-up for any LOI the charterers issued to the owners. The charterers then sent a fax to owners requesting delivery in these terms and attaching both their own and the receivers' LOI.

The cargo was subsequently delivered to the receivers without production of the original bills of lading. After discharge the vessel was arrested by the Yemen Bank which alleged that it held all the original bills of lading in respect of the cargo and asserted a claim for the value of the cargo in a sum in excess of US$3,000,000 together with interest and costs.

The owners sought a declaration under both LOIs, first, that they were entitled to be indemnified in respect of any such liability and secondly, that both the charterers and the receivers were obliged to provide bail or other security to secure the release of the vessel.

The receivers sent their LOI to the charterers and not to the owners and the owners did not argue that they were a party to the contract contained in or evidenced by the receivers' LOI. Their case, which was accepted both by the Court of First Instance and the Court of Appeal, is that the owners were entitled to enforce the terms of the receivers' LOI in their own right by reason of the terms of Section 1 of the 1999 Act.

Two issues potentially arise under Section 1*. The claimant must show both (1) that the term of the contract relied upon purports to confer a benefit upon him and (2) that the parties intended the term to be enforceable by him.

The Court of Appeal approved the findings of the trial judge and held that it was natural to read the terms of the receivers' LOI as conferring a direct benefit on the owners.

It was known to all parties that the owners had physical possession of the cargo and the charterers did not. When the receivers required the charterers to procure the delivery of the cargo to them, the only way the charterers could do so was, in ordinary language, through the agency of the owners. The Court thus found that the owners were the agents of the charterers for the purpose of complying with the receivers' request in their LOI to deliver the cargo to them. The owners were thus properly to be regarded as falling within the category of "agents" whom the receivers promised to indemnify in clause 1 of their LOI.

In addition it was the owners and not the charterers who would need to have the bills of lading delivered to them (as envisaged by Clause 5 of the LOI) once the bills came into the receivers' possession, just as the receivers were the party that should have presented them directly to the vessel rather than the charterers.

The Court thus dealt with the first issue by finding that the parties had agreed that the owners should have the benefit of the receivers' LOI as the agents of the charterers in delivering the cargo to the receivers.

The second issue was whether the receivers had failed to discharge the burden of showing that the parties did not intend the terms of the receivers' LOI to be enforceable by the third party.

The receivers submitted that chains of charterparties are common in the maritime industry, as for example a time charter, a sub-time charter, a voyage charter and a sub-voyage charter and that similar considerations should apply to such contracts and these two LOIs, namely the charterers' LOI provided to the owners and the receivers' LOI provided to the charterers. The receivers sought to rely on comments in Law Commission Report no. 242,which had considered the effect of the proposed 1999 Act in the context of other chain contracts (notably in the construction industry) and which had concluded that where the parties had expressly set up a chain of contracts, the contracting parties did not intend a third party to have rights of enforceability. This would mean in this case that the owners should not be able directly to enforce rights against the receivers.

The Court refused to accept this analysis, holding there is no tradition of chain LOIs similar to the examples given in the Law Commission Report regarding the construction industry. Letters of Indemnity take a number of different forms and each has to be construed according to its own terms. Upon the true construction of the receivers' LOI the parties intended Clauses 1 and 3 to be enforceable by the owners. If both these clauses were intended to be for the benefit of the owners, it made no sense to argue that it was nevertheless intended the receivers' liability should not be directly to the owners.

*The 1999 Act provides, so far as relevant, as follows:

"Right of third party to enforce contractual term

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 a contract if

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

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

1 (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.