Introduction
Letters of Indemnity (“LOI”) are often used to facilitate efficient trade. For instance, when the bills of lading have not arrived at the discharge port in time, and the vessel would otherwise have to wait accruing demurrage, or where the place of delivery under the sales contract differs from the discharge port named in the bills of lading [1].
However, liability in these instances will fall outside of P&I cover due to the exclusions for cargo cover [2] and because the undertakings provided under the LOI are generally onerous.
Therefore, owners and charterers will seek to rely on an indemnity from the party below them in the contractual chain making the request to cover these risks, and they will be reliant on them having sufficient means to meet their obligations under the LOI. In the case of misdelivery, the claims can be significant and may exceed the value of the cargo.
A recent decision of the English High Court confirms that, unless they are acting as an agent for an “undisclosed principal”, only the entity issuing the LOI will be liable under the LOI even if they are a part of a wider group of companies.
An “undisclosed principal” in English law arises when one enters a contract on behalf of another without disclosing this to the other party. The agent and principal must consent, but consent will be based on an objective analysis of their words and conduct and can be express or implied, even if they do not recognise it as an agent/principal relationship themselves [3].
Therefore, when giving a LOI, charterers should carefully consider whether other entities in their own group could inadvertently be liable under the LOI and, when receiving a LOI from a party down the chain, charterers should consider whether the entity providing the LOI (and not just the wider group of companies) has the financial means to meet its obligations.
When could another party be an “undisclosed principal” to a LOI?
This will depend on the facts of each case but the English High Court in Yangtze Navigation (Asia) Co Limited v TPT Shipping Limited [4] provides some guidance on what the courts may consider.
Yangtze Navigation concerned three shipments of logs from New Zealand to India in 2020, which were discharged against a chain of LOIs for discharge without presentation of bills of lading. The cargo was alleged to have been misdelivered, and claims were brought against the vessel owners. The owners sought to rely on the LOIs provided by charterers, but the charterers were unable to recover under the LOI they received from receivers and were put into liquidation. Faced with the prospect of having no recourse for the misdelivery claims, the owners commenced proceedings against another company in the same group as the charterer (the “Affiliate”) and the exporters of the cargo (the “Exporters”), alleging that they were ultimately liable under the LOI because the charterer had been acting as their agent and issued the LOIs on their behalf.
When deciding that the Affiliate and Exporters were not “undisclosed principals” and thus liable under the LOIs, the court considered:
- The contracts between the Charterers, the Affiliate and the Exporters: the Affiliate had a contract with the Exporters under which it would act as the Exporters’ agent in marketing, selling and arranging shipment of their logs. As the Exporters’ agent, the Affiliate contracted with the Charterer for the provision of shipping services for the logs.
- The structure of the group to which the Affiliate and Charterer belonged: the Charterer was established to insulate the rest of the group from the risks of chartering vessels. If the Charterer was only acting as the Affiliate’s agent when chartering vessels and issuing LOIs, this would defeat the purpose of separating the Chartering business.
- How the shipments were arranged: the Charterer did not charter vessels for specific shipments. The Exporters only used space on the chartered vessels and Charterers could use any excess space as they wished, which would be contrary to the Charterers acting only as an agent for the Affiliate or Exporter when chartering vessels.
- Whether the Charterer made money on the shipments: all income and expenditure under the charterparties flowed to and from the Charterer and Exporters through the Affiliate, and the Charterer made no money on the shipments. It had previously been held by the English High Court that it was “perfectly possible” for two parties acting as principals to agree that one would make a ship available to the other in return for the reimbursement of all operating costs and without a profit [4] and the Judge in Yangtze Shipping also did not consider that this meant that the Charterer was only acting as an agent when chartering vessels or issuing LOIs.
- The procedure for issuing LOIs: the Charterer sought the Affiliate’s approval before issuing the LOIs, but this did not necessarily mean that the Affiliate was an undisclosed principal to the LOI because it was to be expected that the Charterer would request the Affiliate’s approval before allowing discharge against LOIs when the cargo was the Affiliate’s security for payment. The Affiliate was required to obtain approval from the Exporters for discharge against LOI if acting as their agent but had not done so on these occasions. Therefore, if the Affiliate was acting as the Exporters’ agent in approving the LOIs, they had done so without authority, but this would not make the Exporters liable to the owner under the LOI.
Conclusion
Many charterers separate their chartering business from other sides of their business, and in Yangtze Navigation, the English courts have again confirmed that this division will be upheld so long as the chartering business is not acting as an agent for other companies in the group.
Therefore, when receiving a LOI, the presumption is that only the entity issuing the LOI will be liable and not any other company in the same group. If there is any uncertainty as to the financial standing of the entity, Charterers may wish to consider asking that the LOI is counter-signed by a first-class bank or that an undertaking is provided by the parent company.
Source: Skuld
