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25 July 2018
In Songa Winds ( EWHC 397), the London High Court found that letters of indemnity requesting delivery without the production of bills of lading to an intermediate trader of cargo are triggered even if delivery is to the trader's buyer.
The use of letters of indemnity to allow the delivery of cargo to a named party without the production of a bill of lading is relatively common, but infrequently called upon. When invoked, the indemnifying party looks closely at whether the letter's terms have been fulfilled, and where this is called into question, an argument about whether the letter of indemnity has been triggered almost always follows. Such was the case in Songa Winds.
A cost and freight trade sale of sunflower oil passed from Glencore through Aavanti to Ruchi. Glencore chartered Songa Winds for the carriage from Ilychevsk to New Mangalore and Kakinda. This was by voyage charterparty with Navig8, which in turn time chartered the vessel from Songa.
Prior to arrival at the discharge ports, Aavanti gave letters of indemnity in the standard protection and indemnity (P&I) club format requesting that Glencore deliver the cargo without production of the bills of lading to Ruchi or such party as Glencore believed to be, to represent, or to be acting on behalf of Ruchi. Glencore then gave its letter of indemnity to Navig8, but it asked for delivery to Aavanti or such party as Navig8 believed to be, to represent, or to be acting on behalf of Aavanti. Navig8 provided a similar letter of indemnity to Songa, again requesting delivery to Aavanti. Delivery was in fact made to Ruchi.
However, Ruchi failed to pay Aavanti for the cargo and Aavanti failed to pay its bank, SocGen, which held the 'to order' bills as security for its letter of credit payment to Glencore. Inevitably, SocGen claimed against Songa, as carrier under the bills, for misdelivery of the cargo. Songa had a defence to that claim, based on whether SocGen had known about Aavanti's business practice of allowing Ruchi to take delivery of shipments before it had paid for them. However, that was an issue before London arbitrators. The issue before the London High Court was an application for summary judgment on whether delivery to Ruchi had triggered the letters of indemnity given by Navig8 and Glencore, which had requested delivery to Aavanti, so that Glencore would have to pay the costs of defending Soc Gen's arbitration against Songa and indemnify Songa for any award against it.
Ordinarily, delivery to an end-buyer instead of an intermediate trader is not thought to be covered by letters of indemnity. However, the judge found that Aavanti's business practice with Ruchi, its letter of indemnity requesting Glencore to deliver to Ruchi (of which Aavanti had given a copy to Ruchi to assist it in taking delivery from the dispatch ports' agents) and its email at the time that Glencore had confirmed that it would give the order to discharge (after being paid) when Aavanti had said that "we were ready to receive our cargo" all showed that Ruchi was Aavanti's agent for delivery purposes and that delivery had therefore been made to Aavanti when the cargo was released to Ruchi, triggering the letters of indemnity given by Glencore and Navig8.
This disposed of the case; however, the judge went on to comment on the alternative argument of whether, if Ruchi had not been Aavanti's agent, the letters of indemnity would still have been triggered because Ruchi was a party that Songa had believed to be, to represent, or to be acting on behalf of Aavanti? In this respect, the focus was on what the master had believed and the judge found that the evidence was insufficient to decide at the summary judgment stage.
The lack of evidence that the master had known of the agency leads to some interesting questions. Before the decision in Bremen Max ( EWHC 2755), the standard wording of letters of indemnity gave the name of the intended recipient of the cargo, but this was held to put the burden on the carrier to make sure that the recipient was indeed the named party. Following Bremen Maz, letters of indemnity were amended to request owners to deliver to "X [the name of the specific party] or to such party as you believe to be or to represent X or to be acting on behalf of X". This was intended to leave all questions of agency to be a matter of the owner's or master's belief and to avoid the burden of having to identify who was actually representing X. However, it now seems that such a burden has been reinstated, insofar as a party that the master does not believe to be representing X can still be doing so at X's insistence to someone other than the master.
This suggests that to determine who takes actual delivery under a standard letter of indemnity, a party must request to see all communications relating to delivery passing between the parties below it in the charterparty chain to see whether any such agency has been declared. This even more important where the letter of indemnity names the agent as the specific party (eg, Aavanti's letter of indemnity to Glencore), because such a letter would presumably be void as the named party, Ruchi, actually took delivery for its principal, Aavanti, and not itself. Hopefully these are questions that will be answered by an appeal court should Glencore decide to pursue the matter further.
The judge also commented on two minor but interesting points. He indicated that deemed delivery under Paragraph 4 of the standard form letter of indemnity – where discharge is to a terminal, facility or other ship, lighter or barge – required there to be such delivery, whereas Songa Winds was requested to deliver at the port and not any specific terminal therein.
The judge also dealt with an argument between Glencore and Navig8 about the effect of a term in the voyage charterparty which said that Glencore's letter of indemnity was subject to a three-month validity period, which Glencore argued acted as a time bar unless Navig8 made a claim or requested an extension. The judge found that the three-month validity period covered any deliveries made within that time without the need for Navig8 to make a claim for those liabilities – just as the letter of indemnity's validity expired once the original bills of lading had been returned to their owners as per Paragraph 5 of the standard wording – without preventing a subsequent claim for a delivery made before the bills of lading were returned.
Overall, the literal constructions of Paragraphs 4 and 5 of the standard letter of indemnity are to be welcomed for providing certainty to the wording. However, the more contextual construction of the identity of the recipient of the cargo will complicate delivery under a letter of indemnity in the general course of trade, and presumably the International Group will react with another amendment to try to redress this.
For further information on this topic please contact Robert Joiner or Chris Grieveson at Wikborg Rein by telephone (+44 20 7367 0300) or email (email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
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