LOIs and delivery to an agent – things to watch out for!

LOIs and delivery to an agent things to watch out for | BDM Blog | BDM Law

It is well known that, in most cases, delivering cargo without delivery up of an original bill is risky for the carrier.   Yet in today’s trading environment it is something that charterers require.  The tanker trade in particular works on the basis that terminals don’t wait for bills of lading and so ship owners are required to go in and discharge to a receiver nominated by their charterer.   To protect themselves, ship owners insist on receiving a Letter of Indemnity (LOI) from their charterer.   The international group P&I Clubs provide suggested wordings for such LOIs although they make it very clear that the ship owners’ exposure for delivery without delivery up of an original bill is not covered by their P&I cover.

From time to time, disputed claims under LOIs make their way to the Courts.   One issue that often comes up is how the LOI deals with the intended recipient of the cargo.  For example, should the recipient be specifically named, as was the case in The Bremen Max (1) , or can it be to a party that is believed to represent the specifically named party, as was the case in The Zagora (2) ?

In the recent case of The Songa Winds (3) , one issue that came up was whether LOIs were valid in circumstances where the intended recipient was a company called Aavanti Industries Pte Ltd (“Aavanti”) but in fact the cargo was delivered to Ruchi Soya Industries (“Ruchi”).   It transpired that Ruchi had not paid for the cargo and so a claim was brought against the ship owner carriers by SocGen, the bank which said it had title to the cargo.   That claim was secured by Glencore (who had issued an LOI to Navig8 who in turn had issued an LOI to the head owners Songa) and the underlying dispute was moved to arbitration in London.

Meanwhile, on the LOI issue, the argument was whether Glencore could escape liability under their LOI to Navig8 which would, in turn, lead to Navig8 escaping liability to Songa.  The principle arguments were that the LOIs named Aavanti and so delivery should have been made to them and not to Ruchi.  On the facts, it was held that Ruchi were acting as Aavanti’s agent.   There was a standing practice in place between Aavanti and Ruchi where the former would request the latter to accept deliveries of cargo sold to them by the former without the production of a bill of lading.  Furthermore, Aavanti had issued LOIs to Glencore requesting them to procure delivery of the cargo to Ruchi and Aavanti had no presence in India and no right to import cargo into India whereas Ruchi had its own dedicated tanks at the terminal.

The above was enough for Mr Justice Baker to enter summary judgment to the effect that the Navig8 and Glencore LOIs were valid and binding.   One interesting point that arose was the test for believing that Ruchi represented Aavanti in view of the standard form of wording in LOIs i.e. that the cargo should be delivered to “X [name of the specific party] or … such party as you believe to be or to represent X or to be acting on behalf of X“.  In this context, it was held that the belief should be that of the bill of lading carrier who owes the delivery obligation – in this case that was the ship owner and therefore the Master or Chief Officer of the carrying vessel.   To suggest otherwise, as submitted by Counsel for Glencore, would be to go against the decision of Mr Justice Teare in The Zagora.   

The final argument was whether a clause in the voyage charter between Glencore and Navig8 relieved the former from liability once three months had expired from the date of issue of their LOI to Navig8.    Mr Justice Baker’s view was that the wording of the voyage charter did not operate in such manner and, even if it did, this would not defeat a claim under the LOI itself on the basis that liability under the latter (being on the standard P&I Club approved wording) was such as to apply from the date of issue ceasing only on delivery up of all the original bills.

The case goes on and it will be interesting to see if it comes back to the Courts.   There was also a debate over what is meant by “providing sufficient funds” to defend a claim against the carrier and this issue was left to one side in the hope that the parties could reach agreement.  If not however, then we may see the case come back to Court on that and possibly other points.

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