Navig8 Chemical Pool v. Songa Chemicals AS (Songa
Winds)  EWCA 1901 (Civ)
In this case, the Commercial Court found that letters of indemnity
(LOIs) issued by the parties to a sale contract chain were valid
and enforceable. Consequently, if the bank that financed the trade
was ultimately successful in its misdelivery claim against the
shipowner, it would be indemnified under the LOIs. The subsequent
appeal was limited to whether a time bar clause in the voyage
charterparty between two parties in the charterparty chain was
incorporated into the relevant LOI with the effect of barring a
claim made under that LOI. The Court of Appeal found that it was
not and that the claim was not time-barred.
The background facts
Songa time-chartered their vessel to Navig8, who voyage-chartered the vessel to Glencore to carry a cargo of crude sunflower seed oil from Ukraine to India.
Glencore had entered into a sale contract to sell the goods to Aavanti who, in turn, had on-sold to Agritrading. The bills of lading were consigned to order and named Ruchi, an affiliated company of Agritrading, as the notify party. Aavanti's purchase of the consignment was financed by SocGen.
The cargo was delivered to Ruchi at the Indian ports without presentation of the original bills, but as against LOIs issued under the sale contract and up the charterparty chain. The LOIs issued by Aavanti to Glencore were for delivery to Ruchi, or to such party as Glencore believed to be, to represent, or to be acting on behalf of Ruchi. In contrast, the LOIs from Glencore to Navig8 and from Navig8 to Songa requested delivery to be made to Aavanti, or to such party as the beneficiary believed to be, to represent, or to be acting on behalf of Aavanti.
Although Aavanti paid Glencore for the cargo, neither Aavanti nor SocGen were apparently paid for the quantities discharged. In arbitration, SocGen claimed for misdelivery as the lawful holder of the bills. Songa sought to rely on the Navig8 LOI and Navig8 sought to rely on the Glencore LOI. Glencore denied that the LOI it had issued was engaged. Songa and Navig8 applied to the Court, seeking a final declaration by way of summary judgment that the relevant LOIs were triggered by the deliveries to Ruchi.
The Commercial Court decision
The Court considered whether Ruchi, in taking delivery, was "representing or acting on behalf of" Aavanti, in accordance with the following wording in the Glencore LOI:
We, Glencore Grain B.V, hereby request you to deliver the said cargo to "Aavanti" or to such party as you believe to be or to represent "Aavanti" or to be acting on behalf of Aavanti".
On the facts of this case, the Court concluded that Ruchi were representing Aavanti and that, therefore, delivery had been effected as in fact intended by Aavanti and Glencore in the LOIs. As the LOI indemnity provisions were triggered, the Court did not need to consider the further issue of whether Songa "believed" that Ruchi represented or were acting on behalf of Aavanti.
The Court also commented on the scope of clause 4 of the IG standard form LOI wording, which was incorporated into the LOIs, and which provides as follows:
If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or facility...then delivery to such terminal, [or] facility...shall be deemed to be delivery to the party to whom we have requested you to make such delivery.
The LOIs had named "the port of New Mangalore or Kakinada, India" as the place of delivery. They did not request delivery at a specific bulk liquid terminal or facility. The Court stated that any greater specificity as to the place of discharge came outside the scope of the LOIs and was only relevant to a claim under the charterparties, which would be dealt with in arbitration. Consequently, the pumping of the liquid cargo into bulk terminals at the named ports would not have been sufficient to invoke paragraph 4 and activate the LOIs, had indemnification in this case depended on it.
The Court also found that Navig8's claim against Glencore was not time-barred under clause 38 of the charterparty, which was ambiguously drafted but which specified that the "period of validity" of any LOI would be three months from the date of issue, renewable on owners' request. The LOIs did not incorporate the language of clause 38 and, even if they had done so, the Court thought that clause 38 was aimed at deliveries that did not take place within three months of issue, rather than instances where claims were brought after three months from delivery (as in this case). Had Glencore intended a different result, they could have specifically provided for it in the LOI.
The Court of Appeal decision
The appeal was limited to the time bar point. The Court of Appeal dismissed Glencore's argument that clause 38 was incorporated into the Glencore LOI and that it barred Navig8's claim. Firstly, clause 5 of the LOIs already covered the expiry of the LOIs (on the presentation of the original bills) and, in doing so, did not reference any terms, either from the relevant charterparty or elsewhere. This was not consistent with an intention to rely on clause 38.
Secondly, in the Court of Appeal's view, the charterparty and LOIs were distinct agreements with separate obligations and contrasting dispute resolution clauses. Clause 38 could not, therefore, be treated as 'carved out' of the voyage charter and construed as part of the LOIs. Glencore could have expressly incorporated clause 38 but chose not to, which was unsurprising in circumstances where there was no time limit in respect of their own obligations to Aavanti.
The Court of Appeal also highlighted that, in some circumstances, a third party might rely on a LOI, e.g. a head owner against a sub-charterer, but would not be privy to the relevant charterparty (e.g. between charterers and sub-charterers) as it would neither be party to that contract, nor aware of its terms. If those terms were subsequently implied into a LOI, this would lead to the unacceptable situation whereby the beneficiary's right of recovery under the LOI might be limited in a way that it could not have been aware of.
Finally, while it did not strictly need to decide the point, the Court of Appeal found that clause 38 did bar claims brought more than three months from the date of the letter of indemnity.
This decision highlights a number of potential risks that can arise when delivering cargo against a LOI without presentation of original bills. Parties to LOIs should draft them carefully and ensure that their terms are strictly complied with so that they can be enforced.
When parties deliver cargo against LOIs, there is generally no P & I cover for any liabilities, costs or expenses that might arise as a result. Therefore, in such instances parties should carefully consider their exposure and whether to purchase alternative insurance cover.
The authors of this article acted successfully for Navig8 in the Commercial Court and Court of Appeal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.