Letters of indemnity for delivery of cargo without production of a bill of lading

In the SONGA WINDS [2018] EWHC 397, The High Court, London decides that LOIs requesting delivery without production of bills of lading to an intermediate trader of the cargo are still triggered even though delivery was to the trader's buyer.

The use of LOIs to allow delivery of cargo to a named party with-
out production of the bill of lading are relatively common place, but infrequently called upon. When they are invoked, the indemnifying party looks very closely at whether the terms of the LOI have been fulfilled, and where there is a question about this, an argumentabout whether the LOI has been triggered almost always follows. Such was the case in the SONGA WINDS.

In brief, there was a C&F trade sale of sunflower oil, passing from Glencore through Aavanti to Ruchi. Glencore chartered SONGA WINDS for the carriage, from Ilychevsk to New Mangalore and Kakinda. This was by voyage c/p with Navig8, who in turn time chartered the vessel from Songa. Prior to arrival at the disports, Aavanti gave LOIs in the standard P&I Club format requesting 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 LOI to Navig8, but this 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 LOI to Songa, again requesting delivery to Aavanti etc. etc. Delivery was in fact made to Ruchi.

However, Ruchi had failed to pay Aavanti for the cargo, and Aavanti had not paid its bank, SocGen, who 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 knew about the 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 High Court was an application for summary judgment on whether delivery to Ruchi triggered the LOIs given by Navig 8 and Glencore that had requested delivery to Aavanti etc etc, so that Glencore would have to pay the costs of defending Soc Gen’s arbitration against Songa, as well as indemnify Songa for any award against it.

Ordinarily, one would have thought that delivery to the end-buyer instead of the intermediate trader would not be covered by the LOIs. However, the judge found that Aavanti’s business practice with Ruchi, its LOI requesting Glencore deliver to Ruchi (which Aavanti gave a copy of to Ruchi to assist Ruchi in taking delivery from the disports agents), and its email at the time Glencore confirmed it would give the order to discharge 
(after being paid) where Aavanti said that “ we were ready to receive our cargo” all showed that Ruchi was its agent for delivery purposes and that delivery was therefore made to Aavanti when the cargo was released to Ruchi, triggering the LOIs given by Glencore and Navig8.

This disposed of the case, however, the judge went on to make comments on the alternative argument that if Ruchi was not Aavanti’s agent, were the LOIs still triggered because Ruchi was a party that Songa believed to be, to represent, or to be acting on behalf of Aavanti? In this respect, the focus was on what the master believed, and the judge found the evidence insufficient to decide this at the summary judgment stage.

This lack of evidence that the master knew of the agency opens up some interesting questions. Before the decision in the BREMEN MAX [2008] EWHC 2755 the standard wording of the LOI just gave a name for the intended recipient of the cargo, but this was held to put the burden on the carrier to make sure the recipient was indeed the named party. So after the BREMEN MAX the LOI was amended so that the owner was requested 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 owners/ master’s belief to avoid the burden of having to identify who was actually representing X. However, it would now look as though such a burden has been reinstated, in so far as a party who 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 the standard LOI, a party has to ask to see all communications relating to delivery passing between the parties below it in the c/p chain to see if any such agency has been declared. This quest is all the more important where the LOI names the agent as the specific party, such as Aavanti’s LOI to Glencore, because such a LOI 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.

There remain two more minor but interesting points commented on by the judge. He indicated that deemed delivery under paragraph 4 of the standard form LOIs where discharge is to a terminal, facility or other ship, lighter or barge required there to be such delivery, whereas the SONGA WINDS was requested to deliver at the ports, not any specific terminal etc etc inside the ports.

The judge also dealt with an argument as between Glencore and Navig8 about the effect of a term in the voyage c/p which said that Glencore’s LOI was subject to a 3 month period of validity, 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 the 3 months, without the need for Navig 8 to make a claim for those liabilities in that 3 month period, just as the LOI’s validity period expired once all the original bills of lading had been returned to 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 LOI are to be welcomed for adding certainty to the wording. However, the more contextural construction of the identity of the recipient of the cargo will complicate delivery under a LOI in the general course of trade, and presumably the International Group will react with another amendment to try to redress this.