Web Alert: Can owners enforce a receiver's LOI against the receivers?

Introduction

Whilst the delivery of cargo without production of the original bills of lading in exchange for an LOI has become accepted as an industry standard request, owners are exposed to significant risks when they agree to deliver cargo without presentation of original bills of lading. This web alert intends to remind owners that accepting an LOI does not always provide adequate protection against the consequences of misdelivery claims. When owners are asked to accept an LOI to deliver cargo without production of original bills of lading, owners should carry out an appropriate due diligence investigation of the party who is to issue such security. This is because the LOI will replace owners’ P&I cover as discharging cargo without production of original bills of lading falls outside club cover following the exclusions in Rule 3.13. (5).

Further to the web alert published on 21 August 2015, the club would like to remind members on the points that need to be taken into consideration when considering whether to accept a LOI:

Contractual Parties

Owners should carefully consider the parties to the LOI. More often than not, a charterparty chain exists and owners need to ensure that this chain is followed. Owners need to make sure that the LOI offered is from owners’ contractual counterparty. If security is accepted from another party, i.e. not the contractual counterparty, owners may find themselves unable to enforce the LOI. 
Under English law, an owner of the vessel may be able to enforce the terms of the LOI pursuant to the Contracts (Rights of Third Parties) Act 1999. We would also guide members to the judgement rendered by the CoA in the case of Laemthong International Lines Co. Ltd v ARTIS & Ors,[1]

Caselaw: Laemthong Glory (No 2) 
In the Laemthong Glory (No 2), owners were allowed to rely on the indemnity provisions of an LOI given by receivers to charterers for the release of the cargo without presentation of the bills of lading since the owners acted as “agents” of the charterers for the purpose of delivering the cargo. The Court of Appeal outlined the commercial purpose of such LOIs, adding that it would not make commercial sense if LOIs were not given such an interpretation. 

The facts:

The vessel was chartered to carry a cargo of bagged sugar from Brazil to Aden, Yemen. The charterparty indicated that owners’ bills of lading would be issued. Specifically, the charter said that, if the original bills of lading were not available for presentation when the vessel arrived at the port of discharge, the owners would, if so requested by the charterers, discharge the cargo to receivers against provision of an LOI by the charterers.

The charterers were also the sellers of the cargo, which they sold on C&F terms. Shortly before the vessel was due at Aden, the receivers asked the charterers to request the owners to deliver the cargo without presentation of the original bills of lading. The receivers asked the charterers to request the owners to deliver the cargo without presentation of the original bills of lading in exchange for an LOI. In turn, the receivers would provide an LOI to the charterers.

The cargo was indeed delivered to the receivers pursuant to the request by charterers but subsequently, the vessel was arrested by the Yemen Bank which held all the original bills of lading and brought a cargo claim against owners.

The owners applied for specific performance of the charterers' and receivers' obligations under their LOIs to provide security in order to release the Laemthong Glory. 

The issue was whether owners could enforce the receivers’ LOI against the receivers under the Contracts (Rights of Third Parties) Act 1999. The judges in first instance and the Court of Appeal, (in dismissing receiver’s appeal) both held that the owners could enforce the receivers’ LOI directly against the receivers.

The owners required the charterers to honour the terms of their LOI, in particular the part saying that charterers would provide 'bail or other security' to 'secure the release of the ship'. When charterers declined to do so, owners applied to the English High Court for specific performance by the charterers and the receivers of their obligation under their LOIs to provide such 'bail or other security'.

The decision:

The court appears to have taken a practical approach to the issues. The court said that, prior to discharge, the cargo was clearly in the owners’ possession and that, in practice, only owners could deliver it. The court further held that by delivering the cargo, owners were complying with their obligations to charterers and with the charterers’ obligations to the receivers under the contract of sale.

The receivers’ LOI related to the obligation of the charterers to deliver the cargo under the sale contract, but, the court considered that, in practice, it was only the owners who could deliver the cargo (it being on their vessel). Further, the owners had issued the bills of lading. To comply with their obligation to deliver under the sale contract, the charterers had to work through the owners. On that basis, the LOI was for the benefit of the owners as an identified party and as such they should be able to enforce the LOI pursuant to the terms of the Contracts (Rights of Third Parties) Act 1999 unless the receivers could show that the parties did not intend the terms of the LOI to be enforced by the owners. 
The Court (both in first and second instance) rejected the attempts by the receivers to show that the parties did not intend the LOI to be enforced. 

Conclusion

When owners are requested to accept an LOI, special consideration should be taken in respect of the terms and extent of liability. Owners should ensure that the LOI terms provide adequate protection and that the party providing the LOI is of good financial standing. The club would always recommend that owners ask for the LOI to be guaranteed and counter-signed by a first-class European Bank. This would provide an additional layer of protection if the LOI requires enforcement.

The Standard Club appreciates that owners are frequently asked to step outside the scope of P&I cover in exchange of an LOI and the IG Clubs have drafted suitable wordings to be used when faced with such requests (though the law & jurisdiction clause may need amending). These standard form LOIs can be found on the club’s website here.

This article intends to provide general guidance on the issues arising. It is not intended to provide legal advice in relation to any specific query. The law is also not static. If in doubt, The Standard Club is always on hand to assist.

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[1] [2005] 1 Lloyd’s Rep 688