Steamship Mutual on risks of Letters of Indemnity

Steamship Mutual has noted a recent High Court decision by Teare J that once again highlights the commercial risks associated with delivering cargo against a Letter of Indemnity when no Bill of Lading is presented.

Bill Kirrane, Syndicate Manager (Claims), wrote that the case in question related to an event in October 2013, when SCIT Trading agreed to sell a cargo of 70,000t of iron ore to Xiamen C&D Minerals, to be delivered at a main port in China. SCIT Trading had a contract of affreightment with SCIT Services, who agreed a voyage charter with Oldendorff Carriers, who agreed a voyage charter on similar terms with Oldendorff GmbH. Oldendorff GmbH agreed a timecharter with the owners of the panamax bulker Zagora. Each of the charterparties had a clause requiring Owners to deliver cargo against charterer’s Letter of Indemnity, in case no bill of lading was available for presentation at the discharge port.

Xiamen C&D Minerals agreed, through an associated company, to sell the cargo to an end-user, Shanxi Hainan. The ship loaded the cargo in Australia between 11th and 14th December 2013. On 16th December Shanxi Haixin nominated Lanshan as the discharge port, and Sea-Road as agents at the port. This information was passed along the charter chain towards owners of the Zagora. A few days after this, letters of indemnity were passed between the parties in the chain, and on 20th December the Owners informed the Master of the Zagora that they had received a Letter of Indemnity for delivering the cargo to Xiamen and instructed him “to deliver the cargo to Xiamen C&D Minerals Co. Ltd. (“Xiamen”) or to such party as you believe to be or to represent Xiamen …….or to be acting on behalf of Xiamen …… Lanshan Port, China, without production of the original bill of lading.” When the ship berthed at Lanshan on 29th December, a representative of the agents, Sea-Road attended onboard and advised the Master that he was there to handle cargo arrangements for Xiamen. Discharge was completed on 31st December, and the ship sailed without incident.

Some months later:

When Zagora called at Lanshan some eight months later, the vessel was arrested by the Bank of China, which claimed to have paid for the cargo under a letter of credit, but not to have received any payment from the buyer, so that they were lawful holders of the bill of lading, and had a claim against the ship for misdelivery.

That claim was brought under Chinese law. When the ship was arrested, the Owners called upon Oldendorff GmbH to honour the terms of the letter of indemnity, and to obtain the release of the ship. A similar request was passed along the charterparty chain, but no action was taken to free the ship. Oldendorff broke the impasse by arranging security, without prejudice to their rights under their charterparties, and the ship was freed to sail almost one month after the arrest.

Oldendorff Carriers then commenced a court action in London against SCIT Services to enforce their letter of indemnity. SCIT Trading in turn commenced proceedings against Xiamen, and, when charterers raised arguments in defence, Oldendorff also commenced an action against the Owners, so that they could pass any defences back along the charter chain. The three actions were consolidated so that all of the arguments could be heard before one court. Before the case reached court, Xiamen and the SCIT companies dropped out of the proceedings, so that only the Owners and the Oldendorff companies appeared at court. Oldendorff Carriers might have obtained a default judgement against SCIT Services, but Oldendorff’s counsel requested that the Court hand down a judgement on the merits, as it was considered that it might be easier to enforce such a judgement against SCIT Services in the future. Oldendorff also raised arguments that had been brought by Xiamen or SCIT, as defences against the Owners.

The charterers’ main argument was that discharge and delivery are different concepts and that the Owners had been instructed to discharge the cargo to Sea-Road, who were acting as Owners’ agents for this purpose, and that Sea-Road were to deliver the cargo later against presentation of a bill of lading.

As such, the charterers said, the letters of indemnity were not triggered by mere discharge of the cargo to Owners’ agents, because this did not amount to delivery to Xiamen. However, the Court found on the facts that Sea-Road were acting as agents of Xiamen, and because Owners had been ordered to deliver the cargo to Sea-Road the letters of indemnity were triggered: Oldendorff were bound by the terms of the letter that they gave to the Owners, and had a claim against SCIT Services under their letter of indemnity.

Steamship said that the case was “a reminder to Members of the potential pitfalls of agreeing to deliver cargo carried under a bill of lading without the production of a bill of lading. Whilst a common practice, there is no P&I cover for liabilities, costs, or expenses arising from delivery in these circumstances unless otherwise determined by the Club’s Directors.”