Lessons for owners relying on letters of indemnity
Navig8 Chemicals Pool Inc v Glencore Agriculture BV (The Songa Winds) [21.08.2018]
The Songa Winds is one of three recent cases concerning the proper interpretation and effect of letters of indemnity (LOIs) issued for the discharge of cargo without production of original bills of lading, following The Bremen Max  and The Zagora . This latest case escalated to the Court of Appeal on a discrete point concerning reference to a time bar for LOIs seen in the charterparty but not written into the LOI itself.
The respondent (Navig8) chartered the ‘Songa Winds’ from the appellant (Glencore) under a voyage charterparty. Clause 38 of the charterparty provided that, if bills of lading were unavailable on discharge, owners were to release cargo against receipt of LOIs on the P&I club’s standard wording. In addition, and the relevant section for the Court of Appeal, it stated that the LOIs would have a ‘period of validity’ of three months from the date of issue.
LOIs were issued by parties in the charter chain on the International Group A standard form and the cargo was discharged to the buyer’s agent without production of original bills of lading. When payment was not received, claims were made and passed up the chain pursuant to the series of back-to-back LOIs. The financing bank initiated arbitration proceedings against owners who, in turn, brought a claim against Navig8, in respect of which Navig8 sought an indemnity from Glencore. The Commercial Court granted summary judgment to rule that the LOIs had been engaged.
The discrete issue between Navig8 and Glencore concerned Clause 38. Glencore argued that, despite the time bar provision not being written into the LOI that they issued to Navig8 it should nevertheless be incorporated into it because that was what was provided for in the charterparty. The Judge held that that it did not preclude the claim being brought – which Glencore appealed.
The Court of Appeal
The issues for the Court of Appeal were:
- Whether the provisions of Clause 38 of the voyage charter were incorporated into the LOIs; and if so
- Whether the effect of Clause 38 was such that no claims could be made after the expiry of three months from the date of issue.
The Court of Appeal ultimately rejected the argument that the material rights and obligations in Clause 38 could be regarded as being transported into the Glencore LOIs. It was stressed that LOIs, particularly those in standard form, ‘are important commercial instruments which needed to be interpreted robustly and in a straightforward way.’ The court declared that in the case of LOIs, there is a ‘strong presumption’ that the written agreement is regarded as containing all of the terms of the bargain between the parties.
A key factor in the decision was that LOIs affect third parties who are not privy to the terms of separate contracts. The Court of Appeal also considered that, on proper construction, the clause provided Glencore with a right to request that the three month time limit was incorporated into any LOI, but it could not operate independently if Glencore did not exercise that right.
In these circumstances, the court held that the three-month period of validity contained in Clause 38 could not be enforced and the appeal failed.
The second issue fell away because the time bar was not so incorporated. But if it had been, the Court of Appeal found in favour of Glencore on the second issue - the wording was clear, and the underlying purpose of a LOI was to secure prompt delivery and a clearly defined time limit helped a party giving the indemnity calculate contingent liabilities.
LOIs play a vital role in international carriage of goods by sea and are understood to be a necessary tool for commerce. They act to prevent delays in delivery when vessels arrive at the port of discharge, should the original bill of lading be unavailable. The speed of shipping has increased dramatically and often ships arrive at port before the necessary paperwork. There are frequently delays of some days before bills of lading are produced or released at the load port and so LOIs prevent unnecessary costs in both time and money.
The enforceability and success of LOIs are crucial, as they are often the only protection for owners handing over cargo at the point of delivery. Liabilities arising as a consequence of delivery of cargo without presentation of bills are usually not covered by P&I insurance and so ensuring that they are properly drafted is crucial. The courts will be reluctant, as this decision has shown, to look beyond the terms of the LOI itself for its terms and, if a party wants to take advantage of bespoke rights agreed upon within the charterparty, they should ensure that they are expressly written in to the letters of indemnity.