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Court finds letter of indemnity obligations engaged

News / / London

Aramco Trading Fujairah FZE v. Gulf Petrochem FZC (MV Kronviken) [2022] EWHC 288 (Comm)
This case is another example of the English courts dismissing unmeritorious challenges to letters of indemnity (LOIs) issued against delivery of goods without production of original bills of lading. The message is clear: the English courts will not entertain unwarranted attempts to avoid obligations under a valid and enforceable LOI.

The background facts

The Defendant Seller and Claimant Buyer entered into a sale contract for a cargo of fuel oil. The sale contract provided that if the bills of lading and certain other documents were not available when the cargo was made available for delivery, the Claimant was required to pay for the cargo against the Defendant's commercial invoice and a LOI. The cargo was shipped on the Kronviken and bills of lading issued, but the original bills were not made available to the Defendant.

The Claimant subsequently paid over US$ 4 million against a LOI providing for English law and jurisdiction. The LOI was on the Defendant’s letterhead, was addressed to the Claimant and signed ostensibly on behalf of the Defendant and with the Defendant’s corporate stamp. Subsequently, the Bank that had financed the Defendant’s purchase (from another seller) of the cargo (but had not been paid) claimed to be the lawful holder of the bills of lading and alleged that the cargo had been wrongfully delivered to the Claimant. The Bank arrested the vessel in Singapore.

The Claimant (who was also the voyage charterer and had provided its own LOI to the vessel’s disponent owner) paid the requested amount of security into the Singapore Court in order to get the vessel released and then asked the Defendant, pursuant to the terms of the LOI, to provide replacement security, alternatively to reimburse the Claimant. The Defendant did not do so. The Defendant subsequently ignored an English Court order that it should pay almost US$8 million into the Singapore Court to secure the Bank’s claim. In due course, and as a result of the Defendant’s non-compliance with the Court’s orders, the defence was struck out and judgment entered.

The Claimant sought a number of declarations, namely:

  1. That the indemnity was engaged by the vessel’s arrest and the Singapore proceedings and the Defendant was obliged in due course to indemnify the Claimant for any damages, costs and expenses it incurred as a result;
  2. That the Defendant should secure the Bank’s claim in Singapore in the amount ordered or provide replacement security or provide the Claimant with counter-security; and
  3. That the Defendant should reimburse the Claimant its legal costs and expenses incurred to date in the Singapore proceedings and as a result of the arrest, as well as any future legal expenses it might incur.

The Court gave judgment in respect of the incurred legal costs and expenses. As to engagement of the LOI and the question of security, the Defendant argued that it was not appropriate for the Court to grant declarations other than after a trial. Further, the Defendant submitted that the declarations should not be granted in any event because: (i) the person signing the LOI and proffering it to the Claimant had no authority to do so; and (ii) on a true construction of the LOI provided by the Claimant to the vessel’s disponent owner, the Claimant was not obliged to provide the security.

The Commercial Court decision

The Court considered and dismissed all the Defendant’s arguments. The Court clarified that it had a discretion to grant a declaration following a default judgment where it would be appropriate to do so and where a claimant could not obtain the fullest justice to which it was entitled without such a declaration.

The Court then considered the Defendant’s argument that the LOI issued to the disponent owner of the vessel was not binding on the Claimant because it was not provided by the Claimant but by a related entity, ATC. The Claimant contended that this was a clerical error. Having reviewed the relevant documentation and correspondence, the Court concluded that naming ATC as the party offering the indemnity to the disponent owner was a clear mistake. Among other things, while the voyage charterparty by which the vessel was let by the disponent owner named ATC as the charterer, critically it also provided "in CHOPT", that is in the charterer's option, so that it could be the Claimant. The relevant voyage orders were on the Claimant’s letterhead and a notice of protest at the loadport referred to the Claimant as the charterer. Further, if the Defendant was liable to the Claimant under its LOI, the Claimant must have been liable in law to provide security to the Singapore Court. It was common ground that the Claimant could only be so liable if it was liable under the LOI provided to the disponent owner. Consequently, it was clear that the LOI offered to the disponent owner should be construed as having been offered by the Claimant not ATC.

The Court also held that the signatory had apparent authority to execute the LOI on behalf of the Defendant because allowing him to use the Defendant’s letterhead and its corporate stamp for the LOI and to have access to and use of the Defendant’s email systems amounted to the Defendant permitting an agent to act in the management or conduct of its business.

The Court was, therefore, prepared to make declarations to reflect these findings and also to encompass a money judgment for the amount of security provided by the Claimant to the Singapore Court. In the event that the security was eventually repaid to the Claimant, there would be no double recovery because the Defendant would be entitled to recover that amount by way of subrogation. 

Comment

The Court was clearly not impressed by the Defendant’s attempts to evade its obligations under the LOI. Among other things, the Court highlighted the fact that the Defendant had raised the lack of authority defence in other LOI disputes, presumably referring to Gulf Petrochem FZC v. OCM Singapore Njord Holdings Hardrada Pte Ltd & others [2022] EWHC 57 (Comm), a recent Ince case, in which the Court also dismissed an argument that the signatory did not have actual authority to sign the relevant LOIs and granted the claimants summary judgment.

The Court stated that the Claimant had paid over US $4 million for a cargo in reliance on the LOI tendered by the Defendant. Without the LOI, there would have been no payment because the Defendant was never in possession of the original bills of lading. Therefore, to allow the Defendant to rely on an alleged want of authority asserted in such circumstances would be unprincipled.

Reema Shour

Reema Shour Professional Support Lawyer

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