Trading companies that seek to insulate their shipping risk by allocating their chartering activities to a separate entity will be reassured by a recent judgment of the English Court, in which it was decided that a letter of indemnity was enforceable only against the entity which had issued it, and not against a connected entity (or their exporter clients) as supposed undisclosed principals.
Key background
In The Xing Zhi Hai [2024] EWHC 2371 (Comm), Christopher Hancock KC was required to determine the jurisdiction of the Court under Part 11 of The Civil Procedure Rules to hear a claim brought by the claimants (“Shipowners”) against defendants (“Shippers”) under letters of indemnity that were subject to the jurisdiction of the English Court (“LOIs”) following misdelivery claims and associated vessel arrests.
Parties
The Shippers consisted of five entities who each held different roles concerning the export of logs from New Zealand to India (“Cargo”):
Defendants 3 – 5 (“Exporters”) were the exporters / producers of the Cargo;
Defendant 2 (“Agent”) promoted and sold the Exporters’ Cargo overseas; and
Defendant 1 (“Charterers”) was the chartering entity of the Agent’s corporate group.
The LOIs
The Agent had engaged the Charterers to ship the Exporters’ Cargo onboard vessels chartered from the Shipowners (“Charters”). In this regard: (i) the Charterers were the only entity expressly named as a party to the Charters; and (ii) the same was true for the LOIs subsequently issued by the Charterers to the Shipowners for the discharge of the Cargo in India without production of bills of lading.
Court proceedings
Disputes arose under the LOIs after the Shipowners were sued for misdelivery by the alleged lawful holders of the bills of lading. Shipowners’ recourse was therefore against Charterers, as the entity providing the LOIs. The issue, however, was that Charterers had become insolvent, making any recovery very difficult. The Shipowners therefore sued the Shippers in the English Court (pursuant to the jurisdiction clause in the LOIs) on the basis that the Shippers were the Charterers’ undisclosed principals under the LOIs and directly liable under them.
Challenge to jurisdiction
The Agent and the Exporters applied to set aside the claim on the basis that there was no good case that they were the undisclosed principals under the LOIs, with the result that the Court had no jurisdiction to make any findings against them.
Decision
It is well settled in English law that an undisclosed agency relationship can arise where an agent intends to enter into a contract on a principal’s behalf and does so within the scope of the principal’s actual authority. But here the Court found no such intention or authority between the Shippers in relation to the LOI.
Specifically, it was accepted that a clear intention not to be bound by the LOIs in this case was evident on the facts, not least because the rationale for the Charterers setting up as a separate entity in the first place was to insulate them from exactly this type of risk.
What’s more, the evidence showed that the Charterers were acting on their own behalf as principal. The relevant Charters had been entered into prior to (and not because of) the Cargoes being shipped. The Charterers would book space on their chartered vessels to third parties when they could. And the evidence of the Agent’s authorising the Charterers in correspondence to issue the LOIs was not enough to justify the inference of an agency relationship.
The Shipowners were therefore found to have no good arguable case that the Agents or the Exporters were the undisclosed principals and therefore bound by the LOIs. Accordingly, the claims were set aside.
Comment
The judgment is good news for businesses using chartering entities to insulate their shipping risks by contracting with shipowners as principals. However, this particular case involved a rigorous assessment of the facts and evidence, such that corporate groups should not automatically assume that the use of a distinct chartering company will always provide full insulation. In particular, it is important that chartering entities are seen to behave like principals themselves.
For shipowners the case is a salutary reminder that an LOI is only as valuable as the solvency of the party giving it. Proper due diligence and security (for example, parent company guarantees) are just two ways in which an LOI can be made as robust as possible.
