Yangtze Navigation (Asia) Co Limited & Anor v TPT Shipping Limited & Ors (The “Xing Zhi Hai”)

DMC/SandT/24/13

England

Yangtze Navigation (Asia) Co Limited & Anor v TPT Shipping Limited & Ors (The “Xing Zhi Hai”)

English Commercial Court: Christopher Hancock KC (sitting as a Judge of the High Court): [2024] EWHC 2371 (Comm): 18 September 2024

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2024/2371.html

Timothy Young KC and Michael Hain (instructed by Holman Fenwick Willan LLP) for Yangtze Navigation and another (Owners)

Simon Rainey KC and Christopher Jay (instructed by Campbell Johnston Clark Ltd) for TPT Forests (Exporters’ Agent)

David Bailey KC and James Goudkamp (insutructed by Herbert Smith Freehills LLP) for Tiaki Plantations and others (Exporters)

CARRIAGE OF GOODS BY SEA: DELIVERY OF CARGO WITHOUT PRODUCTION OF BILLS OF LADING, IN RETURN FOR LETTERS OF INDEMNITY (“LOIs”) SIGNED BY CHARTERERS: CLAIMS FOR MISDELIVERY OF CARGO MADE AGAINST OWNERS: OWNERS SEEK INDEMNITY FROM CHARERERS: CHARTERERS BECOME INSOLVENT: WHETHER EXPORTERS’ AGENT AND/OR EXPORTERS UNDER LOIs UNDISCLOSED PRINCIPALS OF CHARTERERS: APPLICATION TO SET ASIDE THE CLAIM FORMS SERVED BY OWNERS UPON EXPORTERS’ AGENT AND EXPORTERS

Summary

The dispute arose where Owners had delivered three cargoes of logs without the production of the original bills of lading, in exchange for Letters of Indemnity (“LOIs”) signed by Charterers.  On claims for the misdelivery of the cargoes being pursued against Owners, Charterers became insolvent.  This led Owners to seek to pursue their claims for indemnity under the LOIs against the Exporters’ Agent and the Exporters, as allegedly undisclosed principals of Charterers.

In finding for the Exporters’ Agent and the Exporters, the High Court held that, on the evidence, there was not a good arguable case that the Exporters’ Agent and/or the Exporters were undisclosed principals to the LOIs.  The High Court therefore dismissed Owners’ claims and set aside the service of the claim forms.

Case note contributed by Sheridan Steiger, LLM (International Trade and Commercial Law), LLB (Hons), BA (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes

Background

The claim concerned three separate voyages by which cargoes of logs were shipped from New Zealand to India, on board the “Xing Zhi Hai” and two other vessels.

The logs were produced and shipped by three companies, referred to in the judgment as the “Exporters”.  In turn, the Exporters entered into a Log Marketing and Sales Agency Agreement (“LMSAAs”) with the Exporters’ Agent, for the purpose of the latter acting as agent to promote and sell logs overseas.

The Exporters’ Agent was incorporated in New Zealand as a wholly owned subsidiary of TPT Group Ltd (“Group”), for the purpose of export marketing services to log producers.  An internal review of the company structure in 2004 considered how best to insulate the business from the risks of vessel chartering.  This led to the Group incorporating TPT Shipping Ltd (“Charterers”) in 2004.

This further led to Shipping Service Agreements (“SSAs”) being entered into between the Exporters’ Agent, on behalf of the Exporters, with Charterers, for the purpose of shipping the Exporters’ logs from New Zealand to India.

In late 2019 and early 2020, Charterers entered into three voyage charterparties (“Charterparties”) with Owners to carry the three separate cargoes of logs.

The Charterparties all provided that any dispute arising from or in connection with them was to be referred to arbitration in London and that English law would govern the dispute.

Bills of lading were issued for the cargoes by Owners.  However, they were not available at the discharge port and Owners sought LOIs in the conventional form providing for English governing law and English High Court jurisdiction.  The LOIs were signed “for and on behalf of” Charterers only.

Following the discharge of the three cargoes, those responsible for financing the purchase of the cargoes arrested Owners’ vessels alleging that the cargoes had been misdelivered.

Owners initially commenced proceedings against Charterers and sought (and later obtained) a mandatory injunction requiring them to perform their obligations under the LOIs.  However, Charterers subsequently called in administrators and later entered a liquidation process.

In response to this, Owners then sought to bring claims against the Exporters’ Agent and/or the Exporters.  It was Owners’ position that the Exporters’ Agent and/or the Exporters were parties to the Charterparties and that they were, therefore, also principals to the LOIs.  It was also argued that Charterers had entered into the Charterparties and LOIs as agent for the Exporters’ Agent and/or Exporters.

The key issue before the Court, accordingly, was whether the Exporters’ Agent and/or Exporters were undisclosed principals to the LOIs.

The parties largely agreed upon the relevant law on undisclosed principals, although not to its application on the material facts of the case and the evidence available.  They referred to the Privy Council statement (fn.1):

(1)  An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of the agent’s actual authority.

(2)  In entering into the contract, the agent must intend to act on the principal’s behalf.

(3)  The agent of an undisclosed principal may also sue and be sued on the contract.

(4)  Any defence which the third party may have against the agent is available against his principal.

(5)  The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued. The contract may show that the agent is the true and only principal.

Reference was also made to Mr Justice Leggatt’s comment that (fn.2):

“The question whether an undisclosed agency relationship was created must depend in principle…not on the state of mind of the supposed agent at the time of contracting, but on whether the supposed agent had communicated to the supposed principal an intention to contract on its behalf.”

Judgment

Having dealt with the background material facts and the evidence available, the Judge rejected any suggestion that the Exporters’ Agent and/or the Exporters were undisclosed principals of the Charterparties.  This decision was reached by reference to the LSMAAs and the SSAs, which made clear that the Exporters’ Agent was only ever intended to act as an agent for the Exporters.

It was found that the Charterparties were entered into at a time when Charterers did not know whose cargoes would be shipped on board and this was inconsistent with the argument that the Charterparties were made pursuant to express authority given to Charterers by the Exporters’ Agent and/or the Exporters.

The Judge also considered the issue of the LOIs and acknowledged that there was a system by which Charterers sought approval from the Exporters’ Agent before issuing the LOIs.  However, the Judge found that this was not sufficient to conclude that the Exporters’ Agent had consented to be bound and liable for those LOIs.

In support of the above, the Judge noted that the rationale applied by the Group for having constituted Charterers in the first place was to ensure that the Group was adequately protected (or “ring-fenced”) from risks associated with chartering/shipping.

As such, the Judge accepted that there was good reason why Charterers would seek approval for the issue of LOIs from the Exporters’ Agent, who would discuss the matter with the Exporters.  The reason for this was that the goods represented security for payment for the goods, and so, once the goods were delivered, that security would be lost.

Comment

The use of LOIs in shipping is commonplace and is reflected in the fact that the International Group of P&I Clubs publishes on its website suggested wordings for a number of scenarios, including ‘Delivery of Cargo without Production of Original Bills of Lading”.  However, members of P&I Clubs will be familiar with the advice given by the Clubs that an LOI is only as a good as the creditworthiness of the party issuing it, there being no insurance under P&I cover for the consequences of delivering cargo without production of the bills of lading.

Accordingly, this case serves as a salutary reminder that parties should carry out appropriate due diligence before agreeing to any request from charterers in return for an LOI.  If there are any concerns as to the creditworthiness of the party requesting an LOI, steps should be taken to ensure that the LOI is counter-secured by a financial entity, such as a bank, or some other financially robust party.

Footnote 1:  Sui Yin Kwan v Eastern Insurance [1994] AC 199 at 207

Footnote 2:  The “Magellan Spirit” [2017] 1 All ER (Comm) 24