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Indonesia – Charterers’ Letter Of Indemnity Enforceable By Shipowners.

31 October, 2012

 

 
In the case of (1) Far East Chartering Ltd (Formerly Visa Comtrade Asia Ltd) (2) Binani Cement Ltd v Great Eastern Shipping Co Ltd [2012], the Court of Appeal had to examine whether a letter of indemnity issued in favour of one party (charterers) was enforceable by a different party (shipowners), on the strength of the Contracts (Rights of Third Parties) Act 1999. 
 
The dispute in this matter arose out of the sale of a shipment of Indonesian coal where the Buyers, who were also the Charterers of the vessel, refused to pay the Indonesian Sellers the agreed full price, claiming the product was off-spec. In response, the Indonesian Sellers refused to release the bills of lading. Upon arrival at the discharge port in India, and in order to proceed with the discharge of the cargo without bills of lading, the Indian Receivers provided the Charterers with a letter of indemnity which was addressed to “The Owners/Disponent Owners/Charterers”. In it, the Indian Receivers agreed to indemnify Charterers for any loss caused by the discharge.
 
Unaware of the underlying dispute, or of the existence of the letter of indemnity, the Owners of the vessel ordered the port authority to carry out the discharge of the coal. However, when the Owners found out about the issue between the Indonesian Sellers and the Charterers, they instructed the port authority to cease delivery to the Indian Receivers. The instructions were ignored and the discharge was completed. 
 
The Indonesian Sellers pursued the vessel Owners for loss and damage, and the Owners, in turn, sought to rely on the existing letter of indemnity, under the Contracts (Rights of Third Parties) Act 1999, claiming to have acted as Charterers’ agents. At first instance, the court found in favour of the vessel Owners but the Indian Receivers sought to overturn, on appeal, the decision entitling Owners to enforce the letter of indemnity given by the Indian Receivers to the Charterers. However, the Court of Appeal rejected the Indian Receivers’ submissions. 
 
The Court disagreed with the contention that, as the letter of indemnity was addressed to shipowners, it could not be accepted by the Owners acting as Charterers’ agents. The Court found that the proper meaning of the document was that it was addressed to both the Owners and the Charterers, so was capable of acceptance by the latter. The Court also rejected the argument that because the Owners of the vessel had not transferred physical possession of the cargo to the Indian Receivers, they had not performed the request to deliver the cargo contained in the letter of indemnity. It was held that delivery involved the divesting or relinquishing of the power to compel any dealing in, or with, the cargo which could prevent the consignee from obtaining possession, and this the Owners of the vessel had done. 
 
Finally, Charterers had argued that, as a matter of public policy, they would have been unable to enforce the letter of indemnity on the grounds that they were aware, at the time the document was issued, that the Indonesian Sellers were withholding the bills of lading as security for payment for the cargo. Under the 1999 Act, the Owners of the vessel could be in no better position than the Charterers. The Court rejected this argument on the basis that there was a bona fide dispute between the Indonesian Sellers and Charterers, and the bills of lading might well not have been available at the port of discharge, but public policy here was not engaged and did not prevent enforcement of the letter of indemnity. 
 
Although the Far East Chartering case turns on its facts, it is nonetheless a welcome decision for shipowners who will be comforted to know that they can rely on a letter of indemnity given by the receivers to the charterers.
 

 

For further information, please contact: 

 
Rob Collins, Partner, Clyde & Co
 

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