Article

Factual Summary: Beneficiary/Seller, an Australian grain trader, sold 10,000 metric tons of chick peas and 10,000 metric tons of dun peas to Buyer in for delivery in Calcutta, India via ship MV Nelson with payment by LC. Financier, a company located in Singapore, assisted Buyer by applying for the letter of credit which was issued by the Singapore branch of a Thai bank. Another bank was nominated as Negotiating Bank.

While the goods were in transit, the market for legumes dropped significantly, and Buyer delayed in accepting the cargo and failed to pay for it. There were claimed discrepancies which Applicant refused to waive. Moreover, due to difficulties in the size of the vessel and draught, Carrier, experienced difficulties in discharging the cargo, which was ultimately discharged without production of the bills of lading. Ship Owner of the vessel, MV Nelson, by prior agreement indemnified Carrier.

To induce Carrier to release the cargo, it was provided with two LOIs. The letters were issued by Beneficiary, but they also contained the signature of an officer of Negotiating Bank's letter of credit department and Negotiating Bank's stamp since Carrier had indicated that it would not accept indemnities from Beneficiary unless signed by its bank.

Subsequently, the vessel was arrested and the claims of Applicant against the Carrier were settled following an arbitration in London. Seller also became insolvent. Carrier brought this action against Negotiating Bank to enforce the LOIs. The Supreme Court of New South Wales, Hunter J, entered judgment for Carrier. It concluded that the signature of the bank on the letters constituted a representation that the Beneficiary/Seller had the financial capacity to honor its obligations under the indemnities. The trial judge, however, concluded that Negotiating Bank was liable for its negligence in making this representation. The intermediate appellate court reversed, concluding that the offer lacked both actual and apparent authority to bind the bank and also reject the negligence claims. On further appeal from the intermediary appellate court, the appellate court granted the appeal, reversed the decision of both intermediate and trial courts, and remanded for further proceedings.

On appeal, the Court of Appeal concluded that the letter was a LOI but concluded that the officer lacked both actual and apparent authority to bind the bank and also rejected the negligence claims.

On appeal, the High Court of Australia granted the appeal, reversed the decision of the intermediate and trial courts with respect to whether the letters were authorised, and remanded for further proceedings. On remand, the Court of Appeal assessed damages and remanded to the Supreme Court for determination of damages

Legal Analysis:

This is a remitted appeal from the decision of the High Court to the New South Wales Court of Appeal to determine the following issues:

(i) whether the monies paid by Carrier to Ship Owner to fund the settlement of the London Arbitration, were recoverable by Carrier from Negotiating bank under the contract of indemnity;

(ii) whether Applicant had consented to the delivery of the legumes to Buyer thereby providing a defence to conversion, and whether the settlement of the London arbitration was, in the circumstances, reasonable and if the settlement was not reasonable, whether the court was able to undertake a reassessment to determine what a reasonable settlement would have been; and

(iii) whether the contract of indemnity, properly construed, allowed for recovery of legal costs of this litigation on an indemnity basis.

Held in relation to (i):

Per Giles JA (Sheller JA agreeing):

1. Negotiating Bank is a contractual indemnifier, and is in breach of contract. Carrier is entitled to damages in an amount which will put it in the position it would have been in if Negotiating Bank had provided indemnity. The measure of the indemnity is found in the terms of Seller/Beneficiary's LOIs, relevantly indemnity against liability or loss of any nature sustained by reason of delivering the cargo to Buyer (which was taken to the extent to Ship Owner's delivery of the cargo to Buyer).

2. The settlement of the arbitration was a matter of causation loss sustained by reason of delivering of the cargo, and it must have been within the reasonable contemplation of Negotiating Bank and Carrier that a claim of misdelivery would be made if the cargo was delivered without production of the Bills of Lading. Provided the settlement was reasonable, the payment by Carrier in settling the arbitration was recoverable.

Per Handley JA:

Where a contract of indemnity is repudiated the innocent party, who is faced with an adverse claim, is in the difficult position having to litigate the issues on two fronts instead of one. In such circumstances a settlement of the adverse claim, if reasonable, will crystallise the loss for which the innocent party is entitled to indemnity. Such a settlement is within the notional reasonable contemplation of the parties and a result of the breach.

Held in relation to (ii):

Per Giles JA (Sheller JA agreeing):

1. The fax of 13 January 1999 played no part as an instruction to deliver the cargo to Buyer. Neither was there was a consent by Applicant which allowed Bolton to deliver the cargo without liability for misdelivery.

2. The amount of the settlement of the arbitration was not reasonable and so it is appropriate for the Court to undertake a re-assessment to determine what is recoverable. The Carrier could reasonably have settled the London Arbitration for a sum up to the order of seventy percent of Applicant's claims, in round terms $US2,000,000 plus interest should replace the US$2,900,000 plus interest.

Per Handley JA (dissenting):

1. Applicant, as the owner of the cargo, provided a delivery order by fax of 13 January, to Carrier requesting that Carrier deliver the cargo to Buyer. The request in that fax was capable of being revoked by Applicant at any time and the subsequent fax of 5 March had that effect. The cargo discharged after 5 March was not discharged pursuant to that request and, as to any such cargo, Applicant had its full rights under the Bills of Lading. The settlement was not reasonable because Carrier did not establish that it was the result of negotiations conducted in circumstances calculated to lead to a reasonable compromise.

2. Where a plaintiff relies on a settlement to quantify damages but fails to establish that it was reasonable the plaintiff is left with the onus of proving damages. If the failure to negotiate a reasonable settlement was seen as a failure to mitigate the damage the defendant would have the onus of proving the extent to which the actual settlement exceeded one which would be reasonable.

3. The carrier is entitled to recover in full the amounts shown in its schedule for the other losses and out of pocket expenses which totalUS$910,000. This should carry pre-judgment interest of US$141,581.02 in accordance with the decision of the initial Judge. The judgment should take effect from 24 October 2001 and being in US currency should carry simple interest at the rate of 3.83% from that date.

Held in relation to (iii):

Per Sheller JA (Giles JA and Handley JA agreeing):

1. In clause 3 of the indemnity, concerned with the case of arrest or detention or threatened arrestor detention of the vessel, the indemnity is expressed as being "in respect of any liability, loss, damage or expenses caused by such arrestor detention or threatened arrest or detention. "Carrier did not contract to indemnify for its costs of this litigation.

TEXTUAL APPENDIX:

The NEAT LOI of 28 January 1999 was addressed to PCL, wrongly described as the owner of the MV Nelson. It referred to the voyage, the cargo of dun peas and the relevant original bills of lading, and continued-

The above goods were shipped on the above vessel by Messrs NEW ENGLAND AGRICULTURAL TRADERS PTY LTD (and consigned to order) for delivery at the port of CALCUTTA, INDIA, but the Bills of Lading have not yet arrived and we, NEW ENGLAND AGRICULTURAL TRADERS PTY LTD hereby request you to give delivery of the said cargo to:

RECEIVERS as DIRECTED BY M/S ROYAL TRADING COMPANY

NO 2, CLIVE GHAT STREET

5TH FLOOR,

ROOM NO 8

CALCUTTA 700 001 (W.B)

without production of the original Bills of Lading.

In consideration of your complying with our above request we hereby agree as follows:

1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability loss or damage of whatsoever nature which you may sustain by reason of delivering the goods to

RECEIVERS

AS DIRECTED BY

M/S ROYAL TRADING COMPANY

NO 2, CLIVE GHAT STREET

5TH FLOOR,

ROOM NO 8

CALCUTTA 700 001 (W.B)

in accordance with our request.

2. In the event of any proceedings being commenced against you or any of your servants or agents in connection with the delivery of the goods as aforesaid to provide you or them from time to time with sufficient funds to defend the same.

3. If, in connection with the delivery of the cargo as aforesaid, the ship or any other vessel or property belonging to/chartered by you should be arrested or detained or if the arrest or detention thereof should be threatened, to provide on demand such bail or other security as may be required to prevent such arrest or detention or to secure the release of such vessel or property and to indemnify you in respect of any liability, loss, damage or expenses caused by such arrest or detention or threatened arrest or detention whether or not such arrest or detention or threatened arrest or detention may be justified.

4. As soon as all original bills of lading for the above goods shall have come into our possession, to produce and deliver the same to you whereupon our liability hereunder shall cease.

5. ...

* Dr. Alan DAVIDSON is a Senior Lecturer at the TC Beirne School of Law University of Queensland and is a Solicitor and Barrister of the Supreme Court of New South Wales and of the High Court of Australia. Dr. DAVIDSON continues to practice as a consultant. He is a member of the IIBLP Asia Regional Advisory Council and of the Banking Committee of ICC Australia.

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