Article

Note: To pay for the purchase of white crystal sugar, Buyers arranged for HSBC (Issuer) to issue its LC in favor of ARTIS (Buyer), a sugar trader. The LC was advised by Credit Agricole Indosuez Suisse SA. (Advisor). The LC required presentation of bills of landing and a signed copy of the charterparty nominating a certain agent of the vessel owners at the port of discharge.

Carriage was arranged by Seller/Charterer under bills of lading issued by the Master of the vessel Laemthong Glory providing for transport of 14,000 metric tons of sugar from Brazil to Yemen. The charter bill of lading provided "In the event of the Original Bills of lading are not being available at discharge port on vessel's arrival, if so required by Charterer, Owners/Master to release the cargo to Receivers on receipt of Faxed letter of Indemnity. Such letter of Indemnity to be issued on Charterer head paper, wording in accordance with the usual P&I Club wording, and signed by Charterer only always without a bank counter-signature."

When the vessel arrived, Buyers asked Seller/ Charterer to issue an LOI to the owners since they did not have the original bills of lading. Buyers also issued their own LOI to the owners. Buyers' LOI identified the vessel, the charterparty, the 14,000 metric tons of sugar and the particular bills of lading and continued as follows:

Load Port/disport Santos Brazil to Hodaida or Aden Port Republic of Yemen.

The above cargo was shipped on the above vessel by Cargill Agricola SA and USINA CAETA SA and consigned to Abdullah Mohammed Fahem & Co, PO Box 3637 Hodaida Republic of Yemen for delivery at the port of Hodaida or Aden Port Republic of Yemen. But the bills of lading have not yet arrived. We hereby request you to deliver the said cargo to Abdullah Fahem PO Box 3637 Hodaida Republic of Yemen at Aden 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, damage or expense of whatsoever nature which you may sustain by reason of delivering the cargo 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 delivery of the cargo as aforesaid to provide you or them on demand with sufficient funds to defend.

3) If in connection with delivery of the cargo as aforesaid the ship or any other ship or property in the same or associated Ownership management or control should be arrested or detained or should the arrest or detention thereof be threatened or should there be any interference in the use or trading of the vessel (whether by virtue of ... being altered on the ship's registry or otherwise howsoever) 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 the ship or property, or to remove such interference and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest or detention or threatened arrest or detention or such interference whether or not such arrest or detention or threatened arrest or detention or interference may be justified.

4) If the place at which we have asked you to make delivery is a bulk liquid or gas terminal, facility or another ship, lighter or barge then delivery to such terminal, facility, ship, lighter or barge shall be deemed to be delivery to the party to whom we have requested you to make such delivery.

5) As soon as all original bills of lading for the above cargo shall have come into our possession to deliver same to you or otherwise to cause all original bills of lading to be delivered to you whereupon all liabilities hereunder shall cease.

6) The liability of each and every person under this indemnity shall be joint and several and shall not be conditional upon your proceeding first against any person whether or not such person is party to or liable under this indemnity.

7) This indemnity shall be governed by and construed in accordance with English law and each and every person liable under this indemnity shall at your request submit to the jurisdiction of the High Court of Justice in England.

Both of the LOIs were presented by the Seller/ Charterer to the owners who instructed the Master and their local agent to release the cargo to Buyers, which they did.

Subsequently, the Issuing Bank arrested the vessel, claiming the value of the cargo, an amount in excess of US$3,000,000, plus interest and costs, on the basis that it was in possession of the original bill of lading which had been forwarded by the advising bank.

The vessel owners then filed this action seeking a declaration under both LOIs that they were entitled to indemnification and that both Seller and Buyers were required to provide bail to obtain the vessel's release. Buyers resisted, claiming that their indemnity was only to Seller and not to the vessel owners. The trial court, Cooke, J., ruled that the owners were entitled to their LOI against the Buyers who were also obligated to provide bail. In an opinion, The Court of Appeals (Civil Division), Morritt, Clarke, and Neuberger, LJJ, dismissed the appeal.

The trial court had ruled that the owners were entitled to enforce the LOIs and that Charterer and Buyers were obligated to provide bail to release the vessel. The appellate court concluded that Buyers' LOI directly extended to any liability incurred by the carrier.

The appellate court determined that the owners were acting as agents of Seller/Charterer, since Seller/ Charterer could not deliver the cargo except by making use of the carrier to do so. The appellate court noted that the LOI required Seller/Charterer to deliver the cargo to the Buyers and made specific undertakings in the event of such delivery. As was known to Buyers, Seller could not do so unless the vessel owners actually released the cargo. Therefore, Buyers' obligations under the LOI with respect to claims against Seller/Charterer's servants or agents extended to any claims brought against such servants or agents in connection with delivery of the cargo.

The court also determined that the clause in Buyers' LOI referring to the provision of bail or other security to secure the release of the ship or property in the event of arrest extended to the owners. Although the clause did not refer to "servants or agents", it plainly purported to confer a benefit, namely the release of the vessel, which primarily benefited the owners and only secondarily benefited the Seller with respect to any liability that it may have to the owners.

Buyers also argued that their LOI was not enforceable by a third party but only by Seller/ Charterer. The appellate court concluded that the LOI was enforceable by a third party. It reasoned that if the clauses of the LOI were intended to benefit the owners, it would make no sense to hold that it was nevertheless intended that Buyers' liability should not be enforceable directly by the owners.

[JEB/mpp]

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