This case concerns an action regarding letters of indemnity (LOIs) given to permit the delivery of a cargo of iron ore from Western Australia to China other than on the production of an original bill of lading. Whilst factually complex, its particular emphasis is on the role of agency within a chain of LOIs.

Factual background

The voyage concerned a cargo of iron ore aboard the M/V “ZAGORA” from Koolan Island in Australia to Lanshan in China.

Contractual background

SCIT Trading agreed to sell a cargo of 70,000 mt of iron ore on CFR terms to Xiamen. Clause 9 of the sale contract provided for the discharge port agent to be appointed by the buyer. Xiamen then agreed to sell the cargo to Cheongfuli Company Limited (an associated company), who subsequently agreed to sell the cargo to the ultimate buyer, Shanxi Haixin International Iron and Steel Co. Ltd (Shanxi Haixin). Clause 9 of that contract also provided for the discharge agent to be appointed by the buyer. Shanxi appointed Rizhao Sea-Road Shipping Agency Co. Ltd (Sea-Road) as agent.

Due to the nature of the sale terms (i.e. CFR) SCIT Trading was responsible for arranging the vessel to carry the cargo. It had a contract of affreightment with SCIT Services pursuant to which SCIT Services assumed responsibility for the transportation of cargoes sold by SCIT Trading. SCIT Services therefore entered into a voyage charter with Oldendorff Carriers. The charter provided, at box 21, for the agent at the discharge port to be the ’charterer’s agent’ and, at clause 30, also provided for discharge and release by the owner/master against a LOI where the original bill of lading was not available. Pursuant to a long-term agreement, ‘general agreement about cargo re-lets’ the charterer, Oldendorff, was to provide tonnage to Oldendorff Carriers. A time charter was concluded between Oldendorff (the charterer) and Sea Powerful II Special Maritime Enterprises (the owner), owner of the M/V “ZAGORA”. The time charter provided that the charterer was to pay and provide for agencies and that, if an original bill of lading was not available at the discharge port, the charterer was to issue an LOI to be faxed copy to the vessel.

The letters of indemnity

Anticipating the necessity for an LOI, Oldendorff requested a copy of the standard LOI wording acceptable to the owner for delivery of cargo. The LOI provided had the name of the person to whom delivery was to be effected blank. This LOI was then passed down the line to SCIT Services, SCIT Trading and Xiamen. When passing on the form of LOI to Shanxi Haixin, Xiamen identified the person to whom delivery was to be made as Sea-Road (or such party as believed to be Sea-Road). However, when providing SCIT Trading with the requested LOI, Xiamen identified itself (or such party as is believed to be Xiamen or acting for Xiamen) as the person to whom delivery was to be made. This form of LOI was then passed up the line to SCIT Services, Oldendorff Carriers, Oldendorff and the owners.

Discharge and arrest

Discharge took place without production of an original bill of lading against the charterers’ LOI and to a person who said he was there to handle discharge on behalf of Xiamen. Discharge was completed on 31 December 2013. On her return to Lanshan, some eight months later, the vessel was arrested at the suit of the Bank of China who asserted that they were holders of the original bill of lading, that they had not been paid, and that the cargo had been wrongfully discharged (i.e. without production of the original bill of lading).

Owners therefore called upon Oldendorff to obtain release of the vessel pursuant to the LOI they had provided. This was passed down the chain and an interim mandatory injunction was ultimately obtained by SCIT Trading against Xiamen. However, Xiamen took no action and Oldendorff consequently provided security to obtain the release of the vessel whilst reserving its rights to argue the LOI had not been engaged. Various actions were brought and Oldendorff ultimately issued proceedings against the owner.

Legal issues

The court first set out the distinction to be drawn between the concepts of discharge and delivery as posited in The Bremen Max [2009] 1 Lloyd’s Reports 81. Discharge is merely the movement of the cargo from the ship ‘over the ship’s rail’ ashore. Delivery, by contrast, is the transfer of possession of the cargo – in essence, when the shipowner has divested itself of ‘the power to compel any dealing in or with the cargo which can prevent the consignee from obtaining possession’ (The Jag Ravi [2012] All E.R. 707 (paragraph 45)). Therefore, although discharge and delivery may occur simultaneously, they need not do so.

The crucial question to be determined by Teare J in the present case was the role of Sea-Road. In short, whether Sea-Road was taking delivery as agent on behalf of Xiamen or merely took custody of the cargo as agent on behalf of the owner (or Oldendorff).

Teare J held that Sea-Road was acting as an agent on behalf of Xiamen. A number of factual conclusions were identified in support of this. Firstly, clause 9 in the sale contracts whereby the buyer was to nominate discharge port agents. As the ultimate buyer, Shanxi Haixin had nominated Sea-Road, and this had been passed up the chain of charterparties. Additionally, when Xiamen had passed the requested form LOI to Shanxi Haixin it identified Sea-Road as the person to whom delivery was to be made in the absence of an original bill (despite the fact it then provided an LOI to SCIT Trading identifying itself as the party to whom delivery should be effected).

Further, although Sea-Road may have acted as agent for the owner in various matters – for example, minor owner’s matters such as ship’s mail, communications and fresh water – Teare J held that it did not follow that everything done by Sea-Road was done on behalf of the owner. The owner had no interest in discharging the cargo into the possession of Sea-Road as its own agent as this would effectively mean the cargo was still lawfully in its possession (which would necessarily negate the effect of any LOI).

Teare J held that the owner was entitled to an indemnity from Oldendorff pursuant to the LOI and also that the LOIs down the chain to Xiamen were all effective.

This case typifies the inherent difficulties in a situation where a chain of LOIs has been provided. It raises interesting questions on agency and contractual constructions and it also provides owners with some reassurance as to the continued effectiveness of LOIs in facilitating trade.