In this case, the Court of Appeal considered whether Glencore Agriculture BV (Glencore) was obliged to indemnify Navig8 Chemicals Pool Inc (Navig8) under two letters of indemnity (LOIs), or whether Navig8’s claim was defeated by the operation of a time limit in the voyage charterparty.

Factual background

The MT “SONGA WINDS” had been time chartered by Songa Chemical AS (Songa) to Navig8 who in turn chartered the vessel to Glencore on a voyage charter based on an amended Vegoilvoy form.

There were two sales contracts on materially back–to-back terms under which Glencore agreed to sell the goods to Aavanti Industries Pte Ltd (Aavanti) and then Aavanti agreed to sell them to Ruchi Agritrading (Pte) Ltd (Agritrading).

Aavanti issued two LOIs to Glencore so that the goods could be delivered without presentation of the original bills of lading. In turn, Glencore issued two LOIs (Glencore LOIs) to Navig8, and Navig8 issued two LOIs to Songa. Each of the LOIs were on the terms of the IG P&I LOI standard form. On delivery Agritrading failed to pay for the goods.

In the High Court (a summary of the decision can be found in our July 2018 case digest) Mr Justice Baker considered whether the LOIs were validly engaged. He concluded that they were, and therefore Navig8 had an obligation to indemnify Songa, and Glencore had an obligation to indemnify Navig8. In reaching his decision Mr Justice Baker rejected an argument raised by Glencore that Navig8’s claim was time barred.

The Court of Appeal decision concerned only the Glencore LOIs. Glencore argued that Navig8’s claim under the LOIs was time barred due to the three month time limit in clause 38 of the voyage charter. They submitted that clause 38 contained a continuing collateral term and must be read into the LOIs. Furthermore as the obligation to discharge the goods arose under the voyage charter and that obligation was contingent on the LOIs, clause 38 was part of that agreement.

Clause 38 of the voyage charter provided:

‘If bills of lading are not available at the discharge port, owner to release a cargo against receipt of charterer's letter of indemnity in the form of owner's P & I club wording but same without bank guarantee as per owners P & I club wording… The period of validity of any letter of indemnity will be three months from date of issue. The period may be extended, as necessary, upon owners written request for further extension and confirmation (at time of extension request) that 1/3 original bills of lading have not been surrendered to owner. In absence of extension requests the indemnity will expire at the end of initial three month period, or any further extension period.’

Navig8 in response submitted that the Glencore LOIs were standalone agreements and in any event clause 38 did not have the effect of excluding the claim.

Legal issues

The Court of Appeal handed down its judgment on 21 August 2018 dismissing the appeal. Lord Justice Simon considered the following issues and held:

Issue 1 – Whether the provisions in clause 38 of the voyage charter were incorporated into the Glencore LOIs?

The argument that the material rights and obligations in clause 38 were to be regarded as being transposed into the Glencore LOIs was rejected because:

  1. The Glencore LOIs contained a self-contained provision extending Glencore’s liability until such time that the original bills of lading were delivered. This clause made no reference to any extraneous term that might impact on that time limit.
  2. The voyage charter and the Glencore LOIs were distinct agreements with separate and discrete rights and obligations including very different dispute procedures (the voyage charter referred disputes to arbitration and the LOI’s referred disputes to litigation in the High Court).
  3. Clause 38 gave Glencore a contractual right to insist that a letter of indemnity incorporate the relevant delimiting terms, however, Glencore did not insist on any additional terms to the IG form being included. In fact Glencore entered into the LOIs without any reservation or reference to the voyage charter or its provisions at all.
  4. It was common ground that the Glencore LOIs could be relied on by third parties (the agents of Navig8) as against Glencore. If Glencore’s arguments were correct, these third parties would be bound by the clause 38 time limit without being aware of and able to discover (particularly considering that the voyage charter contained a confidentiality clause) the unexpressed collateral term.

Although the appeal was rejected, the Court continued to consider briefly the second issue.

Issue 2 – Was the effect of clause 38 such that no claims could be made after the expiry of three months from the date of issue?

The Court of Appeal found in Glencore’s favour on this second issue. Although this could not assist Glencore it is a helpful clarification for the industry as it confirms the interpretation of clause 38 Vegoilvoy. In Lord Justice Simon’s judgment, the intent and terms of clause 38 were clear. Clause 38 provided a primary three month time limit for the making of claims from the date of the LOI as the underlying purpose was to secure prompt delivery, therefore preventing claims being made after the three months unless an extension had been in place.

This case provides useful guidance that courts will be reluctant to impose terms into LOIs as there is a ‘strong presumption’ that all the terms of the bargain are in the written agreement. If parties wish to rely on terms they should expressly incorporate these and should be careful when entering letters of indemnity on the same terms as those coming up the contractual line to consider whether they do want to expressly include any additional rights.

This article originally appeared in the September 2018 edition of shipping case digest.