Key takeaways
Charterer held directly responsible for LOIs
The Court confirmed the charterer acted as principal, not agent—clarifying liability in indemnity disputes.
Corporate structure can protect against risk
The decision highlights how group arrangements can shield parent companies from contractual exposure.
Agency claims require clear and credible evidence
Arguments based on implied authority or undisclosed principals must be backed by strong documentation and intent
Court of Appeal dismisses agency and undisclosed principal arguments in letters of indemnity dispute
The Court of Appeal has agreed with the Commercial Court that the voyage charterer that issued letters of indemnity (LOIs) for discharge of cargo without presentation of original bills of lading did so purely on its own behalf. In doing so, the Court of Appeal dismissed the argument that the charterer had acted as agent for an undisclosed principal, namely the exporters of the goods in question.
The dispute highlights the importance of ascertaining the identity of the party issuing a LOI and its creditworthiness. Had the voyage charterer in this case not become insolvent, the vessel owners would not have incurred significant legal costs and wasted considerable time in seeking to make other parties liable for cargo interests’ mis-delivery claims.
The background facts
The Disponent Owners of three vessels claimed pursuant to LOIs which had been issued in their favour under three separate voyage charterparties for the shipment of cargoes of logs from New Zealand to India.
The logs had been produced by three New Zealand companies (the Exporters), who had entered into Log Marketing and Sales Agency Agreements (LMSAAs) with TPT Forests Ltd (Forests). Pursuant to the LMSAAs, Forests acted as the Exporters’ agent for marketing and sale of the logs overseas.
Forests also contracted expressly as agent for the Exporters with TPT Shipping Ltd (Shipping), under a shipping services agreement (SSA). Shipping was a wholly owned subsidiary of the TPT Group and had been incorporated specifically to insulate other companies within the Group from vessel chartering risks.
While a majority of the business carried on by Shipping involved the carriage of the Exporters’ logs, a significant part of its business was independent of the Exporters. In cases where the Exporters did not provide a full cargo, Shipping could and did sell space on its chartered in vessels to other NZ producers, thereby generating freight earnings for its own account.
Shipping entered into three voyage charterparties with the Owners in its own name for three shipments between late 2019 and early 2020.
In the absence of original bills of lading at the discharge port, Shipping issued LOIs in the Owners’ favour. The LOIs were signed “for and on behalf of” Shipping. The LOIs provided for English law and English court jurisdiction.
Claims were subsequently brought by the bill of lading holders against the Owners alleging mis-delivery of the cargoes. The Owners initially claimed an indemnity under the LOIs as against Shipping but sought to bring their claims against Forests and/or the Exporters after Shipping entered into administration and subsequently liquidation.
The Owners contended that Shipping entered into the charterparties and/or LOIs as agent for Forests/the Exporters. Forests/the Exporters were, therefore, the undisclosed principal and consequently the party truly liable under the LOIs.
Forests and the Exporters challenged the jurisdiction of the English Court.
The Commercial Court decision
The Court held that there was no good arguable case that Forests was an undisclosed principal to the LOIs or the charterparties. Furthermore, in entering into the charterparties, Shipping had acted as principal and not as agent for the Exporters.
The Court referred to the LMSAAs, specifically clause 5.2, which provided in relevant part as follows:
Shipping Terms
5.2.1 [Forests] shall use its commercially reasonable endeavours to negotiate the most advantageous shipping terms to [Exporters] (taking into account availability of vessels, preferred dates of shipment, securing shipping services in advance and other variations outside the reasonable control of [Forests]) on the following terms and conditions:
…
5.2.1(c) Subject to clause 5.2.1(f), the ship charter shall be between [Forests] and the shipping company on behalf of [Exporters]
...
5.2.1(f) From time to time [Forests] may have access to vessels chartered by [Shipping] and may offer to the Manager shipment of Goods on such vessels. Any acceptance by the Manager of such offers shall be subject to [Forests] and the Manager reaching agreement as to the terms of the shipment (including, but not limited to, the timing of payments by [Exporters] to [Forests] for shipping).”
In the Court’s view, the LMSAAs envisaged that when Shipping was involved, clause 5.2.1(f) would apply, in which case Shipping was to act as principal. This was in contrast with the position under clause 5.2.1(c), when Forests would act as agent for the Exporters. This was consistent with the fact that the charterparties were concluded by Shipping before it knew whose cargoes would be carried on board.
The Court also found that the LOIs had been issued by Shipping on its own behalf. It concluded that it had no jurisdiction over Forests. The Court added that even if this were wrong, the LMSAAs envisaged a particular regime being followed for the authorisation of an LOI. This regime had not been followed and so if Forests had indeed authorised the issue of the LOIs, it had done so without the Exporters’ authority.
On appeal, the Court of Appeal was required to deal only with the position under two of the three charterparties/LOIs. No appeal was brought by the Owners of the third vessel, Xing Zhi Hai. The Court of Appeal also dealt only with the Exporters’ position as the appeal was brought solely in their name.
The Court of Appeal decision
The Court of Appeal has dismissed the appeal.
It found that Shipping had entered into the charterparties as principals, not as the Exporters’ agent because:
The whole point of establishing Shipping was to insulate both Forests and the Exporters from the risks inherent in acting as the charterer of the carrying vessels. That purpose was inconsistent with any intention that Shipping should act as agents for the Exporters in entering into the charterparties.
The insulation of Forests and the Exporters from any obligations as charterer of the vessels was carried into effect in the LMSAAs, which drew a clear distinction between paragraphs (c) and (f) of clause 5.2.1. In the latter case, which was to apply if Shipping was involved, there was to be no agency relationship.
Whilst, as between the Exporters and Shipping, it was the Exporters who had an economic interest in the charterparties, in that they were required to reimburse Shipping for freight and demurrage, and took the benefit of despatch and commission, that did not necessarily point to Shipping acting as the Exporters’ agent. It was equally consistent with an arrangement whereby Shipping would contract as principal, but on the basis that it would in effect be indemnified by the Exporters.
The fact that the charterparties were concluded before the sale contracts provided support for the view that Shipping did not enter into the charterparties as agent for the Exporters. At the time when the charterparties were concluded, it had not been finally decided whose logs would be carried and in some cases the Exporters did not provide a full cargo, leaving Shipping free to carry parcels for other exporters for its own account.
On this basis, the Court of Appeal concluded that the LOIs were also issued by Shipping as principal, not as agent for the Exporters. In any event, an agency relationship between the Exporters and Shipping for the issue of LOIs required them both to give their consent to such a relationship. It had not been shown objectively that such consent was given.
The fact that Shipping sought Forests’ approval before issuing the LOIs was explained on the basis that once the logs were discharged and released to the buyer, the Exporters would lose their security for payment of the purchase price where letters of credit had not been opened. It did not mean that Shipping was acting as agent for the Exporters. Furthermore, as the regime for authorising LOIs in the LMSAAs had not been followed, the Exporters could not be regarded as having consented to the issue of the LOIs on their behalf.
Finally, the Court of Appeal dismissed the argument that Forests had ostensible authority to authorise the issue of LOIs on the Exporters’ behalf and the Exporters were estopped from denying Forests’ authority, with the consequence that Forests had acquired actual authority to authorise Shipping to issue the LOIs. This argument was not made before the Commercial Court and the Court of Appeal was not prepared to allow a new point to be made on appeal. It did, however, consider this was a bad point and would have rejected it in any event.
In conclusion, the Exporters were not liable as undisclosed principals under the LOIs.
Comment
The decision highlights the importance of considering the capacity in which parties to contractual arrangements are acting, namely whether they are principals or agents. It also emphasises how the way in which a corporate group is structured can be effective in ring-fencing liability.
