Overview:
The question before the English High Court in The “Xing Zhi Hai”1, was whether a party could be sued as an undisclosed principal of a charterer that had issued Letters of Indemnity (“LOIs”) for discharge of cargo without presentation of bills of lading and that had subsequently entered into administration. As is the risk in such circumstances claims for misdelivery were then pursued by the holders of the bills of lading against the Owners, and the Owners turned to the LOIs for protection.
The Owners had to prove, inter alia, that the charterer had:
Actual (expressed or implied) authority to bind its (alleged) principal; and
Subjectively intended to act on behalf of that party (regardless of whether that was communicated to the receiver of the LOI).
The English High Court decided against the Owners. The decision is a reminder to the shipping community that LOIs will only ever be as good as (a) the financial standing of the party providing the indemnity, (b) that party’s willingness to honour the indemnity, and (c) to ‘add to’ the security provided by a LOI, recipients should consider express inclusion of any other parties they wish to be bound by the indemnity.
Factual Background:
TPT Forests Limited (“Forests”) was involved in the business of exporting logs for the defendants (“Exporters”). TPT Shipping Limited (“Shipping”) was incorporated in 2004 to insulate Forests from the risks associated with chartering vessels to carry the logs to destination.
The commercial relations between Shipping and Forests were governed by a services agreement (“SSA”) which provided, inter alia, that Forests would deal with Shipping as agent to Exporters and Shipping would be deemed to provide services to Exporters and not Forests.
the relationship between Forests and the Exporters was governed by separate agency agreements (“LSMAA”) which reiterated Forests’ role as agent only with no authority to bind Exporters in any way.
Shipping entered into the CPs with Owners to carry the logs from New Zealand to India. LOIs were sought to discharge the logs without original bills of lading and Shipping issued the LOIs in favour of Owners in their own name
When claims for misdelivery were pursued against the vessel Owner, and because Shipping had entered administration and then liquidation, the Owner claimed against Forests and Exporters as undisclosed principals under the LOIs.
Forests and Exporters applied to set aside service of the claim form issued against them on the basis that the relevant “jurisdictional gateway” – that neither of them was a party to the CPs or LOIs (which were subject to English law and High Court jurisdiction) – had been met.
Legal Principles:
The Owners’ claim was faced with two overlapping issues:
1. Whether the English High Court had jurisdiction – the “Jurisdictional Gateway”
To establish jurisdiction, Owners needed to show that there was a binding jurisdiction agreement. The threshold was that of a “good arguable case”, which means:
The claimants have the better of the arguments
If there is an issue as to whether there was an agreement, the court must take a view on the material available before it, if it can reliably do so; but
In the event a reliable assessment cannot be made, there is a good arguable case for the existence of the agreement if there is a plausible (albeit contested) evidential basis for it.
2. “Undisclosed Principal”
The relevant principles2 relating to an undisclosed principal are as follows:
An undisclosed principal may sue and be sued on a contract made by an agent on its behalf, acting within the scope of its actual authority.
In entering into the contract, the agent must intend to act on the principal's behalf.
The agent of an undisclosed principal may also sue and be sued on the contract.
Any defence which the third party may have against the agent is available against his principal.
The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and its liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.
The third party must irrevocably elect whether to sue the agent or the undisclosed principal.
Agency may be inferred by conduct.
The High Court’s Decision:
The High Court rejected Owners’ case that Forests (and/or Exporters) was an undisclosed principal under the CP (and thus liable under the LOIs) noting that the contractual arrangements between the parties (including the SSAs and the LSMAAs) clearly showed that Forests were only ever intended to act as an agent for the Exporters and not as a principal. Accordingly, as Forest was not a party to the CP (or LOI) the English Court did not have jurisdiction and the claim forms against the defendants were set aside. In this respect:
The evidence in relation to the flow of funds did not support that Forests was a party to the CP as undisclosed principals; rather invoices were rendered to Forests in its agency capacity.
Forests was not a party to the CPs and as such, any obligation to issue LOIs under the CP would be placed on Shipping as charterer.
It would have been inconsistent with Shipping’s purpose of incorporation to say that Forests intended to open itself up to such liability.
There was an obvious reason why Shipping would want to seek Forests' approval for the issuance of a LOI and the discharge of the goods, which was that the goods represented security for payment for those goods.
Key Takeaways:
LOI recipients cannot claim against unnamed parties on an LOI as undisclosed principals unless there is strong evidence in the underlying agreements, written exchanges and parties’ conduct that there was an agency relationship. Whilst there are instances where there may be a sufficiently good arguable case that a party is, in fact, an undisclosed principal to the LOI, this judgment indicates the difficulties in satisfying the agency criteria test.
LOI recipients should be cautious in accepting LOIs from entities that have been set up as a means to insulate their affiliated companies from financial risk. It is recommended that these parties are expressly included in the LOI.
The decision is a useful reminder that an LOI is only as good as its provider, and that the party issuing the LOI is financially robust and, where possible, the LOI is counter-secured by a dependable financial institution.
Club’s position:
As Members are aware, Club cover is discretionary in the case of liabilities arising from delivery of cargo without production of the original bill of lading and any recourse will depend on the enforceability of any indemnity given to them. Find out more.
The Clubs have issued suggested wordings for letter of indemnity when cargo is delivered without surrender of the original bill of lading. Find out more.
Members are always encouraged to discuss with their usual P&I Club contact when in receipt of such requests for advice on possible coverage implications and to consider any recommendations the Club might provide.
2 In analysing the law as to undisclosed principal, the Judge referred, inter alia, to the cases of Sui Yin Kwan v Eastern Insurance [1994] AC 199 at 207, Playboy Club v Banca Nazionale del Lavoro LPV [2018] 1 WLR 4041 and The Magellan Spirit [2017] 1 All ER (Comm) 241
