The Court of Appeal (judgment available here) has upheld the High Court’s judgment (article available here) dismissing claims made by the Shipowners against a group of New Zealand log exporters (“Exporters”) under letters of indemnity (“LOIs”) issued in connection with the delivery of cargoes of logs in India without the presentation of the original bills of lading.
The Shipowners had sought to hold the Exporters liable on the basis that the LOIs, governed by English law and agreeing English court jurisdiction, were issued by Shipping (a special purpose vehicle (“SPV”) created by the Exporters’ sale and marketing agent (“Forests”) to protect the Exporters and Forests from chartering risks) as the Exporters’ agent. The High Court and the Court of Appeal in turn found there was no good arguable case for that contention, so held the Shipowners could not sue the Exporters under the LOIs.
The decision brings further welcome clarity on the legal limits of the undisclosed principal doctrine and underscores the evidential hurdles to implying agency relationships or asserting estoppel-based authority in the context of LOIs issued pursuant to charterparties.
Background
The claims arose from the alleged misdelivery of the logs to the Buyers (“Amrose”) in India without presentation of the original bills of lading. The Shipowners, who received LOIs issued by Shipping (to whom Amrose had issued LOIs), sought to recover under the LOIs after facing claims from the Receivers (who had rights to the logs from Amrose). When Shipping became insolvent (after Amrose had become insolvent, making Amrose’s LOIs issued to Shipping worthless), the Shipowners turned their attention to the Exporters and Forests, alleging they were, in truth, the parties behind Shipping and liable on the LOIs as undisclosed principals.
At first instance, the High Court dismissed the claims, holding that there was no sufficiently arguable case that the Exporters or Forests were principals to the LOIs. Those claims were, therefore, dismissed and the service of the claim forms was set aside. The Shipowners appealed against the decision made in favour of the Exporters and sought to raise a new argument.
Court of Appeal decision
The Court of Appeal dismissed the appeal and agreed with the High Court’s reasoning. The leading judgment confirmed, in respect of the charterparties themselves, that:
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The Exporters and Forests had deliberately structured their arrangements to insulate themselves from chartering risks by interposing Shipping as contracting principal.
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The relevant agency agreements and shipping services agreements contained clear provisions that excluded any agency relationship when Shipping was a charterer.
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Economic benefit alone (such as reimbursement rights or demurrage liabilities) was insufficient to imply an agency relationship between the Exporters and Shipping.
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The factual matrix – including the timings of fixtures, variable identity of shippers across fixtures, and Shipping’s ability to carry logs for third parties – was inconsistent with any clear principal-agent relationship existing between the Exporters and Shipping.
Turning to the LOIs themselves, the Court of Appeal pointed out that the conclusion drawn in respect of the charterparties was also a powerful reason to conclude that the LOIs were issued to the Shipowners by Shipping as principal, not as the Exporters’ agent.
Further, the Court of Appeal held that there was no objective indication of mutual consent to the existence of any agency relationship between the Exporters and Shipping, which is the foundational requirement for both actual and apparent or ostensible authority.
The Court of Appeal also agreed with the High Court’s analysis that Forests giving permission to Shipping to issue the LOIs simply reflected Forests being named as the Shippers in the bills of lading, so Shipping asking for Forests’ consent made sense, and that Shipping would, ultimately, naturally seek reimbursement from Amrose under the back-to-back LOIs.
Apparent or ostensible authority and estoppel
The Shipowners attempted to advance a new argument on appeal – that the Exporters were estopped (i.e. prevented) from denying that Forests had authority to authorise Shipping to issue LOIs on the Exporters’ behalf, and that this created ‘actual authority’ through estoppel.
However, the Court of Appeal refused to entertain this new argument, because it had not been raised at the initial trial stage and evidence potentially relevant to such an argument, in relation to a holding out of Forests by the Exporters and reliance thereon by Shipping, had not been explored before the High Court. These omissions were fatal to the new argument being pursued now.
Further, even if it had been open to the Shipowners to pursue the point, the Court of Appeal found it to be a weak argument for at least three reasons:
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There was no evidence of reliance by Shipping on a holding out by the Exporters to Shipping that Forests had authority to authorise issuance of LOIs on the Exporters’ behalf, which meant an essential factual element of the case was missing.
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The doctrine of undisclosed principal requires the agent to have genuine actual authority to conclude the contract for its principal – not fictional authority by estoppel.
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The mutual nature of the undisclosed principal doctrine would be undermined if a party were bound as principal via estoppel because absent genuine actual authority having been given to the agent then that party could not itself sue on the contract in turn.
Key takeaways
This decision is a strong reaffirmation of the principle that those who wish to impose liability on a specific party under a LOI must ensure that the party is identified in the LOI. English courts remain very reluctant to bypass that structure using agency principles or the doctrine of undisclosed principal without compelling evidence of genuine consent or actual authority.
The judgment also limits the application of apparent or ostensible authority where an estoppel-based argument is raised to impose liability – especially in the context of undisclosed principals, where the rights and obligations under the contract being mutual is critical.
Practical implications
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Clarity of roles: Trading parties using SPVs, such as Shipping, with the intention of protecting or ring fencing themselves from chartering risks should ensure that agency exclusions in their agreements are properly documented and maintained.
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LOI drafting and reliance: Where LOIs are critical to the delivery of the cargo, and bearing in mind the potentially adverse impact on P&I cover, shipowners should satisfy themselves that they are requesting LOIs from creditworthy entities or obtain guarantees from financially robust parent companies or financial institutions, to fortify SPV-issued LOIs.
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Jurisdictional hurdles: As this case illustrates, claimants seeking to invoke English court jurisdiction under LOIs against parties not named therein face significant obstacles absent a strong evidentiary basis to make agent-principal allegations.
Should members have any queries arising from this judgment or article, they should feel free to approach their usual contact for P&I at NorthStandard to discuss.