October, 2024 - The Xing Zhi Hai: Letters of indemnity and the law of undisclosed principals

In Yangtze Navigation (Asia) Co Ltd & Anor v TPT Shipping Ltd & Ors [2024] (The “Xing Zhi Hai”) EWHC 2371 (Comm) the Commercial Court in the context of a jurisdictional challenge considered the question of whether the entity issuing the Letters of Indemnity (“LOIs”) was in effect acting for undisclosed principals.

Background:

The dispute concerned LOIs issued by TPT Shipping Ltd (“the Charterer”) in exchange for Yangtze Navigation (Asia) Co Ltd (“the Owner”) delivering the cargo without production of the original bills of lading for a shipment of logs from New Zealand to India under three different charterparties.

The logs had been produced by three companies (collectively “the Exporters”), who had entered into Log Marketing and Sales Agency Agreements (“LMSAAs”) with TPT Forests Ltd (“TPT Forests”), under which Forests were to act as agent of the Exporters for promotion and sale of the logs. Forests contracted expressly as agent on behalf of the Exporters with the Charterer under a shipping services agreement (“SSA”).

The Owner was sued for misdelivery from the allegedly lawful holders of the bills of lading.

The Owner in turn claimed against the Charterer who had issued the LOIs. As the Charterer had become insolvent, the Owner extended the claim to Forests and the Exporters who were not parties to either the charterparties or the LOIs. The Owner’s main argument was that the Charterer had provided the LOIs as agent of Forests and/or Exporters, who were therefore liable under the LOIs as undisclosed principals.

The Commercial Court:

The judgment provides a helpful summary of the law on ‘undisclosed principals’, as the key issue before the court was whether the Exporters and/or Forests were undisclosed principals. The court considered the case of Sui Yin Kwan v Eastern Insurance [1994] AC 199 where Lord Lloyd summarised the position on undisclosed principals as follows:

“(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority.

(2) In entering into the contract, the agent must intend to act on the principal’s behalf.

(3) The agent of an undisclosed principal may also sue and be sued on the contract.

(4) Any defence which the third party may have against the agent is available against his principal.

(5) The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.”

In this case, referring to settled case law and leading textbooks on the issue, the judge accepted that the Owner had to show effectively that:

1. The charterers had actual authority to act so as to bind the principal, though this may be of course express or implied;
    
2. The charterer intended to act on behalf of Forests or the Exporters; and
    
3. The LOIs did not exclude Forests’ or the Exporters’ right to sue and liability to be sued

The judge rejected the Owner’s argument that Forests and/or the Exporters were undisclosed principals for the following reasons:

1. Under the LMSAAs and the SSA it was clear that in making the shipping arrangements Forests were to act as agent only for the Exporters and not as a principal;


2. The LMSAAs envisaged a dichotomy between situations in which ships were chartered in by Forests as agent for the Exporters and situations where the Charterer made space available on board ships chartered in by them by third parties (which was the case here);
    
3. The timings of the charterparties were inconsistent with the idea that these contracts were entered into on behalf of Forests and/or the Exporters as the Charterer had entered into the charterparties before it was in a position to know which cargoes would be carried on board;
    
4. The accounts and flow of funds did not seem to support the Owner’s assertions that Forests or the Exporters were parties to the charterparties as an undisclosed principal;
    
5. Forests was not a party to the charterparties and the LOIs were issued by the Charterer on its own behalf;
    
6. It made commercial sense for the Charterer to seek Forests’ authority prior to issuing the LOIs as the goods were in fact security for payment of those goods; and
    
7. The LMSAAs did provide for a particular procedure for authorisation for a letter of indemnity and, on the available evidence, this was not followed in any event.

Conclusion:

The court, applying the well-established principle of privity of contract and based on the evidence before it, did not accept that the LOIs were issued by the Charterer as agent of Forests and/or the Exporters. The judge held that the Charterer was acting on its own behalf when providing the LOIs and the Owner’s claims against Forests and/or the Exporters failed.

This decision serves as an important reminder that a party considering whether to accept a letter of indemnity should carefully consider the financial standing of the entity providing the promise of indemnity. Additionally, it is advisable to explore the option for the letter of indemnity to be co-signed by additional entities (not always feasible in practice) so as to increase any prospects of recovery.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.