Web Alert: Case update - The Songa Winds [2018] EWCA Civ 1901- The interrelationship between letters of indemnity and charterparty 'time bar' provisions

News & Insights 10 September 2018


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Given the frequent use of LOIs in the shipping industry, this legal decision will likely be of relevance and interest to both the club’s owner and charterer members.

A recent English Court of Appeal decision provides important guidance on the applicability of charterparty time bar provisions to letters of indemnity (LOIs).

Given the frequent use of LOIs in the shipping industry, this legal decision will likely be of relevance and interest to both the club’s owner and charterer members.

 

Factual background

Disponent owner of the Songa Winds fixed the vessel to voyage charterer to carry crude sunflower seed oil from Ukraine to Indian ports.

Original bills of lading were not available at the discharge port. Voyage charterer issued an LOI to disponent owner for delivery of cargo without presentation of original bills of lading.

Disputes subsequently arose between the parties, and disponent owner pursued claims under the LOI.

English High Court litigation was commenced in which the court considered:

  • the legal construction of the LOI wording
  • whether any claim by Disponent Owners was time barred in any event ('the Time Bar Issue').

The Time Bar Issue was appealed to the Court of Appeal.

 

The Time Bar Issue

The charterparty LOI clause contained an LOI 'period of validity' provision which read as follows:

'The period of validity of any letter of indemnity will be 3 months from date of issue…the indemnity will expire at the end of the initial three month period, or any further extension period [agreed by the parties]'.

Disponent owner did not notify any claim under the LOI within three months of the LOI being issued and did not seek an extension. However, they did then submit LOI claims after this three month period had elapsed.

Voyage charterer argued that any claim under LOI was therefore time barred.

Disponent owner argued that the three month 'period of validity' did not apply to claims under the LOI and did not create a 'limitation period' and / or 'time bar' in any event. Therefore, they were entitled to pursue their LOI claims.

The Court of Appeal had to decide on the following legal questions:

  • Did the charterparty 'period of validity' provision apply to the LOI?
  • If this provision did apply to the LOI, did it constitute a three month limitation period for bringing LOI claims? If so, were disponent owner's claims under the LOI time barred?

 

The Court of Appeal’s Decision

  • Did the charterparty 'period of validity' provision apply to the LOI?

The court held that the LOI was a 'stand alone' written contractual agreement. It was therefore reasonable to regard the text of the LOI as containing all terms agreed by the parties regarding the indemnity agreed.

The court held that it was the responsibility of the issuer of the LOI to take steps to effectively include / incorporate any specially agreed time bar into the LOI. Charterparty provisions would not be automatically transposed / incorporated into the terms of the LOI.

Therefore, the 'period of validity' provision had not been effectively incorporated into the LOI.

  • If this provision did apply to the LOI, did it constitute a three month limitation period for bringing LOI claims? If so, were disponent owner’s claims under the LOI time barred?

Due to the Court of Appeal’s ruling on the first question, this second question did not need to be formally decided.

However, the Court of Appeal commented that they would have interpreted the 'period of validity' provision as a three month limitation period for bringing claims under the LOI.

 

Club comments

This decision provides helpful clarity on how charterparty LOI-related provisions will interact with an LOI itself once issued.

This will potentially promote commercial and legal certainty for owners and charterers agreeing LOIs going forward.

Additionally, while not binding, the Court of Appeal’s comments that a 'period of validity' for an LOI could operate as a limitation period for LOI claims are also of note.

These comments provide a reminder to both owners and charterers that it is important to be alert to the effect of relevant charterparty provisions agreed when negotiating LOIs, including potential time bar provisions.

 

Key take away points for members

  • Owner members are recommended to pay attention to whether any contractual time bar being relied upon by a charterer applies to claims under LOIs issued to them.
  • Owner members are recommended to pay attention to any limitation period that applies to claims under LOIs issued to them and notify any claims within this period.
  • Charterer members are recommended to ensure that any charterparty limitation period that relates to claims under an LOI is effectively included / incorporated in the LOI itself when issued, so that it will apply to the LOI.

The club can provide guidance to members on LOI issues as necessary. However, members should be aware that, as per the club’s rules, unless the board otherwise determines, there shall be no recovery from the club in respect of liabilities arising out of the delivery of cargo without production of the original bill of lading. Therefore, P&I cover does not apply as of right and each LOI-based liability will be judged according to the individual facts of the case.

If you have a query relating to the content of this web alert, please do not hesitate to contact the author, or alternatively your usual contact at the club.

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