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Case Update: The “Xing Zhi Hai” – Cutting Though Agents, Undisclosed Principals and Jurisdiction Challenges

Yangtze Navigation (Asia) Co Ltd & Anor v TPT Shipping Ltd & Ors [2024] EWHC 2371 (Comm) (18 September 2024) (bailii.org)

Key Points 

The judgment (handed down on 18 September 2024) clarifies the position regarding letters of indemnity in shipping claims in the context of English law agency principles.

The issues in the case show practitioners how the English Courts might treat parties issuing letters of indemnity where a chain of agency contracts exists. The main issue for Owners was to prove that the opposing parties were in some way principals to a contract containing an English jurisdiction clause.

Owners had to prove, inter alia, that the issuer of the LOI:

• had actual authority to act so as to bind the principal, which can be express or implied, and
• had subjectively intended to act on behalf of a principal (regardless of whether this was communicated to the receiver of the LOI).

English Courts will likely consider the circumstances under which the contracts were signed, the underlying agency agreement terms and relationships between the companies, as well as flow of funds between agents and principals.

Background Facts

Claims were commenced in the High Court by Yangtze Navigation (Asia) Co Ltd (“Owners”) under three letters of indemnity (“LOIs”) provided in the absence of bills of lading relating to New Zealand logs bound for India.

Owners’ claims relate to three shipments in late 2019 and early 2020 carried onboard the Owners’ vessels pursuant to three charterparties (the “Charters”).

TPT Forests Limited (“Forests”) was a New Zealand company exporting large volumes of logs for the defendant companies (“Exporters”). TPT Shipping Limited (“Shipping”) was incorporated in 2004 to insulate Forests from chartering risks.

By a letter sent to Exporters by Forests, Shipping would:

(1) charter vessels suitable for log shipments

(2) enter into agreements with Forests for shipments as Exporters’ agent

(3) carry out the shipments, and

(4) Forests would pay Shipping for the work (with Forests acting as Exporters’ agent).

A separate services agreement (“SSA”) governed the relationship between Shipping and Forests (which were both wholly owned subsidiaries of TPT Group Limited). The SSA set out that:

(1) Forests would deal with Shipping as agent to Exporters

(2) Forests had authority to represent Exporters in all dealings with Shipping, and

(3) Shipping would be deemed to provide services to Exporters and not Forests.

Another separate agency agreement (“LSMAA”) governed the relationship between Forests and each Exporter. The LSMAAs stated that:

• Forests entered into transactions as Exporters’ agent only (Clause 7)
• Forests has no power to enter into any agreement or bind Exporters in any way (Clause 1.7)
• Any charters entered into for the shipments would be between Forests and the shipping company “on behalf of Exporters” (Clause 5.2.1 (c), subject to Clause 5.2.1 (f))
• Forests may have access to vessels chartered by Shipping and may offer to ship the goods on these vessels subject to agreements reached between Forests and Exporters (Clause 5.2.1 (f)).

The LSMAAs contained a procedure for “Requests for Authorisation” (“RFA”). The RFAs covered the issue of LOIs required for discharging cargo without bills of lading. Under the RFA procedure, Forests would prepare and sign the LOI on the shipowners’ standard terms following receipt of counter-LOIs from cargo receivers.

The Charters, the LOIs and Owners’ quest for a Defendant 

Shipping entered into the Charters with Owners to carry the logs from New Zealand to Kandla, India.

Head owners sought LOIs from Owners to discharge the logs without original bills of lading. Owners then sought LOIs from Shipping and Shipping sought LOIs from the end buyers, and Shipping later issued the LOIs in favour of Owners in their own name.

Issues arose out of the LOIs, and Owners commenced claims under the LOIs against Shipping (their “giver”), but Shipping went into administration. Owners accordingly sued Forests and Exporters, asserting that Forests and/or the Exporters were principals under the LOIs and would be liable for Owners’ claims. But Owners were up against a major issue - Forests and Exporters were not named in the LOIs.

Owners therefore resorted to agency principles to prove their case.

Part 11 Challenges – Cutting through the Legal Test 

The Defendants sought to challenge the Court’s jurisdiction under Part 11 of the Civil Procedure Rules (“CPR”).

Both the Charters and the LOIs were subject to English law and High Court jurisdiction, so Owners had to prove that Forests and/or Exporters were party to those contracts to claim against them – otherwise their claim forms would be set aside.

Part 11 provides that a defendant may apply to set aside service of the claim form if the relevant “jurisdictional gateway” is not satisfied.

Jurisdictional Gateway

If Owners could not meet the three-limb test that a gateway existed against either Forests or Exporters, their claims would fail.

By way of reminder, the test is set out in Brownlie v Four Seasons Holdings Inc [2018] 1 WLR 192 and endorsed in Goldman Sachs International v Novo Banco SA ([2017] UKSC 80; [2018] UKSC 34). The case of Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV and others [2019] EWCA Civ 10) contains a neat re-statement of the test:

• the claimant must supply a plausible evidential basis for the application of a relevant jurisdictional gateway
• if there is an issue of fact about the gateway, or some other reason for doubting whether it applies, the Court must take a view on the material available if it can reliably do so, but
• if the nature of the issue and the limitations of the material available at the interlocutory stage may be such that no reliable assessment can be made, then there is a good arguable case for the application of the gateway if there is a plausible (albeit contested) evidential basis for it.

The test must be satisfied on the evidence relating to the position as at the date when the proceedings were commenced.

Owners’ Claim against Forests 

Owners’ Case was that:

• Forests were an undisclosed principal to the Charters
• Forests approved and issued the LOIs on Shipping’s behalf
• Forests should be liable under the LOIs.

Forests’ Case was that:

• Shipping entered into the Charters on its own behalf
• Forests were not principals under the LOIs
• Forests had no authority to enter the LOIs on Exporters’ behalf.

Forests argued, inter alia, that:

• Shipping was set up to charter vessels as principal
• the timing of the Charters proved that the Exporters (as Forests’ principal) could not be parties to the Charters as tonnage would not have been allocated to the vessels at the time of their signing, and
• Shipping used the spare space on the vessels, so could not be an agent.

Simon Rainey KC put forward a further question, relying on The Magellan Spirit [2017] 1 All ER (Comm) 241 - why would Forests, in light of the terms of the SSA (see Clauses 1.7 and 7 above), suddenly agree to act as a principal?

Owners’ Claim against Exporters

Owners’ Case:

• Forests signed the Charters as agents on Exporters’ behalf
• Exporters were party to the Charters as undisclosed principals
• LOIs were issued on Exporters’ behalf.

The Court’s decision - Forests Claim:

The Court agreed with Forests’ arguments and rejected Owners’ case that Forests was an undisclosed principal under the Charters because, inter alia:

• the SSAs and the LSMAAs clearly showed that Forests only ever intended to act as an agent for the Exporters and not as a principal
• it would have been inconsistent to say that the charters were entered into by Shipping pursuant to an express authority from Forests at a time when Shipping would not know whose cargo would be shipped on the vessels
• The flow of funds from Forests to Shipping did not support that Forests were parties to the Charters as undisclosed principals.

The Court further rejected that Forests was liable under the LOIs because, inter alia:

• Forests were not parties to the Charters
• Any obligation to issue LOIs under the Charter would therefore be placed on Shipping as the Charterer. Even though the Charters imposed no such obligation, it was Shipping who had the right to request discharge against the LOI
• Shipping was incorporated by TPT Group to protect Forest from this very risk. Forests would not have intended to expose itself to such liability in the circumstances where it was not a party to the Charters and was in no way obliged to issue the LOIs.
• It was obvious that Shipping would seek Forests’ approval to issue the LOIs, not because Forests was their principal, but because the goods represented security for payment. If the goods were discharged, security would be lost.

Forests were therefore not a party to the Charters, the LOIs or the exclusive jurisdiction clause.

In light of those findings, Owners had no good arguable case against Forests that the Court had jurisdiction. The claim forms against Forests would be set aside.

Exporters Case:

• Exporters were not a party to the Charters
• Shipping signed the Charters as principal
• Exporters only used space on the Vessels per Clause 5.2.1(f) and not (c)
• Forests had no authority to bind Exporters to the LOIs

The Court’s decision - Exporters Claim 

The Court agreed. The Exporters were not a party to the Charters as undisclosed principal, and Shipping acted as principal in entering the Charters, because, inter alia:

• Shipping’s involvement meant that Sub-Clause (f) applied. Even though the LMSAAs stated that Forests would contract as agents for Exporters, the LMSAAs envisaged two scenarios for Exporters’ trades:
• Exporters would be charterers through Forests as their agents under Clause 5.2.1(c), OR
• Shipping would make space available to Exporters on vessels chartered by Shipping from third-party shipowners under Clause 5.2.1(f).
• This was consistent with the fact that Shipping would charter vessels before it knew whose cargo would be on board. Shipping could not “assume” that Exporters would ship cargo on those vessels despite most of the cargo belonging to Exporters, so Shipping was not entering into a contract on behalf of Exporters as their agent.

The Court further rejected that the LOIs were issued on Exporters’ behalf because, inter alia:

• There was no evidence that the Exporters authorised the issue of the LOIs other than through Forests’ agency
• If that was not the case, then as the court said “the claim would be that the Exporters were bound by the LOIs because those LOIs were issued by Shipping on the authority of Forests, who were in turn acting as the Exporters’ authorised agents under the LMSAAs”. However, the LMSAAs provided an RFA for the LOI approval process, and this process was not followed.
• The most that Owners could have argued on that basis was that, if Forests did in fact authorise the LOIs, they would have done so without authority and Shipping would have a claim against Forests for breach of warranty of authority. Shipping had no such claim, and even if they had, it would not take Owners any further.

The Court decided that Owners did not establish, on the evidence available, that they had the better of the argument that there was an agreement between Owners and Exporters containing an English jurisdiction clause. The claim forms against Exporters would be set aside.

Owners’ claims against all defendants were accordingly dismissed.

Key Takeaways 

• Receivers of an LOI cannot sue unnamed parties on an LOI as undisclosed principals unless there is strong evidence in the underlying agreements , documents and history of the parties’ conduct that there was an agency relationship. 

• Receivers should take care in accepting LOIs from companies evidently set up to insulate their related companies from financial risk. Owners, Shippers and Charterers alike should insist that these parties are expressly named to protect themselves against the LOI giver becoming insolvent. 

• Parties should review their charterparty wording to ensure that the LOI provision allows for greater flexibility and negotiation before accepting an LOI from their counterparty.