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LOIs and liability for inducement of breach of contract

01 February 2019

A recent Court of Appeal ruling highlights the risk to traders and, in particular, to their officers and employees personally, of giving/arranging a letter of indemnity to a carrier against liability arising out of delivery of goods without presentation of the bills of lading. This blog examines the risk of such arrangements giving rise to a liability on their part under the tort of procuring a breach of contract.

The case of Michael Fielding Wolff v Trinity Logistics USA Inc [2018] EWCA Civ 2765 ("the Wolff case") concerned the release, by freight forwarders, of consignments of clothes shipped from Bangladesh to the UK without presentation of the relevant bill of lading or airway bill. However, the Court's findings in that case have equal application to the trading of commodities; in particular oil trading where the use of a letter of indemnity to procure delivery by the carrier of goods carried under a bill of lading without production of that bill ("LOI") is common place.

The facts of the Wolff case

The facts of the Wolff case are relatively complicated but the essence of the case is as follows. Mr Wolff was a director of The Fielding Group Ltd ("TFG"). TFG purchased and imported clothes from Bangladesh. The consignments of clothes concerned were carried under "house" bills of lading or airway bills issued by Trinity Logistics USA Inc ("TUSA"). TUSA had agents in Bangladesh, Trinity Logistics (Bangladesh) Ltd ("Trinity Bangledesh") and agents in the UK, Trinity Europe Logistics Limited ("Trinity Europe"). Trinity Bangladesh dealt with shipment of the goods in Bangladesh and Trinity Europe dealt with release of the goods in the UK. On the facts of the case it was a breach of the respective contracts of carriage for the goods to be released other than against the presentation of an indorsed bill of lading or a "Bank Release" order; neither of which TFG could procure without first paying the supplier for the goods.  Any other release exposed TUSA to claims from the Bangladeshi suppliers for wrongful delivery. Equally any other release by Trinity Europe was a breach of the agency agreement between itself and TUSA.

In 2013 TFG were in financial difficulties and in order to get possession of the goods without first paying for them they induced Trinity Europe, by promising swift payment of their charges, to release goods to them without presentation of an indorsed bill of lading or a "Bank Release" order. Goods were so released between July 2013 and June 2014. This exposed TUSA to claims for wrongful delivery and put Trinity Europe in breach of their agency agreement with TUSA.

TFG went into administration in June 2014. On discovering what had been going on TUSA brought proceeding against various individuals on various grounds. So far as is relevant for present purposes, they brought a claim against Mr Wolff in tort of procuring a breach of contract; that is of the agency agreement between Trinity Europe and TUSA. They claimed an indemnity from Mr Wolff in relation to their, TUSA's, liability to the suppliers of the goods arising out of the wrongful delivery of the goods which resulted from Trinity Europe's breach of the agency agreement.

Parallels between the facts of the Wolff case and the commodity world

The parallels between the facts of the Wolff case and the delivery of commodity cargoes without presentation of the relevant bills of lading are readily apparent. When a trader asks a carrier (usually as the charterer of the ship) to deliver cargo represented by a bill of lading without production of that bill, it is invariably asking the carrier to act in breach of the bill of lading contract. As Longmore L.J. recognised in the opening sentence of his leading judgment in the Wolff case: "It has long been the cardinal principle of the English law of carriage by sea that the carrier should only deliver the goods to a person who presents an original bill of lading." Furthermore, if the request itself does not amount to an inducement to act in such a way the provision of an LOI which specifically indemnifies the carrier against the consequences of so acting is very likely to do so.


The requirements for making good a claim in tort of procuring a contract breach

As confirmed by the Wolff case the requirements for making good a claim in tort of procuring a contract breach are as follows:

(i) the conduct of the defendant must induce or procure the actions of the contract breaker;

(ii) the defendant must know that there is a relevant contract capable of breach and the nature of the contractual rights of the third party which will be breached by the contact breaker's conduct and

(iii)  the defendant must know and intend that the conduct of the contract breaker he is seeking to induce to act will result in the relevant contractual rights being infringed.

Requirements (ii) and (iii) require consideration of the knowledge of the individual defendant concerned; or of the knowledge of the relevant officers/employees if the defendant is a corporate entity. Technically, it is not necessary to prove that the relevant individual actually had the knowledge. It is enough, on the basis of the Wolff case at least, to establish that "it is almost certain" that they did.

The Wolff decision

At first instance the Commercial Court found Mr Wolff liable to TUSA for procuring Trinity Europe's breach of their contract with TUSA. The Deputy Judge found that Mr Wolff (a) had the requisite knowledge of the agency contract between TUSA and Trinity Europe; (b) as an experienced freight forwarder, must have known that what he was asking Trinity Europe to do would put them in breach of their contract with TUSA and (c) that he knew and intended them to breach that contract.

Having represented himself in the Commercial Court Mr Wolff was able to instruct solicitors and counsel on the appeal but they fared no better; his appeal against the Commercial Court judgment was dismissed.

Application of the Wolff case outcome to the commodity world

As mentioned above the parallels between the Wolff case and the use of LOIs are close. A party requesting a carrier to deliver a cargo without production of the bill of lading will be aware of the bill of lading contract concerned (the bills will usually be referred to in the LOI). Further, having under the LOI agreed to indemnify the carrier against claims under the bills, it would be difficult for the requesting party and LOI issuer to say they did not have the necessary knowledge that the action they had induced the carrier to take would amount to a breach of the bill of lading contract.

It must therefore follow that there is a real risk that any trading company issuing an LOI to get a cargo delivered without production of the bill of lading will be potentially liable, not only to the carrier under the LOI itself, but directly to the party whose contractual rights have been infringed by virtue of the carrier's conduct. Furthermore, any individual working for the trader who is engaged in procuring the discharge of the cargo without presentation of the bills may face an identical, personal liability.

There may be circumstances in which a buyer may ask a seller to instruct the carrier to deliver cargo other than against the bill of lading; for example when the seller is also the charterer of the ship and the bill has not yet reached the buyer through the banking chain. If the seller acts on such a request and issues an LOI to the carrier, the buyer may, by virtue of the request, be estopped or otherwise prevented from making any claim against the seller on the basis of procurement of breach of the bill of lading contract. However, such estoppel arguments are inherently quite difficult.

What to do?  

The writer has written previously about the risks traders run in giving an LOI. Those risks arise even when the trader has water tight payment security; for example when the issue of the LOI secures delivery to their buyer but the buyer's bank seeks to enforce the security it has over the goods by virtue of becoming holders of the bills of lading on their presentation to them.  One way of reducing (but certainly not eliminating) this risk is to seek a counter indemnity (in respect of the liability under the LOI) from the buyer/receiver. For the above reasons it is suggested that any such indemnity should, ideally, extend to any claims in tort against both the LOI issuer and their officers and employees founded in the tort of procuring a breach of the bill of lading contract.