Laemthong International Lines Company Ltd v Abdullah Mohammed Fahem & Co

Under section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999, a third party may enforce a contractual term which, properly construed in its commercial context, purports to confer a benefit upon it. The third party may enforce that term unless the contracting parties show under section 1(2) that they did not intend it to be enforceable by the third party.

A chain of related contracts does not of itself exclude third-party enforcement. The court must construe the particular contract against its commercial background. A letter of indemnity requesting delivery by a contracting party may benefit the shipowner which the parties know will effect delivery as that party’s agent.

The owners delivered cargo to receivers without production of the original bills of lading. The charterers and receivers had each issued a letter of indemnity. The receivers’ letter was addressed to the charterers, but it was passed to the owners before they delivered the cargo. After delivery, the vessel was arrested at the suit of a bank claiming to hold the original bills.

Cooke J held in [2004] EWHC 2738 (Comm) that the owners could enforce the receivers’ letter directly under the Contracts (Rights of Third Parties) Act 1999. He declared that the owners were entitled to enforcement and to security for the vessel’s release.

The receivers appealed. The central issues were whether the letter purported to confer a benefit upon the owners within section 1(1)(b), and whether section 1(2) nevertheless excluded direct enforcement.

1. Appeal dismissed. The Court of Appeal, delivering a judgment to which all three members contributed, upheld Cooke J’s declarations.

2. The receivers’ letter of indemnity, construed as a whole and in its commercial setting, purported to confer a benefit upon the owners within section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999. The receivers requested the charterers to deliver cargo which all concerned knew could physically be delivered only by the owners. In effecting delivery, the owners acted as the charterers’ agents for that limited purpose. They therefore fell within the agents protected by clause 1 of the letter. The delivery also altered the legal relationship between the charterers and receivers by satisfying the receivers’ request and crystallising their indemnity obligations.

3. The word “you” in the letter did not restrict clauses 1 and 3 to losses sustained by the charterers. Such a construction was inconsistent with the letter as a whole and commercially insensible. The owners were the persons exposed to misdelivery proceedings, the loss caused by arrest and the need to obtain security. Clause 2 protected servants and agents against proceedings connected with delivery, while clause 3 was directed to securing the release of the ship. The clauses therefore protected the owners directly, although the owners did not become parties to the receivers’ contract.

4. Once the owners showed that the terms purported to benefit them, they could enforce those terms unless the receivers established under section 1(2) that the contracting parties intended otherwise. The receivers failed to do so. The existence of successive letters of indemnity did not create an established commercial chain comparable to conventional construction subcontracts. Letters of indemnity take different forms and must be construed individually. Here their purpose was both to obtain delivery without bills and to protect the owners against the resulting consequences.

5. The owners’ alternative agency argument based on reservation of the right of disposal, the question whether the charterers had been paid and the application to adduce fresh evidence were academic and were not determined.

• Court of Appeal (Civil Division): In [2005] EWCA Civ 519, dismissed the receivers’ appeal and upheld Cooke J’s declarations.

• High Court, Commercial Court: Cooke J held in [2004] EWHC 2738 (Comm) that the owners could enforce the receivers’ letter of indemnity. He declared that the owners were entitled to enforcement and to security for the vessel’s release.