QCR Winter 2018: Sale of goods - Letter of indemnity signed by seller and by seller's bank - Measure of damages for breach of contract by reference to a sub-sale

Euro-Asian Oil SA v Credit Suisse AG - Court of Appeal (Gloster, King and Simon LJJ) [2018] EWCA Civ 1720) - 25 July 2018


Euro-Asian Oil SA entered into four transactions with Abilo where Abilo purchased ultra-low sulphur diesel, sold it on to Euro-Asian CIF Constanza, who further sold it on to Real Oil. This dispute related to the fourth transaction where Euro-Asian had agreed to buy, and Abilo agreed to sell 20,000 mt ultra-low sulphur diesel (ULSD).

The contract of sale dated 1 October 2010, was based on the Amended Incoterms CIF 2000 and included a provision that the payment by Euro-Asian to Abilo was to be by letter of credit, and was to be made 120 days after the bill of lading date against presentation of original documents. On the same day, Crédit Agricole opened a letter of credit with Abilo as the beneficiary. In the event that the shipping documents were not available, payment was to be made against presentation of the beneficiary's invoice and letter of indemnity (LOI) countersigned by Abilo's bank, Credit Suisse.

On 6 January 2011, Credit Suisse presented a LOI to Crédit Agricole. This LOI, signed by Credit Suisse and Abilo in favour of Euro-Asian, contained certain warranties relating to the cargo of 20,000 mt of ULSD shipped on board the MT Ariadne at Puerto la Cruz, pursuant to bills of lading dated 10 September 2010. The LOI provides that in consideration of Credit Agricole paying the full purchase price of about US$15m, Abilo warranted that they have marketable title, rights to transfer title and to effect delivery, and Abilo agreed to indemnify and hold harmless Crédit Agricole and Euro-Asian from all damages, costs and expenses arising from bills of lading remaining outstanding and by reason of breach of the warranties given above.

Euro-Asian did not receive any cargo under the fourth transaction and it became clear that the cargo described in the LOI did not actually exist. Accordingly, Euro-Asian claimed against Credit Suisse for breach of the LOI.

The way in which the four transactions were performed was described by Euro-Asian as a "carousel". The contracted cargo was not delivered according to the terms of the sale contracts on conventional CIF terms, but was performed by means of tank holding certificates issued by the discharge terminal in relation to oil delivered from other vessels and stored in holding tanks at Constantza. As the documents presented by Abilo under the letter of credit was for cargo that had already been discharged, the warranties in the LOI were therefore untrue.

Under the fourth transaction, what went wrong was that Abilo, having suffered financial problems, was unable to find a fifth cargo, and so was unable to obtain an associated tank holding certificate.

Credit Suisse had not known that the previous transactions had also been irregular and claimed in their defence that Euro Asian had been a willing participant in these "separate arrangements" and thus the warranties in the LOI did not apply.

The Judge in the Commercial Court rejected the argument above, and found that by countersigning the relevant LOI, Credit Suisse was "exposing itself to some risk" and that "in signing the letters of indemnity and acting in this way it was no longer a letter of credit bank." The Judge's decision was to award Credit Suisse an indemnity against Abilo confined to 80% of the joint liability of Credit Suisse and Abilo.

Credit Suisse appealed the above decision. The Court of Appeal dealt with the following three issues:

  1. Whether the contract was a contract for sale and delivery of goods on CIF terms to trigger the LOI.
  2. Measure of damages suffered by Euro-Asian for breach of the warranties in the LOI.
  3. The extent of Credit Suisse's indemnity from Abilo.


The appeal on the first issue was dismissed as it was largely dependent on the Judge's findings of fact. Euro-Asian was not a willing participant in the separate arrangements. The Judge further held that Abilo was in breach of the contract, which was on CIF terms, and that both the bank and Abilo were liable under the letter of indemnity.

On the measure of damages to which Euro-Asian was entitled, Euro-Asian had claimed damages on the basis of the sound arrived value of the cargo. The Judge rejected the point and assessed that the damages should be capped at the price at which Euro-Asian invoiced Real Oil. The Court of Appeal's decision upholds the judgement, and emphasizes that the applicable principle is section 51(2) of Sale of Goods Act, which provides that the normal measure of damages for a failure to deliver goods is the estimated loss directly and naturally resulting, in the ordinary course of events from the seller's breach of contract. Because it was always contemplated that Euro-Asian would nominate the same cargo to perform the sub-sale contract, the Court of Appeal confirms that the damages awarded by the first instance Judge was the measure of loss contemplated by the parties.

In respect of the third issue, the Court of Appeal allowed Credit Suisse's appeal. Although Credit Suisse countersigned the LOIs, Abilo was the primary obligor and if Credit Suisse had to pay first, it would have a right of recourse against Abilo. Credit Suisse should be entitled to recover 100% against Abilo.


The decision is a useful reminder of the risks associated with carrying out historical "carousel" arrangements, especially for the banks that countersign LOIs. The decision confirms that warranties in a LOI remain enforceable against a countersigning bank, even if the warranties are untrue, and even if the bank was not aware of the underlying "carousel" arrangement.

The Court of Appeal also considered the relevance of a sub-contract which had been entered into by the Claimant, and the measure of damages the Claimant is entitled to under that contract. While each case will depend on its own facts, in cases where there is a sub-sale contract and there is evidence that both parties contemplated that the goods delivered under the primary contract would be used to perform the sub-sale contract, the damages for breach of the primary contract may be assessed by reference to the value of the sub-contract, displacing the usual market value measure.

Staff Author