UK: Forged Bills of Lading

Last Updated: 13 January 2003
Article by Richard Black

The Commercial Court was recently asked to consider a dispute in which competing parties claimed to be owners of the same goods. I represented the innocent unpaid seller. The case is a timely reminder of the ever present risk of fraud faced by owners and charterers and their insurers as well as by traders and their banks engaged in international trade.

In Transpacific Eternity SA -v- Kanematsu Corporation and another [2002] 1 Lloyd’s Rep 233 the owners of the Antares III sought interpleader relief because they faced rival claims by parties holding different bills of lading in respect of the same part cargo on board their vessel.

Vinsari Fruitech Limited, the second defendant, sold 4,500 mt of Indian yellow toasted soyabean extraction meal and flake to Silijan Pte Limited on FAS (free alongside) Bedi terms. The sale was on FOSFA terms and the contract was silent as to when property passed. Silijan in turn sold the goods on to Kanematsu Corporation, the first defendant. Payment in each case was by means of a letter of credit. The bill of lading named Vinsari as the shipper and was made out to their order. However, when Vinsari presented their documents for payment under the letter of credit to Silijan’s bank the documents were rejected and payment refused.

The Antares III had been chartered by an associate company of Silijan who, pursuant to an authority contained in the charterparty, issued a switch bill of lading naming Silijan as shipper for the entire quantity of cargo loaded. Kanematsu was shown as the notify party. Thus armed with the fraudulent switch bill of lading, Silijan presented it and other shipping documents for payment under the letter of credit opened by Kanematsu. The result was that Kanematsu were defrauded of approximately US$2,000,000.

Silijan then ordered the Antares III to sail to Kagoshima, Japan. Upon arrival of the vessel at Kagoshima, Kanematsu presented the switch bill they had paid for and discharge commenced. Shortly thereafter the shipowners learned that Vinsari claimed ownership of part of the cargo as unpaid Sellers.

The principle issue before the court was who owned the cargo, Kanematsu or Vinsari. Silijan played no part in the proceedings.

Vinsari submitted that it owned the cargo because property had never passed to Silijan under its sale agreement and since Silijan had never owned the cargo Kanematsu did not and indeed could not have obtained title. Vinsari submitted that it was intended by the parties that property should only pass under the sale contract upon payment by Silijan to Vinsari. In this context reliance was placed in particular on the bill of lading which named Vinsari as the shipper and was marked to their order thus reserving a right of disposal and making it plain that ownership would not be transferred until the condition to that reservation of right, namely payment, was satisfied.

Section 19 of the Sale of Goods Act 1979 ("SGA") provides:

"(1) Where there is a contract for the sale of specific goods …… the seller may, by the terms of the contract …… reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.

(2) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal."

Section 25(2) provides:

"Where a person having bought or agreed to buy goods obtains, with the consent of the letter, possession of the goods or the documents of title to the goods, the delivery or transfer by that person… of the goods or documents of title, under any sale… to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner…"

Kanematsu could not rely upon section 25(2) as Silijan had not obtained possession of the goods or the documents of title in respect thereof with the consent of Vinsari as Sellers.

Against this background and given the terms of the bill of lading, it is not surprising that Kanematsu accepted at trial the presumption that property was not to pass until payment as provided in section 19 but they argued that the presumption was to be displaced in this case as this was an FAS contract. Mr Justice David Steel first considered the position under a FOB contract and thereafter under a FAS contract. He said that the presumption which emerged from section 19 of the SGA remained valid for the purposes of a FOB contract. The Judge saw no justification for treating a FAS contract differently. He noted that his view was shared by the editors of Benjamin. The judge found that Vinsari therefore had retained title in the goods and were entitled to the cargo notwithstanding that Kanematsu had paid for the same.

In this case owners were able to interplead as they had been put on notice of the unpaid sellers’ claim to the goods before all the cargo had been discharged. The shipowners liability did not therefore arise for consideration. The liability of a shipowner who discharges cargo against a forged bill of loading was considered by Mr Justice Rix in Motis Exports v Dampskibsselskabet [1999] 1 Lloyds Rep 837. This was the first occasion on which the courts had been asked to consider the point. The judge held that delivery of the cargo by the master against a forged bill of loading provided no defence to a claim by the true goods owner for misdelivery as a forged bill of loading was a nullity and could not absolve the shipowner for liability for misdelivery. The judge also found that the shipowners were liable for the tort of conversion in such circumstances even though they had no intention to act inconsistently with the rights of the unpaid seller. The judge considered it more appropriate that the innocent shipowner rather than the innocent unpaid seller should bear the risk of the loss in such circumstances. The shipowners appealed the decision in relation to the finding on conversion (but not on misdelivery). The appeal was dismissed.

The above cases serve as a salutary warning to the trade of the risks involved when paying for goods on a cash against documents or documentary credit basis. A payment made against a forged bill of loading is viewed as "a nightmare scenario" but, to the credit of the industry, such frauds are not that common. As long ago as 1883 Lord Justice Bowen observed in Sanders v Maclean 11 QBD 327:

"mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud than it is on the supposition of forgery"

That observation appears to be as relevant today as it was 119 years ago.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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