UK: BLG Shipping and International Trade Notes

Last Updated: 21 July 2003

Article by Nigel Wagland

Time charters: Safety of ports in Iraq and the Arabian Gulf region

At the time of publication, an attack in Iraq was imminent. The question arises whether in the case of a time charter where Iraq (and the region) is not excluded as a potential destination, the shipowner could refuse to go there on the basis of prospective unsafety of that port.

At present it is rumoured that charterers serving Iraq have secured lucrative deals for food supplies as Iraq prepares itself for a siege, so the issue may well arise.

The legal test for safety is well known (the Eastern City [1958] 2LLR 127): ‘‘…a port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship …’’. The relevant period of time at which to judge the prospective safety of the port is when the charterers’ order is given (the Evia (2) [1982] 2LLR 307).

Obviously the answer to whether the Gulf area will be safe will depend on what exactly is happening at the time the charterers’ order is given for the vessel to proceed to that port. At the moment, if we believe Rear Admiral Snelson, Commander of British Naval Forces in the Persian Gulf speaking in a maritime conference in Dubai in February, although Iraq has Styx missiles capable of hitting moving targets such as ships, its ability to deploy them in the Southern no-fly zone is ‘‘extremely limited by US and UK air patrols’’. He accepts that there will be some disruption to trade with Iraq itself, but he believes that the potential war against Iraq would be unlike the mayhem caused by the tanker war during the Iran/Iraq war of the 1980s.

Shipowners will of course prefer to be better safe than sorry even if their charterers are prepared to shoulder – as they seem to be at present – the higher premiums for hull, war risk, blocking and trapping and crew insurance. Although certainty on the prospective safety of a port in the Gulf will only come with the benefit of hindsight, it should be borne in mind that English courts have historically been generous to the discretion of the master should he decide that a port to which the charterers have ordered his ship is prospectively unsafe – provided the master’s discretion is exercised reasonably, on the information available at the time.

Do The Hague Visby Rules Apply Where No Bill Of Lading Is Issued?

The House of Lords has recently refused an application by the ship, owners for leave to appeal with the result that the Court of Appeal decision in favour of the shippers, Parsons Process Group Inc, stands.

Parsons Corporation And Others V C.V. Scheepvaartonderneming (The ‘‘Happy Ranger’’) [2002] Ewca Civ 694

The original contract was for the heavy lift carriage of three reactors from Italy to Saudi Arabia which did not exclude liability on the part of the owners for damage. Damage occurred to one of the reactors, weighing 833 tonnes, during loading when a crane hook broke causing it to fall to the ground, striking the side of the vessel as it did so.

The issues before the Court so far have centred on whether the Hague or Hague Visby Rules applied to Parsons’ claim for damage to the reactor. Parsons argued that the Hague Visby Rules applied paving the way for a claim of US$2.4 million. Owners, however, argued and the High Court held that the Hague Visby Rules did not apply because the contract of carriage was not one covered by a bill of lading or any other similar document of title. Consequently, the Hague Rules applied and liability could be limited to £100.

The Court of Appeal, now supported by the House of Lords, overturned the High Court decision holding that the Hague Visby Rules applied compulsorily to the contract of carriage although the claim was subject to the limitation of liability imposed by Article IV Rule 5.

BLG is acting for the successful shippers, Parsons, and their cargo underwriters.

Nullity:A Defence To Payment Under Letters Of Credit?

Other than in the case of fraud by a party demanding payment, the courts have never recognised any exception to the principle of autonomy of letters of credit.

However, in a recent Court of Appeal decision, Montrod Limited -v-Grundkotter Fleischvertriebs GMBH and Standard Chartered Bank 1 , consideration was given to the question of whether there existed a ‘nullity’ exception 2 by which a seller or an issuing bank could avoid payment.

Letter of credit applicants (Montrod) sought a declaration that documents presented under various credits were non-compliant because they had been fraudulently created - although not by the beneficiary of the credits (GF). Through the intervention of a purported agent of Montrod, certificates of inspection were signed and issued by GF using a Montrod company stamp but without Montrod’s authorisation. Consequently, the issuing bank, SCB paid the credits in the face of an assertion by Montrod that the certificates had not been signed or authorised by Montrod and that the documents had been fraudulently created. Payment was made on the basis that in creating the documents (as was accepted by all parties), GF was, at all times, entirely innocent of fraud. Therefore, as the documents conformed "on their face" with those stipulated under the terms of the credits, SCB considered itself obliged to make payment.

Montrod sought unsuccessfully to prevent payment on the basis of what it called a ‘nullity exception’ to the principle of autonomy of letters of credit. It argued that if, by the time of payment it becomes known that documents presented under a credit are not what they appear on their face to be, but are a nullity, then payment should not be made. Montrod argued that if a document is a nullity, then a bank need not pay against it, even to a party who acquired and presented it in good faith.

However, the Court rejected this argument principally because it would not be restricted only to dishonest claimants. In the Court’s view, the fraud exception, ‘should not be avoided or extended by the argument that a document presented, which conforms on its face with the terms of the letter of credit, is nonetheless of a character which disentitles the person making the demand to payment because it is fraudulent in itself, independently of the knowledge and bona fides of the demanding party.’

As a matter of policy, the Court also emphasised that banks deal in documents and questions of apparent conformity only. As a bank is not required to make its own enquiries about allegations of fraud brought to its notice, if a party wishes to establish that a demand is fraudulent it must place before the bank evidence of clear and obvious fraud. Otherwise, the Court stated, if a general nullity exception were to be introduced as part of English law, it would place banks in a dilemma as to the necessity to investigate facts which they are not competent to do and from which the UCP 500 (in particular Articles 3, 4 and 13a 3) is plainly concerned to exempt them. Such an exception would be likely to act unfairly upon the beneficiaries participating in a chain of contracts in cases where their good faith is not in question and would undermine the system of financing international trade by means of documentary credits.

Nevertheless, the Court did go on to suggest the possibility that, in a particular case, the conduct of a beneficiary in connection with the creation and/or presentation of a document forged by a third party might, though itself not amounting to fraud, be of such character as not to deserve the protection available to a holder in due course. The Court acknowledged that the law cannot condone actions which, although not amounting to fraud per se, are of such recklessness and haste that the documents produced as a result are clearly not in conformity.

Even so, despite indicating that reckless or hasty behaviour may represent a possible extension to the fraud exception, the Court did not, on the facts, find it necessary to say whether such a finding would be correct but merely referred to it as a possibility.

While it may have been more helpful (from the perspective of beneficiaries and issuing banks) had the Court developed its comments on there being a possible extension, in terms of actual practice, it is unlikely that such reckless or blameworthy activity could in any event be detected prior to presentation of documents or indeed payment. Similarly, even though a bank is not obliged to investigate the existence of fraud, it is required to consider the evidence of any fraud brought to its attention. Thus, if evidence of such behaviour is presented to a bank, it may require the bank to consider obtaining a declaration from the courts in order to ascertain whether or not the alleged behaviour (and the evidence in support) is in fact sufficient as to oblige it to refuse payment. How in practice this would sit with the obligation of a bank under the UCP 500 to examine documents within a reasonable time is unclear.

1 (2002) 1 All ER (Comm) 257

2 A ‘nullity’ in this instance meaning a document which is forged or fraudulent in such a way as to destroy its essence (e.g. a bill of lading issued by a non-existent carrier).

3 Article 3 of UCP 500 sets out the principle of autonomy; Article 4, the rule that parties deal with documents only; and Article 13, the standard for examination of documents

Notice Of Readiness Revisited: The ‘‘Happy Day’’

In the ‘‘Happy Day’’ 2002 2LLR 487 the Court of Appeal decided that laytime could commence even though the Notice of Readiness had been given, where the vessel, to the charterers’ knowledge, had commenced discharging.

Lord Justice Potter, in order to do justice was obliged to tinker with the old English law adage ‘‘silence cannot indicate assent’’. He said: ‘‘… in an appropriate commercial context, silence in response to the receipt of an invalid notice in the sense of a failure to intimate rejection of it, may at least in combination with some other step taken or assented to under contract amount to a waiver of the invalidity or put another way, may amount to acceptance of the notice as complying with the contract pursuant to which it is given.’’

Shipowner Liable In Tort For Misdelivery Following Customs Warehouse Delivering Cargo Without Production Of Bills Of Lading

The liability of a ship owner following the delivery of cargo without production of bills of lading, and the complexities of the Carriage of Goods by Sea Act 1992 on the claimants’ rights to sue, were recently considered by the High Court in this case.

East West Corporation -V- Dkbs -V- P&O Nedloyd Bv

Goods were shipped to Chile and discharged into a licensed customs warehouse pending payment of customs duty. The bills of lading had been endorsed by the claimants (the shippers) to a correspondent bank in Chile, to be held until payment for the goods was received. However, once the customs duty was paid, the cargo was released to the notify party without presentation of the bills of lading. The claimants were not paid for the goods and brought a claim against the vessel owners in contract, bailment and negligence for misdelivery of the goods.

The High Court held that the right of the claimants to sue under the bill of lading contract had been lost as a result of the bills of lading being endorsed to the Chilean banks, as even though the shippers remained the legal owners of the cargo and could demand that the bills of lading were returned to them, the Chilean banks were the legal holders of the bills of lading within the meaning of COGSA 1992.

The Court also held that a claim in bailment could not be brought as the bailment was on the same terms as the contract contained in the bills of lading and the claimants had no additional rights in bailment.

However, a claim in negligence was upheld as although the claimants did not have any possessory right to the goods at the time of the loss, they did have proprietary rights in the goods, which was sufficient interest in the goods to enable them to claim. The Court considered that the owners could have arranged for the goods only to be released from the warehouse on presentation of the bills of lading, and their negligence in failing to do so had deprived the claimants of their rights in the circumstances in which the goods could not be recovered. The owners were therefore liable.

The Court also rejected the argument that there should be an exception to the rule that bills of lading must be presented for delivery of the cargo when there is a reasonable explanation for their absence.

Owners and their insurers must therefore carefully consider the arrangements for delivery of cargo without production of the bills of lading even after cargo has been discharged into the custody of a licensed customs warehouse or other storage.

This will no doubt be considered a harsh decision for shipowners and their insurers, but perhaps not as harsh as the earlier decision in Motis Exports Limited -v-Dampskibsselskabet AS 912 [2000] 1 Lloyds Rep 211, in which the lawful holders of a bill of lading successfully sued owners for innocently discharging cargo against forged bills of lading. The forged bills of lading were considered by the Court (affirmed by the Court of Appeal) to be a nullity, and owners remained fully liable for the value of the goods discharged against those forged bills.

Order For Provisional Seizure Of Property By An EU Court – Is It Enforceable In The UK?

Council Regulation 44/2001 now governs recognition and enforcement of judgments within the European Union. ‘‘Judgment’’ includes decree, order, decision or writ of execution, as well as interlocutory or provisional judgments, including a provisional order freezing assets. The question, however, arises whether it extends to a provisional or conditional seizure of property (Greek courts, for instance, often order such relief pursuant to their injunction proceedings).

There are no decided cases on this question, however, we believe that the English court should enforce such an order. The difficulty is that English rules of procedure make no provision for the ‘‘provisional seizure’’ of property. On the other hand the court must enforce the substance of the foreign judgment by any procedural means available in English law. In the circumstances of a foreign order for the provisional seizure of property, the English court could grant a freezing order or an order for the sequestration of property in order to give effect to the foreign order.

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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