UK: Does A Dishonouring LC Bank Have Title To Sue Under An Indorsed Bill Of Lading?

Last Updated: 18 September 2013
Article by Stuart Shepherd and Carl Walker

Standard Chartered Bank v. Dorchester LNG(2) Limited (Erin Schulte) [2013] EWHC 828 (Comm)

On one level, this case concerns a technical issue in relation to the application of s.5(2)(b) of the Carriage of Goods by Sea Act 1992 ("COGSA 1992"), in particular, the circumstances in which "a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill" has title to sue under a bill of lading. However, the wider issue addressed in this case is the question of what rights a bank that issues a letter of credit (a "LC Bank") has in respect of the cargo represented by bills of lading indorsed to it in the context of a presentation under the letter of credit, in circumstances in which the LC Bank dishonours the credit. It is suggested that Mr Justice Teare's judgment in this case gives rise to a number of concerns for parties presenting indorsed bills of lading under letters of credit. On another level, it emphasises the risks to traders in issuing letters of indemnity ("LOIs") in respect of discharge of cargo without presentation of bills of lading, a practice that is common in the oil business.

The background facts

The underlying transaction in this case was a sale by Gunvor International BV ("Gunvor") to United Infrastructure Development Corporation ("UIDC") of a cargo of gasoil for delivery CIF Takoradi, Ghana. That sale was secured by the transfer of a letter of credit (the "LC") confirmed by Standard Chartered Bank ("SCB"). Having shipped the cargo on the Erin Schulte, Gunvor presented documents required under the LC to SCB on 3 June 2010. In response, on 9 June 2010, SCB notified two alleged discrepancies, both of which assumed acceptance by Gunvor of amendments which SCB had earlier sought to make to the LC but which had not been accepted by Gunvor. SCB indicated that they were holding the documents to the presenter's order. Despite protest, SCB maintained their position and, in the meantime, the vessel was at the discharge port ready to discharge. Gunvor therefore arranged for an LOI to be issued to the carrier to permit discharge of the cargo without presentation of original bills of lading, which were still held by SCB.

Faced with SCB's continuing refusal to honour the presentation, Gunvor commenced proceedings against SCB under the LC (the "LC Proceedings"). Following service of those proceedings, SCB promptly agreed to pay the full amount claimed by Gunvor plus interest and costs.

As a result of confirming acceptance of amendments to the LC with the issuing bank that had not been agreed by Gunvor, SCB, having paid Gunvor, had no recourse against the issuing bank. Accordingly, almost a year later, SCB issued proceedings against the Owners, the Defendants in these proceedings, alleging that, by virtue of the indorsement and transfer of the bills of lading to SCB under the LC, SCB had become the lawful holders of the bills of lading within the meaning of s.5(2)(b) of COGSA 1992. They claimed the full value of the cargo on the basis of an alleged mis-delivery by Owners.

SCB argued that they became lawful holders of the bills at four alternative moments in time:

  1. When, on 4 June 2010, the bills were physically received by them as part of the documentary presentation under the LC ("Argument 1");
  2. On the close of the fifth banking day following the date of presentation of the documents on the basis that, since their own notice rejecting the documents did not comply with Article 16 of UCP600, it was invalid and, under UCP 600, SCB was at that point deemed to accept them ("Argument 2");
  3. When, on 18 June 2010, SCB contended that they were the holders of the bills of lading ("Argument 3"); or
  4. When, on 7 July 2010, SCB paid the sums claimed by Gunvor in the LC proceedings ("Argument 4").

In response, Owners said that physical delivery of the bills when tendered under the LC was a conditional presentation, namely conditional upon SCB honouring the letter of credit, which they did not do. As to Argument 2, Owners said that SCB's notice of rejection was not defective and therefore not invalid. As to Argument 3, Owners said that any unilateral declaration of "ownership" of the bills by SCB was irrelevant. Finally, in relation to Argument 4, Owners said that, having rejected the documents, it was not open to SCB to withdraw that rejection and accept them without Gunvor's agreement; that there was never any re-presentation by Gunvor under the LC and that at no time did Gunvor, following rejection of the presentation, agree to surrender the bills of lading to SCB. Accordingly, when SCB eventually paid Gunvor, they were not making payment under the LC but in order to settle the claim made in the LC Proceedings.

Analysis

As indicated above, the starting point for the Judge was s.5(2)(b) of COGSA 1992. What he had to decide was whether SCB had possession of the bills "as a result of the completion, by delivery of the bill, of an indorsement of the bill". Mr Justice Thomas (as he then was) considered this provision in the Aegean Sea [1998] 2 Lloyd's Rep 39. Having considered the concept of "delivery" as it arises in s.5(2)(b), he concluded:

"I do not consider that a person satisfies the requirement under s.5(2)(b) and becomes the holder of a bill of lading if that person obtains the bill of lading merely as a consequence of somebody endorsing it and sending it to him. The section requires him to have possession as a result of the completion of an endorsement by delivery. Although the sending and receipt of a document through the post often constitutes service of a document, the sending of a bill of lading through the post does not without more constitute delivery; the person receiving it has to receive it into his possession and accept the delivery before he becomes the holder".

In the Aegean Sea, Mr Justice Thomas concluded, on the facts of that case, that, despite the bill of lading being indorsed to Repsol and physically received by them, Repsol did not become lawful holders because they did not accept delivery of the bill as indorsee; the bill of lading having been indorsed and delivered to them by mistake. Accordingly, delivery is a bilateral act, not a unilateral one, and it is necessary to enquire into the intentions of the parties to determine whether the requirements of s.5(2)(b) have been satisfied.

In the context of a presentation of an indorsed bill under a letter of credit, one therefore needs to ask, amongst other things, whether the presenter intends to complete the indorsement by mere physical delivery of the indorsed bill or whether that presentation is in some way conditional. Bearing in mind that, once the bank becomes the lawful holder of the bill under COGSA 1992, the bank controls the cargo in the sense that it is entitled to take delivery of it, one needs to ask the rhetorical question – does the presenter under an LC intend to give such rights to the bank irrespective of whether it honours the LC or not? Further, would such a presenter expect that, in circumstances where a bank refuses to pay under an LC, whether rightly or not, he would require the bank to re-indorse the bill back to him in order to regain "ownership" of the bill in the sense of being reinstated as lawful holder of the bill under COGSA 1992?

The Commercial Court decision

Mr Justice Teare held that SCB did became the lawful holders of the bills of lading upon their presentation on 4 June but, if he was wrong about that, they became lawful holders on 7 July 2010 when they paid Gunvor.

So far as the question of completion of delivery on presentation was concerned, the Judge, after referring to the decision in East West Corporation v. DKBS [2002] 2 Lloyd's Rep 182 (which concerned s.5(2)(a) of COGSA 1992 not S 5(2)(b)), said:

"Delivery of an indorsed bill of lading is a simple act, though one which requires the requisite intention on the part of the deliveror and deliveree. On the facts of the present case, the bills of lading were delivered on 4 June 2010 when they were received by SCB into their possession. The aim of COGSA 1992 was to simplify the transfer of rights of suit under the contract of carriage contained or evidenced by the bill of lading. The transfer was to be linked to delivery of an indorsed bill of lading instead of, as was the case under the Bills of Lading 1855, to the passing of property under the contract of sale. Thus there is now no need to investigate when and to whom property passed under the contract of sale or what the contractual position was between the deliveror and the deliveree of the bill of lading".

So, whilst the Judge accepts that one has to consider the intention of the deliveror, there is, according to him, no requirement to consider the contractual position as between the deliveror and deliveree of the bill of lading, i.e., in this case, the contractual position as between the bank and the beneficiary of the LC. Since the terms of the contract between the deliveror and deliveree must be the best evidence of the intentions of those parties this is, we suggest, a somewhat surprising conclusion.

As for SCB's alternative arguments, the Judge said little in relation to Arguments 2 and 3 save for concluding that there was nothing technically defective with SCB's message of 9 June by which it gave notice of rejection. However, in relation to Argument 4, the Judge decided that, when SCB paid Gunvor, they were in fact making payment under the LC and not pursuant to a settlement of the LC Proceedings. In relation to that, he said:

"I accept that SCB did not say in terms on that day [7 July 2010] that it was taking up the documents as compliant and would honour the letter of credit but it is the inevitable inference from the fact that payment was made of the full sum due under the letter of credit that the documents presented on 4 June 2010 were compliant, they were being "taken up" and that the letter of credit was honoured".

Whilst argument was addressed to the Judge on the points, he does not explain in his judgment how it is that SCB could unilaterally "take up" the documents that they had already rejected without any re-presentation of the documents and without the agreement of the presenting party.

The Judge also had to deal with an argument from Owners that, even if they were in breach in discharging the cargo without production of bills of lading, that breach had caused no loss to SCB at the time. That was because even if SCB had taken delivery of the goods, it would not have been entitled to sell them as it had no interest in them. It was argued that if they had taken delivery and sold them, this would have been an act of conversion actionable at the suit of the true owner of the goods and SCB would have been bound to deliver up the goods or the proceeds of sale to the true owner of the goods.

Mr Justice Teare rejected that argument on the basis that the indorsement in favour of the bank had, in his view, no doubt been intended to give SCB security by way of a pledge over the goods. That analysis assumes, of course, that, amongst other things, the pledge survives the statement made by SCB that they are holding the documents to the presenter's order. If that is indeed the case, then, despite rejecting a presentation and making a declaration that it is holding documents to the presenter's order, a bank, who would need to retain possession of the bills to maintain the pledge, could refuse to return the bills.

Comment

For better or worse, s.5(2) of COGSA 1992 distinguishes between a consignee in possession of the bill and an indorsee in possession of a bill; in the latter case, possession is expressly required to be by virtue of completion of an indorsement by delivery of the bill. It seems that the Judge in this case was reluctant to grapple fully with the consequences of the different treatment of a consignee and indorsee of a bill under COGSA 1992 and, as a result, did not consider in any detail the underlying contractual relationship between the deliveror/deliveree of the bill.

The consequences of this judgment are that a party presenting an indorsed bill to a LC Bank will, as a result of doing so: (a) transfer to the bank the right to delivery of the cargo under the bill of lading irrespective of whether or not the bank honours the credit; (b) in the event of rejection of the presentation, require the bank to re-indorse the bills back to him in order to regain the right to delivery of the cargo; and (c) face the prospect of a bank being able to retain possession of the bills, despite rejecting the presentation, on the basis that the presentation amounts to a pledge of the bills and the bank is entitled to maintain the pledge in case, at some later time, the bank is found liable to pay under the LC.

Lastly, unless this decision is overturned on appeal, the end result will be that, due to a combination of an error by SCB in confirming an amendment of the LC to the issuing bank to which Gunvor did not consent and Gunvor issuing the LOI, Gunvor will have to pay a sum equivalent to the total value of the cargo to indemnify the Owners in respect of this judgment. This illustrates the risks inherent in issuing LOIs against delivery without production of bills of lading even when you, as the seller, have what you believe to be payment security.

The authors of this article represent the Owners in this litigation. An application for leave to appeal the Commercial Court decision to the Court of Appeal is pending.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.