UK: A Timely Lesson: Understanding How A Sale Contract Dispute May Have Serious Financial Consequences Beyond That Contract Alone

In the recent case of Sang Stone Hamoon Jonoub Co Ltd v Baoyue Shipping Co Ltd ([2015] EWHC 2288 (Comm)), Mr Justice Males provided direction on the potential liability of cargo owners to shipowners where they do not take delivery of the cargo and the recompense such shipowner may expect in return. In this case, the unpaid FOB seller of the goods (who held the bills of ladings) was found liable to the shipowner for storage charges greater than the value of the unpaid cargo.

The Facts

The claimant seller was the shipper of 35,376.611mt of iron ore onboard the defendant shipowner's vessel, the "Bao Yue", from Bandar Abbas in Iran to Tianjin in China in 2012.

The bill of lading

The bill of lading, issued by the defendant shipowner, was issued "to order" and did not name a consignee or notify party. The bill of lading incorporated the terms of the applicable voyage charterparty, including that:

  1. the shipowner was entitled to discharge the cargo "to custom bonded warehouse area against Charterer's single LOI"; and
  2. "in the event cargo being kept in warehouse in lieu of waiting for [original bill of lading] to arrive at the discharge port, the expense of warehouse and all relevant costs to be for Chrtrs' account...".

The sale contract

The sale contract had been concluded on FOB terms between the claimant seller‎ and Teda Qisheng Mineral Products Import & Export Trading Co Ltd as buyer. The "Bao Yue" was the third shipment of cargo under an agreement settling an earlier dispute between the parties in December 2009.

However, a further dispute arose between the parties: the total price of the "Bao Yue" cargo was US$ 1.2 million, of which some 70% had already been paid to the seller by the buyer, leaving a balance of approximately US$ 330,000.

The bill of lading was issued but, instead of being sent to the buyer, was retained by the seller in Iran. A week before the vessel was due to arrive in China, the buyer (who was also the charterer) demanded release of the bill of lading while maintaining that it owed no further monies.

Discharge of the cargo

Upon the vessel's arrival, no bill of lading was presented, it still being locked in the seller's safe in Iran. The defendant shipowner discharged the cargo into custom bonded warehouses via the agent in China, Tianjin Star Ship Agency Co Ltd ("Star Ship"). The bonded warehouse was operated by Tianjin QS Storage & Transportation Co Ltd ("TQST"), a company within the same group as the buyer. Star Ship was authorised to deliver the cargo against presentation of the original bill of lading, which was also required to clear customs.

The storage contract

The storage contract was entered into between TQST and Star Ship and provided that Star Ship was to pay handling and transportation charges, as well as storage charges. The storage contract provided (in translation) that if payment was not made when requested "[the warehouse keeper] is entitled to refuse cargo releasing and to liquidate or otherwise dispose of such goods freight, by which it may offset any overdue charges owe to [the warehouse keeper] under this Agreement".

Following discharge of the goods, storage charges began to run and, on the first day of this trial, the storage charges were said to be more than US$ 2 million, considerably more than the contract value of the cargo. The responsibility for paying the storage and other charges rested with the defendant shipowner.

Efforts to resolve the dispute and release the cargo

Although the seller was aware of the vessel's arrival a week before it was due to arrive, there was no further contact from the seller to the defendant shipowner until three days after the vessel's arrival. The seller informed the master by email that "the buyer have not settled the proceed of this shipment to us as yet and hence the whole set of [original bills of lading] are resting with us waiting for buyer to pay us against the exchange of this document. Trust you will take appropriate measures to prevent any inconvenience in future". It was agreed by all parties and the Court, that the defendant shipowner was expected to understand this to mean that he should discharge the cargo into storage.

Meanwhile, the dispute between the seller and the buyer continued. The seller contended that the bill of lading was security against the outstanding payment and attempted to sell the cargo to a different buyer after it had been discharged into the bonded warehouses. The original buyer asserted that the seller must first reimburse the freight costs and prepayments made for the cargo and said to the seller that "if you would sell the [bill of lading], he would be definitely capable to keep the buyer of the [bill of lading] from acquiring the cargo". The seller refused to pay. The seller then located the cargo in storage, but understood that it might have difficulties in obtaining release of the cargo without agreement of the buyer. In any event, he took no steps to obtain release of the cargo.

By the time of this trial, over three years after the cargo was discharged, the seller had reportedly had no contact with the warehouse owner or any recent contact with the buyer. The seller did not ask for delivery of the cargo or seek to inspect it, nor did the buyer ever attempt to remove the cargo from storage, despite being prompted to do so by the defendant shipowner and Star Ship.

Claim for Conversion1

The seller's claim against the defendant shipowner for unlawful conversion of the cargo was based on two elements:

  1. Conversion by creation of a lien

    i.e that "the defendant [shipowner] was not entitled without the express or implied authority of the bill of lading holder to arrange for storage of the cargo in a way which gave rise to a lien in favour of the warehouse owner for its charges and that no such authority existed in this case"; and
  2. Conversion by denial of access

    i.e. that the conduct of the warehouse owner and agent, to whom the defendant shipowner had delegated the care of the cargo and for whose conduct it was responsible, was such that it denied the seller access to or possession of the cargo, and that such conduct constituted conversion of the cargo.

The Judgment

Although it was accepted that a shipowner (as a bailee of the cargo) is under a duty to the cargo owner (as bailor) not to convert the cargo, the seller's claim failed on both counts.

  1. Conversion by creation of a lien

    The Court held "that a goods owner who authorises a bailee to deliver goods into storage must be taken to authorise the creation of a lien where that is a reasonable and foreseeable incident of the storage contract which the bailee is authorised to conclude".

    It was the seller's responsibility as shipper and party to the bill of lading contract to take delivery of the cargo. The seller had breached the contract by failing to do that, so that the defendant shipowner had "no alternative but to land and store the cargo". In addition, the Court held that "it was not and could not have been suggested that it was unreasonable [for the defendant shipowner] to agree to a term in the storage contract which conferred a lien on the warehouse company for its charges...no sensible warehouse company would agree to store a cargo on terms which did not include such a lien".

    The seller had authorised the storage of the cargo, both expressly by email and through the charterparty, and impliedly due to the well-established law of bailment applicable to a situation where the bill of lading holder fails to take delivery at the discharge port. The defendant shipowner's actions were therefore reasonable in the circumstances.
  2. Conversion by denial of access

    The second basis of the seller's claim also failed. The Court found that there was no conduct which constituted denial of access or a deliberate encroachment on the rights of the seller.

    The Court also found as fact that the seller had never presented the bill of lading and that the cargo remained at the warehouse at all times such that it "is and always has been available to the claimant on presentation of the bill of lading and payment of the charges which have accrued".

Consequently, the Court ordered that:

  1. the seller's claim for damages for conversion failed;
  2. there would be a declaration that the seller is liable to reimburse the defendant shipowner for reasonable storage charges as and when they are paid to the warehouse owner; and
  3. the seller must deliver the original bill of lading to the defendant shipowner to enable the cargo to be sold.
    The Court held that delivery of the bill of lading to the defendant shipowner was required because the seller had a duty to take delivery of the cargo or, alternatively, to mitigate the loss and expense of a failure to do so – otherwise storage costs would carry on increasing.

Conclusion

  • The "Bao Yue" demonstrates that buyers and sellers involved in a dispute under a sale contract risk ‎becoming liable for charges exceeding the value of the cargo if they do not take action to resolve and mitigate the consequences of such dispute. While withholding the bill of lading can often provide good security for a claim against a buyer, the seller must always consider the wider impact of this and other charges which may be accruing as a result of neither party taking action to move the cargo on.
  • A dispute under a sale contract can therefore have a considerable impact on the rights and obligations of parties in relation to other contracts involved in the chain, in this case the contract of carriage. Parties should always be alive to the possibility of serious financial consequences under the other contracts involved. Though in this case it was the seller who was ultimately responsible, (because it refused to release the bill of lading to the buyer) it may just as easily be the buyer who becomes liable, where, for instance, presentation of documents to a bank has been made but the buyer refuses to take delivery of them.
  • What this case does not address is whether the buyer was entitled to refuse to make the further payments due under the sale contract and, therefore, whether it or the seller was in breach of the sale contract. A decision on that point may determine who is ultimately responsible for the storage charges, as between buyer and seller.
  • Buyers and sellers locked in disputes which leave cargo stranded in storage or on a vessel should consider interim and without prejudice action in order to minimise losses or, if this cannot be agreed, court remedies (such as an order for sale) to prevent a stalemate as seen in this case.

Footnote

1. Conversion occurs when a person deliberately deal with goods in a way which is inconsistent with another person's right to those goods and which deprives that other person of the use and possession of those goods. The courts may retain discretion as to what would constitute sufficient deprivation.

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.

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