Hope for carriers facing misdelivery claims: The Singapore Courts signal a need for closer scrutiny of circumstances surrounding banks’ financing arrangements and delivery of cargo

(c) Kelly l Pexels

The Singapore High Court in The “Miracle Hope” (Admiralty in Rem No. 45 of 2020, Registrar’s Appeal No. 298 of 2021 (unreported)) dismissed an appeal by a bank against an Assistant Registrar’s decision to grant the defendant shipowner unconditional leave to defend. This case is one of a trilogy of 2022 decisions involving applications brought by banks for summary judgment on misdelivery claims, the other 2 cases being the first instance decision in The “STI Orchard” (Winson Oil Trading Pte Ltd, intervener) [2022] SGHCR 6 (which appeal was dismissed) and the reported Registrar’s Appeal in Standard Chartered bank (Singapore) Limited v Maersk Tankers Singapore Pte Ltd (Winson Oil Trading Pte Ltd, intervener) [2022] SGHC 242. All three decisions dismissed the various banks’ applications for summary judgment in respect of misdelivery claims involving delivery of cargo without production of original bills of lading.

During this time, an English court decision, Unicredit Bank AG and Euronav N.V [2022] EWHC 957 (Comm), had also been published, which involved close scrutiny of the financing terms provided by the financing bank in determining whether the bank actually looked to the cargo and bills of lading as its security.

JTJB’s John Sze, Jolene Tan, and Sonia Rajendra, and Chan Leng Sun SC (instructed counsel) acted for the 2nd Interveners who were the shippers of the cargo and sub-charterers and argued in defence of the claim in the summary judgment application and subsequent appeal by the bank.

Facts of the case

In The “Miracle Hope”, the bank asserted its rights as alleged holders of original bills of lading and relied on its cause of action in contract (i.e. for the alleged breach by the defendant of the bills of lading contract in delivering cargo without presentation of original bills of lading) in bringing their application for summary judgment.

Of relevance to the case is the sales contract between the Purchaser and Seller of 1,000,000 barrels +- 10% at seller’s option of crude oil (the “Cargo”) on DES, INCOTERMS 2000. Pursuant to financing arrangements the bank had agreed upon with its customer, the Purchaser, the bank financed the sale of the Cargo by way of an irrevocable Letter of Credit (“LC”). The LC provided that payment for the Cargo would be made against the presentation of original bills of lading issued or endorsed to the order of the bank, or in the alternative, where the bills of lading were not available, a letter of indemnity (“LOI”) issued by the Seller to the Purchaser on terms set out in the LC.

On 17 September 2019, the bills of lading for the Cargo were issued to the order of the Seller. Between 13 November 2019 and 16 November 2019, the Cargo was delivered to the Purchaser at Dongjiakou, China, without presentation of the bills of lading but upon the presentation of an LOI.

Subsequently, on 3 March 2020, about four months after the discharge and/or delivery of the Cargo, the bank demanded delivery up of the original bills of lading from the Seller. The original bills of lading were thus endorsed and delivered to the bank on 6 March 2020. Upon obtaining the original bills of lading, the bank issued a letter requesting delivery up of the cargo, and then one day later, having received no response, arrested the vessel and commenced proceedings against the defendant shipowner for inter alia a misdelivery of the Cargo.

Key arguments

The bank had argued that this was a straightforward case – that the Cargo was discharged and delivered to the Purchaser without presentation of the bills of lading before the bank obtained the bills of lading in March 2020, pursuant to indemnities and instructions given up the charterparty chain. The bank, now in its capacity as lawful holder of the endorsed bills of lading, is thus vested with rights of suit under the bills of lading to claim for misdelivery of the Cargo. Having delivered the Cargo pursuant to the indemnities and instructions up the charterparty chain, the defendant owners were thus in breach of contract in failing to deliver the Cargo to the bank upon the bank’s demand and were therefore liable to compensate the bank for the breach. In particular, the bank relied on their argument that the carrier’s paramount duty is to deliver only against presentation of original bills of lading.

The 2nd Interveners argued that at the time of delivery to the Purchaser, it was the Seller and/or the 2nd Interveners and not the bank that was the lawful holder of the bills of lading, and that lawful instructions for discharge and delivery of the Cargo to the Purchaser had been given by the Seller and/or the 2nd Interveners to the defendants at the time of delivery. The Cargo was therefore rightly delivered to the Purchaser. Further, regardless of whether the bank subsequently became a lawful holder of the bills of lading, the bank could not have pointed to any breach of contract on the defendants’ part at the time the Cargo was delivered to the Purchaser. Any rights of suit in contract thereafter acquired by the bank did not make the defendants liable for an action that was permitted and requested by the contracting party and person entitled to possession at time of delivery. In the course of its arguments, the 2nd Interveners raised a proposition for the Court’s consideration, namely: that there would be no breach of contract if cargo is delivered by a shipowner according to the instructions of a person entitled to delivery at the time, such as the lawful holder of the bills, even without the production of the bills (“Proposition No. 2”).

The 2nd Interveners also argued that the bank was not a lawful holder of the bills of lading as it did not obtain them in good faith when demanding the same as assignees of the bills of lading and LOI. To support this, the 2nd Interveners relied on a contract between the Purchaser and a third party which the bank had belatedly disclosed and which the 2nd Interveners alleged the bank had accepted, showing that the Purchaser had passed the title to the Cargo to the third party and argued that there was no intention for any interests to be assigned to the bank.

The 2nd Interveners argued in the alternative that in any event the bank knew and consented to the delivery of the Cargo to the Purchaser without production of the bills of lading. The 2nd Interveners argued that this was supported by the wording of the LOI and LC, and the belated disclosure by the bank during the summary judgment proceedings of correspondence and contracts showing that the bank had approved the on-sale of the Cargo by the Purchaser to the third party even prior to the issuance of the LC.

The Court’s findings

The Court agreed with the 2nd Interveners that there were triable issues in relation to at least two of the defences asserted, namely:

  1. That the cargo was delivered on the instructions of and with the consent/ authority of the Seller and/or the 2nd Interveners in its capacity as lawful holder of the bills of lading at the time that discharge and/or delivery took place; and
  2. That the bank did not become the lawful holders of the bills of lading in good faith.

The Court further found that there were sub-issues which merited further investigation at trial, namely:

  1. Whether the bills of lading were spent by the time of transfer to the bank such that possession of the bills of lading no longer represented the “keys to the warehouse”; and
  2. Whether the bank was entitled to rely on the exception under s2(2)(a) Bills of Lading Act 1992 arising by virtue of a “prior transaction”.

The Court agreed with the 2nd Interveners that this was a case where the financial and sale arrangements merited a proper and further investigation at trial, such that the Court could determine fully the question of the bank’s interest in the Cargo and the documents representing the Cargo, in deciding whether the bank had acquired rights of suit in accordance with the Bills of Lading Act 1992. In particular, the Court took notice of the documents which indicated that there had been an on-sale of the Cargo by the bank’s customer, the Purchaser, to the third party. This drew to fore the issues of whether there was a valid assignment and whether the bank did in fact look to the bills of lading as security for its financing.

The Court opined that an investigation into these matters would potentially throw relevant light on the related issues of whether the bills of lading were spent in this case and in turn whether the bank became lawful holders of the bills of lading in March 2020 in good faith.

As to Proposition No. 2, the Court indicated that the bank’s arguments – that such a proposition would result in catastrophic impact – was somewhat exaggerated at this stage. The Court also highlighted that if this were to be the first case in Singapore where the plausibility of Proposition No. 2 as summarised was to be squarely tested and addressed by the Court, the matter should proceed to trial.

Ultimately, the Court rightly pointed out that the question to be determined is this: If the Seller/ 2nd Interveners were in possession of the original bills of lading at the time of discharge/delivery and was therefore the lawful holders of the bills of lading, then irrespective of the nature of the instructions it gave, if the delivery of the Cargo by the defendant was eventually effected pursuant to the instructions of a party whose status was at the material time that of the holder of the original bills, would the shipowner still be in breach of contract to a subsequent holder for not insisting on presentation of the original bills?

The focus, therefore, would be on the extent of the Seller/2nd Interveners’ rights (if any) at the time of discharge/delivery of the Cargo by virtue of them having possession of the original bills at that material time. These issues were not appropriate for a summary determination but ought to be tested and determined at trial.

Commentary

In coming to this decision, the Court also referred to the unreported Registrar’s Appeal following The “STI Orchard” (Winson Oil Trading Pte Ltd, intervener), as did the case of Standard Chartered bank (Singapore) Limited v Maersk Tankers Singapore Pte Ltd (Winson Oil Trading Pte Ltd, intervener). There appears to be a level of agreement amongst the three experienced judges hearing these cases as to the approach that should be taken in dealing with cases involving misdelivery claims moving forward.

This is a welcome change for carriers facing such claims, as it signals a greater willingness of the Singapore Courts to closely scrutinise the true circumstances and financing arrangements surrounding delivery arrangements. This moves away from an a priori position that a bank that obtains original bills of lading by virtue of clauses in their financing arrangements must have in fact relied on this right to obtain the original bills of lading as security for the claims. Rather, whether this is the case must ultimately be determined on the facts of each transaction, which have to be examined in detail. A principled approach will also require the Courts to examine if delivery was made with the consent or authority of the lawful holder of the bills of lading at the time of delivery.

 

John Sze
Deputy Managing Partner

JTJB Singapore Office
E:johnsze@jtjb.com
T: 6220 9388

 

Jolene Tan
Counsel

JTJB Singapore Office
E:jolenetan@jtjb.com
T: 6220 9388

 

This update is for general information only and is not intended to constitute legal advice. JTJB has made all reasonable efforts to ensure the information provided is accurate at the time of publication.