Hong Kong - The Value Of A Bill Of Lading In The Hands Of A Trade Finance Bank.
Legal News & Analysis - Asia Pacific - Hong Kong - Shipping Maritime & Aviation
5 July, 2019
In the decision of The Yue You 902, the Singapore High Court has recently considered the rights of a trade finance bank seeking to enforce its security over cargoes pledged to it.
The case concerns a standard trust receipt financing scenario, and will therefore be of interest and general application to all trade finance banks.
Until relatively recently, there has been no detailed consideration by a common law Court of the intersection between trade finance law, shipping law, and insolvency law. There are now two relevant authorities – one from the Australian Federal Court (The Stone Gemini) and one from the Singapore High Court (The Yue You 902). We consider The Yue You 902 below. Although not determinative, our view is that the case would be considered persuasive by the English and Hong Kong Courts.
The facts in The Yue You 902 were as follows:
a. A cargo of palm oil was shipped on board the vessel “Yue You 902” from Indonesia to India. The shipment was covered by 14 bills of lading.
b. The bills of lading were made out “TO ORDER” and endorsed in blank by the shipper. In the hands of the bank, the bills of lading were therefore bearer bills, obliging the shipowner to deliver the goods to the lawful holder of the original bills of lading.
c. The bills of lading were pledged to the bank by its customer as security for a trust receipt loan to finance the cargo. Pursuant to the Singapore law equivalent of the English Carriage of Goods by Sea Act 1992 (“COGSA”), the bank became the lawful holder of the bills of lading and entitled to delivery of the cargo.
d. As is common in certain trades, the cargo was delivered without production of the original bills of lading. The shipowner obtained a letter of indemnity (“LOI”) from its contractual counterpart in the charter chain to the effect that the charterer would indemnity the shipowner for any claim brought as a result of the shipowner delivering the cargo without production of the original bills of lading.
e. The trust receipt loans were not repaid to the bank, because its borrower had fallen into insolvency. As part of its recovery strategy, the bank attempted to take delivery of the cargo from the shipowner (presumably intending to sell the cargo to recoup some of its losses created by the borrower’s insolvency).
f. Although the bank held the original title documents to the cargo (the bills of lading), the bank could not take delivery of the cargo because it had already been discharged to the receivers by the shipowner. The shipowner had done so without requiring production of the original bills of lading.
When the bank brought a claim against the shipowner for misdelivery, the following primary defences were raised:
1. That the bank had not acquired rights of suit in under Singapore’s COGSA equivalent, because the cargo had been discharged from the vessel before the bank granted the loan to its customer. In other words, the bills of lading were “spent” before they reached the bank’s hands – effectively that there were no rights left to enforce.
The Court held that the bills of lading were not spent. This was because delivery to the end buyer was not delivery to the person who was entitled to possession of the cargo under the bills of lading. This reflects the traditional common law position.
2. That the bank had particular knowledge of its borrower’s commercial practices and knew that the cargo would be delivered without production of the original bills of lading. Therefore, the bank was not a “good faith” holder of the bills of lading.
The Court held in favour of the bank, finding on the facts of the case that it had no such direct knowledge.
3. That by reason of the above the bank had consented, authorised or otherwise ratified the discharge of the cargo without production of the original bills of lading.
Again, the Court held in favour of the bank, finding on the facts of the case that it had not so consented or authorised discharge without production of the original bills of lading.
To establish consent, the Court held (following common law authorities) that something must be said or done by the consenting party to induce the carrier to believe that there was consent to delivery without production of the original bills of lading. In this case, there appears to have been no communication at all between the bank and the shipowners prior to the discharge of the cargo, which is consistent with the position in a usual trade finance scenario.
The Court held in addition that the grant of the trust receipt loan could not be construed as consent, or ratification of the misdelivery. The granting of a trust receipt loan (as compared with another form of loan) and the taking of the original bills of lading as security by the bank are act that are clearly inconsistent with any intention of the bank to waive its contractual rights of suit.
4. That by reason of the bank’s knowledge of the commercial practices of its borrower the bank should be estopped from asserting its rights over the cargo that had been pledged to it.
The Court held that the bank was entitled to enforce the security against the shipowner. There was no estoppel.
As compensation, the bank recovered from the shipowner the full commercial invoice value of the cargo, plus interest. Although not dealt with in the Singapore Court decision, the shipowner will likely have had recourse under the LOI against its contractual counterparty for amounts paid to the shipowner. The standard form LOI is governed by English law, and so we would expect the LOI dispute to be litigated separately in the English Courts.
The Singapore Court disposed of the shipowners’ arguments on a summary judgment basis. The shipowner appealed the decision, however the bank was successful on appeal.
This case is important for trade finance banks, because it confirms for the first time that a financing bank’s security in bills of lading (as documents of title to the cargo that has been financed) is sound even in the face of commercial industry practice of discharge against LOIs in that particular trade.
The decision confirms that banks can and should act on the face of the documents presented to them.
That said, whether the position would be different if the financing bank had actual knowledge that a particular cargo had been discharged or the bank had consented to the same is an unanswered question. In the usual financing scenario, the bank would not have any contact with the shipowner or the charterer and so the chance of a representation being made by the bank to the shipowner that delivery against an LOI was permitted would be low.
If a shipowner wished to protect its position, then best practice would be to have the financing bank counter-sign the LOI. The bank would then not have any recourse against the shipowner for failing to deliver the cargo to the bank as the holder of the document of title (and therefore the owner of) the cargo. Of course, in the usual case the financing bank would be very unlikely to agree to counter-sign an LOI as it would effectively be giving up its security in the cargo that had been pledged to it.
For further information, please contact:
Andrew Rigden Green , Partner, Stephenson Harwood