Key takeaways

The recent judgment highlights the nature and status of bills of lading in trade financing arrangements when it comes to financing banks enforcing their security for breach of contract. A bill of lading (B/L) has three functions:

• It operates as a receipt, evidencing that goods have been loaded onto a vessel.
• It is a document of title, which confers on the holder a constructive right to possession of the cargo.
• In some circumstances, it is a document containing terms of carriage between the shipowner and the lawful holder of the B/L.

This judgment is concerned with the third of these functions.

The key takeaways from the case can be summarised as follows:

• It is trite law that the carrier who issues a B/L is under an obligation not to deliver the relevant cargo without production of an original B/L.
• There is also a long-established legal position that, in the hands of a charterer, a B/L can only be a "mere receipt" and does not contain evidence of a contract of carriage.
• The Court found that a contract of carriage on the terms of the B/L had "sprung" into existence.
• By permitting discharge of the cargo without presentation of the original B/L, the shipowner was in breach of the contract of carriage.
• However, the breach of contract of carriage was not the cause of the Bank's loss and accordingly the Bank's appeal was rejected.

Background

Key Facts

• Unicredit Bank A.G. ("Bank") financed the purchase of a cargo of oil by Gulf Petrochem FZC ("Gulf") from BP Oil International Ltd ("BP"). BP entered into a charter party with Euronav N.V. ("Shipowner") and chartered the vessel "SIENNA".
• Before the completion of the carriage, the Bank issued a letter of credit (LC) on behalf of Gulf in favour of BP for the majority of the cargo (being approximately 80,000 mt) and Gulf became the owner of the cargo after payment to BP by the Bank following a compliant presentation by BP under the LC. The charter party was then novated to Gulf, which became the charterer in place of BP. 
• As is common in trade financing arrangements, it was agreed that any B/Ls would be pledged as security to the Bank for repayment of the financing. The Shipowner issued a B/L to BP on shipment and it was envisaged that BP would indorse the B/L directly to the Bank. However, due to COVID restrictions, the indorsement had not happened by the time of discharge.
• On Gulf's instructions, the Shipowner discharged the cargo via ship-to-ship transfer to Gulf against its letter of indemnity (LOI) without requiring presentation of any B/L. Only some time after the discharge was the B/L indorsed by BP to the Bank. By this time, it was apparent that Gulf had perpetrated a fraud, the cargo vanished and the Bank was not repaid.
• The Bank brought a claim for breach of the B/L contract against the Shipowner for discharging the cargo without production of the original B/L.

Issues

The High Court found in favour of the Shipowner on the grounds that the B/L did not evidence a contract of carriage and, therefore, the Bank had no claim for breach of contract. The Bank appealed.

The Court of Appeal focused on two main issues:

• Did the B/L constitute a contract of carriage or was it a "mere receipt"?
• Did the breach of contract, by permitting discharge without presentation of the original B/L, cause the Bank's loss?

In more detail

It is trite law that the carrier who issues a B/L is under an obligation not to deliver cargo without production of an original B/L and that it does so at its own peril. This is a contractual obligation contained within the terms of the B/L in its function as a contract of carriage. The Bank's claim was for a breach of this contract.

There is a long-established legal position that, in the hands of a charterer, a B/L can only be a "mere receipt" and does not contain evidence of a contract of carriage with the carrier. As such, any terms of carriage contained in the B/L cannot supersede the terms of any existing charter party. However, the court found that with effect from the novation of the charter party, the "mere receipt" assumption was displaced by a new contract "springing up" between the Shipowner and Gulf under the terms of the B/L. Upon indorsement of the B/L to the Bank by BP, a contract on the terms of the B/L came into existence retrospectively, giving the Bank the right to sue the Shipowner for breach of contract for discharging prior to the production of the B/L.

However, it was on the issue of causation that the appeal failed. The Court found that the breach of contract was not the cause of the Bank's loss. Had the Shipowner initially refused to discharge without the production of the B/L, the Shipowner would have consulted with the Bank as to what to do. It was held (on the basis of the witness testimony of the Master and the Bank's employees) that the Bank would have permitted the discharge to take place without production of the original B/L in keeping with well-established commercial practise in the commodity finance world of discharging against an LOI. The appeal was accordingly dismissed.

Significance of the case

The outcome of the case is significant in that it materially dilutes the benefit conferred on a financing bank as holder of a B/L in being able to sue its carriers. Lenders will need to show, on a balance of probabilities, that if the shipowner complied with its obligations and refused discharge without production of the B/L, the lender would not have permitted discharge anyway under the LOI.

The inference is that this security interest will only be helpful to the secured party if a default is uncovered or suspected prior to discharge, so that the secured party can refuse to discharge to the borrower. Alternatively, if discharge is made against a LOI, the lender can argue causation when suing the shipowner because, with the knowledge or suspicion of the default, it can assert it would not have permitted discharge.

Another legal development may make the factual matrix for this case soon become historic. With the passing of the Electronic Trade Documents Bill in the UK Parliament scheduled for this summer, it is soon hoped that the industry will adopt electronic B/Ls as the norm. Shipowners will take comfort that LOIs may no longer be required as electronic B/Ls will be readily available at the port of discharge. For more insight into e-B/Ls, please refer to our Trade Finance Insight (Issue 7).