Does a dishonouring LC bank have title to sue under an indorsed bill of lading?
Standard Chartered Bank v. Dorchester LNG(2) Limited (Erin Schulte)  EWCA Civ 1382
In our November 2013 Legal Update, we reported on the first instance decision in the Erin Schulte, which subsequently went to appeal. The Court of Appeal has recently given judgment in this case, which has important implications for all traders who rely on letters of credit for payment security in their sale and purchase transactions.
The background facts
The underlying transaction in this case was a sale by Gunvor International BV ("Gunvor") to United Infrastructure Development Corporation 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 ("the Vessel"), Gunvor presented the documents, including bills of lading indorsed to SCB, required under the LC to SCB on 4 June 2010. SCB wrongly rejected the presentation and refused to pay. In the meantime, the Vessel was ready to discharge and, to avoid delays, Gunvor arranged for an LOI to be issued to the carrier to permit discharge of the cargo without presentation of the bills of lading, which were still held to their order by SCB.
Gunvor ultimately commenced proceedings against SCB under the LC ("the LC Proceedings") and, following service of those proceedings, SCB promptly agreed to pay the full amount claimed by Gunvor plus interest and costs and did so on 7 July 2010.
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 one year later, SCB issued proceedings against the Owners of the Vessel, the Defendants in these proceedings, alleging that they had misdelivered the cargo and, as holders of the bills, claiming its full value.
SCB alleged that despite their rejection of the presentation, they had become the lawful holders of the bills of lading within the meaning of s.5(2)(b) of the Carriage of Goods by Sea Act 1992 ("COGSA") upon presentation. This required SCB to show that they had possession of the bills of lading "as a result of the completion, by delivery of the bill, of an indorsement of the bill".
So far as relevant to the appeal, SCB argued that they became lawful holders of the bills at two alternative moments in time:
When, on 4 June 2010, the bills were physically received by them as part of the documentary presentation under the LC ("the 4th June point"); or When, on 7 July 2010, SCB paid the sums claimed by Gunvor in the LC Proceedings ("the 7th July point"). The Court of Appeal decision
The 4th June Point
The Judge at first instance held that SCB became the lawful holders of the bills of lading upon their presentation on 4 June.
As to the question of completion by delivery of the indorsement, the Judge accepted that delivery of an indorsed bill of lading requires the requisite intention on the part of the deliveror and deliveree to give and accept delivery. However, he went on to conclude that there is 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.
By contrast, Moore-Bick LJ, giving the judgment of the Court of Appeal, noted that there was a striking difference between the treatment of consignees and indorsees under COGSA and stated that "delivery" was an essential element in assessing whether the indorsee had become the lawful holder of the bill. After reviewing the authorities, Moore-Bick LJ said as follows:
"In my view completion of an indorsement by delivery requires the voluntary and unconditional transfer of possession by the holder to the indorsee and an unconditional acceptance by the indorsee. In the present case, Societe Generale made an unconditional tender of the bill of lading to SCB on behalf of Gunvor but SCB declined to accept it and held the bill to the order of Societe Generale. As a result, the indorsement was not completed by delivery on 4th June 2010 and the Judge was wrong so to hold".
Accordingly, SCB did not become lawful holders of the bills upon presentation on 4th June 2010.
The 7th July Point
As to the 7th July point, the Court of Appeal held that the Judge had been right to proceed on the basis that Gunvor's claim to recover the face value of the credit properly sounded in debt rather than in damages. The Court observed that, in cases where the LC opening or confirming bank fails to pay against presentation of conforming documents, the beneficiary may sue in debt for the value of the credit, provided that he is willing to transfer the documents to the bank against payment.
On this basis, the Court concluded that Gunvor had no right to recover the full value of the credit as a debt otherwise than against transfer of the documents. Whilst SCB had rejected the presentation of documents and that rejection was irrevocable, the Court considered this to be unimportant. Despite the fact that there had been no re-presentation of the documents by Gunvor, the Court held that there had been an unconditional transfer of the documents upon payment sufficient to render SCB the lawful holders of the bills of lading.
Further, as it was common ground that by 7th July the bills of lading no longer gave a right to possession of the goods (which had by then been discharged), SCB had to satisfy s.2(2)(a) of COGSA i.e. show that they had become holders of the bills as a result of a transaction effected pursuant to a contract or other arrangement predating the time when the bills were "spent". On this point, although the payment and transfer of documents did not occur at the time or in the manner envisaged by the LC, the Court held that the transaction was effected pursuant to the LC rather than, as submitted by the Owners, pursuant to a separate agreement to settle the LC Proceedings. Accordingly, SCB became lawful holders of the bills of lading on 7th July.
This judgment leaves a beneficiary faced with a wrongful rejection of documents, which include a bill of lading, presented under a letter of credit, on the horns of a dilemma. Such a party may only maintain a claim in debt against the bank if it is willing to transfer the documents against payment; in other words, leave the bill(s) of lading with the bank. However, in doing so, the beneficiary will thereby prevent itself from safely taking any steps to mitigate the separate losses to which it may be exposed, such as demurrage and the risk of deterioration or loss of the goods resulting from the fact that whilst the bill(s) are held in limbo at the bank's counters, they may not be presented to the carrier and the cargo delivered. Whilst in this case the bank paid up shortly after proceedings were commenced and 33 days after compliant documents had been presented, it is easily conceivable that the beneficiary may have to fight contested proceedings to their end in order to obtain payment. This could take months or years, during which time the cargo must remain on the ship.
Alternatively, the beneficiary may take steps to mitigate such losses by taking back the bills of lading and securing discharge of the cargo. In doing so, however, the beneficiary will surrender its entitlement to make a claim in debt against the bank and will be limited to claiming damages for non-payment under the letter of credit which would require it to give credit for the value of the cargo and take on the burden of acting reasonably in mitigating its loss. In doing so, it will therefore surrender its otherwise straightforward and unimpeachable claim for the sum due under the letter of credit.
Ince & Co LLP represent the Owners in this litigation. In case of any query, please contact the authors.
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