Standard Chartered Bank v. Dorchester LNG(2) Limited (Erin Schulte)  EWHC 828 (Comm)
On one level, this case concerns a technical issue in relation to the application of s.5(2)(b) of the Carriage of Goods by Sea Act 1992 (“COGSA 1992”), in particular, the circumstances in which “a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill” has title to sue under a bill of lading. However, the wider issue addressed in this case is the question of what rights a bank that issues a letter of credit (a “LC Bank”) has in respect of the cargo represented by bills of lading indorsed to it in the context of a presentation under the letter of credit, in circumstances in which the LC Bank dishonours the credit. It is suggested that Mr Justice Teare’s judgment in this case gives rise to a number of concerns for parties presenting indorsed bills of lading under letters of credit. On another level, it emphasises the risks to traders in issuing letters of indemnity (“LOIs”) in respect of discharge of cargo without presentation of bills of lading, a practice that is common in the oil business.
The background facts
The underlying transaction in this case was a sale by Gunvor International BV (“Gunvor”) to United Infrastructure Development Corporation (“UIDC”) 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, Gunvor presented documents required under the LC to SCB on 3 June 2010. In response, on 9 June 2010, SCB notified two alleged discrepancies, both of which assumed acceptance by Gunvor of amendments which SCB had earlier sought to make to the LC but which had not been accepted by Gunvor. SCB indicated that they were holding the documents to the presenter’s order. Despite protest, SCB maintained their position and, in the meantime, the vessel was at the discharge port ready to discharge. Gunvor therefore arranged for an LOI to be issued to the carrier to permit discharge of the cargo without presentation of original bills of lading, which were still held by SCB.
Faced with SCB’s continuing refusal to honour the presentation, Gunvor commenced proceedings against SCB under the LC (the “LC Proceedings”). Following service of those proceedings, SCB promptly agreed to pay the full amount claimed by Gunvor plus interest and costs.
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 a year later, SCB issued proceedings against the Owners, the Defendants in these proceedings, alleging that, by virtue of the indorsement and transfer of the bills of lading to SCB under the LC, SCB had become the lawful holders of the bills of lading within the meaning of s.5(2)(b) of COGSA 1992. They claimed the full value of the cargo on the basis of an alleged mis-delivery by Owners.
SCB argued that they became lawful holders of the bills at four 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 (“Argument 1”);
- On the close of the fifth banking day following the date of presentation of the documents on the basis that, since their own notice rejecting the documents did not comply with Article 16 of UCP600, it was invalid and, under UCP 600, SCB was at that point deemed to accept them (“Argument 2”);
- When, on 18 June 2010, SCB contended that they were the holders of the bills of lading (“Argument 3”); or
- When, on 7 July 2010, SCB paid the sums claimed by Gunvor in the LC proceedings (“Argument 4”).
In response, Owners said that physical delivery of the bills when tendered under the LC was a conditional presentation, namely conditional upon SCB honouring the letter of credit, which they did not do. As to Argument 2, Owners said that SCB’s notice of rejection was not defective and therefore not invalid. As to Argument 3, Owners said that any unilateral declaration of “ownership” of the bills by SCB was irrelevant. Finally, in relation to Argument 4, Owners said that, having rejected the documents, it was not open to SCB to withdraw that rejection and accept them without Gunvor’s agreement; that there was never any re-presentation by Gunvor under the LC and that at no time did Gunvor, following rejection of the presentation, agree to surrender the bills of lading to SCB. Accordingly, when SCB eventually paid Gunvor, they were not making payment under the LC but in order to settle the claim made in the LC Proceedings.
As indicated above, the starting point for the Judge was s.5(2)(b) of COGSA 1992. What he had to decide was whether SCB had possession of the bills “as a result of the completion, by delivery of the bill, of an indorsement of the bill”. Mr Justice Thomas (as he then was) considered this provision in the Aegean Sea  2 Lloyd’s Rep 39. Having considered the concept of “delivery” as it arises in s.5(2)(b), he concluded:
“I do not consider that a person satisfies the requirement under s.5(2)(b) and becomes the holder of a bill of lading if that person obtains the bill of lading merely as a consequence of somebody endorsing it and sending it to him. The section requires him to have possession as a result of the completion of an endorsement by delivery. Although the sending and receipt of a document through the post often constitutes service of a document, the sending of a bill of lading through the post does not without more constitute delivery; the person receiving it has to receive it into his possession and accept the delivery before he becomes the holder”.
In the Aegean Sea, Mr Justice Thomas concluded, on the facts of that case, that, despite the bill of lading being indorsed to Repsol and physically received by them, Repsol did not become lawful holders because they did not accept delivery of the bill as indorsee; the bill of lading having been indorsed and delivered to them by mistake. Accordingly, delivery is a bilateral act, not a unilateral one, and it is necessary to enquire into the intentions of the parties to determine whether the requirements of s.5(2)(b) have been satisfied.
In the context of a presentation of an indorsed bill under a letter of credit, one therefore needs to ask, amongst other things, whether the presenter intends to complete the indorsement by mere physical delivery of the indorsed bill or whether that presentation is in some way conditional. Bearing in mind that, once the bank becomes the lawful holder of the bill under COGSA 1992, the bank controls the cargo in the sense that it is entitled to take delivery of it, one needs to ask the rhetorical question – does the presenter under an LC intend to give such rights to the bank irrespective of whether it honours the LC or not? Further, would such a presenter expect that, in circumstances where a bank refuses to pay under an LC, whether rightly or not, he would require the bank to re-indorse the bill back to him in order to regain “ownership” of the bill in the sense of being reinstated as lawful holder of the bill under COGSA 1992?
The Commercial Court decision
Mr Justice Teare held that SCB did became the lawful holders of the bills of lading upon their presentation on 4 June but, if he was wrong about that, they became lawful holders on 7 July 2010 when they paid Gunvor.
So far as the question of completion of delivery on presentation was concerned, the Judge, after referring to the decision in East West Corporation v. DKBS  2 Lloyd’s Rep 182 (which concerned s.5(2)(a) of COGSA 1992 not S 5(2)(b)), said:
“Delivery of an indorsed bill of lading is a simple act, though one which requires the requisite intention on the part of the deliveror and deliveree. On the facts of the present case, the bills of lading were delivered on 4 June 2010 when they were received by SCB into their possession. The aim of COGSA 1992 was to simplify the transfer of rights of suit under the contract of carriage contained or evidenced by the bill of lading. The transfer was to be linked to delivery of an indorsed bill of lading instead of, as was the case under the Bills of Lading 1855, to the passing of property under the contract of sale. Thus there is now no need to investigate when and to whom property passed under the contract of sale or what the contractual position was between the deliveror and the deliveree of the bill of lading”.
So, whilst the Judge accepts that one has to consider the intention of the deliveror, there is, according to him, 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. Since the terms of the contract between the deliveror and deliveree must be the best evidence of the intentions of those parties this is, we suggest, a somewhat surprising conclusion.
As for SCB’s alternative arguments, the Judge said little in relation to Arguments 2 and 3 save for concluding that there was nothing technically defective with SCB’s message of 9 June by which it gave notice of rejection. However, in relation to Argument 4, the Judge decided that, when SCB paid Gunvor, they were in fact making payment under the LC and not pursuant to a settlement of the LC Proceedings. In relation to that, he said:
“I accept that SCB did not say in terms on that day [7 July 2010] that it was taking up the documents as compliant and would honour the letter of credit but it is the inevitable inference from the fact that payment was made of the full sum due under the letter of credit that the documents presented on 4 June 2010 were compliant, they were being “taken up” and that the letter of credit was honoured”.
Whilst argument was addressed to the Judge on the points, he does not explain in his judgment how it is that SCB could unilaterally “take up” the documents that they had already rejected without any re-presentation of the documents and without the agreement of the presenting party.
The Judge also had to deal with an argument from Owners that, even if they were in breach in discharging the cargo without production of bills of lading, that breach had caused no loss to SCB at the time. That was because even if SCB had taken delivery of the goods, it would not have been entitled to sell them as it had no interest in them. It was argued that if they had taken delivery and sold them, this would have been an act of conversion actionable at the suit of the true owner of the goods and SCB would have been bound to deliver up the goods or the proceeds of sale to the true owner of the goods.
Mr Justice Teare rejected that argument on the basis that the indorsement in favour of the bank had, in his view, no doubt been intended to give SCB security by way of a pledge over the goods. That analysis assumes, of course, that, amongst other things, the pledge survives the statement made by SCB that they are holding the documents to the presenter’s order. If that is indeed the case, then, despite rejecting a presentation and making a declaration that it is holding documents to the presenter’s order, a bank, who would need to retain possession of the bills to maintain the pledge, could refuse to return the bills.
For better or worse, s.5(2) of COGSA 1992 distinguishes between a consignee in possession of the bill and an indorsee in possession of a bill; in the latter case, possession is expressly required to be by virtue of completion of an indorsement by delivery of the bill. It seems that the Judge in this case was reluctant to grapple fully with the consequences of the different treatment of a consignee and indorsee of a bill under COGSA 1992 and, as a result, did not consider in any detail the underlying contractual relationship between the deliveror/deliveree of the bill.
The consequences of this judgment are that a party presenting an indorsed bill to a LC Bank will, as a result of doing so: (a) transfer to the bank the right to delivery of the cargo under the bill of lading irrespective of whether or not the bank honours the credit; (b) in the event of rejection of the presentation, require the bank to re-indorse the bills back to him in order to regain the right to delivery of the cargo; and (c) face the prospect of a bank being able to retain possession of the bills, despite rejecting the presentation, on the basis that the presentation amounts to a pledge of the bills and the bank is entitled to maintain the pledge in case, at some later time, the bank is found liable to pay under the LC.
Lastly, unless this decision is overturned on appeal, the end result will be that, due to a combination of an error by SCB in confirming an amendment of the LC to the issuing bank to which Gunvor did not consent and Gunvor issuing the LOI, Gunvor will have to pay a sum equivalent to the total value of the cargo to indemnify the Owners in respect of this judgment. This illustrates the risks inherent in issuing LOIs against delivery without production of bills of lading even when you, as the seller, have what you believe to be payment security.