When a bill of lading is not spent: Yue You 902 [2019] SGHC 106

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Bazul Ashhab
Oon & Bazul, Singapore
bazul@oonbazul.com

Prakaash Silvam
Oon & Bazul, Singapore
prakaash@oonbazul.com

Natalynn Ong
Oon & Bazul, Singapore
natalynn.ong@oonbazul.com

In the decision ofThe Yue You 902 and another matter [2020] 3 SLR 573 (Yue You 902), the Singapore High Court considered the rights of a trade finance bank seeking to enforce its security over cargoes pledged to it by its customer. The case concerns a commonly used trade receipt financing scenario and will be of interest and general application to all trade finance banks. The case is also of particular interest because it contains a detailed consideration of the interaction between trade finance law and shipping law when construing the wording of the Singapore Bills of Lading Act (BLA).[1]

Facts

Jiang Xin Shipping Co Ltd (the owner), the defendant ship owner in Yue You 902, had entered into a voyage charterparty with FGV Trading Sdn Bhd (FGV) for the charter of the ‘YUE YOU 902’ (the vessel) for carriage of a cargo of palm oil from Indonesia to India. The shipment was covered by 14 bills of lading made out ‘to order’ and endorsed in blank by the shipper.

FGV had sold the cargo to Aavanti Industries Pte Ltd (Aavanti) who in turn, sold it on to Ruchi Soya Industries Ltd (Ruchi), the cargo’s intended end-receiver. Overseas-Chinese Banking Corporation Ltd (OCBC) was Aavanti’s financier, who had disbursed a trust receipt loan to Aavanti to pay the purchase price for the cargo under Aavanti’s contract with FGV. This trust receipt loan was issued pursuant to a facility agreement between OCBC and Aavanti, entered several years before commencement of the subject voyage. Prior to OCBC’s disbursement of the trust receipt loan to Aavanti, OCBC had collected the original bills of lading from FGV’s bank, in its capacity as OCBC’s collecting bank, under a ‘documents against payment’ basis when FGV presented the bills of lading for payment.

The voyage from Indonesia to India was relatively short, taking about nine days. On the facts of the case, it was only after the owner discharged the cargo to Ruchi on FGV’s instructions that OCBC granted the trust receipt loan to Aavanti and came into possession of the bills of lading and obtained a pledge over the cargo under the terms of OCBC’s facility agreement with Aavanti. As is common in certain trades, the cargo of palm oil was delivered without production of the original bills of lading. The owner had obtained a letter of indemnity from its contractual counterpart in the charter chain to the effect that the charterer would indemnify the ship owner for any claim brought as a result of the ship owner delivering the cargo without production of the original bill of lading. In this case, FGV had issued this indemnity to the owner on a back-to-back basis after receiving a similar indemnity from Aavanti, which in turn received a similar indemnity from Ruchi.

Aavanti eventually defaulted on the trust receipt loan because it had become insolvent. OCBC proceeded to enforce its security under the bills of lading by demanding delivery of the cargo from the owners, presumably to sell the cargo to recoup some of its losses caused by the borrower’s insolvency. When the owners failed to deliver the cargo, which had already been discharged to Ruchi, OCBC commenced proceedings against the owners for breach of contract of carriage and bailment, and conversion.

Whether OCBC acquired a right of suit under section 2 of the Bill of Lading Act

The owners argued that OCBC had not acquired a right of suit under section 2 of the BLA because OCBC only became a holder of the bills of lading after delivery of the cargo to Ruchi, such that possession of the bills of lading no longer gave OCBC a right against the owner to possession of the cargo (ie, in common parlance, the bills of lading had become ‘spent’). The Court did not accept this argument on the basis that delivery of cargo pursuant to a letter of indemnity did not render a bill of lading ‘spent’, as the letter of indemnity did not relieve the owner from its paramount obligations under the Presentation Rule.

The Court also found that even if the bills of lading had been ‘spent’, OCBC was entitled to rely on the exception under section 2(2) of the BLA by virtue of its coming into possession of the bills of lading pursuant to the facility agreement between OCBC and Aavanti. In coming to this conclusion, the Court followed the Singapore High Court decision in BNP Paribas v Bandung Shipping Pte Ltd (Shweta International Pte Ltd and another, third parties), third parties) [2003] 3 SLR(R) 611 and rejected the owner’s argument that the relevant previous transaction under section 2(2) of the BLA should have been the trust receipt loan since OCBC had the discretion , and did so exercise its discretion, to disburse the trust receipt loan under which it took possession of the bills of lading.

Whether OCBC consented to or ratified the delivery of the cargo without presentation of the bills of lading

The owners also argued that OCBC was precluded from bringing a misdelivery claim, as it had consented to the delivery of the cargo to Ruchi without presentation of bills of lading. This was premised on the submission that OCBC knew, or should have known, that the cargo would have been discharged against the indemnity, and in agreeing to grant the trust receipt loan, impliedly consented to and/or ratified the delivery of cargo without presentation of the bills of lading.

The Court rejected this argument and held OCBC’s decision to grant the trust receipt loan and take the bill of lading as security was inconsistent with any intention to waive its contractual rights against the owner under the bill of lading. The Court also held that there could be no prior consent to misdelivery, since OCBC took possession of the bills of lading after discharge of cargo to Ruchi.

Commentary

It is trite that carriers owe a paramount obligation under the contract of carriage evidenced by a bill of lading to only deliver the cargo to which the bill of lading relates against presentation of the bill of lading. This is referred to as the Presentation Rule, and the common law courts have been judicious in holding the carriers to their obligation, notwithstanding the commercial reality and practice of carriers delivering cargo against a letter of indemnity and without presentation of the bill of lading.

The tension between a carrier’s black letter obligation under the Presentation Rule and the commercial reality of carriers discharging cargoes as a matter of practice against letters of indemnity came under the spotlight in Yue You 902, and the Singapore High Court’s decision in favour of OCBC will be welcomed by trade finance banks, because it confirms that a trade financing bank’s security in bills of lading remains sound, even in the face of prevailing commercial practice in that particular trade of discharging cargoes against letters of indemnity.

There is good reason for the Court in Yue You 902 to have upheld the Presentation Rule. Traditionally, trade finance banks do not go behind the face of the documents presented to them for financing. The underlying transaction to a financing arrangement and a buyer or seller’s obligation under the same is independent of the financing arrangement between the buyer or seller and their respective financing banks. There is no duty imposed on a trade finance bank to check on the status of cargo underlying bills of lading presented for payment, or to verify the facts and status of the underlying transaction being financed. It is commercially unwise and impractical to expect a trade finance bank, which is not in the business of trading commodities, to inquire into the features and status of each trade being financed.

In upholding the Presentation Rule, the courts provide certainty and comfort, not just to trade finance banks, but also generally to subsequent indorsees of negotiable bills of lading in good faith. While carriers have a discretion to decide whether or not to breach the Presentation Rule in exchange for an indemnity from their counterparties under the charterparty, indorsees of bills of lading do not enjoy the same control over the underlying cargo, which the bill of lading represents. In this regard, whereas carriers are commercially able to mitigate the risks of delivering cargo without presentation of the bill of lading, subsequent indorsees of bills of lading in good faith do not have an equivalent ‘protection’ against the risk that the physical cargo to which the bill of lading relates is no longer available. There is also commercial value in the courts’ strictly upholding the Presentation Rule, as all interested parties in the industry (ie, carriers, traders, and financiers) can rely on such certainty to assess their risks, rights, and obligations regarding their counterparties in a particular trade.

Notwithstanding the benefits of legal certainty in upholding the Presentation Rule, it is almost inconceivable that trade financiers are blind to the commercial necessity for discharge of cargo against a letter of indemnity for a variety of reasons, including expediency. The financial arrangements underpinning the sale contracts (often sale chains) usually involve long credit terms and the bills of lading often stay in the banking channel far beyond the duration of the subject contract. In Yue You 902, the vessel was chartered on a short voyage which would have taken nine days. The trust receipt loan granted by OCBC for the underlying contract between FGV and Aavanti had a short tenure of 21 days, which OCBC subsequently extended for a further 14 days at Aavanti’s request. It is imminently impractical to expect the carrier to wait indefinitely at a discharge port pending delivery of the original bill of lading through the financing channel, when a carrier’s business model is based on ensuring continuous employment of its vessels. This cannot be in the interest of promoting international trade, and is not in line with the commercial reality of commodity trade.

That said, the courts must strike a balance between the interests of a bill of lading holder, who seeks to enforce its strict legal entitlement, and that of a carrier, who faces immense commercial pressure to bow to the industry practice of discharging cargoes without presentation of bills of lading. So far, a delicate balance has been struck by the courts, upholding the Presentation Rule in favour of holders of bills of lading regarding carriers, and upholding indemnity obligations under letters of indemnity concerning issuing parties requesting delivery in breach of the Presentation Rule. However, while a letter of indemnity may give the carrier some recourse against the requesting party, can it be right that a carrier should be forced to defend a misdelivery claim brought by a bill of lading holder who took possession of the bill despite knowing that the particular cargo had already been delivered to a third party?

A question therefore arises as to how far the courts should go to protect indorsees of bills of lading, who have actual or constructive knowledge that the cargo under the bills of lading have in fact been delivered to a third party at the time that they came into possession of the bills of lading, such that the bills of lading only offers a right of suit against the carrier. In Yue You 902 the Court made the finding that the defendant owner was unable to adduce evidence that OCBC had knowledge of the cargo having been discharged by the time OCBC took possession of the bills of lading, and the Court ruled against the owner on a summary basis.

It remains to be seen whether the position would be different if it could be argued that the financing bank had actual knowledge that the cargo had already been physically delivered to a third party and that it should not be entitled to exercise the rights of contract of carriage under the bill of lading, as it had consented to cargo being delivered without presentation of the original bill of lading. It is also an open position worth exploring as to whether a carrier is entitled to raise the defence that a bill of lading holder, having consented to the discharge of cargo under the bill of lading, has caused its own loss, and should not be entitled to recover from the carrier. This innovative defence was alluded to in UCO Bank v Golden Shore Transportation Pte Ltd [2005] 1 SLR(R) 6 and draws from the defences of consent and estoppel. Such a defence of consent may not require the traditional elements of inducement or representation from the bank to the carrier, given that in the usual course of financing, which runs parallel to the charter contract, there would not be any contact between the financing bank and the carrier or the charterer of the vessel. This defence has not yet been fully argued before the courts, and remains in a nascent stage, which should be thoughtfully developed.

Given the significant defaults arising from the recent collapse in 2020 alone of major commodity traders such as Hin Leong Trading (Pte) Ltd, Hontop Energy (Singapore) Pte Ltd, Agritrade International Pte Ltd, and ZenRock Commodities Trading Pte Ltd, we expect to see more misdelivery claims brought by trade financiers and/or indorsees of bills of lading in relation to these entities. These are opportune times for the robust development of potential defences, which may be raised by a carrier in appropriate cases, to avoid the harsh consequences of breaching the Presentation Rule.

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