Standard Chartered Bank v Dorchester LNG (2) - The Erin Schulte
Standard Chartered Bank v Dorchester LNG (2) Limited (The “Erin Schulte”)
English Court of Appeal: Sir Bernard Rix, Moore-Bick and Briggs LJJ:  EWCA Civ 1382: 22 October 2014
David Foxton QC and Fionn Pilbrow (instructed by Ince & Co LLP) for Dorchester
Michael Tselentis QC and Socrates Papadopoulos (instructed by Norton Rose Fulbright LLP) for SCB
BILL OF LADING: LETTER OF CREDIT: INITIAL REJECTION OF THE PRESENTATION: MEANING OF “INDORSEMENT” OF BILL OF LADING: TRANSFER OF RIGHTS OF SUIT: CARRIAGE OF GOODS BY SEA ACT 1992 SECTIONS 2(2)(A) AND 5(2)(B)
The Court of Appeal held that completion of an indorsement of a bill of lading by delivery required the voluntary and unconditional transfer of possession by the holder to the indorsee and an unconditional acceptance by the indorsee under section 5(2)(b) of the Carriage of Goods by Sea Act 1992. In this case the indorsee had not accepted the bill of lading on first presentation under the letter of credit; nevertheless the holder’s claim against the indorsee sounded in debt (rather than in damages). When the indorsee later paid the debt at a time when the cargo had already been delivered to a third party, there was deemed to be an indorsement of the bill of lading pursuant to the letter of credit. In consequence, the title to sue the carrier under the bill of lading for misdelivery of the cargo vested in the indorsee under section 2(2)(a) of the 1992 Act.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes
Gunvor International BV (“Gunvor”) agreed to sell about 17,000 MT of gasoil to United Infrastructure Development Corporation (“UIDC”) on CIF Takoradi terms in April 2010. UIDC purchased the gasoil to meet a sale contract for a similar quantity to Cirrus Oil Services Ltd (“Cirrus”) in March 2010. Both contracts required payment by letter of credit.
Cirrus set up a letter of credit with United Bank of Africa for payment to UIDC against presentation of conforming shipping documents to Standard Chartered Bank (“SCB”) with an expiry date of 12 June 2010. On 12 April 2010 SCB confirmed the letter of credit to UIDC. On 30 April 2010 the letter of credit was transferred by SCB to Gunvor. Gunvor's bank, Société Générale (“SG”), was appointed to act as its agent for the purpose of drawing under the transfer letter of credit.
After the goods were shipped in part on board “ERIN SCHULTE”, owned by Dorchester LNG (2) Ltd (“Dorchester”), and “MARIA E”, the bills of lading and other shipping documents were taken up and then presented on 4 June 2010 by SG on behalf of Gunvor to SCB before expiry of the transfer letter of credit. However, SCB (wrongly) did not accept the shipping documents as conforming to the requirements of the transfer letter of credit. However, SCB did not return them to SG but held them instead to SG’s order.
The background circumstances to the refusal were that the cargo testing showed the cargo did not conform to the contractual specifications. This led to renegotiation of the contracts and amendments to the letters of credit, certain changes in which Gunvor did not accept.
Eventually, between 15 and 19 June 2010, the “ERIN SCHULTE” cargo was discharged to new buyers, against a letter of indemnity issued by Gunvor, as the bills of lading remained in the possession of SCB and were not available at the discharging port.
Gunvor commenced litigation against SCB due to rejection of the shipping documents, which soon led to SCB agreeing to pay for the goods together with interest for late payment and costs.
As SCB’s security had been undermined by delivery of the goods by Dorchester against Gunvor’s letter of indemnity, SCB pursued a misdelivery claim under the bills of lading against Dorchester. In turn, Dorchester claimed on the indemnity against Gunvor. This left Gunvor defending the misdelivery claim against SCB, where Gunvor sought to argue that SCB did not have title to sue under the bills of lading.
Moore-Bick LJ in giving the opinion, with which Sir Bernard Rix and Briggs LJ agreed, stated that the appeal concerned the interpretation of the meaning of the expression “completion, by delivery of the bill, of any indorsement of the bill” in section 5(2)(b) (fn.1) of the Carriage of Goods by Sea Act 1992 (“the Act”). The principal issue between the parties was whether SCB had obtained title to sue in respect of a misdelivery of the goods.
The judge at first instance had held that SCB became the holder of the bill of lading on 4 June 2010 when it was presented at its counters under the letter of credit, and so had acquired the right to sue on the contract on that date. The judge viewed as irrelevant that SBC had received the documents for checking and, having carried out its checks, had declined to accept them. In the alternative, however, the judge held that SCB had become the holder of the bill of lading on 7 July 2010 when it met Gunvor’s demands. The Court of Appeal unanimously held that the judge was wrong on his primary holding but correct on his alternative holding for the following reasons.
Completion of endorsement by delivery
Section 5(2)(b) of the Act refers to "possession of the bill as a result of the completion, by delivery of the bill, of any indorsement." The issue which divided the parties was quite simply: is the mere transfer of possession of a bill of lading sufficient to constitute completion of an indorsement by delivery, or is it necessary that the transferor and transferee should both intend that the rights under the bill of lading should pass from one to the other by reason of the combined effect of the indorsement and the transfer of possession?
The Court of Appeal noted that the principal reason for the enactment of the Act was to avoid the need for property in the goods to pass upon or by reason of indorsement in order for rights of suit to be transferred to the indorsee. The requirement for an effective indorsement had not given rise to any concerns, and so was not addressed in the Law Commission’s report on which the Act was based. The Court of Appeal, therefore, was thrown back on the language of the statutory provisions and relevant authorities to determine the issue.
Having considered the parties’ submissions, statutory provisions and relevant authorities, the Court of Appeal concluded that completion of an indorsement by delivery required the voluntary and unconditional transfer of possession by the holder to the indorsee and an unconditional acceptance by the indorsee. In the present case, SG 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 SG.
As a result, the indorsement was not completed by delivery on 4 June 2010 and the judge was wrong so to hold. It was therefore necessary to consider whether the indorsement was completed at a later date when SCB settled Gunvor's claim.
Payment under the settlement
The judge had proceeded on the footing that even on 7 July 2010 the obligation contained in the letter of credit still remained open for performance. The judge held that the payment by SCB of the face value of the credit, together with interest and costs, implicitly amounted to an admission that the documents were compliant, that they were being taken up and that the letter of credit was being honoured. His reasoning reflected the argument put forward to the effect that SCB had finally been compelled to accept the documents and satisfy the debt that had arisen under the letter of credit. He also held that, because SCB had become the holder of the bill of lading pursuant to the letter of credit (which was issued before a right to possession of the goods had ceased to attach to possession of the bill), it had become the holder of the bill under a transaction effected in pursuance of an arrangement that satisfied the requirements of section 2(2)(a) (fn.2) of the Act.
The Court of Appeal noted that there was an absence of any unequivocal demand by Gunvor for payment against acceptance of the documents, or of a clear agreement either about the basis on which the payment was being made or about the right to possession of the bill of lading This meant that it was necessary to ascertain the parties' rights by applying general principles of law. On that basis, the Court of Appeal considered whether Gunvor's demand for payment amounted to an implied request to SCB to perform the contract contained in the letter of credit by remitting its face value (together with interest representing damages for delay in payment) or whether it amounted to no more than a claim for damages for breach of the obligation contained in the letter of credit.
Having considered the authorities on the issue, the Court of Appeal held that, whatever view may have been taken at the time when letters of credit were in their infancy, the modern cases support the proposition that if the opening or confirming bank fails to pay against presentation of conforming documents under a letter of credit payable at sight, the beneficiary may sue in debt to recover the value of the credit, provided he is willing and able to transfer the documents to the bank against payment. That is consistent both with the essential nature of the undertaking contained in the letter of credit and with the expectation of those who make use of such instruments to finance international trade.
It followed, in the Court of Appeal’s view, that the judge was right to proceed on the footing that Gunvor's claim to recover the face value of the credit properly sounded in debt rather than damages (subject to the right to recover any consequential losses as damages). Gunvor had no right to recover the full value of the credit otherwise than against transfer of the documents. Gunvor did not ask for the documents to be returned and by accepting payment of the face value of the credit necessarily accepted that SCB was entitled to take them up. Whether that was characterised as a further presentation or merely an insistence that SCB accept the documents pursuant to the original presentation seemed not to matter in the Court of Appeal’s view. Either way there was an unconditional transfer of the documents sufficient to constitute SCB the holder of the bill of lading and it was not open to Gunvor to say that it did not intend to transfer the documents or to complete the indorsement by delivery under the circumstances.
The effect of the transfer to SCB
It was common ground between the parties that by 7 July 2010, when Gunvor accepted payment from SCB, the bill of lading no longer gave a right as against Dorchester to possession of the goods to which it related because that right had been lost once discharge began on 15 June 2010. While the Court of Appeal disagreed with that view, saying that the rights under the contract of carriage, including the right to obtain delivery of the goods from the carrier, did not cease when the goods were discharged against the letter of indemnity, it agreed that, given the concession made below, the action should proceed on that basis.
Due to that concession, the judge had to decide whether the transfer of the documents to SCB involved a transaction effected in pursuance of any contractual or other arrangement made before the time when a right to possession of the goods ceased to attach to possession of the bill under section 2(2)(a) of the Act. Having considered the relevant case law, the judge held that the proper approach was to identify "the real and effective cause" of the transfer to SCB of the bill of lading, which would enable him to determine whether the case fell within section 2(2)(a). On that basis, the judge held that the transfer to SCB of the bill of lading had been made pursuant to the letter of credit and that therefore, even if Dorchester were right in saying that SCB did not become the holder of the bill of lading until 7 July 2010, it nonetheless satisfied the requirements of section 2(2)(a) of the Act and obtained title to sue.
The Court of Appeal did not consider it helpful to seek to identify the "real and effective cause of the transfer". Given that section 2(2)(a) refers to a transaction effected in pursuance of a contractual or other arrangement, the Court of Appeal considered it to be preferable simply to identify the arrangement, if any, pursuant to which the transfer was made. While it was common ground that the letter of credit expired on 12 June 2010, in the present case the documents were presented before the letter of credit expired. If Gunvor's actions were to be interpreted as insisting on the validity of that presentation, as the Court of Appeal thought they were, there was no difficulty in accepting that the transfer of the documents occurred pursuant to the original terms of the letter of credit, apart, that is, from the wholly unjustifiable delay on the part of SCB in honouring its obligation.
On that basis, and in dismissing the appeal, the Court of Appeal held that the judge was right to hold that if SCB became the holder of the bill of lading on 7 July 2010, it did so in circumstances under which the rights of suit under the contract of carriage became vested in it.
The Court of Appeal’s opinion is an interesting application of purposive interpretation to achieve practical utility under circumstances that while not expressly encompassed in the 1992 Act can arise from the commercial interplay between related carriage, trade and finance transactions arising from the use of bills of lading as documents of title to facilitate international trade and secure its financing.
The Court of Appeal’s purposive approach here can be contrasted with the more literalistic approach of the High Court in Primetrade v Ythan (The “Ythan”) [fn.3] where the interests of the marine insurers’ subrogated claim under the bill of lading were undermined and thereby first exposed the potential difficulties of application of the 1992 Act to unusual factual circumstances.
A decision to the contrary here could have further exposed the 1992 Act to the type of flaws that undermined the practical utility of the Bills of Lading Act 1855, which itself provoked substantial and novel litigation in an attempt – by means of the common law - to fill the gap left by limitations in the statutory drafting.
Fn.1: Section 5(2) of the Act provides as follows:
“References in this Act to the holder of a bill of lading are references to any of the following persons, that is to say—
(a) a person with possession of the bill who, by virtue of being the person identified in the bill, is the consignee of the goods to which the bill relates;
(b) a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill or, in the case of a bearer bill, of any other transfer of the bill; … and a person shall be regarded for the purposes of this Act as having become the lawful holder of a bill of lading wherever he has become the holder of the bill in good faith.”
Fn.2 Section 2 provides (so far as material):
(l) Subject to the following provisions of this section, a person who becomes—
(a) the lawful holder of a bill of lading;
shall (by virtue of becoming the holder of the bill …) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.
(2) Where, when a person becomes the lawful holder of a bill of lading, possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates, that person shall not have any rights transferred to him by virtue of subsection (1) above unless he becomes the holder of the bill—
(a) by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill; … ”
Fn.3  EWHC 2399 (Comm) – see archive.onlinedmc.co.uk/primetrade_v__ythan.htm