Article

Note: In January 2008, Kwantas Oil Sdn Bhd (Seller) contracted with Zhejiang Zhongguang Industry Co. Ltd. (Buyer), a mainland Chinese company, for USD 3,414,600.00 worth of Refined Bleach Deodorized Palm Oelin in a quantity of 3,000 metric tons.

In June 2008, Buyer applied to Bank of Communications Co. Ltd., Hangzhou Branch (Issuer) for a commercial LC in favor of Seller using a Seller-altered version of a contract that provided for shipment during June 2008 instead of March 2008, the actual contract date. The LC was issued subject to UCP600 and required a full set (3/3) of bills of lading and was "available with" any bank by negotiation. The text of the LC produced in the opinion is reprinted at the end of this Note. The LC was advised by HSBC Malaysia Berhad, Kota Kinabula and undertook to pay drafts at 90 days after sight.

Seller/Beneficiary presented to Malayan Banking Berhad (Maybank) (Negotiating Bank) among other documents a draft drawn on Issuer and payable to the order of Negotiating Bank. These documents were forwarded by Negotiating Bank, which also endorsed the bill of lading (as the Judge noted). As the documents complied, Issuer accepted the draft.

Subsequently, two days after acceptance, Buyer/Applicant returned the documents to Issuer, claiming that it could not reimburse Issuer due to financial problems. Issuer then took the bill of lading to the agents of Universal Shipping Group Inc. (Carrier) which informed Issuer that the cargo represented by the bill of lading had been shipped in March and released and discharged under a letter of indemnity issued by Seller in favor of Carrier. The original goods were already sold to third parties. Issuer then sued Buyer/Applicant in China but did not obtain any recovery.

When Issuer approached Negotiating Bank to recover the proceeds, Issuer was informed that Seller/ Beneficiary had been "paid" in reliance on Issuer's LC undertaking. As indicated in the Judge's decision, Negotiating Bank "paid" on June 9 and sent the documents to Issuer on June 11, prior to acceptance by Issuer. On maturity, Issuer honored its obligation.

Afterwards, Issuer commenced in rem proceedings against the vessel, the Dolphina, claiming under the bill of lading. The High Court of Singapore, Belinda Ang Saw Ean, J., ruled that Carrier was not liable to Issuer for breach of contract on the bill of lading but found that Carrier was liable in tort for unlawful means conspiracy and awarded damages of USD 3,414,487.32 less Buyer/Applicant's 15% deposit.

In what the Judge described as the four tranches of the case, it became apparent that Carrier was controlled by Kwan Ngen Wah, his brother, Kwan Ngen Chung, and Chong Kan Hiung, that the Kwan brothers were beneficial owners of the Dolphina, and that the brothers owned or controlled Seller/ Beneficiary (which had identical addresses and employees with Carrier, Dongma Oils and Fats (Guangzhou Free Trade Zone) Co, Ltd. which handled the goods when delivered), and other companies involved in this transaction.

The Judge found that there was an actual shipment of the goods which had been delivered and released but the documents presented under the LC were forged, having been based on the actual documents with certain material changes. Since the bill of lading was forged, the Judge concluded that Carrier could not be liable on it.

In reaching this conclusion, the Judge decided that the bill of lading was subject to English law since it expressly incorporated the charter party which was expressly subject to English law.

The Judge then considered whether it was proper for Carrier to deliver the goods against an indemnity rather than the bill of lading under English law. The Judge noted the general rule that unless provided by the contract, the ship owner should only deliver the goods against an original bill of lading. The Judge ruled that the charter party did not vary this rule, making Carrier in breach of contract by discharging the cargo against an indemnity.

The Judge also noted that in order to exercise rights under the bill of lading, a person had to be a "lawful holder" under the U.K. Carriage of Goods by Sea Act. Since the endorsement of the bill of lading by Seller was impaired under the terms of the letter of indemnity, the endorsement of the bill of lading was found to be false and had no effect in the Judge's opinion. As a result, Issuer had no right to sue Carrier for misdelivery under the bill of lading since it was not a holder.

The Judge noted that Issuer's allegation of conspiracy by unlawful means required proof of a combination of two or more persons with the intent to injure or damage another to combine and to commit an unlawful act. The Judge concluded that Carrier was a party to the conspiracy because the "considerable" knowledge of Kwan Ngen Chung should be attributed to it since he is to be identified with Carrier, making the Carrier and Mr. Kwan effectively the same legal entity. The Judge also concluded that Carrier combined with Seller to commit an unlawful act in that Carrier knew that the goods had been discharged and that the original bill of lading should be returned to Carrier under the letter of indemnity, that the LC had been opened in favor of Seller and required an endorsement in blank that the bill of lading was endorsed and negotiated to Negotiating Bank.

The Judge stated that "the inference seems to me irresistible that [Carrier] was operating in furtherance of a common design with [Seller] so as to perpetuate an unlawful fraud by early June 2008: the blank endorsement of [the bill of lading] by [Seller] was an essential part of the fraud, because without it there would have been no compliance with the requirements of the . . . L/C and [Issuer] would not have disbursed funds thereunder to [Seller], and [Carrier] not only knew all this but also knew of [Seller]'s blank endorsement of [the bill of lading], yet [Carrier] did nothing to prevent it, in circumstances where [Carrier] had absolutely no reason to allow such an endorsement. In my view, [Carrier]'s conduct is only explicable on the basis that it had come to an agreement with [Seller] that the latter could dishonestly make use of [the bill of lading] so as to trick [Issuer] into advancing funds under the . . . L/ C." (¶ 301)

Text of LC in part:

SIGNED COMMERCIAL INVOICE IN 4 ORIGINALS AND 3 COPIES INDICATING L/C NO. AND CONTRACT NO. ZJZ/RPL/ 16118/0308

FULL SET (3/3) CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO ORDER AND BLANK ENDORSED, MARKED "FREIGHT PREPAID" AND NOTIFYING DONGMA OILS AND FATS (GUANGZHOU FREE TRADE ZONE) CO., LTD. NO. 15 JING QIAO ROAD, GUANGZHOU FREE TRADE ZONE GUANGZHOU, CHINA 510730 IN 3 ORIGINALS AND 3 COPIES.

[The advice also stated:]

40A: Form of Documentary Credit : IRREVOCABLE
20: Documentary Credit Number : LCZE001200800924
31C: Date of Issue : 080606 (6 Jun 2008)
40E: Applicable Rules : UCP 600
31D: Date and Place of Expiry : 080702 (2 Jul 2008) Malaysia
50: Applicant [Zhongguang]
59: Beneficiary - Name & Address [KOSB]
32B: Currency, code, amount : [USD3,414,600.00]
41D: Available With...By....Any bank by negotiation
42C: Drafts at : At 90 days after sight for 100 pct in voice value
42A: Drawee - [BOC]
44C: Latest date of shipment : 080615 (15 Jun 2008)
48: Period for Presentation: Documents to be presented within 100 days after the date of shipment but within the validity of the credit. (¶¶ 43-44)

[JEB/tg/cmh]

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