Article

Wrongful Discharge of Cargo; Bill of Lading; Negotiation

Note: Negotiating bank brought an action in admiralty to arrest a vessel on a claim against the owners for wrongful discharge of the cargo as to which the bank claimed entitlement as the holder of bills of lading representing the cargo received under a LC. The ship owners claimed that the bank was on notice that the cargo was to have been discharged against letters of indemnity in lieu of presentation of the bills of lading. The owners also cross-claimed against the indemnitors. The court found that the bank had not received notice of the letter of indemnity.

As to the negotiating bank's right to the goods, the owners argued that negotiation under the LC did not give rise to any implied right to the goods and that any right was in favor of the issuer. The Australia Federal Court, New South Wales District, Tamberlin, J., stated:

Letters of credit, which are provided for in relation to contracts for the sale of goods in international trade, are autonomous agreements in the sense that they are distinct from the contractual rights conferred by the underlying agreement for sale of the goods in question. Generally speaking the letter of credit must be honoured regardless of the rights which exist inter se between buyer and seller in relation to the cargo itself ... . Letter of credit transactions are primarily concerned with payment against documents and not with the quality or contractual terms which govern the quality or supply of the goods in question.

It is well settled law that a bearer bill of lading entitles the holder to call for possession of the goods. Where goods are delivered to a person other than the holder of the bill of lading then the person or corporation so delivering is exposed to risk of liability to the holder: see Sze Hia Tong Bank Ltd v Rambler Cycle Co Ltd, [1959] AC at 586 where Lord Denning said:

It is perfectly clear law that a shipowner who delivers without production of the bills of lading does so at his peril. The contract is to deliver, on production of the bill of lading, to the person entitled under the bill of lading. In this case it was 'unto order' 'or his or their assigns,' that is to say, to the order of the Rambler Cycle Company, if they had not assigned the bill of lading, or to their assigns, if they had. The shipping company did not deliver the goods to any such person. They are therefore liable for breach of contract unless there is some term in the bill of lading protecting them. And they delivered the goods, without production of the bill of lading, to a person who was not entitled to receive them. They are therefore liable in conversion unless likewise so protected.

The owners argued that only the issuer obtained rights under the bills of lading because:

it is the issuing bank and as such is exposed to the risk of making payment in respect of the goods delivered to its customers. This is, so it is said, because if the goods are released without presentation of the bills of lading the customer may dispose of them and may not reimburse the issuing bank, thus exposing the issuing bank to liability. Accordingly, the security provided by the right to call for delivery is required.

The court stated that:

The bills of lading which were delivered to [the negotiating bank] in early July, served several purposes. First, it was necessary to present the bills of lading to [the issuer] in order to obtain payment by that bank, as issuing bank, in respect to the letter of credit. Second, the bills also served as security in respect of the cargo which was the subject of the bills of lading in the event that payment was not made by [the issuer]. When [the negotiating bank] received the bills and made payment for the cargo and freight, it acquired special property as the entity to delivery of the cargo. The provision of the bills to [the negotiating bank] as pre-condition of the negotiation and payment of the amounts due gave rise to an implied pledge of title in the goods represented by the bills. The rationale for implication of the pledge is that the furnishing of the bills of lading to [the negotiating bank] as security was a condition on which payment of the purchase price and freight was made by [the negotiating bank]. The entitlement to delivery conferred by the possession of the bills of lading operated to secure Westpac against the contingency that [the issuer] or its customers might not pay.

The indemnitors claimed that the negotiating bank lost any right under the bills of lading when it forwarded them to the issuer for payment under the LC. The court stated that:

The provisions of the UCP recognize that until the documents are accepted and taken up by the issuing bank the bills of lading are to be held for return to the presenter. This position accords with the commercial reality of the present situation where the bills were to provide security to [the] negotiating bank until the documents specified in the letter of credit were accepted by [the issuer]. The documents, in my view, were dispatched on the basis that until acceptance they were to retain their character as security for the moneys paid out by [the negotiating bank]. The possession of the bills did not move into a legal hiatus when they were dispatched on July 6. They did not pass into the 'possession' of [the issuer]. As it turned out the documents required by the letter of credit were never accepted. In my view, they therefore never left the legal possession of [the negotiating bank], notwithstanding that they were not physically in the hands of [the negotiating bank] at the time when the discharge of cargo was carried out. It could not, in my view, be suggested that [the negotiating bank] ever had any intention, imputed or otherwise, to surrender its security or possessory rights under the bills before acceptance by [the issuer]. Until the documents were accepted by [the issuer], [the negotiating bank] remained at risk in relation to the moneys which it had paid as negotiating bank.

The indemnitors also argued that:

[T]here is a customary right to discharge on a letter of indemnity in the absence of a bill of lading. Although there was evidence that it was not uncommon in the relevant period for discharge of cargo to be effected on production of letters of indemnity, this does not provide an answer to the plaintiff's case in conversion. The fact that there is a practice that vessels will discharge against letters of indemnity cannot detract from the rights of the holder of a bill of lading. To reach such a conclusion would undermine the integrity of the bill of lading as a document representing the entitlement to take delivery of the goods. All that the practice indicates is that some owners are prepared to run the risk of being held liable for wrongful discharge of cargo should problems arise in relation to payment.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.