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Court dismisses financing bank’s misdelivery claim for lack of title to sue

News / / London, Piraeus

Unicredit Bank AG v. Euronav NV (Sienna) [2022] EWHC 957 (Comm)
This was a claim brought by a bank that financed the purchase of a cargo and subsequently sought to recover damages for misdelivery following discharge of the cargo without production of the original bill of lading. The claim failed because, in the circumstances of this case, the bill of lading that had been endorsed to the Bank did not contain or evidence the contract of carriage in respect of the cargo.

The decision provides a salutary reminder of the importance of establishing title to sue and ensuring that there is a valid transfer of contractual rights permitting any claim to be brought.

The background facts

The claim arose out of the carriage of a cargo of low sulphur fuel oil from Rotterdam, Netherlands to Fujairah, UAE. The sellers of the cargo were also the original Charterers. The buyers of the cargo subsequently became the Charterers pursuant to a novation agreement. The purchase of the cargo was financed by a letter of credit issued by a bank involved in commodities trade finance. The intention was that the cargo would be resold to sub-buyers approved by the Bank, who would then pay the Bank directly for the cargo.

The cargo was subsequently discharged by STS transfer without production of original bill of lading. Payment against invoices was due to be made thereafter, by which time the Bank realised the buyers were in financial trouble and suspected wide scale fraud. The bill of lading issued in respect of the cargo was then endorsed by the sellers directly to the Bank (the buyers were never indorsees of the bill). The Bank brought a misdelivery claim against the vessel’s Owners, seeking damages of almost US$25 million.

The relevant time line was as follows:

  1. Bill of lading issued 19 February 2020;
  2. Letter of credit issued 1 April 2020;
  3. Charterparty novated on 6 April 2020;
  4. Cargo discharged between 26 April and 2 May 2020;
  5. Payment due between 26 July and 9 August 2020;
  6. Bill of lading endorsed to Bank on 7 August 2020 and received by Bank on 13 August 2020.

The legal issues

The question was whether the Bank was entitled to bring the misdelivery pursuant to the bill of lading. This depended principally on whether the bill of lading contained and/or evidenced the contract of carriage in respect of the cargo at the time the charterparty was novated (and the sellers ceased to be the Charterers) and before the alleged misdelivery claim.

The sellers remained the holders of the bill at the time of delivery. Where a shipper is also the charterer, the bill of lading is not the contract of carriage of goods, but a mere receipt.Where a bill of lading is issued to a charterer and then endorsed to a third party, it attains contractual status on endorsement on the basis that a new contract comes into existence between the carrier and the consignee on the terms of the bill. Here, however, the bill was not endorsed to the Bank when the sellers were still the Charterers and so at the time of endorsement, the bill was no longer in the Charterers’ possession.

The Bank argued that the novation of the charterparty had no bearing on the bill of lading’s status as contract of carriage, it simply transferred the rights and the obligations under the charterparty from sellers to buyers. The Owners disagreed, contending that the novation terminated the contractual relationship between them and the sellers and that the parties had not intended the bill of lading to create a new relationship between them thereafter.

The Commercial Court decision

The Court found in the Owners’ favour and dismissed the Bank’s claim. On the authorities, in circumstances in which the bill of lading was issued to a charterer, the bill had no contractual force. There was no authority for the Bank’s proposition that, after the charterparty was novated, a new contractual relationship came into existence between the sellers/original Charterers and the Owners pursuant to the bill of lading, which ceased to be a mere receipt.

The Court thought that, unless there was an express provision to the contrary in the contractual documentation, the bill as between the (former) Charterers and the Owners remained a mere receipt. Here, there was no evidence that the parties intended that a new and different contract should be created as between the sellers and the Owners. The Court further rejected the argument that when the charterer and bill of lading holder were the same, the bill’s contractual status was merely suspended and could subsequently be “revived”. Instead, there was no contractual relationship at all under the bill in those circumstances.

The Court concluded that the parties had not intended that their relationship would be governed by the terms of the bill of lading at the point where the contractual relationship between them in the charterparty had just been terminated.Therefore, the bill of lading did not contain the contract of carriage between the Owners and the sellers as lawful holder of the bill on or after 6 April 2020, when the charterparty was novated and prior to the alleged misdelivery. In those circumstances, the endorsement of the bill of lading to the Bank did not give the Bank title to sue and its claim failed.

Even if this were wrong, the Court found that any breach of the contract of carriage by the Owners did not cause the Bank’s loss. Among other things, and on the evidence, it was inherent in the financing scheme that the cargo would be discharged without production of the original bill. The Bank was also aware that the bill would not be available until after discharge had taken place and implicitly approved discharge without production of the bill. In addition, and in the light of Covid-19 restrictions, the Bank would not have insisted that the cargo be discharged into storage facilities at Fujairah but would have permitted discharge by STS. Therefore, the loss would have been sustained in any event.

Comment

Trade financing banks should ensure that, where the financing arrangements provide for bills of lading to be assigned to them as part of the security for the financing, those bills contain the relevant contracts of carriage giving them title to sue in respect of misdelivery or other claims against the carrier.

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

Reema Shour

Reema Shour Professional Support Lawyer

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