Does a financing bank need to prove that it would not have agreed to a delivery of cargo without production of original bills before it can succeed on a misdelivery claim against the carrier?
The short answer to this in a recent Singapore case was “No”. Those interested in the judge’s findings in that case can click here to review the judgment in The Maersk Katalin [2024] SGHC 282.
The case is interesting for English lawyers because it relied on an unusual Court of Appeal case called The Sienna [2024] 1 Lloyds Rep 177. In that case it was held for the first time that a carrier had a defence to a misdelivery claim if it could prove that the financing bank’s loss was not caused by a breach of the bill of lading contract. In other words, by the bank’s conduct or words it expressly consented to delivery without the production of original bills of lading such that, if the bank had been asked what to do in circumstances where the original bills were not available and a Letter of Indemnity (LOI) was instead being tendered, it would have agreed to delivery of the cargo without production of the original bills.
Maersk seized upon this case to mount a defence to the misdelivery claim advanced against it in the Singapore Court. Mr Justice Mohan held that the legal burden on the bank as the holder of the bills was to show that there was a breach which it established by virtue of it holding the bills in circumstances where the cargo had been discharged to someone else. The burden of proving that the bank would have agreed to delivery without original bills was on the carrier (Maersk) and they failed to meet that burden. On the facts, it was established that the bank had no knowledge that the cargo had already been released by the time it agreed to issue the Letter of Credit and there was no evidence that the bank agreed to forego its right to treat the bills of lading as security.
Contrast this with the Sienna where the financing bank was involved in the delivery arrangements, knew that the bills were still making their way through the system and indicated that it was content to rely on alternative security which it believed would cover its credit risk. It follows that the circumstances of Maersk Katalin were different to those in the Sienna. The fact that the Letter of Credit referred to payment being made against a sellers’ LOI in the absence of original bills was not enough to override the provision requiring the eventual surrender of the bills and did not detract from the security function of the bills for the bank.
In practice, delivery without production of original bills is incredibly common. In 99% of cases there are no problems. However, if everyone had to wait for original bills to be surrendered then it is likely that shipping would grind to a halt. So there are always risks when delivering without original bills under an LOI. The ship owner can never be 100% safe. They are often contractually obliged under their charter to accept an LOI on certain terms from a party who may ultimately have credit issues. Most misdelivery claims are also uninsured because cargo claims that arise out of delivery without production of bills of lading are expressly excluded from P&I cover. For that reason, the exposure is potentially very serious if anything goes wrong. At BDM we handle many disputes which relate to discharge without original bills and claims under LOI’s. In some cases, those disputes can involve arrests of the ship and a mandatory injunction against the LOI provider to force them to put up security and deal with the claim. The LOI provider may also have recourse claims.
Nick Burgess
Partner
