Misdelivery Claims – Can You Rely On Your BL As Security?

Bills of lading (“BLs”) are highly sought after in trade finance as the backbone of the security package. As a title document, a BL gives the lawful holder the right to demand possession of the goods from the carrier, failing which it can claim for misdelivery. The BL however does not exist in a vacuum and how it is deployed in a trade finance structure can make or break a summary judgment application on a misdelivery claim – if the context shows that the financing bank which became a BL holder never relied on it for security, its claim is unlikely to be smooth sailing. Coming on the heels of The STI Orchard (Winson Oil Trading Pte Ltd, intervener) (“The STI Orchard”) (see: our earlier update), the Singapore High Court has issued a second judgment this year denying a financing bank’s application for summary judgment against a shipowner for misdelivery of cargo.

In Standard Chartered Bank (Singapore) Ltd v Maersk Tankers Singapore Pte Ltd (Winson Oil Trading Pte Ltd, intervener), the Singapore High Court set aside the lower court’s decision granting summary judgment to Standard Chartered Bank (“SCB”) for a misdelivery claim to the tune of US$6.1m. The court found that Maersk Tankers Singapore Pte Ltd (“Maersk”) had raised a triable issue as to whether Maersk’s misdelivery had caused SCB’s loss, which required an examination of whether SCB had regarded the BLs as security to begin with. This required the examination of the precise financing and security arrangements (as was also done in The STI Orchard). Maersk was found to have raised triable issues contesting the notion of SCB having regarded the BLs as security – thus undercutting the bank’s quick recourse to a judgment without trial.

Facts

Hin Leong Trading (Pte) Ltd (“Hin Leong”) purchased a gasoil cargo from Winson Oil Trading Pte Ltd (“Winson”) pursuant to a sale contract which provided for a delivery window of 21 to 25 February 2020. The cargo was discharged to Hin Leong at Universal Terminal without the production of BLs on 28 and 29 February 2020.  On 3 March 2020, i.e., after the delivery, Hin Leong applied to SCB for a letter of credit (the “LC”) in favour of Winson, and its LC application form provided that the LC was for the gasoil to be delivered at Universal Terminal with latest delivery date of “NOR tendered at discharge port: 29 February 2020”. SCB issued the LC on 4 March 2020, which also reproduced the delivery terms from the LC application form.    

Payment under the LC was to be made upon Winson’s presentation of three sets of clean original BLs endorsed to the order of SCB; and if BLs were not available, against Winson’s commercial invoice and a letter of indemnity issued by Winson (“LOI”). Winson’s LOI was to be addressed to Hin Leong and importantly, contained a clause excluding the rights of third parties. On 12 March 2020, Winson presented its commercial invoice and LOI (addressed to Hin Leong) to SCB and received payment under the LC from SCB on 27 March. More than 4 months later, Winson (through its bank) delivered the BLs to SCB who then demanded delivery of the cargo from Maersk on 19 November 2020. The demand culminated in SCB’s misdelivery claim against Maersk, on which SCB obtained a summary judgment at first instance before an Assistant Registrar of the Singapore High Court.

The decision

The decision was reversed on appeal, where the High Court reasoned that whether Maersk’s misdelivery had caused loss to SCB required consideration of whether SCB regarded the BLs as security. Maersk raised two key issues of fact contesting such a notion, which the court found should be examined at trial.

First, having regard to the LC application form dated 3 March 2020 (which identified 29 February 2020 as the latest delivery date), the court considered that it was “certainly arguable” that by the time SCB financed the purchase of the gasoil, it knew or should have known that the cargo was already in Hin Leong’s custody. Such knowledge could arguably indicate that SCB did not regard the BLs as security, as it could not then have expected the BLs to have remained the ‘keys to the warehouse’ or that Maersk would deliver the cargo upon the presentation of the BLs.

Second, the court noted a number of features of the financing and security arrangements between SCB and Hin Leong, which raised factual issues as to the role that the BLs were intended to play, e.g.,

  • SCB’s facility agreement with Hin Leong was described as “Import LCs – Unsecured”, thus raising a question over whether the BLs were indeed intended as security under the facility.
  • SCB argued that the facility required the full set of BLs to pass through banks, indicating that SCB looked to the BLs as security. Maersk in turn referred to a term of the facility which dealt with cases where “the BL is not received by the bank” to demonstrate that SCB did not always require BLs.
  • Hin Leong had requested a trust receipt arrangement of a month from 27 March 2020 to further finance the gasoil, in response to which SCB granted it an import loan of 31 days effectively extending time for repayment. When granting the extension, SCB did not ask for any security, suggesting that it (i) may have been aware that the cargo was unsold and Hin Leong was requesting time to sell it before repayment, and (ii) was willing to assume the risk of HLT’s default without recourse to security.
  • SCB was arguably not even entitled to enforce the LOI issued by Winson to obtain the BLs since the LOI was issued to Hin Leong, not SCB.
  • Hin Leong’s role as a long-standing customer of SCB also lent the case to further examination of SCB’s knowledge of Hin Leong’s intentions about the cargo and its business model.

In the round, the court agreed with Maersk that the financing arrangements between SCB and Hin Leong should be explored further at trial to consider whether SCB in fact regarded the BLs as security.

Lessons learnt

The main takeaway from the case is for banks wishing to simplify their recourse against shipowners to ensure that their financing documents and conduct reflect the importance of the bank’s possession of the underlying BLs. The court here, as in The STI Orchard, was demonstrably prepared to examine the financing arrangements pursuant to which the bank acquired the BLs instead of just stopping at the fact that the bank was a holder of BLs. Some ways to strengthen a bank’s reliance on BLs are by ensuring that the documentation and conduct:

  • require delivery of the BLs endorsed to the order of the bank or in blank,
  • require such delivery again if the financing terms are being varied or extended,
  • if the debtor is known to be using the cargo to produce a new product, require the delivery of new BLs for that cargo,
  • consider whether the cargo has already been received by the debtor at the time the credit is extended,
  • consider when to waive requirements for the presentation of BLs especially in trust receipt mechanisms as the latter might negate the role of the BL as security, and
  • if the BLs are to be provided by the debtor’s seller, secure a direct undertaking from the seller for the delivery of the BLs to the bank

Insights

Oil Storage: Considerations for Financiers & Traders
Asset Recovery in Commodities: Know your Tools
International Trade: The Anti-Money Laundering Achilles’ Heel