Recent Court of Appeal judgment on “the life blood of international commerce” – letters of credit

by Alexandra Shipulina

In October 2014 the Court of Appeal delivered judgement in Standard Chartered Bank v Dorchester LNG (2) Limited (“The Erin Shulte”) [2014] EWCA Civ 1382 in which significant issues relating to letters of credit (“LC”) and bills of lading (“BL”) were considered.

Gunvor International B.V. (“Gunvor”) sold gasoil to United Infrastructure Development Corporation (“UIDC”) which on-sold the cargo to Cirrus Oil Services Ltd. Both sale contracts provided for LCs. An LC was opened by the United Bank of Africa (“UBA”) in favour of UIDC, confirmed by Standard Chartered Bank (“SCB”) and transferred to Gunvor (the “Transfer LC”). Following the partial rejection of supplied cargo due to quality issues, the LC was changed with UIDC’s consent to reflect reduction in the cargo’s value and quantity. No corresponding amendment was made to the Transfer LC and SCB remained liable to Gunvor to honour it on its original terms. On 4 June 2010 Gunvor presented documents to SCB (including the BLs indorsed to SCB), which SCB wrongfully rejected as non-conforming. While the BLs were held in limbo by SCB, the cargo was delivered against a letter of indemnity issued by Gunvor. Subsequent to Gunvor commencing proceedings against SCB, SCB accepted the initially presented documents and paid the full amount due under the Transfer LC (together with interest and costs) to Gunvor on 7 July 2010. In 2011 SCB brought proceedings against the shipowners for wrongful delivery of cargo without production of the BLs.

The following important findings were made by the Court of Appeal:

(i) Completion of an endorsement of the BL requires a voluntary and unconditional transfer of possession by the holder of the BL to the indorsee and an unconditional acceptance by the indorsee. It was held that SCB became holder of the BL within the meaning of s. 5(2)(b) of the Carriage of Goods by Sea Act 1996 (the “Act”) on 7 July 2010 when the presentation of documents was subsequently accepted and the full amount due was paid to Gunvor.

(ii) Once SCB rejected presentation of the documents it could not unilaterally change its mind and decide to take them up. In the judges’ view, that could only be done with the consent of a beneficiary but whether that technically required a fresh presentation or not did not matter.

(iii) If the issuing or confirming bank fails to pay against presentation of conforming documents under a LC payable at sight, the beneficiary is entitled to sue the bank in debt for the value of the credit, provided he is willing and able to transfer the documents to the bank against the payment.

(iv) The requirements of s. 2.2(a) of the Act (for transferring rights of suit to lawful holder of a BL) are satisfied where the arrangements pursuant to which the transfer of rights was made can be identified. It was stated by the judges that “by obtaining delivery otherwise than against the bill of lading, Gunvor took the risk that SCB would accede to its demand, accept the documents and thus acquire the right as holder of the bill of lading to demand delivery from the vessel’s owner”. Therefore, the Court of Appeal agreed with the High Court’s judgment for SCB that SCB became lawful holders of the BLs on 7 July 2010.

Comment

This case demonstrates that once a bank rejects compliant documents and does not honour an LC, a seller can choose to either (i) sue the bank for debt and recover the value of credit but leave the documents with the bank or (ii) sue the bank in damages and cancel the indorsement of the BLs. If the first option is chosen, the seller will benefit from a relatively straightforward claim but the shipped goods will be held in limbo until the claim is settled. If the second option is chosen, the shipped goods will be delivered against the original BLs but the seller will have to give credit for the cargo value and mitigate the damages.

The facts of the case remind banks how important it is to ensure that terms of primary and transferred LCs are consistent and all necessary consents to any amendments are received prior to actually amending the LCs.

Finally, despite the wide use of letters of indemnity in shipping practice, this case stresses that by agreeing to deliver goods without production of BLs shipowners become open to the possibility of being sued by holders of BLs and, unless the relevant P&I Club committee decided otherwise, liability arising out of such delivery may not be recoverable under the general P&I cover.

This article is filed under:  Industry news

About the contributor

  • Alexandra Shipulina Solicitor

    Alexandra is a solicitor in the firm's London office and a member of our Finance Group. She specialises in banking, trade & ship finance, invoice discounting, regulatory work, sale & purchase and shipbuilding contracts.

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