London legal highlights

Three recent UK cases, two in the Court of Appeal and one in the House of Lords, considered various issues in relation to bills of lading and letters of credit. David Lacey and David Leggott highlight aspects of these cases that are of particular relevance to trade finance.

J I MacWilliam Co Inc -v- Mediterranean Shipping Co SA (MSC)

The decision

The Court of Appeal held that a “straight” bill of lading was a “bill of lading or other similar document of title” within the meaning of section 1(4) of the Carriage of Goods by Sea Act 1971 and the associated Hague-Visby rules.

The facts

A straight bill of lading is one that refers to a particular named consignee only – it cannot be transferred to any person other than the person named on the bill. A “bearer” or “order” bill of lading is one in which the consignee is specified as the bearer or the consignment is “to order”. These bills are transferable to any number of transferees in succession. The right of ownership to the goods is transferred on delivery or endorsement of the bill.

MacWilliam was named as the consignee of some printing machinery shipped by MSC from Durban to Boston via Felixstowe. The cargo was damaged in transit. The consignor of the machinery had been issued with a straight bill of lading at Durban.

MSC argued that the straight bill should be treated in the same way as a sea waybill (or a non-negotiable receipt) and, thus, did not fall within the scope of the 1971 act. Therefore, argued MSC, the Hague Rules of 1924 should apply to a straight bill, not the Hague-Visby rules of 1968. MacWilliam argued that the 1971 act, and hence the Hague-Visby rules, did apply to straight bills of lading. The crucial difference between the two sets of rules for these purposes is that the liability of the shipper for lost goods under the Hague rules is less than under the Hague-Visby rules.

In support of its claim, MSC argued that a bill of lading is a document of title. One of the indicia of a document of title is that it can be used to transfer title to the goods represented by it. Therefore, a document that might be described as a bill of lading, but which is not freely transferable, cannot be a bill of lading as it cannot function as a document of title.

MacWilliam contended that, although a straight bill of lading cannot be transferred to a series of transferees, it can be transferred once, namely by the consignor to the named consignee (i.e. MacWilliam), and that, for the purpose of that limited transfer, it performs all the functions of a document of title. MacWilliam also argued that the straight bill should be considered a document of title because the consignee cannot obtain possession of the goods without presentation of the bill of lading.

The court found in favour of MacWilliam.

In doing so, it held that the named consignee under a straight bill should be treated in the same way as a consignee under a bearer or order bill. As a result, the consignee, his bankers and insurers were entitled to the same protection as the consignee under other bills. This would not have been the case if the bill was found to be a non-negotiable receipt (which the court viewed as something “far more exotic”).

Comments

This case helps clarify the position of straight bills of lading and demonstrates an unwillingness by the court to create what might be considered an artificial distinction between bills of lading based on the way in which the consignee is described.

Sirius International Insurance Co - v- FAI General Insurance Ltd and others

The decision

The Court of Appeal held that the beneficiary of a standby LC was not entitled to present a demand under that LC in breach of an express promise to the applicant not to do so. If the question had arisen, which it did not on the facts of the case, the court indicated that it would have granted an injunction to restrain the beneficiary from making a demand under the LC.

The facts

A syndicate at Lloyds wished to reinsure certain risks. The brokers to the syndicate had recommended FAI for this purpose. However, the syndicate (rightly, as it turned out) doubted the financial soundness of FAI and required a more creditworthy reinsurer. Sirius assumed that role and, in turn, reinsured the risk with FAI. FAI agreed that it would pay any claim made on the Sirius reinsurance contract should Sirius be called on to pay by the syndicate.

As a requirement for “fronting” the reinsurance, Sirius received the benefit of a standby LC issued by Westpac at the request of FAI. Sirius agreed with FAI that Sirius would not make demand under the LC unless either FAI agreed that it should pay a claim but had not put Sirius in funds to do so, or the syndicate obtained a judgment or binding arbitration against Sirius for payment. This was called the “drawdown term”. The drawdown term was not contained in the LC issued in favour of Sirius, but it appears that Westpac knew of its existence.

A claim was made by the syndicate against Sirius, although the syndicate agreed that it would not enforce payment by Sirius until proceedings by Sirius against FAI were concluded. This effectively prevented Sirius from claiming that the second drawdown term described above had been satisfied. Sirius then began arbitration proceedings against FAI. Before the proceedings could be completed, provisional liquidators were appointed to FAI, resulting in a stay of the arbitration proceedings. An application to lift the stay was compromised and a Tomlin order (under which proceedings are stayed on the basis of a settlement agreement provided to the court) was made. Sirius argued that this arrangement satisfied the first drawdown term.

Sirius made demand under the LC and placed the funds in an escrow account. The liquidators of FAI brought proceedings against Sirius for drawing on the LC, claiming that the drawdown term had not been satisfied. Sirius counter-claimed, contending that even if the drawdown term was not satisfied, it should still be entitled to draw on the LC because the LC was an independent contract, the terms of which should not be affected by any other contract.

Having examined the terms of the compromise, the court held that the drawdown term had not been fulfilled and so the court had to consider what effect this had on the ability of Sirius to draw on the LC. The court considered the case of Deutsche Ruckverischerung -v- Walbrook Insurance1, in which Philips J declined to imply a term in a sale contract to the effect that breach of that contract would prevent the beneficiary making demand under an associated LC. Absent fraud, the court would not restrain a beneficiary from drawing on an LC even where the beneficiary was in breach of its obligations to the applicant under an independent contract.

In this case, however, there was no need to imply a restriction on the ability to draw on the LC, as the applicant and beneficiary had expressly agreed the terms of the restriction. The court, like the trial judge, found no reason why this contract should not be enforceable.

Comments

The status of the LC itself is unaffected by a separate agreement restricting demands. From the issuer’s point of view, the beneficiary remains free to make demand under the LC in accordance with its terms. A separate contractual restriction will not entitle the issuer to refuse to pay a demand under an LC made in accordance with its terms. It may, however, enable an applicant to obtain an injunction preventing the beneficiary from making the demand. If the court issued an injunction, the beneficiary would be prevented from making demand in the first place.

However, the applicant needs to obtain the injunction before a claim is made. As a result, applicants are well advised to require that standby LCs require the beneficiary to provide documents confirming that some notice of the demand has been given to the applicant. This will, of course, only be of use if there is an agreement limiting the right to make demand that would be breached in the circumstances.

If the applicant is unable to obtain an injunction before demand is made, an alternative approach is to obtain a freezing order in respect of the proceeds of the LC, thus preventing them being dissipated pending resolution of the dispute.

Finally, in Sirius, the court did not consider whether making demand in breach of an express covenant not to do so could be considered fraudulent. The courts have held that “it is not the role of [an issuing bank] to examine the merits of allegations and counter-allegations of breach of contract”2. Philips J in Deutsche Ruckverischerung held that a beneficiary who makes demand under an LC in circumstances where there is a dispute under the underlying contract cannot be considered to be fraudulent. While the point is not beyond argument, the fraud exception has traditionally been applied where a beneficiary presents to the issuer documents that contain, expressly or by implication, material representations of fact that are to the knowledge of the beneficiary, untrue3. A simple demand will not contain any such express representations.

Homburg Houtimport BV and others -v- Agrosin Private Ltd and another (MV Starsin)

The decision

The House of Lords held that provisions typed on theface of a bill of lading prevailed over inconsistent provisions in the standard printed conditions typed on the back of the bill.

The facts

The MV Starsin was a vessel owned by Agrosin. Oreander Shipping Ltd had the vessel under a demise charter. In turn, Oreander had granted a time charter in favour of Continental Pacific Shipping (CPS). The vessel was carrying a cargo of timber and plywood owned by Homburg, which had been damaged in transit due to negligent stowage. CPS subsequently became insolvent.

The cargo was carried under contracts of carriage evidenced by transferable bills of lading. The signature box on the face of the bill of lading contained the typed words “as agent for CPS (the carrier)”, below which was a stamp and two signatures of the port agents for CPS at the port of loading.

The question central to the appeal was whether Agrosin and Oreander, the shipowners, had any liability to the cargo owner under the bills of lading, or whether CPS was liable for the loss, i.e. were the bills of lading shipowner’s bills or charterer’s bills? The shipowners argued that the typed words had the effect of making the bills of lading “charterer’s bills” and, thus, the shipowners had no liability to the cargo owner. However, the back of the bill contained pre-printed terms and conditions. Of these, the court focused on clause 33 (relating to the identity of the carrier), which provided that: “the contract evidenced by this bill of lading is between the merchant (i.e. the Cargo Owner as holder of the bill of lading) and the owner of the vessel (i.e. the Shipowners)… and it is therefore agreed that said ship-owner only shall be liable for any damage or loss due to any breach or non-performance of any obligation arising out of the contract of carriage.”

The cargo owner contended that these terms made the bills “shipowner’s bills” and, therefore, it was entitled to recover its loss from the shipowners.

The House of Lords, reversing the majority decision of the Court of Appeal, took the view that greater weight should be placed on the terms that the parties had expressly chosen to include in the bill. They recognised that, in certain situations, it would be necessary for the parties to the bill of lading to have reference to the standard terms printed on the back of the bill. However, it was difficult for the court to accept that this would stretch to the parties needing to resort to them to discover who the contracting parties to the bill were – especially when the identity was clear from the face of the bill.

In doing so, the House of Lords adopted the standard set out in UCP 500 and UCP Position Paper 4. This paper provides that the name of the carrier must appear on the front of the bill of lading. The issuer of an LC, therefore, will reject documents that fail to indicate the name of the carrier in this way, even though the identity of the carrier may be indicated on the back of the document. This reinforces Article 23(a)(v) of UCP 500, which states that issuers will not examine the content of terms and conditions on the back of the bill.

Comments

The House of Lords adopted what might be seen as a common-sense approach in giving greater weight to terms to which the parties had expressly turned their attention rather than those terms contained in pre-printed form on the back of the bill (and to which, in practice, the parties might never have referred). The court also lent its support to the approach adopted in UCP 500 and the related position paper, which will be of assistance to those involved in financing transactions of this type. q

References

1 [1995] 1 WLR 1017

2 Türkiye Is Bankasi AS -v- Bank of China, per Waller J. [1996] 2 Lloyds Rep 611 at 617

3 United City Merchants (Investments) Ltd - v- Royal Bank of Canada, per Diplock J [1983] 1 AC 168 at 183

David Lacey is a partner at Lovells in London. David Leggott is also with Lovells.