Standard Chartered Bank v Dorchester Lng (2) Ltd Re: MT ERIN SCHULTE

This is the judgment of the Court on an action by the Claimant Bank (“SCB”) against the Defendant Shipowner (“the Shipowner”) for damages in the sum of US$6,132,355.74 for the misdelivery and/or conversion by the Shipowner of a cargo of about 9,208 mt of gasoil shipped on board the vessel Erin Schulte off Cotonou, Benin, on 13 May 2010. The principal issue is whether SCB has title to sue under the Carriage of Goods By Sea Act 1992 (“COGSA 1992”) as the lawful holder of the bills of lading relating to the cargo. The debate has concerned the claim in contract because it is accepted that the claim in conversion adds nothing to the claim in contract.

SCB is engaged, inter alia, in the funding of international contracts of sale by letters of credit. The Shipowner is the registered owner of the vessel and is incorporated in the Isle of Man. The vessel was under a time charter and two voyage charters at the material time. The sub-voyage charterer, and the shipper of the cargo of gasoil, was Gunvor International BV (“Gunvor”), a major independent oil trader.

On 26 March 2010 a sale contract was entered into between United Infrastructure Development Corporation (“UIDC”) and Cirrus Oil Services Ltd. (“Cirrus”) pursuant to which Cirrus agreed to buy and UIDC agreed to sell 18,000mt of gasoil. UIDC sourced the gasoil from Gunvor and on or about 23 April 2010 agreed to purchase the gasoil from Gunvor. The gasoil was required for use in the mining industry and therefore was to be of a specified quality.

Both contracts of sale stipulated for the opening of letters of credit by the respective purchasers. On 6 April 2010 a letter of credit (“the prime letter of credit”) was opened by the United Bank of Africa (“UBA”) in favour of UIDC on the application of Cirrus. It was governed by UCP 600 and had an expiry date of 12 June 2010. The prime letter of credit was confirmed by SCB to UIDC on 12 April 2010. On 30 April 2010 Gunvor became the second beneficiary pursuant to a transfer of the prime letter of credit (“the transfer letter of credit”). The bank Societe Generale acted as the agent of Gunvor for the purpose of drawing under the transfer letter of credit.

On 12 May 2010 some 9,466 mt of gasoil were shipped on board the vessel Maria E off Cotonou for carriage to and delivery at Takoradi, Ghana pursuant to the sale contracts. On 13 May 2010 some 9,208 mt of gasoil were shipped on board the vessel Erin Schulte off Cotonou for carriage to and delivery at Takoradi also pursuant to the sale contracts. The bills of lading recorded that the shipper was Gunvor and the consignee “to the order of Societe Generale, Paris.”

On 13 May 2010 Maria E arrived off Takoradi and a sample of her gasoil was taken. It was not of the required quality. Accordingly UIDC and Cirrus rejected the cargo on both vessels.

Cirrus offered to purchase the cargo on Maria E at a reduced price for general rather than mining use. It appears that UIDC accepted that offer. Cirrus did not wish to buy the cargo on Erin Schulte, even at a reduced price.

On 20 May UBA advised SCB of Amendment no.3 to the prime letter of credit which amendment reduced the value and quantity of the cargo covered by the letter of credit to that shipped on board Maria E. SCB sent the Amendment no.3 to UIDC seeking its consent on 25 May 2010.

On 26 May 2010 Gunvor presented documents under the prime letter of credit to SCB in respect of the sale of the cargo on board Maria E.

On 1 June 2010 UIDC notified SCB of its agreement to Amendment no.3. On the same date SCB sent Amendment no.3 to Gunvor seeking its consent. Also on the same date SCB advised UBA that UIDC had consented to Amendment no.3. As events subsequently proved this was unwise in circumstances where SCB was still to hear whether Gunvor had consented to Amendment no.3. It was not disputed that the effect of sending this message to UBA was that whilst SCB remained obliged to honour the transfer letter of credit to its full value SCB could only seek recourse from UBA to the limited extent permitted by Amendment no.3.

On or about 2 June 2010 SCB paid Gunvor in respect of the presentation it had made on 26 May in respect of the cargo on board Maria E.

On 4 June 2010 UIDC informed Gunvor that two new buyers had agreed to buy the cargo on board Erin Schulte. One buyer was Chase Petroleum Ghana Limited (“Chase”) and the other was UBI Energy Petroleum Ghana Limited (“UBI”). Two new letters of credit were opened in favour of UIDC, one by SCB (the Chase letter of credit) and the other by Trust Bank Ghana (the UBI letter of credit). UIDC requested SCB to transfer the Chase letter of credit to Gunvor.

However, that transfer never happened because on 4 June 2010 Gunvor presented documents under the original transfer letter of credit in respect of the cargo on board Erin Schulte. The documents which had been presented under cover of a letter dated 3 June 2010 included the bills of lading in respect of the cargo on board Erin Schulte which had been indorsed in favour of SCB. They were received by SCB’s London office on 4 June 2010 at 9.34 am, scanned and sent to SCB’s service centre in Chennai for checking.

On 7 June 2010 Societe Generale confirmed to SCB that Gunvor had rejected Amendment no.3.

On 9 June 2010 SCB sent a SWIFT message MT 734 to Societe General. The glossary of SWIFT messages indicates that MT 734 is “An Advice of Refusal”. The message, so far as material, provided as follows:

“77J: Discrepancies:

This advice does not constitute a rejection of documents by applicant and is only sent in accordance with UCP600 article 16c. Discrepancies referred to applicant.

L/C amount overdrawn

Quantity overshipped

77B: Disposal of documents

/Hold/ at your disposal we have not contacted issuing bank await your disposal instructions.”

The effect of this message has been the subject of debate in this action. I will return to its meaning and effect later in this judgment. The message appears to have been sent as a result of an error, namely, a belief by the service centre in Chennai that the documents were discrepant because of Amendment no.3. The service centre either cannot have seen or cannot have taken into account Gunvor’s refusal to consent to that amendment.

On 11 June Societe Generale responded to the MT 734 message saying that the presentation was valid, which it was.

There then followed chasing messages by Gunvor and Societe Generale and discussions took place between SCB and UIDC. A view was formed within SCB as a result of those discussions that Gunvor may have agreed to Amendment no.3 and so on 16 June SCB advised Societe Generale that the documents should be presented under a different letter of credit. Societe Generale replied that day saying that there would be no other letter of credit, that complying documents had been presented and that payment should be made by SCB. At the same time there were discussions between SCB and Gunvor during which Gunvor demanded that SCB honour its obligation to pay. UIDC made clear to SCB that any payment by it under the transfer letter of credit was at SCB’s risk and that UIDC could not accept such payment because the transfer letter of credit related to “a separate product and contract which [Gunvor] failed to honour”.

Mr. Meyern, SCB’s European Head of Trade and Lending Operations, became involved in the matter on or about 16 June 2010. He formed the view, correctly, that SCB was obliged to pay Gunvor under the transfer letter of credit. Notwithstanding the formation of this view SCB’s legal department became involved. Gunvor instructed Ince & Co LLP to defend its interests.

Between 15 and 19 June 2010 the cargo on board Erin Schulte was discharged on the instructions of Gunvor. Discharge was not given against production of a bill of lading but on production of letters of indemnity. Delivery was taken by the two new purchasers of the cargo, Chase and UBI.

On 18 June 2010 SCB wrote to Ince & Co. seeking a meeting and clarification as to various matters. SCB said, in particular:

“One of the specific issues we would like to discuss is whether and if so the basis upon which Gunvor has instructed the carrier to split the gasoil cargo and discharge the same apparently without reference to [SCB] as the rightful holder of the Bill of Lading.”

A similar letter was sent to UIDC. It was apparent that SCB, having realised that it had no right of recourse from UBA in respect of its liability to Gunvor, hoped to find a commercial solution to its problem.

But Ince & Co. replied on the same day, saying that the position remained the same, that SCB ought to have paid Gunvor and that there was nothing to discuss.

On 21 June 2012 SCB said in terms that it was not obliged to make payment to Gunvor. This was not a contention that could be supported.

Ince & Co. replied on 24 June, saying that unless payment (together with interest) was paid by 30 June 2010, legal proceedings would be commenced. On 30 June 2012 SCB requested a meeting with Gunvor as a matter of urgency and said that arrangements were in hand to pay the amounts claimed by Gunvor into an escrow account held by Norton Rose.

On 1 July 2010 Gunvor commenced proceedings. On 5 July 2010 discussions took place between Ince & Co. and Norton Rose and on 7 July 2010 Norton Rose informed Ince & Co. that SCB agreed to pay the sum claimed plus interest and costs. Gunvor agreed to discontinue its claim. The sums claimed in respect of principal and interest were paid to Gunvor’s account with Societe Generale (into which payment was required to be made under the letter of credit) under cover of Swift message MT 756 (“Advice of reimbursement or payment”). Gunvor’s costs were paid to Ince & Co.

It was apparent from Mr. Meyern’s evidence that SCB feared the reputational consequences of not honouring the letter of credit, which consequences would have been exacerbated by litigation.

UIDC subsequently confirmed to SCB that UIDC was paid for the cargo by Chase and UBI.

Thus, the somewhat extraordinary result of these events appears to have been that although UIDC has been paid for the cargo it has not paid either Gunvor or SCB in respect of the cargo. UIDC is therefore the beneficiary of a windfall which resulted from SCB’s error in notifying UBA of UIDC’s agreement to Amendment no.3 without obtaining Gunvor’s agreement to that amendment. That exposed SCB to the risk, which materialised, of having to pay Gunvor with no right of recourse from UBA. The question raised by these proceedings is whether SCB can recoup its loss from the Shipowner on the basis that SCB was the lawful holder of the bills of lading. If it can then Gunvor will have to indemnify the Shipowner pursuant to the letters of indemnity it gave in order that the cargo might be discharged without production of the bills of lading. I was informed that Gunvor has taken over control of the defence in this case on behalf of the Shipowner.

Mr. Michael Tselentis QC submitted on behalf of SCB that SCB became the lawful holder of the bills on 4 June 2010, alternatively on 11 June 2010, alternatively on 18 June 2010 and in the final alternative on 7 July 2010 when the sum due to Gunvor under the transfer letter of credit was paid. As a result SCB is able to sue on the contract contained in or evidenced by the bills of lading. The Shipowner’s discharge of the cargo otherwise than on production of the bills was a breach of that contract which caused loss to SCB, namely, the value of the cargo which SCB could have realised by selling it. Mr. Paul Downes QC submitted on behalf of the Shipowner that SCB never became the lawful holder of the bills and that in any event there was no breach of contract by the Shipowner and even if there were a breach SCB has suffered no loss.

Section 5(2)(b) of COGSA 1992 provides:

“References in this Act to the holder of a bill of lading are references to any of the following persons, that is to say-

…….

(b)

a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill or, in the case of a bearer bill, of any other transfer of the bill….”

If SCB is such a person then, pursuant to section 2(1)(a) of COGSA 1992, all rights of suit under the contract of carriage are transferred to and vested in it.

The meaning of delivery in the context of COGSA 1992 has been considered by Thomas J. (as he then was) in the Aegean Sea [1998] 2 Lloyd’s Reports 39. The material facts of that case were somewhat unusual in that the bills of lading were indorsed by Louis Dreyfus to Repsol by an inadvertent error (see p.56 rhc). They ought to have been endorsed to another party, ROIL. The bills were sent to ROIL who forwarded them to Repsol. Repsol pointed out the mistake to Louis Dreyfus who acknowledged the mistake and requested the return of the bills so that they could void the indorsement. Repsol returned the bills and Louis Dreyfus voided the indorsement, reindorsed the bills to ROIL and sent them to ROIL. It was submitted on behalf of the owners of the vessel that Repsol were holders of the bills within the meaning of section 5(2)(b) of COGSA 1992. The bills had been indorsed and delivered to them. Thomas J. did not accept that submission:

“I do not consider that a person satisfies the requirements under s.5(2)(b) and becomes the holder of a bill of lading if that person obtains the bill of lading merely in consequence of someone endorsing it and sending it to him. The section requires him to have possession as a result of the completion of an endorsement by delivery. Although the sending and receipt of a document through the post often constitutes service of a document, the sending of a bill of lading through the post does not without more constitute delivery; the person receiving it has to receive it into his possession and accept the delivery before he becomes the holder. ….Repsol never accepted delivery of it as the endorsee or transferee. As soon as they saw the endorsement to them they sent it back to be endorsed to the rightful endorsee and transferee.” (see p.59 rhc – p.60 lhc)

It follows from this statement of principle that, as it was put by Mr. Downes QC on behalf of the Shipowner, delivery is a bilateral, not a unilateral, act. In Bills of Lading by Aikens, Lord and Bools it is said at paragraph 8.40 that

“both transferor and transferee need to have the requisite intention that the person to whom indorsement of the bill of lading is made and delivery given is to be the “holder” of the bill.”

The learned editors add that “it is not entirely clear what is sufficient to constitute acceptance.” The court has to determine what amounts to acceptance on the facts of the present case.

Mr. Tselentis QC, on behalf of SCB, has submitted that on the facts of the present case the answer is simple. The bills of lading, having been endorsed in favour of SCB, were delivered by Gunvor to SCB through the post on 4 June 2010. The covering letter dated 3 June 2010 from Societe Generale on behalf of Gunvor bears on its reverse a date stamp of 4 June 2010 9.34 am indicating that they were received on that day and at that time. Gunvor intended that SCB should accept delivery of the bills and SCB, by receiving them into its possession on 4 June 2010, scanning them and sending them to Chennai for checking, accepted delivery of them. The bills have remained in SCB’s possession ever since.

Mr. Downes QC, on behalf of the Shipowner, submitted that SCB, having received the bills as part of a presentation under a letter of credit, did not accept them until SCB had accepted the documents as compliant under the letter of credit and had honoured the presentation by paying the sum due under the letter of credit. That did not happen on 4 June 2010.

There is, in my judgment, a cogent case that on the facts of this case SCB received the bills of lading into its possession on 4 June 2010 and has kept them in its possession ever since. SCB received the bills on that day and retained possession of them; it did not send them back to Societe Generale as Repsol sent the bills back to Louis Dreyfus in the Aegean Sea. They were scanned and sent to Chennai for checking. The originals were no doubt kept secure by SCB. It is a reasonable and necessary inference from these facts and matters that SCB received the bills into its possession and accepted delivery of the bills as the indorsee of the bills on 4 June 2010.

The Shipowner’s argument to the contrary was based upon the proposition that “a presentation of documents does not amount to a complete delivery of documents, because the intention of the parties is that possession should only pass when the letter of credit is honoured. Until the letter of credit is honoured possession of the documents is conditional in nature.” This proposition was said to be supported by observations on the history of letters of credit, certain obiter dicta of Aikens J. in the Ythan [2006] 1 Lloyd’s Reports 457 and a reference to the judgment of David Steel J. in Credit Industriel et Commercial v China Merchants Bank [2002] EWHC 973 (Comm).

With regard to the observations on the history of letters of credit it was submitted that in the nineteenth century when a bank, to whom a presentation of documents had been made by the seller’s agent at the counters of the bank, dishonoured the presentation the seller’s agent would take the documents away with him. If for some reason the documents were left with the bank, for example, pending possible waiver of the discrepancies by the buyer, the documents would be held to the order of the seller. Consistent with this observation Aikens J. referred in the Ythan at paragraph 88 to the position where “a bank receives bills of lading as part of shipping documents for which payment is to be made pursuant to sale contract (say FOB or CIF). So long as payment is not made, the bank will normally hold the shipping documents to the order of the seller.” The judgment of David Steel J. in Credit Industriel et Commercial v China Merchants Bank concerned an action under a letter of credit. The claimant presenter said that the bank was unable to rely upon certain alleged discrepancies because the notice of rejection did not comply with UCP 500 and because the bank had failed to return the documents to the presenter. David Steel J., at paragraph 66, held that the procedure contemplated by UCP 500 required the bank to examine the documents and to decide whether to “take them up or refuse them”. Reference was made to an ICC report which stated that “once documents are presented to the bank, those documents belong to the presenter until the documents are taken up.”

The court is concerned with a claim by an indorsee of a bill of lading based upon the transfer of the rights of suit in a contract of carriage contained in or evidenced by a bill of lading pursuant to COGSA 1992 consequent upon the completion by delivery of the indorsement of the bill of lading. The court is not concerned with a claim by a beneficiary of a letter of credit based upon the presentation of documents under the letter of credit. Caution must therefore be exercised when seeking to draw conclusions from the practice in the nineteenth century when, after the Bills of Lading Act 1855, the transfer of rights of suit in a contract of carriage contained in or evidenced by a bill of lading was dependent upon the passing of property by reason of the indorsement. That requirement has been done away with by COGSA 1992. Caution must also be exercised when drawing conclusions from the obiter dicta of Aikens J. in the Ythan where the bills were bearer bills and had not been indorsed to a named indorsee. As will shortly be seen the position of a named indorsee is or may be different under COGSA 1992 from the position of the holder of a bearer bill. Finally, the decision in Credit Industriel et Commercial v China Merchants Bank did not concern the delivery of bills of lading as contemplated by COGSA 1992. It concerned the procedure to be followed by a bank when deciding whether to take up or refuse documents presented under a letter of credit. Mr. Downes emphasised the language used by David Steel J. of “taking up” the documents. He suggested that that was the same concept as accepting delivery of documents. However, it is necessary, as it always is in the law, to consider the context in which judicial observations are made. In the context of Credit Industriel et Commercial v China Merchants Bank the “taking up” of documents meant deciding that the documents were compliant and acknowledging a liability to honour the bank’s undertaking in the letter of credit. David Steel J. was not considering what was required to accept delivery of indorsed bills of lading for the purposes of COGSA 1992. In the typical case the bank will have received the bills of lading a day or more before the bank is able, having inspected the documents in its possession, to decide whether they are compliant or not and so to “take them up or refuse them”.

Notwithstanding the need for caution there is no dispute that, as stated by the ICC report quoted by David Steel J., until documents are taken up the Bank holds them to the order of the presenter. Based upon this common ground Mr. Downes submitted that a bank to whom documents are presented only accepts delivery of them when, having examined them to see if they are compliant with the letter of credit, it decides to take them up. That is consistent with the circumstance that until that happens the documents belong to the presenter. Thus, submitted Mr. Downes, acceptance of delivery and taking up of the documents occurred at the same time.

Mr. Downes described this as a “neat” solution. I am however satisfied that it is not correct for it is inconsistent with the reasoning of the Commercial Court and of the Court of Appeal in East West Corporation v DKBS [2002] 2 Lloyd’s Reports 182 and [2003] QB 1509.

The decision in East West Corporation v DKBS concerned delivery under COGSA 1992. In that case there was, as there is in the present case, an issue as to whether the shippers of goods had title to sue the shipowner who had discharged and delivered the goods without production of the bills of lading. The bills, which stated that the goods had been consigned to the order of certain Chilean banks, were remitted to those banks. This was to enable the Chilean banks to release the bills to the buyers on payment of the price. Thus the claimants retained full control over the bills because the Chilean banks held them to the order and direction of the claimants. The claimants said that they had title to sue both in contract, for breach of the contract of carriage, and in bailment. The former claim failed. The latter claim succeeded.

The claim in contract required the court to consider the effect of COGSA 1992 and in particular section 5(2)(a) which defined a holder of a bill as “a person with possession of the bill who, by virtue of being the person identified in the bill, is the consignee of the goods to which the bill relates.” It was held that the Chilean banks were holders within that definition. This was so notwithstanding that the goods remained in the ownership of the claimants and that the banks had not obtained any security or other interest in them. The claimants had submitted that section 2 of the Act, which provided for the transfer of the rights in contract to the holder of the bills, did not apply where the shipper retained constructive possession of the bills and physical possession of them was held by a person acting in a ministerial capacity. This submission was rejected by Thomas J. who said, at paragraph 22:

“In my view it is not appropriate to go behind the facts as they would appear from the face of the bill of lading……If the claimants were correct there would need to be an enquiry into the question as to whether the consignee named on the face of the bill of lading had, as between the shipper and the person named as consignee, an entitlement to delivery.”

Thomas J. accepted at paragraph 29 that where a bearer bill or a bill endorsed in blank is delivered to an agent then the principal may be the holder for the purposes of COGSA 1992 for

“in such a case the real question which arises is who is in possession as the actual holder……..The agent holds custody of the bill for his principal and it is the principal who has possession and is the holder for the purposes of the 1992 Act.”

However, Thomas J. concluded that where the holder is the named consignee his right as holder of the bill is personal to him. In such a case there is no difficulty in identifying the holder (see paragraphs 30-31).

The decision of Thomas J. was upheld by the Court of Appeal. Mance LJ. (as he then was), with whom Laws and Brooke LJJ. agreed, referred with approval, at paragraph 16, to a statement in Carver on Bills of Lading (edited by Treitel and Reynolds) at paragraph 5-017 as follows:

“Where, indeed, the bill bears a personal indorsement to, and is in the possession of, the agent, then the principal could not be a “holder” of it for the purposes of the Act; but the same is not necessarily true where the bill which has been delivered to the agent is a bearer bill, or one that has been indorsed in blank.”

Mance LJ then said that:

“The present circumstances seem to me directly analogous to those covered by the first part of this passage. The express consignment of the goods under the bills to the Chilean banks or order, followed by the delivery of such bills to such banks by or under the authority of the claimants, equates with a personal indorsement.”

Mance LJ concluded, at paragraph 17, that the 1992 Act contemplated rights of suit being transferred to persons who are, vis-a-vis the shippers, acting as agents.

It must follow from the reasoning of Mance LJ that in the present case SCB, to whom the bills had been personally indorsed, can be the “holder” of the bills notwithstanding that, as stated in the ICC report quoted by David Steel in Credit Industriel et Commercial v China Merchants Bank, “once documents are presented to the bank, those documents belong to the presenter until the documents are taken up”. Thus the fact that, until the documents are “taken up” following a compliant presentation, the documents are held to the order of the presenter so that, in the present case, SCB may be said to be acting vis-à-vis Gunvor as agent does not lead to the conclusion that SCB has not accepted delivery of the indorsed bill of lading for the purposes of COGSA 1992. Just as the suggestion in East West Corporation v DKBS that the shipper retained constructive possession of the bills failed, so must the suggestion in the present case that Gunvor or Societe Generale retained constructive possession of the bills must fail. Just as in East West Corporation v DKBS where the Chilean banks held the bills to the order of the shippers and yet had title to sue so in the present case SCB held the bills to the order of Gunvor and yet had title to sue. It is true that the decision in East West Corporation v DKBS related to a consignee within section 5(2)(a) of COGSA 1992 and not to an indorsee within section 5(2)(b) of COGSA 1992, that section 5(2)(b) refers expressly to delivery whilst section 5(2)(a) does not and that the Chilean banks had possession of the bills in order to release them on payment whereas SCB had received the bills as part of a presentation under a letter of credit. But the reasoning of Mance LJ clearly encompassed a personal indorsee such as SCB. A consignment was equated with a personal indorsement. I consider that, as a first instance judge, I should follow that reasoning.

But even without the guidance of the reasoning in East West Corporation v DKBS I would have reached the same conclusion. Delivery of an indorsed bill of lading is a simple act, though one which requires the requisite intention on the part of deliveror and deliveree. On the facts of the present case the bills of lading were delivered on 4 June 2010 when they were received by SCB into its possession. The aim of COGSA 1992 was to simplify the transfer of rights of suit under the contract of carriage contained or evidenced by the bill of lading. The transfer was to be linked to delivery of an indorsed bill of lading instead of, as was the case under the Bills of Lading Act 1855, to the passing of property under the contract of sale. Thus there is now no need to investigate when and to whom property passed under the contract of sale or what the contractual position was between the deliveror and deliveree of the bill of lading. The effect of Mr. Downes’ submission, however, is that in order to decide whether rights of suit have passed it is now necessary to investigate whether the bank to whom the bills have been indorsed has decided that the documents tendered under a letter of credit (which will include not only the bills but other documents as well) were compliant with the letter of credit or not. Indeed, he submitted that COGSA 1992 must be construed in the light of UCP 600. This approach to the construction of COGSA 1992 is not justified by the legislative aim of COGSA 1992 which was to simplify the transfer of rights of suit. Mr. Downes’ approach requires the simple act of delivery to be understood by reference to the terms of a letter of credit. There is no trace of this approach in the language or in the legislative aim of COGSA 1992.

For these reasons I am persuaded that SCB has title to sue the Shipowner pursuant to sections 2(1) and 5(2)(b) of COGSA 1992. The bills, which had been indorsed to SCB, were delivered to SCB on 4 June 2010.

This conclusion is consistent with the decision of the Singapore Court of Appeal in Keppel TL v Bandung [2003] 1 Lloyd’s Reports 619. That decision, based upon the Singapore Bill of Lading Act which was in pari materia with COGSA 1992, was to the effect that, where Keppel, the holder of a bearer bill, had specially indorsed the bill in favour of a bank, which was to hold the same for collection against payment by the purchaser, the bank became the holder of the bill and transferee of the rights of suit under the contract of carriage contained in or evidenced by the bill of lading contract. Keppel was unable to rely upon the underlying arrangement between it and the bank to resist this conclusion. The Court of Appeal emphasised that rights of suit under a bill of lading operated independently of the banking arrangements which any of the holders of the bill in the chain may have had with his bankers and had to be differentiated from the issue as to who, among competing claimants, had the better title to the goods; see paragraphs 20 and 31. Both of those observations support the reasons I have given for rejecting the submission made on behalf of the Shipowner in the present case.

In case I am wrong in the conclusion which I have reached I should consider at least one of Mr. Tselentis’ alternative cases. If, as submitted by Mr. Downes, SCB did not accept delivery of the bills until it decided that there had been a valid presentation and that the letter of credit should be honoured, then Mr. Tselentis submitted that delivery must have occurred on 7 July 2010, at the latest, when SCB paid the sum due under the letter of credit.

It was common ground that by 7 July 2010 the bills had been “spent”, that is, they no longer gave a right as against the carrier to possession of the goods to which the bills related. They had been spent once discharge commenced on 15 June 2010. Accordingly Mr. Tselentis accepted that SCB had to show that it had become the holder of the bills, pursuant to section 2(2)(a) of COGSA 1992,

“by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill…...”

Mr. Tselentis submitted that SCB had become the holder of the bills by virtue of a transaction effected in pursuance of the transfer letter of credit which was a contract made before the bills had been spent.

Mr. Downes submitted, first, that there was no completion of the indorsement of the bills by the delivery of the bills on 7 July 2010. The presentation had been rejected. It was never accepted. Second, if, contrary to that submission, SCB did become the holder of the bills on 7 July it did so pursuant to the agreement made on 7 July 2010 to settle the proceedings issued by Gunvor.

There was also a dispute as to whether SCB had rejected the presentation made on 4 June 2010 as non-compliant by its SWIFT message of 9 June 2010. Mr. Tselentis on behalf of SCB, submitted that it had not done so because the message was not an unambiguous rejection as was required by UCP 600 Article 16 and that once 5 working days had elapsed from presentation it had lost the right to reject the presentation and so must be deemed to have accepted the presentation. Mr. Downes, on behalf of the Shipowner, submitted that the SWIFT message was a rejection because it was in the form of MT 734 which is a notice of refusal and that properly construed it was a notice of refusal by SCB, albeit not one by the applicant, Cirrus. The Shipowner’s case in this regard was supported by SCB’s witness Mr. Meyern who agreed that the SWIFT message was a rejection by SCB.

I accept that on 9 June 2010 SCB rejected the documents as discrepant. I have reached that conclusion, not because SWIFT message MT 734 was used, but because of the contents of that message. Two discrepancies were alleged. There can have been no purpose in identifying alleged discrepancies if SCB had not rejected the presentation. At the same time SCB made clear that the applicant, to whom it said the documents had been referred, had not rejected them and so held out the possibility that the discrepancies might be waived. In the meantime SCB held the documents to the order of Gunvor. Had SCB accepted the presentation as compliant it would not have held the documents to the order of Gunvor. Finally, the text said in terms that the message was sent in accordance with Article 16(c) of UCP 600 which provides for a refusal to honour.

I accept that the SWIFT message does not say in terms that SCB is refusing to honour but it appears to me to be the inevitable inference from the text of the message that SCB had refused to honour (whilst holding out the possibility that if the alleged discrepancies were waived by the applicant the letter of credit might be honoured thereafter).

It may be that the absence of an express refusal to honour renders the message non-compliant with UCP 600 Article 16 (c) (though the DOCDEX decision No.303 would suggest not). But if it is non-compliant, any such non-compliance would have been relevant if there had been a discrepant presentation. The absence of a notice of rejection which complied with Article 16 would have meant that SCB would be unable to rely upon the discrepancies; see Article 16(f). However, it is common ground that the documents were compliant and not discrepant. In those circumstances there was, to use Mr. Tselentis’ phrase, “an inescapable obligation to pay”. Societe Generale, Gunvor and Ince & Co. had been making that point since 11 June 2010. SCB, which had denied any obligation to pay as late as 21 June 2010, recognised and accepted its obligation on 7 July 2010 at the latest when it paid the sum due under the letter of credit.

Thus if, as submitted on behalf of the Shipowner, delivery of the bills of lading did not occur until SCB had taken up the documents as compliant and had honoured the letter of credit, delivery must have occurred on 7 July 2010. I accept that SCB did not say in terms on that day that it was taking up the documents as compliant and would honour the letter of credit. But it is the inevitable inference from the fact that payment was made of the full sum due under the letter of credit that the documents presented on 4 June 2010 were compliant, that they were being “taken up” and that the letter of credit was honoured. I am unable to accept Mr. Downes’ submission that there was no admission that SCB’s previous position was wrong. Such admission appears to me to be implicit in the fact that the full sum due under the letter of credit was paid and that SCB made sure that the payment was made in accordance with the mechanism provided by the letter of credit. I accept that the payment, together with payment of interest and costs, also settled the proceedings which had been issued by Gunvor but that is consistent with an implicit admission of liability by SCB.

The further question is whether SCB can bring itself within the proviso in section 2(2)(a) of COGSA 1992. The meaning of the phrase “effected in pursuance of” in section 2(2)(a) of COGSA 1992 has been considered in at least three cases, the David Agmashenebeli [2003] 1 Lloyd’s Reports 92, the Ythan [2006] 1 Lloyd’s Reports 457 and the Pace [2010] 1 Lloyd’s Reports 183.

In the David Agmashenebeli Colman J. said, at p.118 rhc, that:

“In essence, the transference of the bill of lading after it has ceased to be a document of title has to be a transference provided for by the antecedent contractual or other arrangements. If it is a transference called for by contractual or other arrangements made after the bills of lading ceased to be documents of title vis-à-vis the ship, proviso (a) has no application.”

In the Ythan [2006] Aikens J. (as he then was) said at paragraph 84 that the contractual or other arrangements in section 2(2)(a) refer to the “reason or cause” for the transfer. On the facts of that case (which concerned the compromise of an insurance claim on cargo which had been lost as a result of an explosion on board the vessel) Aikens J. held, also at paragraph 84, that the reason for the delivery of the bills was because it was “contemplated” that underwriters would pay under the compromise agreement which was made long after the cargo had been lost. He accepted, in paragraph 85, that it could be said that the delivery of the bills “arose out of the open cover” but in his view “the immediate reason and proximate cause of the transfer of the bills” was the compromise agreement.

In the Pace at paragraphs 45-48 I referred to both of those cases and agreed with Aikens J. that the words “in pursuance of” can most appropriately be understood to mean that the contractual or other arrangements must be the reason for or cause of the transfer or delivery of the bills.

In the Ythan Aikens J. referred to the immediate reason for and proximate cause of the transfer of the bills. I do not doubt that that was an appropriate description in circumstances where Aikens J. wished to differentiate between a “but for” cause (the open cargo cover in existence before the cargo was lost) and what was in his judgment the real or effective cause, (the later compromise agreement with the underwriters). However, I am not persuaded that section 2(2)(a) always requires the court to identify the immediate reason or the proximate cause because, in a case where, as here, there are competing reasons or causes, that would or might tend to identify the later cause as the real or effective cause. That may of course be the right answer, as it was on the facts of the Ythan, but it need not always be. Depending on the circumstances of the case the earlier cause may be the real and effective cause. For this reason, in a case of competing reasons or causes, I consider it more appropriate to ask what is the real and effective cause. Identification of that cause will enable the court to determine whether the delivery of the bills was effected “in pursuance of” contractual or other arrangements made before the time when the bills were spent.

In the present case the question therefore is whether the real and effective cause of the delivery of the bills to SCB on 7 July 2010 (assuming that that was when delivery occurred rather than on 4 June 2010) was the transfer letter of credit confirmed on 30 April 2010 (before the bills were spent on 15 June 2010) or the settlement of Gunvor’s action on 7 July 2010 (after the bills were spent).

There is, in my judgment, a powerful case that the real and effective cause of the delivery of the bills on 7 July 2010 was the transfer letter of credit. The principal sum paid by SCB was the sum due under the transfer letter of credit. SCB implicitly conceded that Gunvor’s claim under the letter of credit was good and paid the sum due (together with interest and costs to compensate Gunvor for the delay in payment and for the costs of having to issue proceedings). The payment of the principal sum was made in accordance with the mechanism of the letter of credit.

But Mr. Downes submitted that the immediate reason for and proximate cause of the delivery of the bills was the settlement on 7 July 2010. The settlement was reached, he submitted, because SCB wished to avoid the reputational damage that flowed from having been sued and from having been on the receiving end of an unanswerable claim in which SCB had acted incompetently and dishonourably. Had SCB wished merely to pay the sum due, no discussions concerning, in particular, the need for the proceedings to be discontinued, would have been required.

I accept that the settlement was made in part because SCB needed to avoid damage to its reputation. But the cause of any such damage would have been a refusal by SCB to honour an inescapable obligation under a letter of credit. That, to my mind, illustrates that the reason for and cause of the settlement was the letter of credit and the inescapable obligation which had accrued pursuant to its terms. I accept that litigation would draw attention to SCB’s conduct and heighten the reputational damage but I consider it unrealistic to regard the settlement which ended that litigation as the reason for and cause of the payment of the sum due under the letter of credit.

The settlement was also reached because SCB had failed in its attempt to get Gunvor and UIDC to discuss a more favourable commercial settlement which rescued SCB from the position into which it had got itself into, namely, facing an obligation to pay Gunvor with no recourse against UBA. But I do not consider that that prevents the transfer letter of credit from being the reason for and cause of the payment of the sum due under the letter of credit.

In my judgment the transfer letter of credit was the real and effective cause of the payment of the sum due under the letter of credit and hence (on the assumption that the Shipowner’s case on what amounts to acceptance of delivery under COGSA is correct) of delivery of the bills.

For these reasons, if the Shipowner’s case on what amounts to delivery of a bill under COGSA is correct, I would have held that SCB had title to sue pursuant to sections 5(2)(b) and 2(2)(a) of COGSA 1992.

Mr. Downes submitted that the Shipowner did not commit a breach of the contract contained or evidenced by the bills of lading when it discharged and delivered the goods without production of the bills of lading but on production of a letter of indemnity. This was a bold submission; see the discussion of the authorities in East West Corporation v DKBS by Thomas J. at paragraphs 120-129 which commences as follows:

“It has been made clear in decisions of the highest authority that a carrier must under the usual terms of a bill of lading deliver the goods only against presentation of an original bill of lading.”

Mr. Downes submitted that the Shipowner had discharged the goods in accordance with the instructions of Gunvor who was the true owner of the goods and the lawful holder of the bill of lading. No authority was cited which supported the suggestion that discharge without the production of the bill of lading pursuant to the instructions of a shipper who was neither the named consignee nor the indorsee was not a breach of the contract of carriage contained in or evidenced by the bill of lading. But the discharge was said to fall squarely within the exception to the carrier’s obligation to discharge on production of the bill of lading recognised by Clarke J. (as he then was) in the Sormovskiy 3068 [1994] 2 Lloyd’s Reports 266, namely, where it is proved to his reasonable satisfaction that the person seeking possession of the goods is entitled to possession of them and that there is some reasonable explanation of what has become of the bills of lading. The existence of this exception is controversial. Rix J. (as he then was) has disagreed with Clarke J. that there is such an exception; see Motis Export v Dampskibsselkabet [1999] 1 Lloyd’s Reports 837. Thomas J. in East West Corporation v DKBS agreed with Rix J and Mance LJ in the same case doubted whether there is such an exception. But even if the existence of such an exception is assumed there is no evidence that the Shipowner could bring itself within it. In circumstances where the bills had been consigned to the order of Societe Generale and then indorsed to SCB and the goods were being discharged to Chase and UBI it is difficult to see how the Shipowner could believe that Gunvor or Chase and UBI were entitled to possession of the goods or what the reasonable explanation for the absence of the bills might have been. In any event there was no evidence from the Shipowner that it was proved to its reasonable satisfaction that the person seeking possession of the goods was entitled to possession of them and that there was some reasonable explanation of what had become of the bills of lading.

Thus the Shipowner, by discharging and delivering the goods without production of the bill of lading, committed a breach of the contract of carriage contained in or evidenced by the bill of lading.

Mr. Downes next submitted that if there was a “technical” breach of contract no loss was caused because discharge had been to the person entitled to possession of the goods, or rather at the direction of such person. It may be that where delivery is made to the person entitled to possession of the goods no loss is caused, as where delivery is made to a buyer who has paid for the goods but where the bills, indorsed to him and en route to him, are still in the banking system and have not reached the discharge port. But those were not the facts of this case. In the present case the goods were delivered to Chase and UBI at the direction of the Gunvor. It was Mr. Downes’ submission that Gunvor was entitled to possession of the goods at the time of delivery by the Shipowner. But Gunvor was not the indorsee of the bills and so could not claim to be entitled to possession of the goods from the Shipowner. SCB was the indorsee of the bills who was entitled to possession of the goods from the Shipowner.

Mr. Downes then submitted that no loss was caused to SCB by the Shipowner’s breach of contract because if SCB had taken delivery of the goods it would not have been entitled to sell the goods. Any such sale would have been a conversion of the goods actionable at the suit of the true owner of the goods. SCB would be bound to deliver up the goods or the proceeds of sale to the true owner.

It is true that SCB was not the owner of the goods but the security of a bank which agrees to finance an international sale of goods under a letter of credit lies, in part, in its rights as holder of the bills of lading and thereby to possession of the goods. The indorsement of the bill in favour of the financing bank will usually be intended to confer a security by way of pledge. That was no doubt the intention in the present case. That pledge enables the bank to obtain delivery of the goods and if necessary realise them for the purposes of the security; see Scrutton on Charterparties and Bills of Lading 22^nd.ed. at article 116 and Sewell v Burdick (1884) 10 App. Cas. 74 at p.82. Before COGSA 1992 the transfer of contractual rights in the bill of lading pursuant to the Bills of Lading Act 1855 was linked with the passing of property. A bank financing the international sale of goods would not have those rights transferred to it because the property in the goods would not be intended to pass to the bank; see Sewell v Burdick. However, under COGSA 1992 the indorsement and delivery of the bill to the financing bank will now result in the transfer of the rights under the bill of lading contract to it. There is no reason to suppose that that change, which was brought about to simplify the law as to the transfer of rights under a bill of lading, in fact removed the financing bank’s traditional security. On the contrary, by enabling the rights under the bill to be transferred to the financing bank where it is the indorsee of the bill, its security interest in the bill is strengthened. In so far as the cause of action in conversion may not be effective where the carrier has discharged the goods before the bank has acquired its security interest (see Scrutton, again at article 116), the rights of suit in contract, if transferred under COGSA 1992, can be exercised even if the indorsement was completed by delivery after the goods had been discharged. Just as the financing bank could realise its security before the passing of COGSA 1992 by obtaining delivery of the goods and if necessary selling them so, in my judgment, the financing bank can do so after the passing of COGSA 1992. Such sale cannot be a conversion as against the shipper for it was the shipper who, by indorsing the bills in favour of the bank, pledged the goods in favour of the bank and thereby created its security interest. The shipper cannot complain if the bank realises the security which the shipper had created. The financing bank would not be bound to hold the proceeds of sale to the order of the owner of the goods, save to the extent that they exceeded the sum required as security. Mr. Downes said that until SCB had paid out under the letter of credit it had no security interest. Mr. Tselentis’ answer to this, which I accept, is that once a compliant presentation of documents was made on 4 June 2010, SCB was under an inescapable obligation to pay and from that time it could exercise the security interest it acquired by reason of the pledge of the goods.

I am therefore unable to accept Mr. Downes’ submission that SCB has suffered no loss. If it were correct it would have deprived SCB of the security provided by the bills and would undermine the manner in which the financing of the international sale of goods has long been secured.

For these reasons there must be judgment for SCB in the sum of US$6,132,355.74, that being the agreed sum which SCB could have realised by selling the cargo together with interest and costs.