Singapore High Court discusses bank’s right to enforce security over bills of lading under Bills of Lading Act
29 August 2019
The “Yue You 902” and another matter [2019] SGHC 106
In The “Yue You 902”, the Singapore High Court considered the issue of whether a trade finance bank was entitled to enforce its pledge over original bills of lading as security over a trust receipt loan where the loan was granted after the discharge of cargo by the carrier in possession.
This decision should be of interest not only to trade finance banks but to carriers as well. It is a reminder that a carrier is obliged to deliver cargo only to the person in possession of the original bills of lading. Delivery of cargo, whether or not against a letter of indemnity, to persons not entitled does not cause a bill of lading to be spent.
Facts
FGV Trading Sdn Bhd (“FGV”), the seller of the cargo, entered into a voyage charterparty with the defendant shipowner, Jiang Xin Shipping Co Ltd (“defendant”) to charter the vessel “Yue You 902”. The cargo was sold to Aavanti Industries Pte Ltd (“Aavanti”) who then on-sold it to Ruchi Soya Industries Ltd (“Ruchi”). Ruchi issued a letter of indemnity (“LOI”) to Aavanti who in turn issued a back-to-back LOI to FGV, who also issued a LOI to the defendant, all requesting the defendant to deliver the cargo to Ruchi without production of the original bills of lading.
In the meantime, the plaintiff bank, Overseas-Chinese Banking Corporation Ltd (“plaintiff”), received 14 bills of lading from FGV though its bank (“Maybank”) under cover of a document against payment collection schedule. All 14 bills of lading were blank endorsed by FGV. When the plaintiff informed Aavanti of the arrival of the documents, Aavanti requested financing for the entire purchase price of the cargo by way of a trust receipt loan. This request was granted by the plaintiff. The cargo was completely discharged before the plaintiff remitted the purchase price to Maybank.
Aavanti defaulted on the loan and the plaintiff proceeded to enforce its security over the bills of lading by demanding delivery of the cargo from the defendant, which the defendant failed to do. The plaintiff then commenced proceedings against the defendant pursuant to the 14 bills of lading for breach of contract of carriage, breach of contract of bailment, conversion and detinue.
Did the plaintiff acquire a right of suit?
The defendant argued that the plaintiff had not acquired a right of suit under the Bills of Lading Act (“Act’”) because the bills of lading had become “spent”, the cargo having been delivered to Ruchi before the plaintiff became the holder of the bills of lading.
However, the court disagreed that the bills of lading were “spent” because delivery against a letter of indemnity to a person not entitled to the cargo does not cause a bill of lading to be “spent”. The position under the Act is consistent with the traditional common law position.
The court was also of the view that even if the bills of lading were “spent”, the plaintiff would still have rights of suit under the “spent” bills of lading because the plaintiff became the holder under section 2(2) of the Act, by virtue of a “transaction” effected in pursuance of any “contractual or other arrangements”, made before the bills of lading became “spent”. On the facts, the court found that the relevant “contractual or other arrangements” was the Facility Agreement as it was undeniable that the request and grant of the trust receipt loan were made pursuant to the Facility Agreement. Alternatively, the relevant “contractual or other arrangements” was the sale contract between FGV and Aavanti, since Aavanti requested the trust receipt loan from the plaintiff in order to carry out and fulfil the sale contract.
Was the plaintiff a holder of the bills of lading in good faith?
Next, the defendant submitted that the plaintiff had not become the holder of the bills of lading “in good faith”, and that consequently, under the Act, the contractual rights of suit could not be transferred to the plaintiff. In particular, the defendant alleged that the plaintiff knew that the cargo had been discharged before it agreed to extend the loan to Aavanti.
However, the court disagreed with the defendants and found that there was no evidence to suggest that the plaintiff had actual knowledge that the cargo had been discharged.
Did the plaintiff consent to the discharge of cargo without production of bills of lading?
The defendant also submitted that, by granting the trust receipt loan to Aavanti with the knowledge that the cargo would be or had been delivered against a LOI without presentation of original bills of lading, the plaintiff had consented to the discharge of the cargo without production of the original bills of lading.
Again, the court disagreed with the defendants, finding that the defendant was not able to point to anything said or done by the plaintiff which could have induced the defendant to conclude that the plaintiff had consented to the discharge of the cargo without production of the original bills of lading.
The court found that the plaintiff’s decision to grant a trust receipt loan (as opposed to other types of loan) and take the bills of lading as security was clearly inconsistent with any intention to waive its contractual rights of suit against the defendant under the bills of lading. There was nothing said or done by the plaintiff after the grant of the loan which could be construed as ratification of the misdelivery or waiver of the plaintiff’s rights of suit.
Comment
The decision in The “Yue You 902” should be welcomed by trade finance banks. It provides comfort that in a typical or conventional trade finance structure, the courts will likely endorse the bank’s right to call on and enforce the bank’s security by way of a pledge over original bills of lading, even if it is industry practice in that particular trade for cargoes to be discharged against letters of indemnity.
Care should however be taken. The outcome in that case could have been very different if the court had found that the plaintiff had actual knowledge that the particular cargo covered by the bills of lading in its possession had been discharged against the LOIs, or if the bank had consented or authorised to the same.