Important Court of Appeal judgment on the operation of bills of lading and letters of credit

31/10/14

On 22^nd October, the Court of Appeal (Moore-Bick LJ, Briggs LJ and Sir Bernard Rix) handed down judgment in Standard Chartered Bank v Dorchester LNG (2) Limited (“The Erin Schulte”) [2014] EWCA Civ 1382. This judgment determines a number of points of general importance to the operation of bills of lading and letters of credit.

In simplified form, the relevant facts were as follows: Gunvor was the seller of two cargoes of gasoil to UIDC, who was in turn was on-selling them to Cirrus. Cirrus opened a letter of credit in favour of UIDC, which was confirmed by Standard Chartered Bank (“SCB”), and in due course, at UIDC’s request, transferred to Gunvor. There were issues between the parties to the sale contracts as to the quality of the gasoil, with the result that, as between UIDC and Cirrus, Cirrus accepted the first cargo only. An amendment to the letter of credit was requested by Cirrus’ bank, reducing the value and the quantity of the cargo covered by the letter of credit to that on board the first vessel. Having obtained the consent of UIDC, but before obtaining the consent of Gunvor, SCB consented to that amendment. The cargo on the second vessel, the Erin Schulte, was in due course on-sold by UIDC to new sub-purchasers. Gunvor rejected the requested amendment to the transfer letter of credit, and presented documents, including indorsed bills of lading, to SCB under the transfer letter of credit in respect of the cargo on the Erin Schulte. By virtue of its error in accepting the amendment without confirmation from both beneficiaries, SCB remained liable to Gunvor under the transfer letter of credit, but had no right of recourse in respect of that liability. SCB wrongfully rejected what was (and was subsequently agreed to be) a compliant presentation, and stated that it held the documents to the order of Gunvor. Gunvor continued over the following month to insist on the validity of its original presentation, but was met by intransigence on the part of the bank. During this period, the cargo was discharged against a letter of indemnity issued by Gunvor to the carrier, Dorchester LNG (2) Limited (“Dorchester”). After Gunvor had issued Commercial Court proceedings against SCB, the bank paid up, settling the claim by making payment in full of the amount due under the letter of credit, along with interest and costs (by now over a month after the original presentation and three weeks after the expiry of the letter of credit). Having paid Gunvor, SCB then sued Dorchester for misdelivery, since the carrier had delivered the cargo other than upon presentation of the bills of lading (which at all times were sitting at SCB’s counters). The issue between the parties was whether SCB had at any time become the holder of the bills of lading under the Carriage of Goods by Sea Act 1992 (“COGSA”), such that it had acquired rights of suit against Dorchester. Teare J decided at first instance ([2013] EWHC 808 (Comm)), that SCB had become the holder of the bill of lading, either on 4 June 2010 (upon and by virtue of the original presentation, notwithstanding the rejection of that presentation) or alternatively on 7 July 2010, when SCB settled Gunvor’s claim in full.

Moore-Bick LJ, giving the judgment of the Court, ultimately dismissed the appeal, overturning the finding that SCB had become the holder of the bills on 4 June 2010, but affirming the conclusion that it became the holder on 7 July 2010.

The judgment rules on a number of points of general importance in the field of international trade. In particular, issues arose in the appeal as to:

• (Most significantly) the true meaning and effect of section 5(2)(b) of COGSA (prescribing when and how an indorsee becomes the holder of a bill of lading);
• The effect of a rejection of a presentation made under a letter of credit;
• The legal nature of a claim for dishonour of a letter of credit; and,
• The true meaning and effect of section 2(2)(a) of COGSA (dealing with the transfer of spent bills of lading, and whether and when such a transfer confers rights of suit).

As to those issues, the Court of Appeal concluded as follows:  

• The Court of Appeal ruled that the judge had erred in holding the indorsement had been completed by delivery on 4 June 2010. SCB had argued, and Teare J had accepted, that mere receipt by the bank of the indorsed bills of lading was sufficient to complete the indorsement and render the bank the holder of the bills (i.e. the bank became holder upon presentation, regardless of whether it accepted or rejected the presentation). The Court of Appeal held that the indorsement was not completed until the bank accepted the presentation and took up the bills – ‘completion of an indorsement by delivery requires the voluntary and unconditional transfer of possession by the holder to the indorsee and an unconditional acceptance by the indorsee’ (see para 28). This conclusion has important ramifications for the everyday operation of letters of credit and bills of lading – for example, it is apparent from this that following rejection of a presentation, bills of lading need only be returned to the presenter, not re-indorsed back to him by the bank.
• The Court of Appeal ruled on the nature of a rejection of a presentation, accepting Dorchester’s submission that its effect was final – ‘once SCB had unequivocally rejected the bill of lading it could not unilaterally change its mind and decide to take it up. That could be done only with the consent of Gunvor…’ (para 33).
• As for the nature of a claim for dishonour of a letter of credit, older authorities suggested it was a claim for damages, whilst more modern authorities suggested it was a claim in debt. The Court of Appeal concluded (para 51) that a claim for the face value of the credit was properly to be considered one in debt rather than damages for failure to honour the letter of credit. A beneficiary could sue in debt to recover the value of the credit, provided he was willing and able to transfer the documents to the bank against payment, or alternatively recover (or refuse to transfer) the documents and sue in damages.
• Finally, as to the test in section 2(2)(a) of COGSA, which had been the subject of a string of first instance decisions, the Court of Appeal concluded that it was not ‘helpful to seek to identify the “real and effective cause of the transfer”’, but rather that the court should ‘simply … identify the arrangement, if any, pursuant to which the transfer was made’ (para 56). 

The judgment is here.