22 August, 2019
The “Yue You 902” and another matter [2019] SGHC 106
In this case, the Singapore High Court (“Court”) allowed Overseas-Chinese Banking Corporation Limited (“Bank”) to enforce its pledge over original bills of lading in its possession as security over a trust receipt loan. The Court clarified the law in relation to the rights of a trade finance bank over pledged original bills of lading, especially in the case where the trade finance bank only became the lawful holder of the original bills of lading after the cargo was discharged without the production of the original bills of lading.
Facts
The Bank was given a pledge over 14 original bills of lading (“BLs”) to secure a trust receipt loan granted to the buyer (“Buyer”) for the purchase price of the cargo. The cargo was discharged by the defendant shipowner (“Defendant”) against a letter of indemnity provided by its contractual charterer without production of the BLs. The Buyer defaulted on the trust receipt loan and the Bank demanded delivery of the cargo from the Defendant as lawful holders of the BLs. As the cargo was already discharged, the Bank claimed against the Defendant for breach of contract of carriage, breach of contract of bailment, conversion and detinue.
Decision
(a) Was the Bank a lawful holder of the BLs?
The Bank was a lawful holder of the BLs if the Bank became the holder of the BLs in “good faith”. The Defendant argued that the Bank was not a holder in “good faith” as the Bank had particular knowledge of the Buyer’s commercial practices and knew that the cargo had already been discharged against the letter of indemnity by the time the Bank became the holder of the BLs. The Court held that the Bank did not have actual knowledge of the discharge of the cargo. General knowledge that letters of indemnity may be used in the trade of certain commodities involving short voyages was not sufficient by itself to input such actual knowledge. In any case, the Bank had acted honestly and provided valuable consideration in the form of a loan in return for a security interest in the BLs.
(b) Were the BLs “spent” before the Bank became a holder of the BLs?
The Defendant argued that the cargo had been discharged prior to the Bank becoming a holder of the BLs. As such, the BLs had become “spent” before the Bank acquired them. The Court held that the BLs were not “spent”. The BLs do not become spent if delivery is made to persons not entitled. In this case, the delivery was made against a letter of indemnity to a person who was at the material time not entitled to delivery under the BLs.
(c) Did the Bank still have rights against the Defendant if the BLs were “spent”?
The Bank will still have rights of suit under the “spent” BLs against the Defendant pursuant to section 2 of the Bills of Lading Act, if the Bank became the holder of the BLs by virtue of a transaction effected in pursuance of any “contractual or other arrangements”, made before the BLs became “spent”. In this case, the relevant “contractual or other arrangement” would be the facility agreement for the trust receipt loan, and it is undeniable that the request and grant of the trust receipt loan were made pursuant to the facility agreement.
The relevant “contractual or other arrangement” also does not have to be one which the Bank is a party to, if it can be said that the sale contract for the cargo is a cause or reason for the trust receipt loan. Thus, even if there was no facility agreement to rely on, the Bank can rely on the sale contract for the cargo as the relevant “contractual or other arrangement”.
Learning Points
This case provides assurance to trade finance banks in relation to their rights under pledged bills of lading in a typical trade finance transaction. However, the outcome may have been different if the trade finance bank had actual knowledge of, or consented to, the discharge of the cargo. This is especially so in supply chain financing where the trade finance bank may have greater knowledge of the modus operandi of the various parties including the seller, charterer and shipowner. The risk of misrepresentation which can lead to an estoppel of the rights of the trade finance bank is also higher in such cases.
In addition, it is also worth mentioning that it is important that a trade finance bank obtains the bills of lading through conventional trade structures. In this case, the Bank received the BLs through banking channels. This is a good indication that the BLs could not have been “spent” in the Bank’s possession, because any delivery by the Defendant would not be delivery to a person entitled to delivery under the BLs, since the BLs are in the possession of the Bank. The outcome may again be different if the Bank received the BLs from the Buyer or a third party, as there will be the risk that the cargo was already delivered with the BLs, before the BLs were delivered to the Bank. Likewise, it is also prudent for the bills of lading to be consigned to the order of the trade finance bank. This will again mitigate the risk of the bills of lading becoming “spent” as any delivery of the cargo other than to the order of the trade finance bank would not be delivery to a person entitled to delivery under the bills of lading.
