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CONTENTSINTRODUCTION 02
TRADECourt construes “Notices” provision in GAFTA 64 contractSoufflet Negoce SA v. Fedcominvest Europe SARL [2014] EWHC 2405 (Comm) 03
Damages for breach of terms as to quality – does the Sale of Goods Act limit such damages to depreciation in value?Saipol SA v. Inerco Trade SA (Selandra Swan) [2014] EWHC 221 04
Commercial Court rules on buyers’ rights to extensions of time under GAFTA 49Nidera BV v. Venus International Free Zone for Trading and Marine Services SAE (Pioneer Wave) [2014] EWHC 2013 (Comm) 05
TRADE FINANCE Court of Appeal considers whether dishonouring LC bank has title to sue under indorsed bill of ladingStandard Chartered Bank v. Dorchester LNG(2) Limited (Erin Schulte) [2014] EWCA Civ 1382 07
Exceptional circumstances required to prevent bank from paying under letter of creditAlternative Power Solutions v. Central Electricity Board and Another [2014] UKPC 31 08
SHIPPING Bill of lading “law and arbitration” clause incorporates charterparty court jurisdiction provisionCaresse Navigation Ltd v. Zurich Assurances MAROC and others (Channel Ranger) [2014] EWCA Civ 1366 10
CONTACTS 12
INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATENOVEMBER 2014
02 INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
INTRODUCTION
Welcome to the latest edition of our biannual Legal Update, which we hope you will find informative and useful. In this issue, we review a number of recent decisions that we believe will be of interest to you and relevant to your business.
We review two cases dealing with the construction of provisions in GAFTA standard form contracts. The first deals with the construction of the “Notices” provision in GAFTA 64, in which the Court favoured a commercial rather than an overly literal meaning. The second deals with the nature and scope of the buyer’s right to extend the delivery period under the relevant clause in GAFTA 49. In both cases, the Commercial Court dismissed the Sellers’ appeal from the GAFTA Appeal Board award.
In Saipol v. Inerco, the Court dealt with the recovery of damages for breach of terms as to quality. The primary issue was the application of Sections 53 and 54 of the Sale of Goods Act 1979 that deal with the determination of the appropriate measure of damages for breach of warranty and whether they limit such damages to depreciation in value.
On the trade finance side, we report on one of our own cases, the Erin Schulte, which went to the Court of Appeal and which has serious implications for traders relying on letters of credit for payment security in their sale contracts. We report on how the law as now stated in that case puts a beneficiary in a difficult position when faced with a wrongful rejection of documents which includes a bill of lading. Does he maintain a claim in debt against the bank by leaving the documents with the bank or does he take them back and secure discharge of the cargo against presentation of the bill? Both alternatives are potentially problematic.
We also review a decision of the Privy Council in Alternative Power Solutions v. Central Electricity Board highlights the autonomy principle underpinning letters of credit and confirms that commercial disputes arising in the underlying transaction are irrelevant to the issuing bank’s obligation to pay upon presentation of documents complying with the credit. The case also confirms the virtual impossibility of obtaining an injunction to prevent the bank from making payment because the balance of convenience will almost always be in favour of allowing the bank to make payment.
Finally, our shipping case is the Court of Appeal decision in the Channel Ranger. The dispute related to whether the reference in a bill of lading to the incorporation of a “law and arbitration” clause was effective to incorporate a law and court jurisdiction provision in a charterparty. The appeal judges agreed with the first instance judge that this was a question of construction of the terms of the contract rather than incorporation. They concluded that the parties must have intended to incorporate the dispute resolution clause in the charterparty.
Ince & Co LLP’s International Trade and Commodities Group provides a full service to clients in the global trading community. We advise clients in a range of industries including oil and gas, biofuels, coal, sugar/molasses, grain and feed, oils and fats and metals. If you have any queries arising out of the content of this Update, or any matters you wish to discuss with us, please feel free to contact me or the authors of specific case reports you are interested in, or your usual contact at Ince & Co.
Stuart ShepherdPartner and Global Head of Trade, [email protected]
03INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
TRADE
Court construes “Notices” provision in GAFTA 64 contract Soufflet Negoce SA v. Fedcominvest Europe SARL [2014] EWHC 2405 (Comm)
The decision in this case provides helpful guidance on the construction of the “Notices” provision in GAFTA 64 (General Contract for Grain in Bulk FOB terms). The Court upheld the GAFTA Board of Appeal award, which found that the provision in the contract whereby any notice received after 1600 hours on a business day would be deemed to have been received the following day, applied only in the case of resales and repurchases (which was not the case here). The commercial reality was that, in those cases, it is particularly important that notices up or down the chain are served without delay because intermediary sellers or buyers in the chain may otherwise be prejudiced if the notice is not received in time to be passed on.
The background factsPursuant to a sale contract dated 4 October 2010, which incorporated GAFTA 64, the Sellers agreed to sell a quantity of French feed barley to the Buyers on FOB terms. The relevant terms of GAFTA 64 for the purposes of the parties’ dispute were as follows:
“6. PERIOD OF DELIVERY...In case of re-sales all notices shall be passed on without delay, where possible, by telephone and confirmed on the same day in accordance with the Notices Clause....8. EXTENSION OF DELIVERYThe contract period of delivery shall be extended by an additional period of not more than 21 consecutive days, provided that Buyers serve notice claiming extension not later than the next business day following the last day of the delivery period....19. NOTICESAll notices required to be served on the parties pursuant to this contract shall be communicated rapidly in legible form. Methods of rapid communication for the purposes of this clause are defined and mutually recognised as: - either telex, or letter if delivered by hand on the date of writing, or telefax, or E-mail, or other electronic means, always subject to the proviso that if receipt of any notice is contested, the burden of proof of transmission shall be on the sender who shall, in the case of a dispute, establish, to the satisfaction of the arbitrator(s) or board of appeal appointed pursuant to the Arbitration Clause, that the notice was actually transmitted to the addressee. In case of resales/repurchases all notices shall be served without delay by sellers on their respective buyers or vice versa, and any notice received after 1600 hours on a business day shall be deemed to have been received on the business day following. A notice to the Brokers or Agent shall be deemed a notice under this contract.” (Emphasis added.)
The original agreed delivery period was 10 November – 10 December 2010 at the Buyers’ option. As 10 December 2010 was a Friday, “the next business day following the last day of the delivery period” on which any notice claiming an extension under clause 8 had to be served was Monday 13 December 2010. The Buyers’ nominated vessel was delayed and the Buyers tendered a notice claiming an extension at 1709 on 13 December. The Sellers argued that, as the notice was served after 1600 hours, it was deemed to have been received the following day, on Tuesday 14 December, pursuant to the deemed notice provision in clause 19 and was therefore out of time. The Buyers contended that the deemed Notice provision only applied to resales/repurchases, which was not the case here, and they claimed damages from the Sellers for non-performance of the contract.
The GAFTA Board of Appeal found in favour of the Buyers, holding that the deemed notice provision in clause 19 did not apply and that, under clause 8, the Buyers had until midnight on 13 December 2010 to serve the notice claiming an extension. The notice served by them was therefore valid and they were entitled to damages for the Sellers’ wrongful repudiation of contract. The Sellers appealed.
The Commercial Court decisionThe Court acknowledged that there was more than one way of construing the relevant wording in the contract but concluded that the Buyers’ construction was the more natural one in the context of GAFTA 64 when construed as a whole. In the Court’s view, the provision that any notice served after 1600 would be deemed to have been served the next day applied only to notices in the case of resales/repurchases and not to all notices.
There was a clear scheme within GAFTA 64, extending beyond the Notices clause 19, for notices in the case of resales/repurchases and that scheme sought to ensure that, so far as possible, intermediate sellers and buyers were in a position to pass on such notices on the same day. In particular, under clause 6, vessel nomination notices in the case of resales had to be passed on, where possible, by telephone and then confirmed on the same day in accordance with clause 19, the Notices provision. Clause 19 required written notices to be given and served before 1600 hours in resales/repurchases cases if they were to be deemed as having been served on the same day.
CommentThe Court avoided what it referred to as an “over zealous semantic and syntactical analysis” of the contractual provision in question and side-stepped arguments on which interpretation made more business common sense. Instead, it construed the disputed wording in the context of the contract as a whole, this being more likely to result in a construction that accords with what the parties can objectively be taken to have agreed.
Reema ShourProfessional Support Lawyer, [email protected]
Ted GrahamPartner, [email protected]
04 INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
Damages for breach of terms as to quality – does the Sale of Goods Act limit such damages to depreciation in value?
Saipol SA v. Inerco Trade SA (Selandra Swan) [2014] EWHC 2211
This sale contract dispute provides a useful refresher with regard to the proper application of the provisions of Sections 53 and 54 of the Sale of Goods Act 1979 (the “SGA”) dealing with the determination of the appropriate measure of damages for breach of warranty.
The background facts Pursuant to a FOB contract (the “Contract”), Inerco Trade SA (the “Seller”) agreed to sell and Saipol SA (the “Buyer”) agreed to purchase 3,000 MT of Ukrainian crude sunflower oil (the “Product”) in bulk, at a price of US$1,275 per MT. Delivery was due to take place at Ilyichevsk, between 15 March and 15 April 2008.
The Seller shipped the Product, as part of a total cargo of about 16,600 MT of Ukrainian crude sunflower seed oil, on board the MT Selandra Swan (the “Vessel”) on 16 March 2008. The balance of the cargo loaded onto the Vessel (approximately 13,600 MT) was shipped by four other sellers. Before shipment, all five consignments of cargo had been comingled and the whole cargo was loaded, comingled into the Vessel’s tanks (“the entire cargo”).
The entire cargo was discharged at Dunkirk on 31 March 2008. In the weeks following discharge, it had become clear that the entire cargo had been contaminated prior to loading on board the Vessel.
The Buyer’s claim The Buyer pursued a claim for damages against the Seller for breach of S. 13 (sale by description) and S. 14 (implied terms as to quality and fitness) of the SGA. The Seller denied the Buyer’s claim and the dispute was referred to FOSFA arbitration.
The Tribunal upheld the Buyer’s claim that, in respect of the 3,000 MT of Product sold by the Seller to the Buyer, the Seller was in breach of Sections 13 and 14 of the SGA.
The quantum of the Buyer’s claimThe Buyer sought to recover damages from the Seller in respect of:
> the difference in value between sound and contaminated Product;
> costs incurred by the Buyer in respect of storage and financing of the contaminated Product; and
> sums paid by the Buyer to sub-purchasers to whom the contaminated Product had been sold.
The Buyer also contended that it was entitled to damages in respect of the contamination of the entire cargo and not only in respect of the 3,000 MT sold by the Seller.
The law on damagesNot all losses that flow from a breach of contract are necessarily recoverable. As a matter of English law, the recoverability of damages for breach of contract may be restricted on the grounds of remoteness. In this respect, the main principles were laid down in Hadley v. Baxendale [1854] EWHC Exch. J70, which provides that a claimant will only be able to recover:
1. losses arising naturally, according to the normal course of things from the breach of contract (the “first limb”), sometimes referred to as “general damages”; and
2. losses which may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as a probable result of the breach (the ”second limb”), sometimes referred to as “special damages”.
So far as relevant for present purposes, the SGA provides as follows:
S. 53:
(2) “The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.
(3) In case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”
S. 54:
“Nothing in this Act affects the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover money paid where the consideration for the payment of it has failed.”
The Buyer’s claim in respect of damages was advanced pursuant to S. 53(2) and S. 54 of the SGA not S. 53(3).
The Tribunal’s award on damagesThe Tribunal held that the Buyer was only entitled to (i) damages representing the difference in value between the Product as it was warranted and its actual value and (ii) damages in respect of storage and financing costs of the contaminated Product. The Tribunal held that the Seller’s liability was confined to the 3,000 MT it had sold to the Buyer and did not extend to the entire cargo.
The Tribunal’s award on quantum was appealed by both the Buyer and the Seller, but the FOSFA Board of Appeal upheld the Tribunal’s findings. The Board treated the Buyer’s claim in respect of the contamination of the entire cargo as one for special damages and, in rejecting it, said:
“However, we see no special circumstance arising in the surrounding “factual matrix” or commercial background to the parties’ trade, neither in their agreed contractual
05INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
regime of an FOB purchase on standard terms for a generic grade of a crude vegetable oil, that could be said to lead to the conclusion that there were any special damage considerations either expressed or in the contemplation of the parties at the time the Contract was concluded beyond the trade norm of either a fixed price allowance or compensation for loss in market value in the event of a quality breach.”
On the basis of that conclusion, the Board determined that the Buyer’s damages were to be determined under S. 53(3) even though the claim had been advanced under S. 53(2) of the SGA.
The appealThe Buyer brought an appeal in the Commercial Court (the “Court”), pursuant to S. 69 of the Arbitration Act 1996 (appeal on a point of law) and the main question before it was whether the SGA limited the recoverable damages to the difference in value between sound and defective goods.
The Commercial Court decisionThe Court held that the SGA did not limit the recoverable damages to the difference in value between sound and defective goods. It further held that the Board had erred in making its award based on S. 53(3) of the SGA, particularly in circumstances where the Buyer had advanced its case pursuant to S. 53(2) and S. 54 of the SGA.
The Court said that under S. 53(2) of the SGA, there can be, depending of course on the facts of the situation, a claim for “consequential” losses on the basis that such losses are those that will result in the usual course of things i.e. losses that fall under the first limb of Hadley v. Baxendale. In such circumstances, it is not necessary to consider whether the losses claimed were within the special contemplation of the parties, or whether the defending party had assumed responsibility for such losses at the time of contracting (i.e. it is not necessary to consider the second limb of Hadley v Baxendale); the point simply does not arise.
The case was remitted to the Tribunal for further consideration in light of the Court’s findings.
CommentThis decision provides a reminder that the measure of damages for breach of warranty in relation to quality in S. 53(3) of the SGA is only a prima facie measure and does not prevent a claimant from claiming any and all loss directly and naturally resulting from the breach, as the claimants did in this case, under S. 53(2) of the SGA.
Louise McDonaldSolicitor, [email protected]
Stuart ShepherdPartner and Global Head of Trade, [email protected]
Commercial Court rules on buyers’ rights to extensions of time under GAFTA 49
Nidera BV v. Venus International Free Zone for Trading and Marine Services SAE (Pioneer Wave) [2014] EWHC 2013 (Comm)
This recent decision from the Commercial Court provides useful guidance on the construction of Clause 8 of the popular GAFTA 49 form; in particular, on the nature and scope of a buyer’s right to extend the delivery period under that clause.
The Court held that the “clear and unqualified” words in Clause 8 mean that a buyer has an absolute right to extend the shipment period under Clause 8 of GAFTA 49, and the right would remain available to a buyer whose nominated vessel had already arrived and was presented within the delivery period.
The background factsIn late 2010, Venus (“Buyers”) bought 30,000 mt of Ukrainian yellow corn from Nidera (“Sellers”) on FOB terms, using the GAFTA 49 standard form contract with delivery 16-31 October. The Buyers nominated a vessel that tendered NOR at the load port, Yuzhny, Ukraine, on 15 October 2010. However, no berth was available and loading did not commence.
In the meantime, Ukraine had adopted a Resolution implementing a quota system over various exports including corn, and issued an Order setting a quota for corn export of 2,000,000 metric tons and prescribing an export licence application procedure. The Resolution was made before the vessel tendered NOR on 15 October, but both the Resolution and Order were only published after 15 October.
The Buyers claimed that under Clause 6 of GAFTA 49, the Sellers were obliged to have the goods ready for delivery at any time within the delivery period. Meanwhile, the Sellers asserted that the cargo had been available at the loading port from the beginning of the loading period and the delays were due to the Resolution and the Order.
The delivery period was due to expire on 31 October, but on 29 October the Buyers claimed an “extension of the shipment period to 21 November in accordance with Clause 8 of GAFTA 49”.
Clause 8, so far as here relevant, reads:
8. EXTENSION OF DELIVERY
[8.1] The contract period of delivery shall be extended by an additional period of not more than 21 consecutive days, provided that Buyers serve notice claiming extension not later than the next business day following the last day of the delivery period.
The Sellers argued that the Buyers’ purported extension was invalid and ineffective. Having been unable to obtain an export licence, on 2 November the Sellers cancelled the contract in reliance on GAFTA Prohibition Clause 13, on the basis that they had been prevented from performing the contract due to prohibition.
06 INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
On 5 November, the Buyers advised the Sellers that the Buyers accepted the Sellers’ repudiatory and/or renunciatory breaches of contract as bringing the contract to an end.
The Buyers claimed in a GAFTA arbitration that they were entitled to damages. The Sellers denied that there was any such entitlement on the following grounds:
i. the Buyers’ claim for an extension to the delivery period was wrong, because GAFTA Clause 8 was not intended to apply to a situation where a vessel had already arrived and was presented within the delivery period. The extension was invalid and ineffective; and
ii. the Sellers were entitled to rely upon the GAFTA Prohibition Clause 13.
The GAFTA Tribunal and the Appeal Board both held that the Buyers had validly extended the contract delivery period. As a result, the Sellers’ cancellation of the contract was premature, constituting a repudiatory breach of contract that had been validly accepted by the Buyers.
It was on this issue – the nature and scope of Clause 8 of GAFTA 49 and whether the Buyers’ extension was valid – that the Sellers appealed to the Commercial Court.
The Commercial Court decisionThe issue was whether GAFTA Clause 8, which offered the Buyers the option to extend the delivery period, ought to be limited in its application. Could Clause 8 apply to a situation where a vessel had already arrived and was presented within the delivery period?
The Sellers’ main argument in favour of construing such a limitation into the wording of Clause 8 was that since the Buyers’ obligation under the contract was to nominate a vessel for loading (Clause 6), any extension of time sought by the Buyers would logically be an extension allowing the Buyers additional time to perform that obligation.
It followed, therefore, that any right on the part of the Buyers under Clause 8 to extend time must naturally be linked to Clause 6 and limited only to an allowance of additional time for the Buyers to present a contractual vessel within the extended delivery period.
In circumstances where the Buyers had already fulfilled their contractual obligation under Clause 6 to nominate and present such vessel for loading, Clause 8 insofar as it conferred a right on the part of the Buyers to extend the delivery period, no longer had any relevance, and could not be invoked to grant the Buyers additional time to do something they had already done.
The Commercial Court was not persuaded by these arguments. The Judge held that the Sellers’ arguments provided no sound basis for departing from what Clause 8 appears to say on its face: namely, where a timely notice is served, there is an unqualified right of extension under clause 8. The Judge accepted the Buyers’ assertions that the extension of time was valid on the basis that Clause 8 was clear and unqualified in its terms.
Although the Judge accepted that there was a link between Clauses 6 and 8, the Judge held that it could not follow that Clause 8 is solely concerned to mitigate what would otherwise be the effect of Clause 6. Significant weight was placed on the fact that the parties had used an unmodified provision in a standard form contract for use all over the world from day to day. The Court would only find that the words had limited meaning if there was compelling evidence that the limited meaning would be obvious to a trader.
The Sellers’ appeal was dismissed and leave to appeal was refused.
CommentFor traders and other frequent users of GAFTA 49, the decision offers helpful guidance on an important clause in a widely-used standard form contract. Buyers will be glad to know that they have an unqualified right to extend the shipment period under a sale contract, even if they have already nominated (and presented) a vessel for loading, to seek to prevent sellers seeking to rely on potentially temporary impediments (such as prohibition) to avoid performance of their contracts.
Wai Yue LohPartner, Beijing [email protected]
Ajay Ahluwalia Solicitor, Beijing [email protected]
07INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
TRADE FINANCE
Court of Appeal considers whether dishonouring LC bank has title to sue under indorsed bill of lading
Standard Chartered Bank v. Dorchester LNG(2) Limited (Erin Schulte) [2014] EWCA Civ 1382
In our November 2013 Legal Update, we reported on the first instance decision in the Erin Schulte, which subsequently went to appeal. The Court of Appeal has recently given judgment in this case, which has important implications for all traders who rely on letters of credit for payment security in their sale and purchase transactions.
The background factsThe underlying transaction in this case was a sale by Gunvor International BV (“Gunvor”) to United Infrastructure Development Corporation of a cargo of gasoil for delivery CIF Takoradi, Ghana. That sale was secured by the transfer of a letter of credit (the “LC”) confirmed by Standard Chartered Bank (“SCB”). Having shipped the cargo on the Erin Schulte (“the Vessel”), Gunvor presented the documents, including bills of lading indorsed to SCB, required under the LC to SCB on 4 June 2010. SCB wrongly rejected the presentation and refused to pay. In the meantime, the Vessel was ready to discharge and, to avoid delays, Gunvor arranged for a letter of indemnity (“LOI”) to be issued to the carrier to permit discharge of the cargo without presentation of the bills of lading, which were still held to their order by SCB.
Gunvor ultimately commenced proceedings against SCB under the LC (“the LC Proceedings”) and, following service of those proceedings, SCB promptly agreed to pay the full amount claimed by Gunvor plus interest and costs and did so on 7 July 2010.
As a result of confirming acceptance of amendments to the LC with the issuing bank that had not been agreed by Gunvor, SCB, having paid Gunvor, had no recourse against the issuing bank. Accordingly, almost one year later, SCB issued proceedings against the Owners of the Vessel, the Defendants in these proceedings, alleging that they had misdelivered the cargo and, as holders of the bills, claiming its full value.
SCB alleged that despite their rejection of the presentation, they had become the lawful holders of the bills of lading within the meaning of s.5(2)(b) of the Carriage of Goods by Sea Act 1992 (“COGSA”) upon presentation. This required SCB to show that they had possession of the bills of lading “as a result of the completion, by delivery of the bill, of an indorsement of the bill”.
So far as relevant to the appeal, SCB argued that they became lawful holders of the bills at two alternative moments in time:
1. When, on 4 June 2010, the bills were physically received by them as part of the documentary presentation under the LC (“the 4 June point”); or
2. When, on 7 July 2010, SCB paid the sums claimed by Gunvor in the LC Proceedings (“the 7 July point”).
The Court of Appeal decisionThe 4 June Point The Judge at first instance held that SCB became the lawful holders of the bills of lading upon their presentation on 4 June.
As to the question of completion by delivery of the indorsement, the Judge accepted that delivery of an indorsed bill of lading requires the requisite intention on the part of the deliveror and deliveree to give and accept delivery. However, he went on to conclude that there is no requirement to consider the contractual position as between the deliveror and deliveree of the bill of lading, i.e. in this case, the contractual position as between the bank and the beneficiary of the LC.
By contrast, Moore-Bick LJ, giving the judgment of the Court of Appeal, noted that there was a striking difference between the treatment of consignees and indorsees under COGSA and stated that “delivery” was an essential element in assessing whether the indorsee had become the lawful holder of the bill. After reviewing the authorities, Moore-Bick LJ said as follows:
“In my view 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. In the present case, Societe Generale made an unconditional tender of the bill of lading to SCB on behalf of Gunvor but SCB declined to accept it and held the bill to the order of Societe Generale. As a result, the indorsement was not completed by delivery on 4 June 2010 and the Judge was wrong so to hold”.
Accordingly, SCB did not become lawful holders of the bills upon presentation on 4 June 2010.
The 7 July PointAs to the 7 July point, the Court of Appeal held that the Judge had been right to proceed on the basis that Gunvor’s claim to recover the face value of the credit properly sounded in debt rather than in damages. The Court observed that, in cases where the LC opening or confirming bank fails to pay against presentation of conforming documents, the beneficiary may sue in debt for the value of the credit, provided that he is willing to transfer the documents to the bank against payment.
On this basis, the Court concluded that Gunvor had no right to recover the full value of the credit as a debt otherwise than against transfer of the documents. Whilst SCB had rejected the presentation of documents and that rejection was irrevocable, the Court considered this to be unimportant. Despite the fact that there had been no re-presentation of the documents by Gunvor, the Court held that there had been an unconditional transfer of the documents upon payment sufficient to render SCB the lawful holders of the bills of lading.
Further, as it was common ground that by 7 July the bills of lading no longer gave a right to possession of the goods (which had by then been discharged), SCB had to satisfy s.2(2)(a) of COGSA i.e. show that they had become holders of the bills as a result of a transaction effected pursuant to a contract or other arrangement predating the time when the bills were “spent”.
08 INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
On this point, although the payment and transfer of documents did not occur at the time or in the manner envisaged by the LC, the Court held that the transaction was effected pursuant to the LC rather than, as submitted by the Owners, pursuant to a separate agreement to settle the LC Proceedings. Accordingly, SCB became lawful holders of the bills of lading on 7 July.
CommentThis judgment leaves a beneficiary faced with a wrongful rejection of documents, which include a bill of lading, presented under a letter of credit, on the horns of a dilemma. Such a party may only maintain a claim in debt against the bank if it is willing to transfer the documents against payment; in other words, leave the bill(s) of lading with the bank. However, in doing so, the beneficiary will thereby prevent itself from safely taking any steps to mitigate the separate losses to which it may be exposed, such as demurrage and the risk of deterioration or loss of the goods resulting from the fact that whilst the bill(s) are held in limbo at the bank’s counters, they may not be presented to the carrier and the cargo delivered. Whilst in this case the bank paid up shortly after proceedings were commenced and 33 days after compliant documents had been presented, it is easily conceivable that the beneficiary may have to fight contested proceedings to their end in order to obtain payment. This could take months or years, during which time the cargo must remain on the ship.
Alternatively, the beneficiary may take steps to mitigate such losses by taking back the bills of lading and securing discharge of the cargo. In doing so, however, the beneficiary will surrender its entitlement to make a claim in debt against the bank and will be limited to claiming damages for non-payment under the letter of credit which would require it to give credit for the value of the cargo and take on the burden of acting reasonably in mitigating its loss. In doing so, it will therefore surrender its otherwise straightforward and unimpeachable claim for the sum due under the letter of credit.
Ince & Co LLP represent the Owners in this litigation. In case of any query, please contact the authors.
Stuart ShepherdPartner and Global Head of Trade, [email protected]
Carl WalkerSolicitor, [email protected]
Exceptional circumstances required to prevent bank from paying under letter of credit
Alternative Power Solutions v. Central Electricity Board and Another [2014] UKPC 31
It is a fundamental principle underlying the operation of documentary credits that the obligations of the parties under the credit are independent of the terms of any underlying commercial transaction. Accordingly, any commercial disputes between the parties to the underlying transaction are irrelevant to the issuing bank’s obligation to pay upon presentation of documents complying with the letter of credit. This obligation is subject only to narrow exceptions where there is fraud on the part of the beneficiary or illegality.
In a recent judgment, the Privy Council has considered the scope of the fraud exception and confirmed that an injunction restraining a bank from paying under a letter of credit on the basis of fraud will only be justified in extraordinary circumstances.
The background factsThis matter came before the Privy Council on appeal from the Court of Appeal of Mauritius. Alternative Power Solutions (“APS”) contracted to supply a quantity of light bulbs to the Central Electricity Board (“the CEB”). The contract entitled the CEB to inspect the bulbs to confirm their conformity to the contract prior to shipment. The CEB also alleged that the parties had agreed that the bulbs were to be manufactured by, or under licence by, Philips in China, although this was not accepted by APS.
Payment was to be made by way of an irrevocable letter of credit and the CEB duly procured the issue of a letter of credit (“the LC”) by Standard Bank (“the Bank”). The LC provided for payment against the presentation of certain documents by APS. Significantly, the list of documents required did not include any certificate of inspection of the goods or written confirmation from the CEB that the goods could be released for shipment. The CEB requested an amendment to require presentation of these additional documents but this was not agreed by APS.
The goods were shipped without the CEB having had the opportunity to verify them and the CEB applied for an interlocutory injunction restraining the Bank from making payment in the event of a compliant presentation of documents by APS. Various allegations of fraudulent conduct were made against APS, including (i) that APS’s tender for the contract required that the goods would be manufactured by or under licence by Philips in China (which the Mauritian Court of Appeal subsequently held that APS never had any intention of complying with) and (ii) that APS had not allowed and/or authorised the CEB to inspect and verify the goods at the place of manufacture in China.
9INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
The decisions of the Mauritian courts The Judge at first instance granted the injunction sought by the CEB. The Court was evidently influenced by alleged breaches of the underlying contract by APS. In particular, the Judge held that it was not open to the Bank to pay under the LC in circumstances in which it was aware that the terms and conditions of the underlying contract had not been complied with. The Judge held that the CEB had raised “a serious prima facie arguable case that there might be an attempt to defraud it” and considered that APS was debarred from claiming payment of the contract price until all disputes had been resolved. He further noted that APS was protected against any damage it suffered as a result of the injunction by the undertaking in damages given by the CEB. On that basis, the Judge concluded that the balance of convenience was heavily in favour of granting the injunction.
The decision and reasoning of the Judge at first instance was upheld by the Mauritian Court of Appeal.
The Privy Council decisionThere were three issues for consideration by the Privy Council: (1) what is the correct test to establish the fraud exception, (2) was there sufficient evidence of fraud in this case to establish the exception and (3) did the balance of convenience justify an interlocutory injunction?
On the first issue, the Privy Council held that the Judge had not applied a sufficiently stringent test in considering whether the fraud exception had been established. The correct test is stated in United Trading Corporation S.A. v. Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554, namely whether it is seriously arguable that, on the material available, the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demands and that the bank was aware of that fact.
As to whether there was sufficient evidence of fraud, the Privy Council noted that the CEB had relied upon the failure of APS to supply bulbs manufactured by Philips and that they had failed to allow the CEB to inspect and verify the bulbs at the place of manufacture. These allegations, however, were allegations of breaches of the sale contract and were thus irrelevant to the liability of the Bank under the LC. In so far as he had relied on these allegations as amounting to fraud, the Judge was held to have erred in principle.
The Mauritian Courts were also influenced by evidence given by the CEB that APS had twice breached undertakings given to the Court. The Privy Council held that even if there was some force in this allegation against APS, it was irrelevant to the position under the LC.
The Privy Council also accepted APS’s submission that the balance of convenience will almost always militate against the grant of an injunction. Even if a party is able to establish the fraud exception, it still faces what was described as an insuperable difficulty, in that it will have an adequate remedy against the bank in damages if it pays despite being on notice of fraud.
By contrast, an injunction would interfere with the issuing bank’s obligations to other banks involved and might cause greater damage to the bank than the party seeking the injunction could pay on their undertaking as to damages. In these circumstances, the balance of convenience will almost always be in favour of allowing the bank to pay.
CommentThis case provides a useful reminder of the autonomy principle underpinning letters of credit and confirms that commercial disputes arising in the underlying transaction are irrelevant to the issuing bank’s obligation to pay upon presentation of documents complying with the credit.
It is virtually impossible to obtain an injunction preventing the bank from making payment because the balance of convenience will almost always be in favour of allowing the bank to make payment. While the decided cases do not go so far as to say that the balance of convenience will never justify granting an injunction, it is clear that extraordinary circumstances will be required. Such circumstances have not so far presented themselves to the English courts.
This underlines the importance of ensuring that any and all documents a buyer requires before the seller is able to obtain payment are accurately listed in the letter of credit. Once the letter of credit has been issued, any omissions can only be corrected with the agreement of the other party. Absent such agreement, it is highly unlikely that the buyer will have any means of stopping payment once the seller has presented the documents that are listed in the letter of credit.
Stuart ShepherdPartner and Global Head of Trade, [email protected]
Carl WalkerSolicitor, [email protected]
10 INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
SHIPPING
Bill of lading “law and arbitration” clause incorporates charterparty court jurisdiction provision
Caresse Navigation Ltd v. Zurich Assurances MAROC and others (Channel Ranger) [2014] EWCA Civ 1366
The Court of Appeal in this case has considered whether reference in a bill of lading to the incorporation of a “law and arbitration clause” was effective to incorporate a law and court jurisdiction (not arbitration) clause in a charterparty. This dispute concerns a claim for cargo damage of around US$ 1 million under a bill of lading on the Congenbill 1994 standard form. The appeal was against a Commercial Court decision upholding an anti-suit injunction made on the basis that the bill of lading did incorporate an English law and court jurisdiction clause referred to in the charterparty. The Court of Appeal dismissed the appeal and upheld the Commercial Court’s decision.
The background factsThe Respondent Owners commenced proceedings in the English Commercial Court seeking a declaration of non-liability regarding salt-water damage to the cargo at the discharge port in Morocco. The cargo insurers (appellants in the current proceedings) challenged the English Court’s jurisdiction and commenced proceedings in Morocco against the Owners in relation to the cargo damage.
The Owners were granted an anti-suit injunction by the Commercial Court restraining pursuit of the Moroccan proceedings by the cargo insurers.
The Congenbill 1994 bill of lading contained the following typed clause: “All terms, conditions, liberties and exemptions including the law and arbitration clause, are herewith incorporated.” The terms of the governing voyage charterparty, however, provided that it would be governed by the exclusive jurisdiction of the English courts and did not provide for arbitration.
The Commercial Court decisionThe Commercial Court held that the provision in the bill of lading expressly seeking to incorporate an arbitration clause from the charterparty was sufficient to incorporate the English High Court jurisdiction clause in that charterparty. The Court took the view that this issue was one of construction of the terms of the contract, rather than one of incorporation, and that the real question was what the parties reasonably understood by the words “law and arbitration clause”. The Court held that the only clause that the parties could have intended to refer to by the words “law and arbitration clause” was the court jurisdiction clause in the relevant charterparty, rather than to incorporate an arbitration clause “if any”. Construing the clause in this way did not offend against the need for clarity and certainty in the construction of these types of clauses.
The Commercial Court therefore held that the Defendant cargo insurers were bound by the English court jurisdiction clause in the charterparty and granted the anti-suit injunction to restrain the proceedings that the Defendants had commenced in Morocco.
The cargo insurers appealed the Commercial Court’s decision to the Court of Appeal.
The Court of Appeal decisionThe Court of Appeal agreed with the Commercial Court’s reasons and dismissed the appeal. The Court reiterated the Commercial Court’s view that the question in this case is not one of incorporation of terms but of construing the meaning of the words used in the bill of lading. In addition, the words in the bill of lading must be read as a whole in their context. The argument put forward by the appellant cargo insurers that the meaning of the words in the bill of lading is “arbitration clause if any” was found to be wholly uncommercial since the original parties to the bill of lading are taken to have known of the terms of the charterparty and that it did not contain an arbitration clause. The reference to an arbitration clause in the bill of lading was therefore not inconsistent with the incorporation of the charterparty court jurisdiction clause. The Court of Appeal confirmed that, in its view, this finding did not run contrary to the need for clarity and certainty when incorporating terms into bills of lading since the clause in the charterparty was one that was usual in the trade.
Notably, the Court of Appeal also referred to The Merak [1965] (relied upon by the appellant cargo insurers in the present case) in which the Court of Appeal by a majority found that they could not correct an error in the bill of lading terms which referred to the incorrect clause number of the arbitration clause in a charterparty. The Court of Appeal in the present case commented that the approach of the Court in The Merak to the interpretation of contractual terms was “old-fashioned and outdated”. In view of subsequent important decisions on the construction of contracts, the Court suggested that if the same case were to be decided today, it is very likely that it would be decided differently.
CommentEnglish law has long recognised the principle that general words of incorporation in a bill of lading only incorporate those provisions in the charterparty that are directly relevant or “germane” to the shipment, carriage, discharge and delivery of the cargo, and not ancillary charterparty terms such as arbitration and jurisdiction clauses. This case falls outside this general principle since, rather than general words being used, there was a specific reference in the bill of lading to one kind of charterparty ancillary provision, being the “law and arbitration clause”. This reference was sufficient to incorporate the charterparty court jurisdiction (rather than arbitration) clause since the terms used were usual in the shipping trade and it was clear that the parties were aware that there was no arbitration clause in the charterparty and therefore intended to incorporate the court jurisdiction clause.
11INTERNATIONAL TRADE AND COMMODITIESLEGAL UPDATE
This case is a further reminder that, for certainty and to avoid potential disputes, parties should use clear and specific words of incorporation in a bill of lading and as far as possible refer to the correct law and jurisdiction clause(s) in the appropriate charterparty.
Rania Tadros Partner, [email protected]
Pavlo Samothrakis Solicitor, [email protected]
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