Letter of indemnity never substituted a bill of lading
Wednesday, 25 April 2012 | 11:00
The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Geoffrey Valenzia and Mr Justice Giannino Caruana Demajo, on February 3, 2012, in the case “Patrick Pillon in representation of BNP Paribas (Suisse) SA vs Smarta Navigation Ltd” held, among other things, that a shipowner was liable in damages for releasing the cargo to a third party who was not in possession of the original bills of lading.
The facts in this case were as follows.
The charterer Mark Man (UK) purchased and shipped a consignment of goods on board the ship Smarta in the port of Odessa. It gave BNP Paribas six sets of original bills of lading “to order”.
The receiver of the goods was a subsidiary company of Nidera Handelscompagine who had to pay Mark Man by transferring funds to its account at BNP Paribas.
BNP Paribas had to deliver the bills of lading to permit the release of the goods.
It resulted that the owners of the vessel, Smarta Navigation Ltd, delivered the goods to Nidera on the instructions of the charterer on the basis of a letter of indemnity issued by the charterer and not against the original bills of lading. BNP Paribas was not paid as a result. Mr Man did not pay any indemnity while BNP Paribas claimed that the goods should not have been released without the bills of lading.
Faced with this situation, BNP Paribas sued Smarta Navigation for damages.
Smarta Navigation submitted in defence that:
The bills of lading incorporated the relative Charter Party Agreement. Under clause 40 of the Charter Party, it had a duty to deliver the goods without having to receive the bills of lading in original and this on the basis of a letter of indemnity granted by the charterers. Smarta Navigation claimed to have acted in good faith and in accordance with the Charter Party.
Clause 40 provides: “Should no original bills of lading be available at discharge port or in consignees’/receivers’ hands then, if required by the charterers, owners may agree to discharge the cargo against a faxed letter of indemnity duly issued on charterers’ head paper as per owners’ usual P&I wording, signed and stamped by charterers only, without a bank guarantee being required. The letter of indemnity shall automatically become null and void against presentation of one of three original bills of lading duly accomplished. In any case, if bills of lading are not at discharge port, owners are never to allow discharge without charterers’ clear written instructions. The original must be received by owners prior to completion of discharge.”
The bank failed to act in good faith. It could have avoided damages by not allowing Smarta Navigation to deliver the goods to the receiver.
On March 30, 2011, the First Hall of the Civil Court dismissed Smarta Navigation defence. It held that Smarta failed to deliver the goods without having in its possession the bills of lading and that this was very prejudicial to the bank.
Aggrieved by this decision, Smarta Navigation entered an appeal, calling for its revocation.
On February 3, 2012, the Court Of Appeal gave judgement by confirming the decision of the first court.
The following reasons were given for the court’s decision:
At issue was whether Smarta Navigation was liable in damages for having released the goods to a third party, who was not in possession of the bills of lading. Smarta Navigation claimed to have acted in accordance with the charterparty agreement, which it said was incorporated in the bills of lading. There was no misdelivery.
The bank, on the other hand, contended that their contractual relations with Smarta Navigation were based on the bills of lading, which endorsed in blank “to order”.
It said that it was not a party to the charter party agreement. It did not authorise the release of the goods to third parties. The bills of lading were issued “to order” with the aim that they could be endorsed in favour of third parties. Smarta Navigation could not claim that it did not know that the bills of lading were “to order”.
Christopher Hill writes that “a bill of lading has a threefold purpose:
• It is a document of title with negotiable characteristics;
• It is a receipt of goods shipped on board a named carrying vessel;
• It is the best available evidence of the terms and conditions of the contract of carriage of goods as between shipper and carrier.”
He adds that: “A negotiable bill of lading is used rather in the same manner as a cloakroom ticket when an overcoat is left in the care of an attendant at the theatre. The owner of the coat is given a ticket, sees the show, returns to the cloakroom, offers his ticket without necessarily saying anything nor needing to identify himself and is handed back his coat.
“In the same manner, presentation of the bill, not identification of the consignee by other means, is what is required to obtain the delivery. P&I Clubs expressly excluded recovery from Club funds for claims resulting from the adverse consequences of delivering cargo without the production of an original bill of lading.
“All club managers were prepared to do to assist their members in what was a commercial predicament was to recommend acceptance of a suitably worded letter of indemnity, endorsed by a first-class bank.
“A charter party is the contract, a private contract between two principal parties. It is this one basic fact that distinguishes a voyage charter party from what is too loosely described as a bill of lading contract. Thus a charter party is a private agreement between two parties, individual or corporate. Like any other contract only those who entered it can sue or be sued upon it.”
In the case of carriage of goods, a charter party regulated the relations between the charterer and the owner of the vessel.
In this case BNP Paribas had a bill of lading which was endorsed to itself, since it financed the goods.
The fact that the bill of lading was endorsed in favour of the bank and that it was given a copy of the charter party did not mean that the bank became a party to the charter party. Nor did it mean that, once the bank was aware of the existence of the charter party, it accepted the charter party. Clause 40 of the charter party was not in the interest of the bank. If the owner released the goods to a third party who did not have the bills of lading it would expose the bank to a greater risk of not receiving payment and of reducing the value of the bills of lading.
The purpose of clause 40 was to avoid delay in part where goods was to be unloaded, and this to the advantage of the ownerand charter.
Smarta Navigation and the charterer were aware that the bills of lading were in the bank’s possession as a guarantee for repayment of the loan.
The court ruled that P&I Clubs insist that its members did not accept such clauses, unless accompanied by a bank guarantee. There was no bank guarantee in the circumstances, it said. The bank was not a party to the charter party. It was not proven that it accepted or endorsed the charter party, or that it accepted any responsibility if the goods were released without the bills of lading.
Letter of indemnity: Smarta Navigation claimed that the bank was aware of clause 40 of the Charter Party, that it had a duty to deliver the goods without receiving the original bills of lading on a basis of a letter of indemnity, granted by the charterer. The bank, however, said that Smarta Navigation was not obliged to release the goods under the letter of indemnity. It was only authorised to do so.
Besides, if there was a case for damages, the person who issued the letter of indemnity had to make good for the damages, to cover the liability of the shipowner.
If the owner agreed to release the goods on the basis of a letter of indemnity it did so at its own risk. The owner should not accept a letter of indemnity unless this was given by a recognised bank. Nor was this letter of indemnity, countersigned by the bank.
A letter of indemnity never substituted a bill of lading. Insofar as the owner of the vessel released goods to a person who was not in possession of the bill of lading, he remained responsible and his only remedy was to sue under the letter of indemnity.
The court ruled that, according to maritime usage, goods were to be released to a person having a bill of lading. “Custom is that defendants are in breach of contract if they deliver cargo without the presentation of an original bill of lading”.
On the other hand, “all that the practice indicates is that some owners are prepared to take the risk of being held liable for wrongful discharge of cargo should problems arise in relation to payment” – Sormovskiy 3068.
Clause 40 could not be interpreted in a way to deny the bank from making a claim for damages against the owner. The bank did not endorse the agreement between the charterer and the owner, nor did it renounce its rights, maintained the court.
Bills of lading: The fact that the bills of lading were issued “to order” meant that they could be endorsed in favour of third parties. Smarta Navigation could not claim, therefore, that it did not know that the bills were endorsed.
The owner did not have to be informed that the bills were endorsed. The bank had not renounced its rights under the bills of lading nor did it release Smarta Navigation from its obligation to deliver the goods to the holder of the bill of lading.
Despite clause 40 of the Charter Party, as Smarta Navigation released the goods to a person not in possession of a bill of lading, it was liable for damages.
A letter of indemnity did not replace a bill of lading but only entitled Smarta Navigation to compensation. Smarta Navigation was not obliged to release the goods to a third party, not in possession of a bill of lading. Nor was it correct to say that the bank was in bad faith. Smarta Navigation was aware that the bank would be prejudiced by its act.
Smarta Navigation was not justified to release the goods, on grounds that the charterer had similar transactions with the bank in the past, concluded the court.
Source: Times Of Malta