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[Buy ICLR report:  3 WLR 261]
[View ICLR summary:  WLR(D) 440]
||Neutral Citation Number:  EWCA Civ 1382
||Case No: A3/2013/1490
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Mr. Justice Teare
 EWHC 808 (Comm)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||22nd October 2014
B e f o r e :
LORD JUSTICE MOORE-BICK
Vice-President of the Court of Appeal, Civil Division
LORD JUSTICE BRIGGS
SIR BERNARD RIX
(Transcript of the Handed Down Judgment of
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Mr. David Foxton Q.C. and Mr. Fionn Pilbrow (instructed by Ince & Co LLP) for the appellant
Mr. Michael Tselentis Q.C. and Mr. Socrates Papadopoulos (instructed by Norton Rose Fulbright LLP) for the respondent
Hearing dates : 1st & 2nd July 2014
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Moore-Bick :
- This appeal raises an important question about the interpretation of the Carriage of Goods by Sea Act 1992 ("the Act"), which amended the law relating to the transfer of rights of suit under contracts of carriage contained in bills of lading. It concerns the meaning of the expression "completion, by delivery of the bill, of any indorsement of the bill" in section 5(2)(b) of the Act.
- On or about 23rd April 2010 Gunvor International B.V. ("Gunvor") agreed to sell 17,000mt. of gasoil +/- 10% to United Infrastructure Development Corporation ("UIDC") c.i.f. Takoradi, Ghana. The goods were purchased by UIDC in order to meet a contract for the sale of a similar quantity of gasoil to Cirrus Oil Services Ltd ("Cirrus") entered into in March 2010. Both contracts provided for payment by letter of credit. On 6th April 2010 the United Bank of Africa ("UBA") at the request of Cirrus opened a letter of credit ("the prime letter of credit") in favour of UIDC with the respondent, Standard Chartered Bank ("SCB"). It was governed by the ICC Uniform Customs and Practice for Documentary Credits 600 ("UCP 600") and expired on 12th June 2010. On 12th April 2010 SCB confirmed the letter of credit to UIDC. On 30th April 2010 the letter of credit was transferred by SCB to Gunvor ("the transfer letter of credit"). Gunvor's bank, Société Générale, was appointed to act as its agent for the purpose of drawing under the transfer letter of credit.
- The goods were shipped in two parcels from Cotonou, Benin, on successive days in May 2010. On 12th May 2010 Gunvor shipped 9,466 mt of gasoil on board the vessel Maria E and on 13th May 2010 it shipped a further 9,208 mt of gasoil on board the vessel Erin Schulte, in each case under a bill of lading providing for carriage of the goods to Takoradi. The bills of lading were consigned to Société Générale or order.
- The Maria E arrived at Takoradi on 13th May 2010. When the cargo was tested it was found not to be of the required specification, as a result of which Cirrus and UIDC rejected both cargoes. In the event Cirrus agreed to purchase the cargo on the Maria E at a reduced price, but it was unwilling to take the cargo on the Erin Schulte.
- On 20th May 2010 UBA advised SCB of Amendment No. 3 to the prime letter of credit, by which both the quantity of goods and the amount payable were reduced to correspond with the new agreement under which Cirrus had purchased the cargo on the Maria E. On 25th May 2010 SCB asked UIDC for its agreement to Amendment No. 3, which UIDC gave on 1st June 2010. On the same day SCB asked Gunvor for its agreement to Amendment No. 3, but at that point things began to go wrong, because SCB advised UBA that UIDC had agreed to the amendment without having first obtained Gunvor's agreement to a corresponding amendment of the transfer letter of credit. The effect of that oversight was that, although SCB remained liable to Gunvor to honour the transfer letter of credit in accordance with its original terms, it could seek recourse against UBA under the prime letter of credit only to the more limited extent resulting from Amendment No. 3.
- In the event, UIDC was able to find new buyers for the cargo on board the Erin Schulte, Chase Petroleum Ghana Limited ("Chase") and UBI Energy Petroleum Ghana Limited ("UBI"). New letters of credit were opened in favour of UIDC, one by SCB itself (the Chase letter of credit) and the other by Trust Bank Ghana (the UBI letter of credit). UIDC asked SCB to transfer the Chase letter of credit to Gunvor, but before that could be done on 4th June 2010 Gunvor presented documents in respect of the cargo on board the Erin Schulte under the original transfer letter of credit. On 7th June 2010 Société Générale formally confirmed to SCB that Gunvor had rejected Amendment No. 3.
- The documents presented by Société Générale on behalf of Gunvor to SCB at its London offices on 4th June 2010 included a set of bills of lading covering the cargo on board the Erin Schulte indorsed in favour of SCB. They were scanned and sent by SCB to its service centre in Chennai for checking. On 9th June SCB informed Société Générale that the documents did not comply with the letter of credit and that it was holding them to Société Générale's order. Discussions followed, in the course of which Société Générale and Gunvor continued to insist that the presentation was valid (as is now accepted to have been the case) and SCB continued to maintain the contrary.
- On 9th June 2010 the vessel arrived at Takoradi. In the absence of a bill of lading the cargo was discharged between 15th and 19th June 2010 against a letter of indemnity issued by Gunvor and was delivered to Chase and UBI. Gunvor continued to insist that the documents presented on 4th June 2010 complied with the letter of credit and pressed SCB for payment, but to no avail. By late June 2010 Gunvor had instructed solicitors to press its claim, but SCB remained adamant and so, on 1st July 2010, Gunvor commenced proceedings against SCB. Following service of the claim form SCB also instructed solicitors, who soon made it clear that their client was willing to concede Gunvor's claim. On 7th July 2010 SCB paid the full the amount of the face value of the letter of credit together with interest and costs, following which the proceedings were discontinued by consent.
- The Erin Schulte is owned by the appellant, Dorchester LNG (2) Ltd ("Dorchester"). Having been forced to capitulate to Gunvor's entirely justified claim, SCB turned its attention to the vessel's owners. On 6th May 2011 it brought the present proceedings against them to recover the value of the cargo which, it alleged, they had misdelivered by discharging it without production of a bill of lading. Under the letter of indemnity the owners were entitled to be indemnified by Gunvor against any liability arising from the discharge of the cargo and accordingly, although the proceedings had been brought against Dorchester, Gunvor assumed the burden of defending them. The principal issue between the parties was whether SCB had obtained title to sue in respect of a misdelivery of the goods.
The statutory provisions
- The important parts of the Act for present purposes are contained in sections 2 and 5. Section 2 provides (so far as material):
"2—(l) Subject to the following provisions of this section, a person who becomes—
(a) the lawful holder of a bill of lading;
. . .
shall (by virtue of becoming the holder of the bill . . . ) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.
(2) Where, when a person becomes the lawful holder of a bill of lading, possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates, that person shall not have any rights transferred to him by virtue of subsection (1) above unless he becomes the holder of the bill—
(a) by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill; . . . "
- Section 5(2) of the Act provides as follows:
"References in this Act to the holder of a bill of lading are references to any of the following persons, that is to say—
(a) a person with possession of the bill who, by virtue of being the person identified in the bill, is the consignee of the goods to which the bill relates;
(b) a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill or, in the case of a bearer bill, of any other transfer of the bill;
. . .
and a person shall be regarded for the purposes of this Act as having become the lawful holder of a bill of lading wherever he has become the holder of the bill in good faith."
- The judge held that SCB had become the holder of the bill of lading on 4th June 2010 when it was presented at its counters under the letter of credit and so had acquired the right to sue on the contract on that date. It was irrelevant, in his view, that SCB had received the documents for checking and, having carried out its checks, had declined to accept them. In the alternative, however, he held that SCB had become the holder of the bill of lading on 7th July 2010 when it met Gunvor's demands.
Completion of indorsement by delivery
- Section 5(2)(b) of the Act refers to "possession of the bill as a result of the completion, by delivery of the bill, of any indorsement." The issue which divides the parties can be stated quite simply: is the mere transfer of possession of a bill of lading sufficient to constitute completion of an indorsement by delivery, or is it necessary that the transferor and transferee should both intend that the rights under the bill of lading should pass from one to the other by reason of the combined effect of the indorsement and the transfer of possession? Mr. David Foxton Q.C. submitted on behalf of Dorchester that there must be an intention to transfer and receive the rights of suit under the contract of carriage and that in this case, since SCB was not willing to accept the documents, the necessary intention was not present on its part. He drew support from the use of similar language in section 2 of the Bills of Exchange Act 1882, in which "indorsement" is defined as "an indorsement completed by delivery", and from the decisions on which that Act was based. He also relied on section 31(3) which provides that a bill payable to order is negotiated by the indorsement of the holder completed by delivery.
- Mr. Michael Tselentis Q.C. accepted that in order to be in possession of the bill of lading at all the recipient must have an animus possidendi, by which he meant knowledge of its existence and an intention to exercise physical control over it, but he submitted that nothing more was required. "Delivery", he submitted, means no more in this context than the voluntary transfer of possession. Accordingly, the indorsement to SCB was completed by delivery as soon as the bill of lading came into its possession, regardless of the fact that, having examined it for compliance with the letter of credit, SCB decided not to accept it.
- The Carriage of Goods by Sea Act 1992 resulted from the Law Commission's Report No. 196 on Rights of Suit in respect of Carriage of Goods by Sea. As is well known, its primary purpose was to do away with the requirement in the Bills of Lading Act 1855 that property in the goods had to pass upon or by reason of the indorsement in order for rights of suit to be transferred to an indorsee. The requirements for an effective indorsement do not themselves appear to have given rise to concern, however, and the report does not address them. One is therefore thrown back on the language of the statutory provisions.
- One thing that immediately strikes one about section 5(2) of the Act is the difference between the treatment of consignees and indorsees. By virtue of section 5(2)(a) in order for a named consignee to become the holder of a bill of lading it is sufficient that he be in possession of it. In his case there is no equivalent to the requirement in section 5(2)(b) that there be completion of the indorsement by delivery of the bill. The reason may be that the consignee, though not in the true sense an original party to the contract, is the person to whom the carrier has agreed to deliver the goods against production of the bill of lading and who alone, therefore, can call for their delivery. In those circumstances possession of the bill of lading on his part is all that is required to enable the contract to be performed in accordance with its terms. The same is not true in the case of an indorsee, however, whose position as such depends on the decision of an existing holder. Indorsing the bill, in the sense of adding and signing an instruction to deliver the goods to a third party, is an inchoate act. While the bill remains in the hands of the holder the indorsement is revocable, since he may cancel or vary it as he pleases. It is only when he delivers the bill to the indorsee that the indorsement becomes irrevocable and effective to transfer the rights of suit which it represents. Delivery therefore represents an essential element in a series of voluntary acts designed to give effect to the holder's intention to transfer the rights which it represents. To that extent there is, in my view, a clear analogy between the indorsement of bills of lading and the indorsement of bills of exchange, which may explain why the draftsman of the Act chose to use language similar to that found in the Bills of Exchange Act 1882.
- Unless he is under a specifically enforceable obligation to do so, a person cannot be forced to accept a transfer of property or rights against his will. When a bank takes possession of a bill of lading under a letter of credit or any comparable financial arrangement it does so with the intention of holding it as security for the recovery of the funds that it becomes obliged to pay to the beneficiary. Normally it obtains a special property in the goods as a pledgee and a right to sue under the contract of carriage. If, on the other hand, the bank rejects the bill of lading altogether at the moment of presentation, there can be no delivery, any more than there could be of a chattel. The question in this case is whether, having taken possession of the bill of lading for examination, the bank, by rejecting it and holding it to the order of the person presenting it, refuses to accept delivery and thereby prevents the completion of the indorsement in its favour.
- In Aegean Sea Traders Corpn v Repsol Petroleo S.A. (The 'Aegean Sea')  2 Lloyd's Rep. 39 a cargo of crude oil was shipped at Sullom Voe for carriage to Spain under a bill of lading bill consigned to, or to the order of, Louis Dreyfus Energy Ltd ("Louis Dreyfus"), from whom Repsol Oil International Ltd ("ROIL") had purchased the cargo. Pursuant to the contract of sale Louis Dreyfus sent the documents, including the bill of lading, to ROIL, but by mistake indorsed the bill in favour of Repsol Petroleo S.A. ("Repsol"), ROIL's parent company. ROIL sent the documents to Repsol, who sent them back to Louis Dreyfus to enable it to cancel the indorsement and re-indorse the bill to ROIL. The original indorsement was cancelled, the bill was re-indorsed and were sent back to ROIL. As a result of a casualty to the vessel, the question arose whether Repsol had became the holder of the bill of lading under section 5(2)(b) of the Act. The owners argued that once it was shown that Louis Dreyfus had put the bill into the post and Repsol had received it (albeit by the circuitous route which I have described) actual possession coupled with knowledge was sufficient to satisfy the requirements of that section. It was said to be nothing to the point that Repsol did not want to accept the bill or that it had been indorsed to it in error.
- Thomas J. rejected the owners' argument. Having noted that section 5(2)(b) required the indorsee to have possession of the bill as a result of the completion of the indorsement by delivery, he held that in order to satisfy that requirement the person receiving the bill must accept delivery. Moreover, the bill had not been sent by Louis Dreyfus to Repsol; it had reached Repsol by a roundabout route from ROIL. The judge said at page 60, col.1:
"In my view Repsol therefore never obtained possession of the bill of lading as the result of completion by delivery of the bill by endorsement. There never was any delivery of the bill of lading by Louis Dreyfus to Repsol to complete the endorsement. Even if Repsol had obtained possession of the bill of lading from Louis Dreyfus, they never accepted delivery of it as the endorsee or transferee."
- Mr. Tselentis submitted that the ratio of the judge's decision is that the bill of lading was not delivered by Louis Dreyfus to Repsol at all, but in my view that is to take too narrow a view of the matter. It is clear that the unwillingness of Repsol to accept delivery of the bill was, in the judge's view, a sufficient ground for his decision, but his emphasis on the need for there to have been a delivery of the bill by Louis Dreyfus tends to support the conclusion that section 5(2)(b) requires both an intention on the part of the indorser to transfer the document and an intention on the part of the indorsee to accept it. The decision therefore provides additional support for the propositions which in my view are to be derived from the language of the section itself. It is inconsistent with the proposition that an indorsee in possession of the bill becomes the holder regardless of his wishes or of the circumstances in which that has come about.
- In East West Corporation v DKBS 1912 and Akts Svendborg  EWHC 83 (Comm),  2 Lloyd's Rep 182 goods were shipped in Hong Kong for carriage to Chile under bills of lading naming certain Chilean banks as consignees. The goods were held by the customs authorities in Chile pending payment of import duty and on payment of the duty were released to the receivers without production of the bills of lading. The receivers failed to pay for the goods, whereupon the shippers brought proceedings for misdelivery against the carrier, which contested their title to sue. Thomas J. held that since the Chilean banks were named as consignees in the bills of lading and were in possession of them with the authority of the shippers, they fulfilled the requirements of section 5(2)(a) and became the lawful holders to the exclusion of all other parties. The argument that the banks held the bills of lading as agents for the shippers and not in their own right was rejected. The decision was upheld on appeal ( EWCA Civ 83,  QB 1509). Mance L.J., with whom Laws and Brooke L.JJ. agreed, held that the express consignment of the goods to the banks or their order, followed by delivery of the bills to them by or under the authority of the claimants, was the equivalent of a personal indorsement. As a result, the banks became the holders of the bills and the rights of suit were transferred to them pursuant to section 5(2)(a) of the Act.
- Mr. Tselentis placed some emphasis on the statement of Mance L.J. in paragraph 16 of his judgment that:
"[t]he express consignment of the goods under the bills to the Chilean banks or order, followed by the delivery of such bills to such banks by or under the authority of the claimants, equates with a personal indorsement.",
which he submitted supported the conclusion that possession by the indorsee of a bill of lading is sufficient of itself to transfer the rights of suit. However, the question that arises in the present case was not before the court in East West. In that case the bills of lading had been delivered to the banks by the sellers with the intention that they should use them to take delivery of the goods and the banks had received them for that purpose. As consignees the banks were the only parties who had the right to take delivery. The court was not concerned with the negotiation of the bills by the person who currently had the right to take delivery, nor was it concerned with a refusal by the banks to accept the bills. In the passage to which I have referred, Mance L.J. was simply affirming that a person named as consignee obtains the right to sue on the bill of lading if it is delivered to him with the authority of the shipper.
- In Keppel Tatlee Bank Ltd v Bandung Shipping Pte Ltd  1 Lloyd's Rep. 619 bills of lading covering a cargo of palm oil were indorsed in blank and delivered to the buyers, RPH, who had themselves sold the goods to Indian sub-buyers, Lanyard. The bills were delivered by the buyers to the claimant bank, Keppel Tatlee, for delivery to Lanyard against payment of the price under the sub-sale. The bank added the name of the State Bank of Saurashtra above the indorsement and forwarded the bills to that bank for collection by Lanyard against payment. However, Lanyard failed to take up and pay for the bills of lading, which were returned to Keppel Tatlee, but without any further indorsement in its favour. On receipt of the bills Keppel Tatlee stamped the word "cancelled" across the indorsement. The cargo was discharged to Lanyard without production of the bills of lading, whereupon Keppel Tatlee began proceedings against the vessel. The Singapore Bills of Lading Act contained provisions corresponding to those of sections 2 and 5 of the Carriage of Goods by Sea Act 1992 and the only issue of significance was whether Keppel Tatlee had title to sue. The Singapore Court of Appeal held that by adding the name of the State Bank of Saurashtra to create a special indorsement and delivering the bills to it Keppel Tatlee had intended to vest the rights of suit in the State Bank of Saurashtra with a view to enabling it in its turn to transfer the rights to Lanyard. Without a further indorsement of the bills of lading in its favour by the State Bank of Saurashtra Keppel Tatlee did not acquire the rights of suit under the contracts of carriage.
- None of that, with respect, seems to me to be at all surprising. The creation of a special indorsement in favour of the State Bank of Saurashtra and the subsequent delivery to it of the bills of lading were together intended to make that bank the holder of the bills until it transferred the rights of suit to the sub-buyers. That would, of course, have required a further indorsement, either in their favour or in blank, together with delivery of the bills themselves. Mr. Tselentis sought to gain some support from an observation in paragraph 23 of the judgment which tends to suggest that mere physical delivery of the bills to the State Bank of Saurashtra was sufficient to render it the lawful holder and it is true to say that when discussing East West Corporation the court appears to have thought that there was no material distinction between the position of a consignee and that of an indorsee. For the reasons I have given, however, I respectfully disagree with both those observations, but it must be borne in mind that the issue which we have to decide did not arise in that case and is unlikely, therefore, to have been the subject of detailed argument.
- Mr. Tselentis drew our attention to a passage in paragraph 32 of the speech of Lord Hobhouse in Borealis AB v Stargas Ltd (The 'Berge Sisar')  UKHL 17,  2 AC 205 in which his Lordship said that the concept of taking delivery involves a voluntary transfer of possession from one person to another. He submitted that this statement (repeated in paragraph 36) supported the conclusion that nothing more is required under section 5(2)(b) than the mere voluntary transfer of possession by the holder to the indorsee. However, in that part of his speech Lord Hobhouse was dealing with section 3 of the Act, which is concerned with taking or demanding delivery of the goods from the carrier. He was not concerned with the meaning of section 5(2)(b), which uses the phrase "the completion, by delivery of the bill, of any indorsement", a more complex expression which is capable of denoting something more than mere physical delivery.
- Our attention was also drawn to the views expressed by various commentators on the Act. The distinguished editors of Carver on Bills of Lading (3rd ed.) refer to the Aegean Sea in paragraph 5-020 with apparent approval, as do the editors of Scrutton on Charterparties (22nd ed.), at paragraph 2-009 and the authors of Bills of Lading (Aikens, Lord and Bools) at paragraph 8.40. None of them support the conclusion that a mere transfer of possession without an accompanying intention to transfer and accept the rights under the contract of carriage is sufficient to complete an indorsement. Moreover, I think one can also derive some assistance from the provisions of section 5(2)(b) relating to bearer bills. In the case of a bearer bill, the holder is a person with possession of the bill as a result of the completion, by delivery of the bill, of any transfer of the bill otherwise than by indorsement. That contemplates a transaction of some kind pursuant to which the rights under the contract are to be transferred and to which effect is given by the delivery and receipt of the bill.
- Mr. Tselentis submitted that the Act does not permit a conditional delivery of a bill of lading indorsed to the recipient, but I can see no reason why that should be so. Its purpose was to enable the rights of suit embodied in a bill of lading to pass independently of title to the goods. If the mere indorsement of the bill is ineffective of itself to pass the rights of suit, there is no reason in principle why the bill should not be delivered to the indorsee on a conditional basis. Unless and until the condition is satisfied, the indorsee holds the bill to the order of the indorser as his agent. No third party interests are involved, because, unless and until the delivery becomes unconditional, the bill can be returned and the indorsement cancelled. The concept of delivering deeds and other documents in escrow is well established and the same principles apply in relation to bills of exchange. Misuse of a bill of lading by the recipient contrary to the terms on which it was delivered to him raises other questions which it is unnecessary to explore in this case.
- 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 Société Générale 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 Société Générale. As a result, the indorsement was not completed by delivery on 4th June 2010 and the judge was wrong so to hold. It is therefore necessary to consider whether the indorsement was completed at a later date when SCB settled Gunvor's claim.
Payment under the settlement
- The judge proceeded on the footing that even on 7th July 2010 the obligation contained in the letter of credit still remained open for performance. In paragraph 63 of his judgment he held that the payment by SCB of the face value of the credit, together with interests and costs, implicitly amounted to an admission that the documents were compliant, that they were being taken up and that the letter of credit was being honoured. His reasoning reflected the argument put forward by Mr. Tselentis to the effect that SCB had finally been compelled to accept the documents and satisfy the debt that had arisen under the letter of credit. He also held that, because SCB had become the holder of the bill of lading pursuant to the letter of credit (which was issued before a right to possession of the goods had ceased to attach to possession of the bill), it had become the holder of the bill under a transaction effected in pursuance of an arrangement that satisfied the requirements of section 2(2)(a) of the Act.
- These submissions were also made in support of SCB's case on the appeal. Mr. Tselentis submitted that Gunvor had continued to press for payment pursuant to the letter of credit and by implication had invited SCB to accept the documents. It had brought proceedings claiming the amount due under the letter of credit as a debt and had eventually received it, together with interest and costs. Although SCB did not expressly say that it was taking up the bill of lading, that was the necessary effect of its actions. On making payment it ceased to hold the bill of lading to the order of Gunvor and held it in its own right. At that point the indorsement was completed by delivery. The fact that the cargo had been discharged some weeks earlier did not matter, because the case fell within section 2(2)(a) of the Act.
- Mr. Foxton submitted that once SCB had rejected the bill of lading it could not unilaterally change its mind and decide to accept it. It remained open to Gunvor to make a further presentation, but it never did so. Throughout its exchanges with SCB Gunvor had insisted that the original presentation of the documents on 4th June 2010 had been valid and effective. No further presentation was necessary and none had been made. Although the claim had been pleaded in debt as well as damages, it was properly to be characterised as a claim in damages for failing to honour the contract contained in the letter of credit. Once the documents had been rejected the bill of lading was never subsequently delivered to SCB with the intention of completing the indorsement. Indeed, it would have been pointless for Gunvor to have done so, since that would have opened the door to a claim by SCB against Dorchester which would inevitably have found its way back to Gunvor itself under the letter of indemnity.
- It is, perhaps, hardly surprising that the communications between the parties following the rejection of the documents had more of a commercial than a legal flavour about them. Mr. Tselentis sought to persuade us that during the last week of June 2010 SCB's attitude had softened and that it had attempted to find a solution to the problem by negotiation, thereby suggesting that it had not taken a final decision one way or the other. As far as it goes, that appears to be correct, but it is also clear that SCB had by that stage recognised internally that the problems were of its own making. A negotiated solution was therefore attractive, but, the judge's finding that it had rejected the documents was not challenged. The fact is that SCB was unwilling to meet Gunvor's demands and did not do so until after proceedings had been issued.
- SCB's argument has the attraction of simplicity, but in my view Mr. Foxton was right in saying that 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, but whether that technically required a fresh presentation does not in my view matter. All that was necessary was for Gunvor to make it clear that it was willing for SCB to take up the documents and accept liability for payment of the amount stipulated in the letter of credit. If SCB had done so, it would not have been open to Gunvor to argue that it had not become the holder of the bill of lading.
- Until the point at which proceedings were issued Gunvor, not surprisingly, did not formally characterise its claim as one in debt or damages; it took the straightforward position that it had made a valid presentation of documents under the letter of credit and that SCB was liable to it. If it be necessary to do so, I would accept Mr. Foxton's submission that Gunvor relied throughout on the presentation made on 4th June, but since SCB did not agree to Gunvor's demand, it is necessary to consider what happened thereafter.
- After proceedings had been issued things moved quickly. SCB indicated that it was willing to pay the full amount claimed together with interest and costs. It asked to whose account the funds should be paid and was told to pay the principal sum with accrued interest to the account of Société Générale designated in the letter of credit and the sums in respect of costs to Gunvor's solicitors. At that point there appears to have been no discussion about the nature of the liability or, more importantly, about what should happen to the bill of lading. In those circumstances Mr. Foxton submitted that the letter of credit mechanism for payment had not been operated in the true sense; SCB had simply asked where to make the payment and had been given the necessary directions. There would have been no need for further directions in order to enable SCB to comply with the letter of credit. The fact that it was asked to pay the principal and interest to Société Générale was simply a matter of practical convenience. He submitted that the parties had done no more than compromise the claim brought against SCB in the proceedings. In the absence of any agreement to the contrary SCB continued to hold the bill of lading to the order of Société Générale and Gunvor. He accepted, however, that neither of them had asked for it to be returned.
- In the absence of any unequivocal demand by Gunvor for payment against acceptance of the documents, or of a clear agreement either about the basis on which the payment was being made or about the right to possession of the bill of lading, it is necessary to ascertain the parties' rights by applying general principles of law. In order to do so it is necessary to have regard to their rights and obligations immediately before the payment was made. Perhaps the first question to consider is whether Gunvor's demand for payment against the backdrop of the particulars of claim amounted to an implied request to SCB to perform the contract contained in the letter of credit by remitting its face value (together with interest representing damages for delay in payment) or whether it amounted to no more than a claim for damages for breach of the obligation contained in the letter of credit.
- One might have expected that the clearest statement of Gunvor's position immediately before the payment was made would be contained in the particulars of claim, but in my view that document is equivocal. Although the primary way in which the case is put is as a claim in debt, it is also pleaded as a claim for breach of contract in failing to honour the letter of credit. If the matter had proceeded to trial, the parties might well have given greater thought to the correct basis of the claim and its implications, but because of the rapid capitulation of SCB it was unnecessary for them to do so. One is therefore left with proceedings in which claims are made on alternative bases and a settlement which does not involve a necessary choice between them. In those circumstances it is necessary to consider the true nature of Gunvor's cause of action. If it was to recover a debt, there was a corresponding obligation on Gunvor to transfer the documents, including the bill of lading, to SCB, since presentation and transfer of the documents was a condition of the existence of the debt, just as in a contract for the sale of goods transfer of property and payment of the price are co-ordinate conditions. If, on the other hand, the claim was for damages for breach of contract, presentation of the documents was necessary before the obligation to pay arose, but, payment having been refused, transfer of the documents was not necessary to give rise to a claim for damages.
- The distinction between a claim in debt and a claim for damages is described in Chitty on Contracts, 31st ed., vol. 1, paragraph 26-008 as follows:
"A debt is a definite sum of money fixed by the agreement of the parties as payable by one party in return for the performance of a specified obligation by the other party or upon the occurrence of some specified event or condition; damages may be claimed from a party who has broken his contractual obligation in some way other than failure to pay such a debt."
The corresponding passage in the 27th edition of Chitty, which was in materially identical terms, was approved by this court in Jervis v Harris  Ch 195, per Millett L.J. at page 202G. This suggests that a claim for money due under a letter of credit following presentation of conforming documents sounds in debt rather than damages and although the judge did not say so in terms, I think it is clear that he proceeded on the basis that Gunvor's claim was properly to recover a debt. However, the earlier authorities do not entirely support that conclusion.
- The nature of the obligation constituted by a letter of credit depends, of course, on its terms, but where, as in this case, the credit is subject to UCP 600, that provides a useful starting point for the analysis. Article 2 of UCP 600 contains various definitions. It defines "credit" as any arrangement which constitutes a definite undertaking "to honour a complying presentation", and for these purposes "honour" is defined as meaning to pay at sight (if the credit is available by sight payment), to incur a deferred payment undertaking and pay at maturity (if the credit is available by deferred payment) or to accept a bill of exchange and pay at maturity (if the credit is available by acceptance). In the minds of those responsible for framing UCP 600 the concept of honouring a letter of credit appears, therefore, to have been similar to that of honouring a bill of exchange.
- In the case of a bill of exchange section 57 of the Bills of Exchange Act 1882 (which reflected the position at common law) prescribes the measure of damages for dishonour, which includes the amount of the bill, interest and the expenses of noting. The damages are to be deemed to be liquidated damages and accordingly no question of mitigation arises. Section 57 makes it clear, therefore, that a claim for dishonour of a bill of exchange sounds in damages, not debt, a view which appears to reflect the understanding of earlier commentators, including Chalmers himself (see Chalmers, A Digest of the Law of Bills of Exchange, Promissory Notes and Cheques, 1878, pages 163 & 166 – 167, Chitty on Bills of Exchange (11th ed., 1878, Ch. XXVII and Byles on Bills of Exchange (13th ed., 1879), Ch. XXXIII). That also appears to have been accepted as axiomatic by Morris J. in N.V. Ledeboter and Van Der Held's Textielhandel v Hibbert  1 K.B. 964 at page 967, where he described the claim for dishonour of a bill of exchange as one sounding in damages.
- There is surprisingly little authority, however, on the nature of a claim for dishonour of a letter of credit. In Belgian Grain & Produce Co. Ltd v Cox & Co. (France) Ltd (1919) 1 Ll. L. Rep. 256 the defendant opened a letter of credit in favour of the claimant in respect of the price of a parcel of Japanese green peas. The defendant declined to accept the documents on the grounds that one of the policies of insurance did not cover transhipments and the claimant sued for the face value of the credit. As well as contesting the adequacy of the policy, the defendant argued that the claim lay in damages, which were to be measured by the amount which the claimant could have recovered from the buyer for non-acceptance of the goods. That argument was rejected. Bankes L.J. (with whom Warrington and Scrutton L.JJ. agreed) said:
"Now, no authority has been cited for that proposition, and, speaking for myself, and as far as I know anything of such letters of credit as this, it would seem to me that the contention, if sound, would defeat the object of letters of credit in this form, which, as I understand it, is to secure payment of the amount of the purchase price of the goods, or of the actual amount named in a letter of credit, in exchange for the particular document mentioned therein, and one of the objects is to avoid any controversy in reference to the amount of damage and to secure that, as against the documents, if they are in order, the amount of money named in the letters of credit should be paid over." (Emphasis added.)
The court gave judgment for the face value of the credit in exchange for the documents.
- Two things emerge from that decision. The first is that, although the nature of the claimant's cause of action was not central to the dispute, the court appears to have accepted that the claim sounded in damages measured by reference to the face value of the credit. Mr. Tselentis submitted that the court rejected the contention that the claim could sound only in damages, but in my view the issue to which the judgment was directed was simply whether the claimant could recover the face value of the credit or a lesser sum calculated by reference to the loss of bargain under the contract of sale. The second is that the court required the claimant to deliver the documents to the defendant. It appears that the goods were still being held to the order of the claimant, but the ability to give delivery of the goods does not appear to have been regarded as essential to the success of the claim.
- Stein v Hambro's Bank of Northern Commerce (1921) 9 Ll. L. Rep. 433. 507 concerned a claim for money due under a letter of credit, the issue being whether the claimant could recover damages in the amount of the face value of the credit or was limited to the loss sustained on the contract of sale. On presentation of the documents they were rejected and were taken away by the claimant who sued the bank for the face value of the credit. Having decided that the documents had been wrongfully rejected, Rowlatt J. heard argument on the measure of damages and reserved judgment. On giving his decision he said (page 507):
" . . . I took time to consider whether the damages which the plaintiff was entitled to recover were simply the money equivalent of the bill or whether they were the same damages as he would be entitled to as against a buyer for non-acceptance of the goods.
. . . The question is whether the plaintiff is suing upon a contract to pay money upon the fulfilment of certain conditions which have not been fulfilled, or whether he is suing for the breach of an obligation to carry through a transaction under which something has still got to be done by the plaintiff on the analogy of the position which arises where a buyer refuses to accept goods the property in which has not yet passed.
It seems to me that this is clearly a case of a simple contract to pay money upon the fulfilment of conditions which have been fulfilled. The bank had simply to accept the bill when the proper documents were brought to them. They were brought to them. The plaintiff in effect put them down on the counter of the bank, asked for acceptance, and the bank would not give acceptance. Plaintiff rather than leave the documents there took them away again. There is no question arising as between buyer and seller as to the buyer having some opportunity of inspecting the goods or anything of that sort. The obligation of the bank is absolute, and is meant to be absolute, that when the documents are presented they have to accept the bill. . . .
. . . if the bank want the documents they have got to pay the charges . . . "
- Despite the judge's description of the credit as "a simple contract to pay money upon the fulfilment of conditions", I think it is clear that he proceeded on the footing that the claim properly sounded in damages rather than debt. It is clear that, as in the previous case, the real issue between the parties was whether damages were to be measured by the face value of the credit or the loss of bargain on the contract of sale. The nature of the contract pointed in favour of the former. Once again, however, the court appears to have accepted that the bank had a right to take up the documents on payment of the charges.
- In Urquhart Lindsay & Co. Ltd v Eastern Bank Ltd  1 K.B. 318 a letter of credit covering the payment of the price of goods deliverable by instalments was repudiated by the opening bank. Rowlatt J. again expressed the view that the claim sounded in damages. He considered it elementary that "as a general rule the amount of damages for non-payment of money is only the amount of the money itself." A similar view was expressed by Greer J. in Dexters Ltd v Schenker & Co. (1923) 14 Ll. L. Rep. 586, another claim under a letter of credit, as follows at page 588:
"It is common practice that where a sum of money has become due and has not been paid under the terms of a document the claim is framed in the form of a claim simply for the money provided by the undertaking contained in the document, but I suppose, strictly speaking, after the date of payment has passed and payment has not been made, the way to read a claim of this sort is that it is a claim for damages for the non-payment of money, and in ninety-nine cases out of a hundred the amount of damages will be the sum which there has been an undertaking to pay."
- Mr. Tselentis submitted that this passage was contrary to principle and in any event obiter. Moreover, later authorities to which he drew our attention proceeded on the basis, some more explicitly than others, that on presentation by the beneficiary of conforming documents an obligation sounding in debt is created in his favour.
- Power Curber International Ltd v National Bank of Kuwait Ltd  2 Lloyd's Rep. 394 concerned a letter of credit opened by the defendant bank in favour of the plaintiff in respect of the price of goods sold to a third party in Kuwait. It incorporated the Uniform Customs and Practice for Documentary Credits (1974 Revision). Documents were to be presented to the bank at its offices in North Carolina, where the plaintiff carried on business. The bank paid the first instalment, but refused to pay the balance on the grounds that the courts of Kuwait had made an order forbidding any further payment. The plaintiff sued the bank for the outstanding amount due under the letter of credit and obtained summary judgment on the grounds that there was no defence to the claim. It appears to have been accepted by all concerned that the claim sounded in debt, because the defendant argued, among other things, that the lex situs of the debt was Kuwait and that for that reason payment was unlawful. Lord Denning and Griffiths L.J. rejected that submission on the grounds that the lex situs of the debt was North Carolina. Waterhouse J. did not take that view, but he did not think that the order of attachment made by the Kuwaiti court affected the existence of the debt which he considered had been created by the letter of credit.
- I do not think that any further assistance is to be derived from the decision of the House of Lords in United City Merchants (Investments) Ltd v Royal Bank of Canada  A.C. 168, to which Mr. Tselentis drew our attention, although it is fair to say that the way in which Lord Diplock expressed himself is entirely consistent with the submission that the claim in the present case sounds in debt. That also appears to have been the assumption in Floating Dock v The Hong and Shanghai Banking Corporation  1 Lloyd's Rep. 65, in which, following a successful claim against the defendant for failing to honour a letter of credit, Evans J. gave judgment in favour of the plaintiff for the face value of the credit and ordered a separate enquiry as to damages.
- In Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran  1 Lloyd's Rep. 36 the defendant, acting through its agent Bank Melli, rejected a tender of conforming documents leading to a claim under the letter of credit. Sir Christopher Staughton observed (at page 38, col.1) that:
" . . . instead of leaving the documents with Bank Melli and suing for the amount payable under the credit, Seaconsar took them back. Hence their claim against Bank Markazi is not in debt, for the amounts which were due under the credit if the documents were not validly rejected; it is a claim in damages for wrongful failure to honour the credit."
- Finally our attention was drawn to the case of Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  1 Lloyd's Rep 432, in which, in an attempt to enforce an arbitration award in its favour, the claimant sought a third party debt order under CPR Part 72 in respect of amounts due under two letters of credit of which the defendant was the beneficiary. CPR Part 72 allows the court on the application of a judgment creditor to make an order requiring a third party to pay the judgment creditor "the amount of any debt due or accruing due to the judgment debtor from the third party." Although he set aside an interim third party debt order made earlier, Field J. appears to have accepted that in principle the obligations under the letters of credit constituted debts for the purposes of the rules.
- Whatever view may have been taken at the time when letters of credit were in their infancy, in my view the modern cases support the proposition that if the opening or confirming bank fails to pay against presentation of conforming documents under a letter of credit payable at sight, the beneficiary may sue in debt to recover the value of the credit, provided he is willing and able to transfer the documents to the bank against payment. That is consistent both with the essential nature of the undertaking contained in the letter of credit and with the expectation of those who make use of such instruments to finance international trade. It has been said on many occasions that letters of credit are the life-blood of international commerce and are intended by those who use them to be "as good as cash". In the words of Lord Diplock in United City Merchants v Royal Bank of Canada at page 183F, the whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods. If the beneficiary is willing and able to transfer the documents to the bank, therefore, he is entitled to recover the face value of the credit as a debt. If he is not willing or able to hand over the documents, the position is different, as Sir Christopher Staughton pointed out in Seaconsar Far East v Bank Markazi. Since the contract provides for payment against documents, the beneficiary is not entitled to recover the full value of the credit otherwise than on surrender of the documents.
- It follows that in my view the judge was right to proceed on the footing that Gunvor's claim to recover the face value of the credit properly sounded in debt rather than damages (subject to the right to recover any consequential losses as damages). Gunvor had no right to recover the full value of the credit otherwise than against transfer of the documents. It did not ask for the documents to be returned and by accepting payment of the face value of the credit necessarily accepted that SCB was entitled to take them up. Whether that is characterised as a further presentation or merely an insistence that SCB accept the documents pursuant to the original presentation seems to me not to matter. Either way there was an unconditional transfer of the documents sufficient to constitute SCB the holder of the bill of lading and it is not open to Gunvor to say that it did not intend to transfer the documents or to complete the indorsement by delivery. If Gunvor had retained the documents and had sued SCB to recover damages for breach of contract in wrongfully rejecting the documents, it would have been obliged to give credit for their value, but that did not happen.
The effect of the transfer to SCB
- It was common ground below that by 7th July 2010, when Gunvor accepted payment from SCB, the bill of lading no longer gave a right as against Dorchester to possession of the goods to which it related because that right had been lost once discharge began on 15th June 2010. In my view that was not in fact the case, because the rights under the contract of carriage, including the right to obtain delivery of the goods from the carrier, did not cease when the goods were discharged against the letter of indemnity. They remained in existence and were capable of forming the basis of a claim against Dorchester for misdelivery. Nonetheless, the action was fought on the basis I have described and neither party suggested that we should depart from that concession at this stage.
- The judge therefore had to decide whether the transfer of the documents to SCB involved a transaction effected in pursuance of any contractual or other arrangements made before the time when a right to possession of the goods ceased to attach to possession of the bill under section 2(2(a) of the Act. Having considered the decisions in The David Agmashenebeli  1 Lloyd's Rep 92, The Ythan  1 Lloyd's Rep 457 and The Pace  1 Lloyd's Rep 183, he held that the proper approach was to identify "the real and effective cause" of the transfer to SCB of the bill of lading, since that would enable him to determine whether the case fell within section 2(2)(a). On that basis he held that the transfer to SCB of the bill of lading had been made pursuant to the letter of credit and that therefore, even if Dorchester were right in saying that SCB did not become the holder of the bill of lading until 7th July 2010, it nonetheless satisfied the requirements of section 2(2)(a) of the Act and obtained title to sue.
- Dorchester did not initially obtain permission to appeal against that part of the judge's decision, but on the hearing of its renewed application, which was made on a more limited basis, it was granted permission to amend its grounds of appeal to contend that this was not a case in which the requirements of section 2(2)(a) of the Act had been satisfied so as to transfer to SCB rights of suit under the contract of carriage. Mr. Foxton submitted that even if there had been a further presentation of the documents on 7th July 2010, the delivery of the bill of lading to SCB on that occasion did not constitute a transaction effected in pursuance of a contractual or other arrangement made before it had become spent, because the letter of credit had expired on 12th June 2010.
- I do not myself think that it is helpful to seek to identify the "real and effective cause of the transfer". Given that section 2(2)(a) refers to a transaction effected in pursuance of a contractual or other arrangement, I think it is preferable simply to identify the arrangement, if any, pursuant to which the transfer was made. It is common ground that the letter of credit expired on 12th June 2010. Once the letter of credit has expired the beneficiary is no longer entitled to require the issuing bank to honour it, since the obligation to do so has lapsed. However, in my view Mr. Tselentis was right in saying that, if documents are presented out of time, it remains open to the bank to waive the expiry date and accept them against payment of the face value of the credit. For obvious reasons the bank is unlikely to take that step without first obtaining the agreement of its own customer, but that is a matter for the bank itself. In the present case the documents were presented before the letter of credit expired and if Gunvor's actions are to be interpreted as insisting on the validity of that presentation, as I think they are, there is no difficulty in accepting that the transfer of the documents occurred pursuant to the original terms of the letter of credit, apart, that is, from the wholly unjustifiable delay on the part of SCB in honouring its obligation. The alternative view is that the documents were transferred to SCB pursuant to a fresh tender made after the letter of credit had expired, which the bank chose to accept. Mr. Foxton submitted that that is what occurred and that it constituted a transaction effected in pursuance of a fresh arrangement made after the time when the right to possession of the goods ceased to attach to possession of the bill of lading. In my view, however, that does not reflect commercial reality. The fact is that, if the documents were transferred to SCB against payment of the face value of the credit, as was the case, the transaction was one which in real terms was effected pursuant to the letter of credit, despite the fact that it did not occur at the time, or under the precise circumstances, envisaged by it. In my judgment, therefore, the judge was right to hold that if SCB became the holder of the bill of lading on 7th July 2010, it did so in circumstances under which the rights under the contract of carriage were transferred to it.
- It may seem surprising at first sight that Gunvor, which at the time when it asked the vessel to deliver the goods to its new sub-buyers was the owner of those goods and entitled to recover the bill of lading relating to them, should have incurred a liability to indemnify the vessel's owners in respect of a misdelivery of the goods, and all as a result of the actions of a bank which had dishonoured its obligation to it under the letter of credit. The explanation lies, however, in the way Gunvor chose to procure the discharge of the cargo. It could have called for the return of the bill of lading from SCB, cancelled the indorsement and presented it to the vessel itself. Had it done so, however, it would have been left with nothing more than a claim for damages against the bank. Instead it chose to leave the bill of lading with the bank and obtain delivery of the goods under a letter of indemnity, all the while pressing SCB for payment. By obtaining delivery otherwise than against the bill of lading Gunvor took the risk that SCB would accede to its demand, accept the documents and thus acquire the right as holder of the bill of lading to demand delivery from the vessel's owners. When that eventually occurred, the delivery of the goods constituted an interference with the rights which had passed to SCB at a later date.
- For those reasons, although I respectfully differ from the judge in relation to the meaning and effect of section 5(2)(b) of the Act, I think that he was right to hold that SCB became holder of the bill of lading on 7th July 2010 and that as a result the rights of suit under the contract of carriage became vested in it. I would therefore dismiss the appeal.
Lord Justice Briggs :
- I agree.
Sir Bernard Rix :
- I also agree.
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