UniCredit has lost a closely watched appeal over a US$24.7mn loss on a cargo of fuel oil that went missing during the collapse of a commodities trader in 2020, in a case which lawyers say could have an impact on the spate of similar claims stemming from commodity finance frauds.

London’s Court of Appeal on May 4 unanimously dismissed UniCredit’s attempt to overturn a High Court decision last year that it could not recoup its loss from vessel owner Euronav, although the appellate court also found in favour of one ground of the Italian lender’s appeal.

The appeal has been eagerly anticipated due to the possible ramifications of the High Court’s treatment of whether the bills of lading (BLs) constituted contract of carriage, and because the bank was unable to rely on a claim of misdelivery against a shipping firm, previously a relatively sure-fire route to recover losses on awry commodity finance transactions.

Belgium-headquartered Euronav discharged a cargo of oil, financed by the lender, from the vessel Sienna against a letter of indemnity (LOI) and without presentation of the BLs in April 2020.

Oil giant BP had sold the oil to trader Gulf Petrochem, UniCredit’s client. Unknown to the bank, the trader was just weeks away from collapse.

BP was the holder of the original BLs, but the documents had not been endorsed and forwarded to UniCredit as paper-based trade finance processes were snarled during the early months of the coronavirus pandemic.

BP had novated the charterparty to Gulf Petrochem, and the High Court judge found last year that in those circumstances the BLs constituted a “mere receipt” and no longer represented a contract of carriage.

But the three-judge panel overturned that aspect of the earlier judgement, finding instead that the BL did evidence a contract after the novation, because otherwise the transaction would exist in a “legal vacuum”, which was clearly not the intention of the parties.

In any case, the judges found, when the BLs were finally received by UniCredit in August 2020, a contract between the bank and Euronav came into being retrospectively.

However, the appeal was still dismissed because the court found that contrary to the bank’s arguments, Euronav’s delivery of the cargo via ship-to-ship transfers off the coast of Oman – without seeking explicit approval from UniCredit – was not the cause of the bank’s loss.

The judges found that the High Court judge, Justice Clare Moulder, had followed the correct procedure when she found that if Euronav had asked for discharge instructions from BP – which would then have referred the vessel owner to UniCredit – the bank would have allowed discharge against the LOI and without requiring the BLs, and therefore still suffered the same loss.

“In those circumstances delivery without production of the bill would no longer have been a breach of the bill contract. The initial breach would therefore have caused no loss,” Lord Justice Popplewell wrote.

A lawyer representing UniCredit had previously indicated that the outcome of the appeal may influence whether the lender remained in the commodity trade finance market.

At the appeal hearing in March, UniCredit’s barrister John Russel KC said that the 2022 judgement had “sent something of a shockwave” through trade finance banks and that UniCredit has, “at high levels, considered whether they might leave the entire sector if the security they thought they had by holding bills of lading is potentially so illusory or at risk as the first instance judgement suggests”.

UniCredit declined to comment on the impact of the appeal on its commodity trade finance business, or whether it will appeal to the Supreme Court, when contacted by GTR. Euronav also declined to comment.

The appellate court’s judgement acknowledged UniCredit’s argument that the High Court decision “would have calamitous consequences for those involved in providing commodity trade financing, because it would be open to [vessel] owners in almost every case in which discharge took place against an LOI without production of the bill of lading to assert a similar causation defence”.

But he continued: “If that is so, it is simply the result of the application of conventional principles to which the practical consequences for market practice must yield,” and noted that there are other forms of security available to trade finance lenders.

“I would question, however, whether the decision in this case has such far reaching consequences. It is the result of a particular finding of fact as to what instructions would have been given to these shipowners in the light of the fact that… the bank thought they were wholly or largely secured in other ways. It is by no means clear that similar findings of fact could be made in most other cases.”


‘A significant decision’

Lawyers say the latest decision has important ramifications for the wider trade finance market, particularly on the raft of misdelivery claims filed by banks in recent years in the wake of fraud scandals at commodity traders in Asia and the Middle East.

It is another signal that in a break from the past, where misdelivery cases were generally easy victories for trade finance banks which had not been repaid for financed cargoes, courts are more likely to examine the bank’s behaviour to ascertain whether they were the true cause of the loss.

While the court stressed that the case presented a unique set of facts, one lawyer who spoke to GTR says it has similarities with a rising number of cases in the trade finance sector.

“The key takeaway is that actions speak louder than words,” the Singapore-based maritime law specialist says. “Notwithstanding that the transaction may actually stipulate that the BLs are to be pledged to the bank as security, if a bank is going to behave in a manner as if the BLs did not act as its security, this may override whatever is written on paper.”

Some legal observers had reacted with surprise when the High Court judgement was handed down last year, because of the doubt it cast on the status of a BL, particularly in a situation – common in the oil trading business – where there is a delay to the delivery endorsement of the paper documents.

Lawyers at Ince described the appellate court’s ruling as “a significant decision for carriers, charterers and financing banks alike”.

“It makes clear that the usual presumptions as to the status of a bill of lading can be displaced where the parties are found to have intended something different,” the lawyers wrote in a note on the firm’s website.

“It also highlights the courts’ general view that commercial parties intend their relationships to be governed by contract. The court will incline towards a finding that there is a contractual relationship where possible to avoid a contractual vacuum.”

The maritime law specialist also noted that the facts in the case were “fairly unique” because of BP’s novation of the charterparty to Gulf Petrochem, compared to a more typical situation where the contract would remain between the seller and the vessel owner until discharge.