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Banks wanting to sue ship owners for discharging cargoes without original bills of lading may only have a year after the event to make a claim, following a “landmark” ruling from the UK’s highest court.

The UK Supreme Court ruled on November 13 that Maltese trade finance lender Fimbank is unable to seek damages from ship charterer KCH Shipping to recover its loss on a cargo of coal, because it did not make its claim soon enough.

Fimbank argued it had six years from the date of the alleged misdelivery in 2018 to make a claim, but KCH countered that the Hague-Visby Rules, an international convention that is widely used in shipping, applies a one-year time bar to such claims.

Lawyers say the ruling is significant for any transactions which incorporate the Hague-Visby Rules, which can be applied even when not stipulated in contracts.

“This decision is a ‘win’ for everyone involved in carrying, buying, selling, and financing cargoes worldwide, because it confirms that parties will be able to ‘close their books’ within one year, rather than having to worry about misdelivery claims coming out of the woodwork up to six years later,” says Thor Maalouf, a partner with law firm Reed Smith, which represented KCH.

Misdelivery claims are often used by trade finance banks to recoup losses when a lender fails to repay a trade loan and the cargo cannnot be located.

The cases usually centre on whether the shipowner or charterer discharged the goods without the original bills of lading, and many have come before the courts since a rash of insolvencies in the commodity trading sector in 2020.

“Trade finance banks that rely on bills of lading as security will need to be aware that a one-year time bar will apply even where cargo is discharged into storage which they consider to be in the custody of the carrier pending ultimate delivery,” says Reed Smith partner Kyri Evagora.

“They should therefore make sure to diarise one year from discharge regardless of when ‘delivery’ is intended to take place.”

Fimbank financed the purchase of 85,510 metric tonnes of steam coal by its client Farlin Energy & Commodities, with the cargo shipped from Indonesia to India in April 2018 aboard bulk carrier Giant Ace, according to the judgment.

The coal was discharged against a letter of indemnity and without presentation of the 13 original bills of lading, which is common practice for some traded commodities.

Farlin sold the coal to “various sub-buyers”, the judgment says, but Fimbank was “unable” to collect payment for the cargo or get repaid for the financing. Fimbank separately won a US$20.3mn court judgment against Farlin in 2019.

The lender began arbitration against KCH in April 2020, alleging that the carrier misdelivered the cargo to “persons who were not entitled to receive it”.

KCH said the suit was out of time under the Hague-Visby rules, but Fimbank countered that the one-year time bar against misdelivery claims only applied to events that occurred up until or during discharge, and not to misdelivery that took place after the goods had been taken off the ship.

The proceedings were put on hold until the time bar question was resolved.

The Commercial Court and the Court of Appeal both sided with KCH, but Fimbank appealed to the Supreme Court.

Law firm Stephensen Harwood, which was not involved in the case, says the “landmark” and “hotly anticipated” Supreme Court ruling “underscores the importance of timely legal action in misdelivery cases and reinforces the finality intended by the time bar provision”.

“This judgment will likely influence how carriers, shippers, and financiers approach the drafting and interpretation of bills of lading and related contracts,” says a note from lawyers Emma Skakle and Rebecca Crookenden.

“It reinforces the necessity for robust processes to trace endorsements made to bills of lading and secure letters of indemnity before issuing delivery orders in the absence of the original bills of lading.”

Fimbank declined to comment.