Misdelivery claims are one of the messiest types of disputes in trade finance, with cases regularly winding up in court. They arise when a bank which believes it has title over goods being shipped, such as through holding the bills of lading, is not repaid by the receiver to whom it extended financing.
London’s Commercial Court late last month handed down two judgements in separate cases involving misdelivery of a financed commodities shipment. Alongside other cases heard in London this year and two significant judgements in Singapore, they add some legal clarity to a complex field of law.
Oil giants clash
In a judgement handed down on October 3, London’s Commercial Court wrapped up a dispute between three oil giants stemming from what a judge described as poorly crafted contracts for the delivery of 1 million barrels of crude oil to since-collapsed trader Hontop Energy.
The cargo, financed by French lender Natixis, was delivered by Brazil’s Petrobras in late 2019 without presentation of the original bills of lading, but with letters of indemnity (LOIs) issued by parties down the chain of vessel charterers.
In March 2020, Natixis arrested the vessel, the Miracle Hope, in Singapore because the letter of credit issued had not been repaid by Hontop. The bank demanded US$76mn for the ship’s release, triggering cascading claims from the vessel owners down to oil trader Trafigura, Gunvor subsidiary Clearlake Shipping, and finally Petrobras, over liability for the alleged misdelivery.
The case is another example of messy legal situations that can arise when a trader defaults on a payment, but where the bank and shipping companies have allowed discharge without presentation of the original bills of lading and have relied on letters of indemnity – routine practice in the seaborne oil trade.
The litigation, which has been before the courts since 2020, was further complicated by charter party contracts, which Judge Mark Pelling described as not “competently drawn document[s]” which cannot “fairly be described or approached… on the basis that they were drafted by skilled professionals”.
Trafigura had time-chartered the Miracle Hope from the ship’s head owner, which is not named in the judgement. Trafigura sub-chartered the vessel to Clearlake, who in turn sub-chartered it to Petrobras on back-to-back terms for transportation of around 1 million barrels of oil from Brazil to Qingdao.
In late 2019, Natixis paid Petrobras under a letter of credit applied for by Hontop, on the basis of an LOI as the original bills of lading were not available.
While the judgement does not explain the reason behind Natixis’ arrest of the vessel, Hontop collapsed a few months later and another claim filed in Singapore by Natixis regarding a similarly-timed oil deal suggests Hontop began defaulting on payments to Natixis in early 2020.
Following two judgements in the English courts in the first half of 2020, Petrobras was ultimately ordered to pay a US$76mn security to the courts in Singapore in order to release the vessel. The October 3 judgement in London confirmed that Petrobas must indemnify Clearlake, which in turn indemnifies Trafigura, which indemnifies the head owners. The fate of the security Petrobras paid to the court will be determined by proceedings in Singapore between Natixis and the vessel’s owners, which are ongoing.
Among Petrobras’ arguments – repeating submissions made by Natixis in Singapore – was that there is a difference between “discharge” and “delivery” and that the vessel owners should have retained control over the cargo following discharge. But the judge found this was not plausible, could not be discerned from the language used by the parties and noted evidence from the ship’s master that it would not have been possible at that port.
The parties also tussled over the role of different Clearlake entities in the chartering chain, which the judge found ultimately did not affect the chain of indemnities.
Natixis, Trafigura and Gunvor declined to comment on the case. Petrobas did not respond to a request for comment.
Lawyers at Preston Turnbull, who acted for the vessel owners in the dispute, wrote in a note on the judgement that “the case provides another warning regarding what can happen when a party in the sale chain becomes insolvent and/or fails to pay the financing bank who has the bills of lading as security”.
“The judgement highlights the importance of ensuring that LOI clauses, as with all contractual provisions, are clearly worded.”
Missing coal
On September 28 the Commercial Court handed down a judgement on an aspect of misdelivery law that had not been previously adjudicated by an English court: whether the one-year time limit on misdelivery claims applies to a misdelivery that takes place after goods are discharged.
In a long-running case, Maltese trade finance lender Fimbank had alleged that the shipping arm of South Korean energy firm KCH was responsible for the misdelivery of around 85,000 metric tonnes of coal in India in April 2018, which it had financed.
A previous judgement in the case from 2020 said the cargo was valued at around US$7.3mn, although KCH disputed the figure.
While the judgement does not delve into the financial arrangements between Fimbank and the buyer of the coal – Farlin Energy & Commodities FZE – it says Fimbank had title over the coal and held the original bills of lading. A separate legal judgement in a Dubai court shows that Fimbank won a US$20.3mn judgement against Farlin in February 2019 after the latter defaulted on debt obligations.
The coal was discharged under LOIs issued up the shipping chain, eventually resting with KCH as the demise charterer. According to the judge, Sir William Blair, “what actually happened to [the coal] has not been explored in the facts before the court, and is in dispute”.
Fimbank commenced arbitration proceedings against KCH in April 2020. But under the Hague-Visby Rules which are used by many countries to govern the carriage of goods at sea, there is a “time bar” requiring claims be filed no later than a year after the alleged misdelivery.
A previous Commercial Court ruling in the case shows there were “recriminations” over the cause of the delay in making the claim, with the bank alleging it had been misled over which party had to be served.
According to the judgement, Fimbank argued in arbitration that the misdelivery occurred after the goods had been offloaded in the port, and therefore the time bar did not apply.
It also argued that a clause in the Congenbill which states that the carrier of the cargo “shall in no case be responsible for loss and damage to the cargo, howsoever arising prior to loading into and after discharge from the vessel” meant the Hague-Visby Rules did not apply to the contract.
The arbitration panel disagreed, finding that the Hague-Visby time bar does apply to misdelivery after discharge because, as summarised by the judgement, “the contract of carriage covered by a bill of lading applies before loading, before the goods pass over the ship’s rail, and persists after the goods pass over the ship’s rail until right and true delivery”.
Fimbank won permission to appeal the award in December 2021. In the latest judgement, Blair upheld the tribunal’s award and dismissed Fimbank’s appeal.
In his judgement, Blair noted that this question has previously been left open by the courts in England and Wales, and that courts in other jurisdictions have come to varying conclusions.
“These points of law are not only of considerable difficulty, but are potentially of considerable commercial significance,” he wrote.
In a note on the judgement, the UK P&I Club says “this decision will be welcomed by shipowners but members are reminded that while it has now been clarified under English law [that the time bar applies to post-discharge misdelivery] there is still a lack of international agreement on the position”.
Fimbank said it had no immediate comment. A lawyer representing KCH in the proceedings did not respond to a request for comment.
