The power of the pea

RUNNING to more than 300 pages, it's unlikely to be on the top-sellers list, but a decision handed down by Mr Justice Hunter last October should be of interest to everyone in the shipping and international trading community. The decision in question concerned Pacific Carriers Ltd v Bank Nationale de Paris and was handed down by the Supreme Court of New South Wales, Australia.

The case involved the export from Australia in 1998 of various consignments of chickpeas and dun peas. They were loaded onto the vessel Nelson in various ports in Australia for discharge in Calcutta, India. The buyer of the cargo was an Indian company, Royal Trading (Royal). Unfortunately, for just about everyone concerned, Royal took possession of the goods in Calcutta but failed to pay for them.

The goods were delivered to Royal by the master of the Nelson, which vessel was time-chartered by the Singapore-based plaintiff (PCL), without production of bills of lading at the request of PCL in return for a letter of indemnity from Royal. The sale and purchase of the cargo was financed by the Singapore commodity trader Swiss Singapore Overseas Enterprises (SSOE) who, as security for its financing of the trade, held the bills of lading as pledgee. SSOE had arranged for the original bills of lading, issued by PCL, to be switched to accommodate Royal's requirements to sell the peas on. Payment was to be made under various letters of credit, which had been opened in favour of the Australian seller (NEAT) by SSOE.

SSOE arranged to take possession of the switched bills of lading so they could be presented to its bank and the ship's master to ensure the peas would be delivered to SSOE as holder of the bills of lading. SSOE would then be able to enforce its security over Royal as Royal owed SSOE substantial sums of money from prior transactions.

NEAT voyage-chartered the Nelson from PCL. Pursuant to the charter party, NEAT was responsible for any demurrage incurred at the discharge port of Calcutta. Calcutta, however, is notorious for delays during discharge, partly due to congestion, and discharge of the cargo from the Nelson was greatly delayed, causing demurrage to run. Meanwhile, there were delays in receiving the bills of lading in Calcutta, and the market price for chickpeas and dun peas fell.

Although NEAT was secured under its letter of credit for its sale price, Royal found itself in difficulty in selling the peas on at a profit and, for that reason, failed to pay SSOE, even though SSOE had paid its bankers who had in turn paid NEAT under the various letters of credit. Even the letter of credit payments were not without drama as problems arose with discrepant documents.

As every shipowner knows, to deliver goods to a receiver without production of the original bills of lading by that receiver is an invitation for the true owner of the goods to sue the shipowner in conversion. In addition, every shipowner knows that its P&I club will not cover it for such wrongful delivery in the absence of a special agreement. It is therefore in the interests of the shipowner to obtain an appropriate letter of indemnity from the party requesting the delivery of the goods (in this case, Royal). The shipowner will also be interested in obtaining a letter of indemnity from its time-charterer. In this case, one was obtained from PCL who, as the time charterer/disponent owner, prudently sought an indemnity form the voyage charterer, NEAT, to be confirmed by NEAT's banker, BNP (the bank LOI).

Once the wrongful delivery had taken place, things happened very quickly. SSOE arrested the Nelson as security for its claim against the vessel's owners for conversion of the goods. That dispute subsequently went to arbitration in London, and related proceedings took place in Singapore and South Africa. PCL started proceedings in the New South Wales Supreme Court against BNP seeking to be indemnified by BNP, under the bank LOI, in respect of PCL's liability to pay damages to the vessel's owners under the vessel's time-charter. In turn, the owner's claim against PCL was back-to-back for the conversion claim it faced from SSOE in the London arbitration. There was no claim in any of the proceedings between the owner and PCL as they resolved their dispute amicably. The owner and PCL effectively stood in the same shoes in the Supreme Court proceedings.

There were various cross-claims between parties. At no stage, however, was Royal involved in the proceedings in New South Wales, despite it being the ultimate 'bad guy'. SSOE, as the party that had paid for the goods through the letters of credit, was the party out of pocket. Yet BNP, when sued by PCL for an indemnity, joined SSOE in claiming damages for any liability BNP had to PCL. PCL and the vessel's owners had not paid SSOE for the converted goods. BNP had not honoured the indemnity to PCL, so was not out of pocket. NEAT, which had been paid under the letters of credit, was insolvent by the time the trial commenced and BNP was one of NEAT's major creditors.

Amongst the various cross-claims, BNP raised some novel arguments against SSOE. It claimed, among other things, that the creation of the switch in bills of lading was in some way unlawful and that SSOE had interfered in BNP's contractual relationships. There were also some interesting issues as to the measure of damages, the relevant exchange rates between the different countries involved, and discrepancies under the letters of credit. The hearing before Mr Justice Hunter took over 35 days.

The main decision handed down by the court was a finding in favour of PCL against BNP in relation to the letter of indemnity provided by NEAT and backed by BNP. What was particularly interesting was that the court declined to find that there had been a specific contractual obligation or guarantee given by BNP to PCL whereby BNP itself would honour the indemnity. This decision was perhaps a little surprising given that the indemnity was in a fairly standard form of wording, common to letters of indemnity where there has been a delivery of goods to a receiver without production of the original bills of lading.

BNP argued that all it intended to do by counter-signing the NEAT indemnity was to authenticate the signatures of the NEAT's officers. Cross-examination of the bank's witnesses on this point was telling. The court declined to accept the bank's evidence and found in favour of PCL and against BNP in negligence on the basis that BNP's execution of the document was its personal assurance that NEAT (the bank's customer) was good for the indemnity. As it transpired, it was not. PCL could have asked for NEAT to procure a stand-alone letter of indemnity from BNP as NEAT's banker, but it did not do so. As a result, PCL won and BNP lost. BNP lost its cross-claims against SSOE and NEAT, and costs were awarded in favour of PCL against BNP and in favour of SSOE and NEAT against BNP.

Although the court did not have to decide many of the issues raised in the proceedings, it appeared to have no difficulty with the concept and practice of switching bills of lading, which is particularly common in trades to South and South-East Asia. Interestingly, the court found that SSOE held the switched bills of lading as a pledgee in its capacity as financier of the transaction between Royal and NEAT.

The common law has long given a plegdee of bills of lading similar rights to the holder or endorsee. There were also some interesting arguments in relation to the bills of lading legislation in Australia and England, including the rights of the pledgee of the bill of lading to obtain delivery of the goods in return for the production of the bill of lading.

During the course of the case, it emerged that the London lawyers for the owners had been advised that their defence to the conversion claim, brought by SSOE against the owner in the London arbitration, was without merit. But perhaps one of the most interesting results of the litigation was that, during its later stages, SSOE and the owner/PCL settled their dispute with a very significant payment by PCL to SSOE for the damages claimed by SSOE against the owners for conversion. That payment crystallised PCL's claim for indemnity against BNP. BNP sought to argue that the quantum of the settlement was unreasonable but failed to find favour with the court.

As usual, the actual decision by the court was based very much on the facts of the case and the particular findings of evidence made by the judge. Nevertheless, the wide-ranging issues considered by the court in this case should mean that the decision in the Nelson case is of interest to everyone involved in the international sale, sea carriage and financing of goods.

Well-established principles of law, such as the risks faced by the shipowner who delivers goods without production of the original bills of lading, the entitlements of the pledgee of bills of lading, and issues relating to the application of the principles in Incoterms and UCP 500, have been proved. This case sends out a clear warning to shipowners and banks to make sure they get their letters of indemnity correctly worded and issued by the correct party - preferably a party which has the means to honour the letter of indemnity and is likely to do so for a reasonable amount of time into the future.

It would appear that the humble chickpea, and its cousin the even more humble dun pea, have done their bit to clarify the law.