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Endorsement, delivery, possession and holdership

The Erin Schulte [2014] EWCA Civ 1382

 

Facts

Most of the relevant events in the Erin Schulte took place in the spring of 2010. UIDC had sold 17,000 mt gasoil to Cirrus in March 2010, and it bought the same quantity from Gunvor in April 2010 (CIF Takoradi, Ghana). These were both documentary sales. Upon instruction of Cirrus, the United Bank of Africa opened an L/C in favour of UIDC. Standard Chartered first confirmed this L/C to UIBC, and subsequently transferred the L/C to Gunvor.

The gasoil was split into sub-shipments in Cotonou (Benin); 9,446 mt was shipped on board the Maria E. and 9,208 mt was shipped on board of the Erin Schulte. Clean bills of lading were issued for both sub-shipments, mentioning Gunvor’s bank (‘Société Générale or order’) as the consignee. When the Maria E. arrived in Takorade on 13 May 2010, the gasoil proved to be off spec. Cirrus negotiated a reduced price for this shipment, but rejected the gasoil on board of the Erin Schulte altogether.

In light of this new situation, UIBC had to find a new buyer and the L/C had to be amended.  The United Bank of Africa approached Standard Chartered to reduce the amount mentioned in the L/C on 20 May 2010, and Standard Chartered in turn approached UIBC and Gunvor for their agreement. Standard Chartered obtained UIBC’s agreement on 1 June and informed the United Bank of Africa (still pending Gunvor’s response) that the amount covered by the L/C could indeed be reduced.

Standard Chartered had thus assumed a vulnerable position; it was still exposed to Gunvor’s claim for the full amount under the initial L/C, yet it could only recover the reduced amount from the United Bank of Africa under the amended L/C. Unfortunately, this risk soon materialized. Société Générale presented the documents on behalf of Gunvor under the initial L/C (including the original (3/3) bill of lading endorsed by Société Générale to Standard Chartered) on 4 June 2010. Standard Chartered rejected the documents saying that they were non-compliant and informed Gunvor that it would hold them to the order of Société Générale. Standard Chartered however eventually honoured the initial L/C on 7 July 2010.

When the Erin Schulte arrived in Takorade on 9 June 2010, the original (3/3) bill of lading was still physically held by Standard Chartered and could not be presented to the carrier by the new buyer. Instead the gasoil was released against a letter of indemnity issued by Gunvor. So the hunter became the prey; Standard Chartered initiated proceedings against the owners of the Erin Schulte (Dorchester) for misdelivery, but any sum awarded in these proceedings would ultimately have to be reimbursed by Gunvor under the letter of indemnity.

Judgment

In view of these facts and circumstances, the key question was whether Standard Chartered had a right of suit under the Carriage of Goods by Sea Act 1992. S. 2 (1) COGSA 1992 prescribes that the ‘lawful holder of a bill of lading (…) shall (…) have transferred to and vested in him all rights of suit under the contract of carriage (…).’ S. 5 (2) (b) COGSA 1992 then identifies the holder of an order bill of lading as the ‘person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill (…)’.

Both parties agreed that the delivery in the sense of S. 5 (2) (b) COGSA 1992 is consensual (instead of factual), but they disagreed as to the required measure of consensus.  Standard Chartered argued that its intention to assume physical control over the bill of lading was sufficient, and that it had become the lawful holder of the bill of lading on 4 June 2010 (alternatively on 7 July 2010 upon payment under the L/C). Dorchester argued that Standard Chartered should not only have had the intention to assume physical control over the bill of lading, but should also have had the intention to acquire the rights of suit under the bill of lading contract. As it had refused to accept the documents, and therewith had refused to accept the transfer of rights of suit under the bill of lading contract, Standard Chartered had not become the lawful holder of the bill of lading.

Although the Commercial Court and the Court of Appeal ultimately agreed that Standard Chartered had acquired a right of suit pursuant to S. 2 (2) (a) COGSA 1992, they disagreed on the ‘delivery’ of the bill of lading in the sense of  S. 5 (2) (b) COGSA 1992.  Justice Teare accepted that the delivery had taken place on 4 June 2010 as the presentation and subsequent receipt of the bill of lading satisfied the requirements of S. 5 (2) (b) COGSA 1992. The judge held that the delivery ‘of an indorsed bill of lading is a simple act, though one which requires the requisite intention on the part of deliveror and deliveree. On the facts of the present case the bills of lading were delivered on 4 June 2010 when they were received by SCB into its possession.’

On appeal, Moore-Bick LJ held that the receipt of the bill of lading by the bank in its possession was not enough as S. 5 (2) (b) COGSA required ‘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.’ Under these circumstances, the Court of Appeal unanimously held that the endorsement had not been completed by delivery.

Analysis

The difficulty with the bill of lading is that is has three separate functions; it serves as a receipt, it is a document of title and it evidences the contract of carriage. These functions of the bill of lading sometimes overlap when the bill of lading is transferred from one holder to the next. Such a transfer may then e.g. trigger payment under an L/C, symbolically transfer the possession of the underlying goods and transfer the rights of suit under the bill of lading contract. The effect of the transfer depends on the intention of the parties, the nature of their relationship and the function of the bill of lading.

The receipt function can be traced back to the fourteenth century (W.P. Bennett The history and present position of the bill of lading as a document of title (Cambridge University Press 1914) 5-6), the symbolic function (as a document of title at common law) was recognized at the end of the eighteenth century (Lickbarrow v. Mason [1794] 5 TR 683; Barber v. Meyerstein (1870) LR 4 HL 317; Sanders Brothers v. Maclean (1883) 11 QBD 327) and the contractual function was acquired in the course of the nineteenth century when merchants started to accept a bill of lading (instead of a charter party) as evidence of the contract of carriage (Crooks v. Allen (1879) 5 QBD 38; The Ardennes [1951] 1 KB 55; 2 ER 15).

This contractual function next to the symbolic function brought certain complications. Whereas the transfer of the bill of lading could symbolically transfer the possession in the goods, the transfer of the bill of lading would not transfer any rights under the bill of lading contract (Thompson v. Dominy (1845) 14 M&W 403, 153 ER 532). This was a problem when the goods had already been transferred to the buyer but were subsequently lost or damaged during the voyage. The buyer had no privity of contract, hence no right of suit under the bill of lading contract (Tweddle v. Atkinson (1861) 1 B&S 293; 121 ER 762; Dunlop v. Selfridge [1915] AC 847). The seller did have privity of contract, but nevertheless still no right of suit in absence of a proprietary interest in the goods (The Albazero [1976] 2 Lloyd’s Rep. 467; 3 ER 129).

The Bills of Lading Act 1855 provided some statutory relief (see for common law relief Dunlop v. Lambert (1839) 6 Cl & F 600; 7 ER 824, and later Brandt v. Liverpool [1924] 1 KB 575). The 1855 act linked the contractual rights under the bill of lading contract to the proprietary interest in the goods; it provided that ‘every endorsee of a bill of lading, to whom the property in the goods herein mentioned shall pass upon or by reason of such consignment or endorsement, shall have transferred to and vested in him all rights of suit (…)’. Again problems surfaced however, e.g. when the bill of lading was transferred to a bank pursuant to a pledge (Sewell v. Burdick [1884] All ER Rep 223) or when the goods were transferred other than by endorsement of the bill of lading (The Delfini [1990] 1 Lloyd’s Rep. 252).

The COGSA 1992 finally separated the proprietary rights from the contractual rights (see in particular S. 2 (4) COGSA 1992, necessary to circumvent The Albazero). The transfer of the bill of lading to its lawful holder provides him with all rights of suit, irrespective of the underlying cause (provided of course that it is a valid one). The intention to transfer the property in the goods is just as effective as the intention to present the bill of lading to the bank as one of the documents prescribed in the L/C and just as effective as the intention to allow a freight forwarder to collect the goods in the port of discharge (Law Commission Rights of suit in respect of carriage of goods by sea (HMSO 1992) 12; Mance LJ in East West Corporation v. DKBS 1912 A/S [2003] 2 All ER 700).

The initial intention of the parties and their banks in the Erin Schulte (as in any straightforward documentary sale) was to transfer the possession of the goods against payment of the purchase price. The presentation of the (duly endorsed) bill of lading under the L/C would have equalled delivery, and the transfer of the bill of lading (as a document of title) would have symbolically transferred the possession of the goods carried thereunder.

Given the rejection of the shipment of gasoil in the Erin Schulte however, Gunvor clearly had a different agenda. As the initial sale contract had already been cancelled, Gunvor had no intention to transfer the possession of the goods to UIBC. Gunvor simply seized the opportunity to collect the full sum under the L/C, and instructed Société Générale to endorse the bill of lading to Standard Chartered for presentation under the L/C.  This presentation of the bill of lading thus never transferred the possession of the underlying goods. In fact the bill of lading never functioned as a document of title (at common law or otherwise as it was never presented to Dorchester) at all.

Standard Chartered obviously had no intention to accept any transfer of the possession of the goods either, and certainly had no intention to pay the initial sum where it could only recover the reduced sum. Hence it rejected the presentation and held the documents to the order of Société Générale. This refusal to accept the documents ultimately proved decisive in appeal. Moore-Bick LJ considered the endorsement incomplete as S. 5 (2) (b) COGSA 1992 required an ‘unconditional acceptance’ by Standard Chartered, and Briggs LJ and Sir Bernard Rix agreed.

All the same, Société Générale voluntarily presented the documents and Standard Chartered did not return them (The Aegean Sea [1998] 2 Lloyd’s Rep. 39). In fact Standard Chartered intentionally kept the bill of lading after its presentation, albeit as an agent for Société Générale. It is submitted that this intention to keep the bill of lading is decisive, and not the intention to unconditionally accept the bill of lading (under the L/C). The endorsement to Standard Chartered, its factual possession and its intention to keep the bill of lading satisfy S. 5 (2) (b) COGSA 1992 (Powell v. McFarlane (1979) 38 P&CR 452; JA Pye (Oxford) v. Graham [2003] 1 AC 419).

It makes no difference that Standard Chartered acted as an agent for Société Générale. The lawful holder can hold the bill of lading as an agent for someone else, and still have title to sue under the bill of lading contract if he holds the bill of lading pursuant to a statutory transfer (East West; The Ythan [2006] 1 Lloyd’s Rep 457). This is perhaps best explained by a series of variations on a documentary sale whereby the bill of lading is issued by the carrier to the order of the seller.

1) The seller of the goods endorses the bill of lading to the order of the buyer, and then presents the bill of lading to the buyer against payment of the purchase price. The transfer of the bill of lading symbolizes the transfer of possession of the goods. The buyer physically holds the bill of lading in his possession, and he is the lawful holder in the sense of S. 2 (1) COGSA 1992.

2) The buyer gives the bill of lading to one of its employees with the instruction to present it to the carrier. This is not a transfer; the employee acts in a purely ministerial capacity (G.H. Treitel & F.M.B. Reynolds Carver on bills of lading (Sweet & Maxwell 2011) 229); the buyer retains physical holdership, is still in possession and remains the lawful holder of the bill of lading in the sense of S. 2 (1) COGSA 1992.

3) The buyer gives the bill of lading to a freight forwarder with the instruction to present it to the carrier. Again, this is not a transfer. The bill of lading (still endorsed to the order of the buyer) is now physically held by the forwarder as an agent for the buyer. The forwarder has custody, but the buyer retains (constructive) possession. eThe buyer remains its lawful holder as the requirements of S. 5 (2) (b) COGSA 1992 (endorsement and delivery) have obviously not been met.

4) The buyer endorses the bill of lading to the order of the forwarder, and then gives it to him with the instruction to present it to the carrier. The forwarder still acts as the buyer’s agent, but he is without a doubt the lawful holder of the bill of lading (East West). The requirements of S. 5 (2) (b) COGSA 1992 have been met and the forwarder is in possession of the bill of lading, even if he were to present himself as an agent for the buyer.

5) The buyer endorses the bill of lading to the order of the forwarder, and then gives it to him with the instruction to present it to the carrier. The forwarder however declines the instruction as the buyer still has to pay the last three invoices, and he keeps the bill of lading in his vault for the time being.  The forwarder acts as the buyer’s agent, and he may have declined the instruction (the underlying cause of the transfer), but he is still the lawful holder of the bill of lading. The buyer has voluntarily transferred possession, the forwarder controls the bill of lading and the requirements of S. 5 (2) (b) COGSA 1992 have been met.

6) The buyer endorses the bill of lading to the order of the forwarder, and then gives it to him with the specific instruction to keep it safe in the vault. Again, the forwarder acts as the buyer’s agent but this time he is only a custodian of the bill of lading as its possession was never transferred. The buyer retains the constructive possession of the bill of lading, and remains its lawful holder as the endorsement is not completed by delivery.

Obviously, none of these variations provides a 100% match with the Erin Schulte, but they do show the delicate relation between endorsement, delivery, possession and holdership. The rights of suit under a bill of lading contract pass with the transfer of the bill of lading to the lawful holder. Such a transfer requires an endorsement completed by delivery. The delivery is the voluntary transfer of possession (S. 61 SGA 1979; The Berge Sisar [2001] UKHL 17, 2 ER 193), and possession requires factual possession and the intention to possess (Powell v. McFarlane; JA Pye (Oxford) v. Graham).

When Société Générale presented the bill of lading on 4 June 2010, it did so voluntarily and with every intention to pass possession. Standard Chartered could have returned the bill of lading immediately (or later), but it did not. Although it clearly had no intention to accept the bill of lading (as one of the documents identified) under the L/C, Standard Chartered nevertheless intentionally kept the bill of lading, albeit ‘to the order of Société Générale’.

The (putative) agency relation between Standard Chartered and Société Générale is however irrelevant for the identification of the lawful holder. The COGSA 1992 does not require an intention to transfer proprietary rights; it only requires the possession of the bill of lading, and this possession was transferred to Standard Chartered on 4 June 2010 without any reservations. The endorsement to the order of Standard Chartered in fact implies that Société Générale could not even have been the lawful holder between 4 June and 7 July 2010 (Keppel TL v. Bandung [2003] 1 Lloyd’s Rep. 619; Carver 230).

Société Générale was probably well aware of this. It made no efforts to retrieve the bill of lading, thus implicitly recognizing Standard Chartered as its lawful holder. If Société Générale really had retained the constructive possession of the bill of lading, it could (and would of course) have instructed Standard Chartered to return at least one (1/3) duly endorsed original for presentation to Dorchester, instead of exposing its principal Gunvor to the foreseeable liabilities under the letter of indemnity.

 

Endorsement, delivery, possession and holdership (2015) 21 JIML 18 (The Erin Schulte);