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 In the oil (paper) trade, Bills of Lading need to be
physically checked and endorsed following each transfer of t
itle,
possibly along a chain of buyers and banks. The consequence is that in
short-sea trades where voyage time takes just a few
days, the cargoes arrive at the port of discharge long before the Bills of
Lading. The commodity traders found a way to deal
with this matter by offering Letters of Indemnity both to carrier and buyer.
The letter of indemnity in favour of carrier is for
discharge of cargo without the presentation of an original Bill of Lading,
whilst the letter of indemnity in favour of buyer is to assure him
that he will receive the Bills of Lading latter on.
On its turn, a banker financing oil imports needs to ensure
that letter of indemnity for missing Bills of Lading is
addressed to the financing bank rather than actual buyer and that the
letter of indemnity contains the seller’s undertaking
that the full set of Bills of Lading will be sent to the bank not to the
buyer because the bank is making the payment not the
buyer.
The importance of this matter has been recently underlined
in a British Court litigation involving the commodity
trading company Trafigura and Korean bank Kookmin Bank (Trafigura Beheer BV
vs. Kookmin Bank Co (2006) EWHC 1450).
Trafigura bought an oil cargo from Pertamina PT, an
Indonesian oil company, for re-sale to Huron in Korea. For
this purpose Trafigura voyage chartered the vessel “Shanghai” through
its subsidiary in Singapore from Morelia Overseas
Inc. to carry the cargo from Indonesia to Korea. Trafigura requested Huron
to pay by letter of credit.
The letter of credit issued by Huron's bank required that
"Bills of Lading be issued to or
endorsed to the order of Kookmin Bank, Seoul, Korea (issuing
bank)". The letter of credit also
stipulated that in the absence of Bills of Lading the
payment was to be effected against the Commercial Invoice and
Letter of Indemnity issued by
Trafigura in favour of Huron.
Upon completion of loading, Bills of Lading were issued
indicating Pertamina as shipper.
While preparing the shipping documents for presentation to
the negotiating bank, an employee in Trafigura’s
Singapore office noticed a series of discrepancies in the references to
loading port, discharge port and freight notations in
the Bills of Lading. Furthermore,
the Bills of Lading were made out to order of the negotiating bank
(ANZ Bank London Branch) instead of the issuing bank (Kookmin Bank
Seoul) as was required by the letter of credit.
To avoid the rejection of Bills of
Lading for these discrepancies, Trafigura presented only the
Commercial Invoice and the Letter of Indemnity issued by Trafigura in
favour of Huron. After receiving the payment from
negotiating bank, Trafigura authorized the contracting shipowner, Morelia
Overseas Inc., to release the cargo to Huron against
a letter of indemnity pursuant to charter party.
Huron didn't reimburse the issuing bank for the amount paid
under letter of credit and soon after it obtained the
cargo went into liquidation. In an attempt to recover its debt from Huron
for the amount paid under letter of credit the
issuing bank demanded the original shipping documents from the negotiating
bank which in its turn referred the demand to
Trafigura.
To comply with letter of credit requirements, Trafigura
arranged with the ship manager in Singapore to have the
original set of Bills of Lading exchanged with a new set of Bills of
Lading showing the details required by L/C.
The ship manager agreed to do so provided the original set
of Bills of Lading be surrendered for cancellation and
the new set of Bills of Lading be claused to indicate that the voyage
had been completed. Thus the ship manager
representative wrote the words "Voyage accomplished. Null and void"
in manuscript on the back of each of the
three new Bills of Lading. The ship manager representative retained one of
the three new Bills of Lading on behalf of the Master
on whose behalf it furnished a receipt for one of the originals.
Trafigura then sent the two original new Bills of Lading and
the Master’s receipt for the third original Bill of
Lading to Pertamina, who passed the documents in the banking chain for
reaching to Kookmin Bank. This did happen. The two
new Bills of Lading arrived in the end at Kookmin Bank via London branch of
ANZ Bank.
Kookmin Bank sued all parties involved: Trafigura, the
shippers of the cargo (Pertamina PT), Morelia Overseas
Inc. as contracting owners of the ship Shanghai and the ship
managers, Tanker Pacific Management.
Who is to blame for what happened?
Contracting shipowners? In delivering the cargo against
Trafigura’s letter of indemnity, they complied with
charterer’s voyage instructions.
Ship managers? All what they did was to protect the
shipowner against the risk of competing claims for the
cargo. That’s why they claused
the new set of Bills of Lading with the words:
"Voyage accomplished. Null and void".
Trafigura? Trafigura complied with both the terms of
sale contract and L/C. They were not concerned with the
financing arrangements between Huron and its bank. Trafigura opted to
tender the letter of indemnity instead of Bills of
Lading due to the discrepancies found in Bills of Lading. The fault was on
the part of Kookmin Bank which should have asked that
the letter of indemnity for missing bills of lading be made in their favour,
not addressed to applicant.
Here is an example of wording that may be used in L/C:
“ In the event when
the beneficiary is not able to deliver the shipping documents/ full set of
Tanker Bills of Lading within 30 banking days from
the date of Tanker Bill of Lading, the payment shall be effected against the
Commercial Invoice and a letter of indemnity issued by beneficiary in
favour of issuing bank, countersigned by the
beneficiary’s bank for authentication of beneficiary’s authorized signature,
in the following format:
QUOTE
From:
To: ….. (name of issuing bank)
….
Dear Sirs,
We refer to a cargo of …..…………. net US Barrels of Russian
Export Blend Crude Oil loaded on board the vessel
……..… at the port of .......... pursuant to Bill of Lading No. …………. dated
…/…/2006,
covered by the documentary credit number
………. issued by
yourselves on ….. (date)…… Although we have
agreed to sell the above mentioned cargo to Messrs.…(name of applicant)...…,
we have been unable to provide you with the full set
of original 3/3 Original “Clean on Board” Bills of Lading and the other
original shipping documents requested by documentary credit number
……….. covering the said sale.
In consideration of your undertaking to pay to us the
full purchase price of USD ……………….
of the above mentioned cargo with value …
latest 30th
day after Bill of Lading date
….. , we hereby expressly warrant that
we have marketable title to such crude oil cargo and that we have the
full right and authority to transfer such title and
to effect delivery of the said crude oil cargo to you.
We further agree to make all reasonable efforts to obtain
and surrender to you/ ….. Bank (issuing bank) for
account of Messrs ….. (name of applicant), as soon as possible,
the full set of original Bills of Lading and other
shipping documents as requested by documentary credit referred to above and
to protect, indemnify and hold you harmless from and
against any and all damages, costs and expenses (including reasonable legal
fees) which you may suffer or incur by reason of the
original Bills of Lading and other shipping documents remaining
outstanding, including, but not limited to, any claims or demands
which may be made by a holder or transferee of the
original Bills of Lading or by any other third party claiming an interest in
or lien on the cargo or proceeds thereof.
This Letter of Indemnity shall be governed by and construed
in accordance with the English Law and any disputes
hereunder that cannot be settled by mutual agreement between the parties
shall be subject to the exclusive jurisdiction of the
English Courts.
This Letter of Indemnity shall expire 14 months after the
Bill of Lading date or upon our tender of the full set of
original Bills of Lading and other shipping documents to you/
…. Bank, in strict conformity with the terms and
conditions of their documentary credit number ……, whichever occurs first.
For and behalf of ......name of seller...........................................
By: ................................... Name and Title
Authorized Signatory
UNQUOTE”
The case of Trafigura Beheer BV vs. Kookmin Bank Co (2006)
EWHC 1450 raised a number of issues:
Letter of Indemnity provided by Trafigura to Huron stated
that the two Bills of Lading and Master’s receipt be
sent not to issuing bank but to L/C applicant, Huron. There was no provision
in the letter of indemnity provided by Trafigura to
Huron that issuing bank receive any Bills of Lading at all, so the issuing
bank had no legal basis to ask for the original set
of Bills of Lading after making the payment against the invoice and a letter
of indemnity addressed to Huron.
In order to have been entitled to original set of Bills of
Lading required in L/C, Kookmin Bank should have
asked that the letter of indemnity for missing bills of lading be made in
their favour not addressed to applicant.
Only then issuing bank may sue the beneficiary for failure
to submit the Bills of Lading.
English Court interpretation was that L/C option to pay
against invoice and letter of indemnity for missing Bills
of Lading is intended not just for the situation when conforming
documents are not available but also when the
documents are available but do not conform with L/C terms.
Here is what Court said on this matter:
“ The argument raised
by Kookmin to the effect that the provision is inapplicable where Trafigura
had available to it Bills of Lading which were
non-compliant is to be rejected out of hand. It follows that, contrary to
Kookmin's submissions, the presentation of the LOI cannot in itself
constitute a representation that Trafigura did not
have any Bills of Lading available to it. At most it could constitute a
representation that it did not have conforming
documents available to it which, it is common ground, was true.”
Huron? Huron manipulated Kookmin Bank from the beginning.
It should have alarmed Kookmin Bank that the terms of
purchase contract required to be financed provided that “Bills of Lading be
issued or endorsed to the order of buyer” and that
the letter of indemnity was addressed to Huron.
But if there is someone to blame for Kookmin Bank’s loss
then it should be searched at Kookmin Bank itself as
the bank’s employees fail to make proper security arrangements.
Here is what Court said on this matter:
“ The sale contract
provided for property to pass to the Buyer at the ship's flange at the load
port and at the time when discharge instructions and
delivery to Huron took place, the shipping documents were still in the
control of the shippers who were entitled to change
their delivery instructions to the shipowners. No conversion could take
place at either point because Kookmin had no entitlement to the cargo,
no entitlement to any B/L and no interest in the
cargo. Kookmin had agreed to pay against the LOI. Once payment was made
under the L/C on presentation of the LOI, there could
not be any issue as to who was entitled to the cargo, as between Trafigura
and Huron and the ship owners were entitled to deliver the cargo to
Huron on Trafigura's and Pertamina's instructions.
It is Kookmin's misfortune that it failed to make
appropriate arrangements which gave it a contractual right
against the carriers or some form of security against its customer in
respect of reimbursement of the sum which it had paid
under the L/C, whether by requiring the LOI to provide for delivery of
original B/Ls to it, rather than its customer or by
some other means.”
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