A Singapore court has ordered Maersk Tankers to pay more than US$39mn to UOB after it delivered a cargo of gasoil to since-collapsed commodity trader Hin Leong without the presentation of original bills of lading (BLs).
The case stems from Hin Leong’s insolvency in March 2020, which has led to revelations of widespread fraudulent activity at the trading house and a wave of litigation from lenders seeking to recover losses.
Misdelivery claims against ship owners that discharged cargoes without original bills of lading has been a popular legal tactic for banks nursing losses from Hing Leong and other traders that collapsed around the same time, with mixed results.
In this case, set out in a Singapore High Court judgment handed down this week, Hin Leong agreed to purchase 752,870 barrels of gasoil from commodity trader Winson Oil in February of that year, split across four parcels.
The cargoes were loaded onto a Maersk-owned vessel, Maersk Katalin. Upon arrival in Singapore, Winson issued a discharge letter of indemnity and instructed Maersk to unload the fuel at Hin Leong’s Universal Terminal.
A few days later, Hin Leong applied to UOB for a letter of credit (LC) to finance the purchase of two of those parcels, with Standard Chartered financing the other two.
In the absence of original BLs, Winson provided a payment letter of indemnity – a common mechanism in oil trading used to ensure transactions can progress without parties having to wait for paper documents to be delivered.
But after news emerged of Hin Leong’s insolvency, UOB sought to track down the original BLs with increasing urgency, and warned it would pursue Winson for any loss if they were not recovered, the judgment shows.
The bills were eventually delivered to UOB in July, at which point the bank launched its claim against Maersk Tankers.
UOB argued that because Maersk delivered the cargo to Hin Leong without original BLs, it was a clear case of misdelivery. The bank’s claim argued Maersk should have retained possession of the cargo, the judgment says.
Maersk argued in its defence that if UOB had already financed the trade at the time it arrived in Singapore, it too would have authorised discharge without original BLs.
This argument – referred to as the causation defence – would mean UOB’s loss was ultimately caused by Hin Leong’s insolvency, rather than Maersk’s actions, and so would have happened anyway.
But Justice Mohan ruled there was no evidence to support that claim, saying it was presented “in a contextual and factual vacuum”.
Not only is it unfair for UOB to “prove a negative” – that it would not have authorised discharge if, hypothetically, it had been in that position – but banks “take security for a reason”, he ruled.
Maersk’s defence also questioned whether UOB genuinely considered the original BLs as security over the cargo.
It pointed out UOB also had a financing arrangement with Hin Leong for unsold cargoes, whereby the trader would assign receivables to the bank for onward sales.
But a UOB officer said during cross-examination that in the bank’s view, it was “primarily secured” through the original BL but took multiple forms of security.
For example, if oil cargoes were later blended and re-sold by Hin Leong, the original BL would no longer correspond to an existing cargo, but the assigned receivables would still be of value to the bank.
Justice Mohan concluded that UOB “may have expected repayment out of the assigned receivables whilst also looking to the [original] BLs as security. I see no reason to treat the two as mutually inconsistent or exclusive”.
He ruled that Maersk is liable for misdelivery and must pay damages of US$39.4mn to UOB.
UOB did not comment when contacted by GTR. A spokesperson for Maersk Tankers said the company does not comment on ongoing litigation.
Misdelivery under spotlight
The outcome contrasts with a closely watched case in 2022, in which UniCredit failed in a bid to claim US$24.7mn in damages from shipping company Euronav after oil cargoes were discharged by ship-to-ship transfers without the presentation of original BLs.
Commodities and international trade lawyer Edwin Cai, legal and compliance manager at JSW International Tradecorp, says a crucial difference in the latest case is that Maersk’s causation defence “fell short”.
“The defence of causation may not be an untenable defence to run, depending on the factual circumstances,” Cai says in an analysis of the case.
“[But] the judgment in Maersk is a salutary reminder of the high threshold to meet in order to cross the evidential burden of proving such a defence in the context of a misdelivery claim, and that asking the court to draw inferences from speculative or hypothetical scenarios will not suffice.”
Chin Aik Soh, managing director of commodity finance advisory firm SCATF Consulting, says the case demonstrates that traders chartering vessels “have to be very mindful that they might be on the hook if the borrower defaults, and it will come back to haunt them”.
“The charterer should get the LC-issuing bank to acknowledge that the cargo will be discharged without the production of original BLs,” he tells GTR, speaking in a personal capacity.
Soh adds that addressing payment letters of indemnity to the LC-issuing bank, rather than the applicant, gives a bank the contractual right to demand original BLs if the borrower defaults.
“Given the competing need by the bank to rely on the original BL as security and the risk that the charterer may become liable for misdelivery claim, this is a contentious issue where the bank and its clients would have to decide at what point in time the BL shall cease as security,” Soh says.
“The bank should then consider taking other forms of security when the cargo has been discharged as a practical measure to help their clients avoid demurrage claims. After all, the cargo has to be discharged in order for their clients to on-sell the cargo and realise the proceeds to repay the financing.”
This article was amended on November 8, 2024, to show Chin Aik Soh was speaking in a personal capacity, to remove a reference to his previous employment, and to remove a comment on UOB internal practices.
