Causation in Misdelivery Cases: The “Maersk Katalin”

The original bill of lading (OBL) represents the cornerstone of security for international trade finance transactions. Lenders seek the OBL because it gives them a right to possession of the cargo; and if not possession of the cargo, a claim for misdelivery against shipowners who release the cargo without presentation of the OBL. A series of recent court decisions[[1]] from Singapore and UK beginning in 2022 however has signalled a weakening of misdelivery claims, with shipowners successfully resisting such claims (in summary judgment applications or on merits). These decisions have put the spotlight on the defence of causation of the loss, and in particular whether holders of OBLs (like banks) would have allowed discharge without presentation of OBLs. This examination of the lender’s conduct in turn brings into focus the multiple layers of security in the trade finance structure and the lender’s knowledge of cargo discharge without OBLs. The “Maersk Katalin”,[[2]] provided an occasion for the Singapore High Court to analyse the issue of causation at trial. There is much for both shipowners and lenders to learn from this case when dealing with an action for misdelivery.

Facts: Discharge without OBLs

In The “Maersk Katalin”, United Overseas Bank Ltd (UOB) financed Hin Leong Trading Pte Ltd (HLT)’s purchase of oil cargo from Winson Oil Trading Pte Ltd (Winson). The cargo was carried on board the Maersk Princess pursuant to a voyage charter between Maersk Tankers Singapore Pte Ltd (Maersk) and Winson.

The cargo was discharged on 29 February 2020 and HLT applied to UOB on 3 March 2020 for a letter of credit to finance its purchase of the cargo. The application was approved on 4 March 2020 and the LC (as is usual for oil trades) provided for payment against the beneficiary’s presentation of a commercial invoice and letter of indemnity (Payment LOI) if, among other things, the OBLs were not available upon negotiation. The LOI template in the LC included the beneficiary’s undertaking to provide the OBLs in consideration of UOB making payment without receiving them.

In due course, Winson presented its invoice and Payment LOI to its advising and negotiating bank, Credit Suisse, which determined the documents to be in compliance with the LC, and sent the documents to UOB. After checking the correctness of the documents with HLT, UOB paid Winson under the LC. HLT did not reimburse UOB for this amount, and shortly after making arrangements for extended payment deadlines, announced its insolvency. Thus left out of pocket, UOB obtained the OBLs from Winson and commenced misdelivery proceedings against Maersk. One of Maersk’s key defences was that its delivery of the cargo without the presentation of OBLs was not what caused UOB’s loss.

Findings & Commentary

The causation defence: Demonstrating that the loss would not have occurred but for Shipowner’s breach in discharging the cargo without OBLs

UOB, as the lender bringing a misdelivery claim, had the legal burden of proving its loss. That is, the loss would not have occurred but for Maersk’s breach in discharging the cargo without the OBLs. This however did not require UOB to refute every counterfactual in which it would have relinquished security over the cargo. Rather, Maersk, as the party raising the causation defence, was required to produce evidence tending to prove that UOB would have authorised discharge without OBLs. This is because, the judge reasoned, it would be unfair to require UOB to prove a negative; and there should be baseline inference that banks take security for a reason and will not part with it absent a commercial reason for doing so.

Step 1 of the causation defence: Proving lender would have been approached if shipowner was asked to discharge without OBLs

On the facts, the court found that Maersk had not led any evidence on whether UOB would even have been contacted when Maersk was asked to discharge the cargo without OBLs. Rather, considering the likely chain of events, the court found it uncertain that UOB would have been contacted in such a case. This was a key feature that distinguished The “Maersk Katalin” from UniCredit Bank AG v Euronav NV.[[3]] (where the shipowner had successfully resisted a misdelivery claim by pointing to the bank’s own case that it would have been contacted for instructions if the shipowner was asked to discharge the cargo without OBLs).

Without establishing this step 1, the shipowner would not be in a position to demonstrate that if it was asked to discharge without OBLs, it would have sought the bank’s instructions. This prerequisite step (before the inquiry turns to the bank’s conduct) is likely to present a practical hurdle for shipowners. This is because it requires shipowners to lead evidence showing how instructions would have been sought from their charterers down the chain to the OBL holder (the bank), for authorisation to discharge without OBLs.

Step 2 of the causation defence: Proving that the lender would have consented to discharge without OBLs.

Maersk also argued for a general inference that UOB would have consented to Maersk’s discharge without OBLs on the basis that UOB: (i) issued the LC knowing that the cargo had already been delivered into HLT’s possession; and (ii) went on to conduct itself in ways that either demonstrated its knowledge as to the cargo’s prior discharge and/or evinced a disregard of the cargo or the OBLs as security.

Receivables vs OBLs as security: Maersk focused on the fact that UOB was financing HLT to cover its purchase of unsold goods for blending and storage. It argued that the act of blending would destroy any security rights the bank had over the cargo and the bank was instead relying on the assignment of receivables of that blended cargo as its security. The Court pointed out that both security interests were not mutually exclusive – the bank could have treated the OBLs as security, prohibiting any dealing with the financed cargo until the OBLs arrived at its counters, and at the same, looked for repayment through receivables from the blended cargo (only after it received the OBLs). The Court held that the documents and UOB’s testimony demonstrated that the bank intended to have these security rights collectively, applicable at different points of time. While Maersk argued that the bank and HLT could not realistically have intended such an arrangement because the LC payments to HLT’s supplier was predicated on a letter of indemnity instead of OBLs (suggesting reliance on the receivables as security), Maersk failed to provide evidence from HLT to contradict the bank’s position.

This outcome might be different in another case if a shipowner is able to demonstrate that the bank’s conduct was consistent in only looking at the receivables for security. For example, if it can be shown that a bank in UOB’s position was intended to be paid from proceeds of a blended product before the OBLs in question were expected to arrive, it would be difficult for the bank to assert a security interest over the cargo. Alternatively, such a result may follow if the evidence points to a practice of the bank financing cargo where although OBLs were prescribed for as security, the bank (i) knew that cargo was routinely discharged without OBLs even before they arrived at the bank, and (ii) looked at receivables as security. On the facts, Maersk’s bare assertion that UOB knew from experience that HLT had a practice of taking delivery of cargoes without presentation of OBLs was found to be lacking any evidence.

The bank’s alleged knowledge of cargo having been discharged at the point of issuing the LC:  The court emphasised the need for addressing this query from the perspective of bankers (whose primary functions do not include active monitoring of financed cargoes), as opposed to persons more experienced in the operational aspects of international sales. The evidence before the court included communications between UOB and HLT going both ways – i.e., suggesting that the cargo had already been discharged, and that the cargo was to be discharged prospectively. After careful consideration of the evidence, the judge concluded that UOB was not aware of the cargo having been discharged before it issued the LC.

This was a highly factual finding on the basis of the Court’s assessment of the correspondence presented to it. Our view is that there was some evidence indicating the bank’s knowledge of discharge without OBLs and although it was insufficient to displace the bank’s position to the contrary – the margin between the two positions did not appear very significant. Given the speed and nature of trade finance operations, such evidence of a bank’s conduct is likely to be scrutinised in future cases and might very well produce a different result if the correspondence was more unequivocal.

Conclusion

We do not consider this case to advance a bulwark proposition weakening the causation defence. Rather, it emphasises the highly factual nature of the defence; and accordingly, the need for shipowners to produce sufficient evidence of how the bank failed to treat OBLs as security. While it is for the bank to prove its misdelivery claim, in practical terms, the onus is on the shipowner to secure evidence demonstrating that an instruction to discharge without OBLs would have ultimately led to the bank’s views being sought, and that it was permitted such discharge perhaps because it was relying on other security.

From a bank’s perspective, this case underscores the need for banks to be alert to any conduct which may undermine the value of OBLs as security – particularly when straddling the different types of security interests that banks accept. Banks must be careful not to inadvertently extinguish OBLs as security in their reliance on repayment via an assignment of receivables from the sale of cargo.  This case makes it clear that questions of causation are intensely factual. With the causation defence being increasingly engaged in misdelivery cases, it may be more challenging to obtain summary judgments for such misdelivery claims, as the bank’s conduct calls for closer scrutiny at a full trial.

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[[1]]: The STI Orchard [2022] SGHCR 6, Standard Chartered Bank (Singapore) Limited v Maersk Tankers Singapore Pte Ltd and another [2022] SGHC 242, UniCredit Bank AG v Euronav NV [2022] EWHC 957 (Comm), UniCredit Bank AG v Euronav NV [2023] EWCA Civ 471

[[2]]: The “Maersk Katalin”, [2024] SGHC 282 [Singapore]

[[3]]: UniCredit Bank AG v. Euronav NV, [2024] 1 Lloyd’s Rep 177 [UK]