The “Jeil Crystal”

[2023] SGHC 74 [Singapore]

Summary & Analysis:

To support its purchase of 2,000MT of Lube Base Oil (the Cargo) from IRPC Public Co. Ltd. (Seller), GP Global APAC Pte Ltd. (Buyer/Applicant) applied for and caused Banque Cantonale de Genève (Issuer) to issue an irrevocable LC in favor of Seller/Beneficiary.^[1] As Buyer/Applicant intended to on-sell the Cargo to Standard Asiatic Oil Co. Ltd. (Second Buyer),^[2] Issuer contemplated a “self-liquidating” transaction.^[3] The Cargo was laden onboard the “Jeil Crystal” (the Vessel) in Thailand to be shipped to Bangladesh; Buyer/Applicant chartered the Vessel from Jeil International Co. Ltd. (Vessel Owner) for a single voyage. Dae Myung International Pte Ltd. (Vessel Operator) was the Singapore commercial operator and agent at all material times for Vessel Owner while RG Chartering Sdn Bhd (Broker) was Vessel Owner’s Broker and intermediary for Vessel Operator and Buyer/Applicant. After LC issuance, Broker contacted Vessel Operator to inform of voyage instructions and that Buyer/Applicant needed “switched B/Ls” to be issued in Singapore. Original B/Ls were issued identifying Seller/Beneficiary as shipper and consignee “to order of” Issuer.

A few days later, Broker (on behalf of Buyer/Applicant) instructed Vessel Operator on steps to issue the switched B/Ls. Notably, Vessel Operator “enquired when the First Set BLs would be surrendered as they could not issue the Switch BLs until the First Set BLs were ‘surrendered and void’.” (para.14). Among other steps such as establishing mirror B/L identification numbers, Buyer/Applicant requested a non-negotiable copy of the switched B/Ls for purposes of customs clearance in Bangladesh; after some back and forth, Vessel Operator agreed to despite not having yet received the original B/Ls. (See paras. 14-15). As the non-negotiable switched B/L copy was circulated, Bank of Ayudhya (Presenting Bank) sent the original documents to Issuer on behalf of Seller/Beneficiary. Broker later sent Vessel Operator a draft letter of indemnity (LOI) and informed it was checking with Buyer/Applicant on the “whereabouts” of the original B/Ls. Subsequently, Issuer (upon request of Buyer/Applicant) endorsed the original B/Ls to the order of Buyer/Applicant and sent Buyer/Applicant the documents on 25 June 2020.^[4]

Shortly thereafter, Vessel Operator received the original B/Ls, marked them “null and void” and issued the switched B/Ls. When the Vessel arrived in Bangladesh, Vessel Operator discharged and delivered the cargo to Second Buyer against Buyer/Applicant’s LOI and without production of the original B/Ls.

In the following months, Issuer first contacted Vessel Owner to “give notice of its purported interest in the Cargo” and that the Cargo should not be released absent Issuer’s consent. In doing so, Issuer attached a copy of the original B/Ls. While not mentioned until later in the Judgment, Buyer/Applicant became insolvent and Issuer, suspicious of fraud, sought to protect against losses.^[5] Issuer subsequently initiated legal action, obtaining a warrant of arrest for the Vessel.^[6] Issuer originally alleged misdelivery of the Cargo without Vessel Owner (i.e. its agent Vessel Operator) requiring production of the B/Ls. When solicitors for Vessel Owner requested that Issuer produce for inspection the original B/Ls, Issuer essentially stalled for several months. Issuer later responded that the B/Ls were unavailable for inspection but failed to elaborate. Accordingly, Issuer abandoned its claim for misdelivery and amended its complaint to allege “wrongful switch of the bills of lading without the [Issuer]’s knowledge or consent.” In this way, Issuer was alleging breach of contract or, alternatively, negligence. Vessel Owner’s attempt to have the suit set aside was dismissed at trial; the appellate court, however, set aside the trial decision. The security furnished by Vessel Owner was returned and a decision on the merits followed. The High Court of Singapore, Mohan, J., dismissed all claims by Issuer and ruled in favour of Vessel Owner on its counterclaim of wrongful arrest.

Issuer principally claimed that Vessel Owner breached contractual obligations owed to it as Issuer was the original to order consignee named in the B/Ls. Vessel Owner had knowledge of the same and by switching the B/Ls, Vessel Owner unlawfully caused harm to Issuer as the financing bank. Vessel Owner argued in opposition that Issuer lost any rights of suit when it surrendered possession following endorsement to Buyer/Applicant. Furthermore, as Issuer initiated suit without holding the original B/Ls, Vessel Owner alleged wrongful arrest of the Vessel, “demonstrating at the very least gross negligence implying malice on the part of the [Issuer].”

After outlining the issues for determination (para.34), Judge began with when Issuer actually had rights of suit under the original B/Ls. Issuer claimed to be a “contracting party” from the moment the originals were issued, 13 June 2020. The Judge, however, noted that “that contention could not, with respect, be further from the true position in law.” It is settled under Singapore’s Bills of Lading Act that the statute “provides for the transfer of rights of suit to the lawful holder of a bill of lading by virtue of him becoming the holder of the bill.”^[7] Issuer received the original B/Ls 19 June 2020 and endorsed them to the order of Buyer/Applicant a few days later: “Therefore, any rights of suit under the contract of carriage only vested in the [Issuer] as if it were a party to that contract between 19 June and 25 June 2020 – not at any time before that period and, more importantly, not at any time after.” (para.42). Issuer “divested itself of any rights or interests in the Cargo” by its endorsement and delivery of the B/Ls to Buyer/Applicant. The Judge noted that this legal effect was consistent with Issuer’s decision to amend its complaint and abandon its original misdelivery claim. Having failed to allege a valid misdelivery claim as a B/L holder, the Judge turned to Issuer’s alternative contractual and tort allegations.

Issuer argued that Vessel Owner breached contractual obligations owed to Issuer by taking actions to “irreversibly switch” the B/Ls beginning mid-June 2020. Issuer predominately relied on the process of Vessel Owner, Vessel Operator and Broker circulating the draft switched B/Ls and argued that the switched B/Ls must have been issued by 17 June 2020 when the parties exchanged the non-negotiable copy for review. The Judge considered these arguments “misconceived.”

"The circulation of draft Switch BLs, as the expression suggests, does not lend itself to the inference that it was destined, from that point onwards, that the Switch BLs would be issued come what may. Nor does the issuance of a copy of the non-negotiable Switch BL have that effect. These were, in my view, merely preparatory steps to effecting the switch or, in the case of the issuance of the non-negotiable copy of the Switch BL, steps taken to facilitate the Vessel’s clearance with Bangladeshi customs. [para.54]."

The Judge accepted Vessel Owner’s position that the switched B/Ls would only be issued after the originals were surrendered and voided. Nevertheless, Issuer placed significant emphasis on an email from Broker to Vessel Operator on behalf of Buyer/Applicant that the non-negotiable switch B/L was needed for “LC negotiation.” Issuer claimed this should have been a “red flag” to Vessel Owner and caused it to inquire with Issuer. The Judge disagreed, noting that Issuer knew Buyer/Applicant planned to on-sell the Cargo and thus the switched B/L copy could be used to draft LC terms between Buyer/Applicant and its end-buyer. In this way, the non-negotiable switched B/L copy was used for informational purposes only.

The Judge then turned to the commercial reality of Issuer’s admittedly “self-liquidating” transaction. As such, Issuer contemplated its financing in two parts: (1) LC issued in favour of Seller/Beneficiary on the account of Buyer/Applicant; and (2) Buyer/Applicant’s re-sale of the Cargo to its end-buyer “against a payment to be made at the [Issuer]’s counters”, i.e. repayment of its LC exposure. This process involved endorsing the original B/Ls to Buyer/Applicant so the same could call for the discharge and delivery of the Cargo to its end-buyer. Accordingly, the evidence at trial showed that Issuer “(a) knew that there was a risk that the end-purchaser might not pay, and (b) accepted that endorsing the First Set BLs and relinquishing them to [Buyer/Applicant] would mean relinquishing its security in the Cargo.” (para.65). That Issuer relied on the creditworthiness of Buyer/Applicant was further evidenced by the fact that it did not have a trust receipt arrangement in place. In noting that Issuer’s endorsement of the original B/Ls was clean and unqualified, Judge expressed that: “The emphasis the [Issuer] seeks to place on the importance of the First Set BLs as a pillar of international trade cannot be reconciled with how the [Issuer] chose to structure the financing operation in this case or its conduct in relation to the First Set BLs.” (para.68).

After dispensing with Issuer’s novel contractual novation theory (paras.69-76), the Judge turned to Issuer’s claim sounding in negligence. As a general matter, where a contract governs the relationship between parties, the law will not impose a concomitant tortious duty of care. As pleaded, the Judge considered Issuer’s claims overlapping; even if Vessel Owner had a duty of care alongside contractual obligations, that duty “would only require the [Vessel Owner] to exercise reasonable care not to interfere with or prejudice the rights and interests of those entitled to the Cargo.” This possible duty would only arise at the time the switched B/Ls were issued so as not to interfere with rights of those holding the originals. It was a settled matter of the action that Vessel Owner took all necessary steps to ensure the switched B/Ls would not be issued and circulated without the originals being surrendered and voided. Nor was the Judge persuaded by an alleged alternative duty of physical care concerning the Cargo itself: “It does not suggest that the duty extends to informing the [Issuer] and/or obtaining the consent of the [Issuer] to the switch of the bills of lading. In my view, that is a bridge too far”. (para.84).

Before turning to Vessel’s Owners claim for wrongful arrest, the Judge dealt with Issuer’s final claim in bailment. In general, “the duties of a bailee arise out of the voluntary assumption of possession of another’s goods.” (para.88). Again, whatever duties Vessel Owner may have had as bailee “evaporated” when Issuer endorsed the original B/Ls and delivered them to Buyer/Applicant. The same conclusion obtained for Issuer’s alternative argument regarding circulation of the switched non-negotiable B/L copy. These were “mere preparatory steps” that did not affect rights or interests in the Cargo. While Issuer further claimed that it “paid” for the Cargo’s freight, the Judge disagreed. Buyer/Applicant paid from its account with Issuer and Issuer’s banking facilities: “Just because a party uses its banking facilities with its bank to make payment of freight does not make the bank the payer of the freight; nor does it render the bank the bailor of the cargo shipped onboard.” Issuer cited no authority in support.

Turning to the matter of wrongful arrest, the Judge noted the “uncontroversial” legal standard as being “one of mala fides or gross negligence implying malice.” (para.95). On the evidence, Vessel Owner claimed Issuer was grossly negligent in bringing its claim implying malice. Put differently, the test could be analogised to an LC demand made with no colourable basis: “The key question is whether the action was so unwarrantably brought, or brought with so little colour, or so little foundation, that it rather implies malice on the part of the [Issuer], or that gross negligence which is equivalent to it.” Before proceeding, the Judge cited with approval the “cautionary statement” found in The “Xin Chang Shu”^[8] that vessel arrest “is an extremely draconian remedy”. To protect vessel owners from abusive arrests, the threshold for relief should not be set so high as to be “practically illusory.” (para.98). As for the action at hand, Issuer acknowledged it was negligent but argued it did not cross the necessary threshold to merit damages. The Judge disagreed. The quintessential element to pursue a misdelivery claim is lawful possession of bills of lading when the action is commenced. As the Judge would discover through examination, Issuer relied on the representations of the then relationship manager for Buyer/Applicant that it actually held the B/Ls: “The failings in this case were quite shocking, particularly for a financial institution” such as Issuer.

"The Judge considered it material that no testimony was given by the former relationship manager for Buyer/Applicant who represented that Issuer was in possession of the original B/Ls before the in rem action commenced and vessel arrested.

Moreover, the Judge expressed concern with Issuer’s internal workings: “As a major trade financing bank, one would expect the [Issuer] to have systems in place to check in respect of a particular financing transaction if documents negotiated under a letter of credit were still in its possession and, if so, what those documents were. The absence of any evidence on this point is also unsatisfactory.” (para.106).

It could not be said that Issuer “applied its mind” to satisfy itself that it could properly initiate the lawsuit."

Even the task force that was established by the [Issuer] to discuss the arrest of vessels connected to [Buyer/Applicant] following its collapse – which comprised senior trade finance documentation experts in the [Issuer]’s organisation – did not appear to take any steps to properly verify this crucial threshold element of the [Issuer]’s cause of action in coming to its decision to arrest the Vessel. [para.107].

After commenting further on Issuer’s “lackadaisical and grossly negligent conduct in arresting the Vessel”, the Judge accepted that Vessel Owner made a valid claim for wrongful arrest and turned to the quantum of damages. As mentioned previously, the Vessel was arrested 11 October 2020 and released 21 October after Vessel Owner posted security. Vessel Owner sought damages for several reasons: (1) bunker consumption; (2) voyage cancellation; (3) loss of use; (4) more port charges; and (5) interest on its security. See para.117. The Judge accepted alleged damages the evidence tendered by Vessel Owner for bunker consumption, additional port charges and voyage cancellation. As for loss of use of the Vessel, the Judge rejected the claimed damages as they were unsupported. Vessel Owner made bare assertions unaccompanied by negotiations for chartering the remaining space during and around the time of its arrest. For similar reasons the Judge rejected the damages sought regarding interest on its furnished security, i.e. lack of specific proof. Accordingly, the Judge granted Vessel Owner damages amounting to USD 126,380.16 and SGD 1,664. See para.137.