Bills of Lading: Indemnities and Bank Guarantees Prof Martin Davies Tulane Maritime Law Center, New Orleans Intertanko International Chartering Forum Singapore, 27 March 2006

2 Why LoIs and guarantees are needed Eg, Steamship Mutual Rule 25(xiii), Proviso (viii): Eg, Steamship Mutual Rule 25(xiii), Proviso (viii): “Unless and to the extent the Directors shall in their absolute discretion otherwise determine, there shall be no recovery from the Club under paras a-d of this Rule 25 xiii in respect of the Member’s liabilities, costs or expenses arising out of: (a) the discharge of the cargo or any part thereof from an entered ship at any port or place other than a port or place permitted by the relevant contract of carriage; (b) the delivery of cargo carried on an entered ship without the production of the relevant bill of lading”

3 Why LoIs and guarantees are needed Delivery of cargo without production of original BLs is not covered by P&I Clubs Delivery of cargo without production of original BLs is not covered by P&I Clubs –Not a mutual risk –No cover unless Directors agree –Or unless specially covered – eg, UK Club’s Extended Cargo Cover Ditto delivery at a port other than that named in the BL Ditto delivery at a port other than that named in the BL

4 International Group LoIs December 1998 Circular December 1998 Circular –“If you must do it, do it like this” Later modifications Later modifications Agreement by British Bankers’ Association (BBA) on form of words for bank- guaranteed LoI Agreement by British Bankers’ Association (BBA) on form of words for bank- guaranteed LoI

5 International Group LoIs Int Group A: delivery without production of original BL Int Group A: delivery without production of original BL –Int Group AA: requestor plus bank Int Group B: delivery at port other than stated in BL Int Group B: delivery at port other than stated in BL –Int Group BB: requestor plus bank Int Group C: delivery at port other than stated in BL and without production of original BL Int Group C: delivery at port other than stated in BL and without production of original BL –Int Group CC: requestor plus bank

6 Amount If requestor alone, usually unlimited liability If requestor alone, usually unlimited liability If bank agrees to join, usually stipulates agreed maximum If bank agrees to join, usually stipulates agreed maximum –IG recommends 200% of sound market value of cargo

7 Duration For A and AA: until presentation of original BLs For A and AA: until presentation of original BLs For B, BB, C, CC: until shipowner is satisfied that no claim will be made For B, BB, C, CC: until shipowner is satisfied that no claim will be made –Because there can still be claim for wrong- port delivery even if original BLs presented

8 Scope of security given Bail or security to prevent or lift arrest of ship or surrogate/associated ship Bail or security to prevent or lift arrest of ship or surrogate/associated ship Requestor only; banks do not join in giving of security, even under AA, BB, CC Requestor only; banks do not join in giving of security, even under AA, BB, CC

9 Special tanker clauses Paragraph 4 in A, AA, C, CC (not B, BB): Paragraph 4 in A, AA, C, CC (not B, BB): “If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or facility, or another ship, lighter or barge, then delivery to such terminal, facility, lighter or barge shall be deemed to be delivery to the party to whom we have requested you to make delivery”. “If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or facility, or another ship, lighter or barge, then delivery to such terminal, facility, lighter or barge shall be deemed to be delivery to the party to whom we have requested you to make delivery”.

10 Given to whom? Enforceable by whom? Laemthong International Lines Co. Ltd v. Artis (The Laemthong Glory)(No. 2) [2005] 1 Lloyd’s Rep. 632 Laemthong International Lines Co. Ltd v. Artis (The Laemthong Glory)(No. 2) [2005] 1 Lloyd’s Rep. 632 –Receivers ask voyage charterer-shippers to request delivery without original BLs –Charterers give LOI to owners; receivers give LOI to charterers (copy to owners’ agents); cargo delivered –Ship arrested at discharge port (Aden) by Yemen Bank alleging it had paid charterers but had not been paid by receivers –Owners sued charterers and receivers on LOIs –Preliminary question: could owners sue receivers directly on their LOI?

11 The Laemthong Glory (No. 2) Contracts (Rights of Third Parties) Act 1999 (U.K.), s. 1 Contracts (Rights of Third Parties) Act 1999 (U.K.), s. 1 –Person not a party to a contract may sue in its own right to enforce a term of a contract if the contract expressly so provides Receiver’s LOI was not an indemnity in respect of charterer’s liability under its LOI Receiver’s LOI was not an indemnity in respect of charterer’s liability under its LOI Receiver’s LOI was an indemnity in respect of delivery by charterers “or their agents” Receiver’s LOI was an indemnity in respect of delivery by charterers “or their agents” For purposes of delivery, owner was charterer’s agent, so LOI conferred a benefit on it For purposes of delivery, owner was charterer’s agent, so LOI conferred a benefit on it Act applied, owners could enforce receivers’ LOI directly Act applied, owners could enforce receivers’ LOI directly

12 Issued by whom? Who signs? “[A]n agent must have authority, whether apparent, actual or implied, to bind his principal” (Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113, 122 (2d Cir. 1998)) “[A]n agent must have authority, whether apparent, actual or implied, to bind his principal” (Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113, 122 (2d Cir. 1998)) If person who signed had no actual authority, requestor or bank may refuse to honor LoI If person who signed had no actual authority, requestor or bank may refuse to honor LoI

13 Actual authority Not enough that person who signs is an employee, even a senior management employee Not enough that person who signs is an employee, even a senior management employee Must have authority to bind requestor or bank to the liability being undertaken (which may be millions of dollars) Must have authority to bind requestor or bank to the liability being undertaken (which may be millions of dollars)

14 Actual authority Pacific Carriers Ltd v. BNP Paribas (2004) 218 CLR 451 (High Ct Aus.) Pacific Carriers Ltd v. BNP Paribas (2004) 218 CLR 451 (High Ct Aus.) –Manager of Documentary Credit Department of BNP Paribas signed over bank “chop”: no actual authority for this purpose (US$8 million indemnity) OOCL v. Kids International Corp., 1999 WL (S.D.N.Y.) OOCL v. Kids International Corp., 1999 WL (S.D.N.Y.) –Carrier not entitled to summary judgment on LoI signed by “Director of Imports” –Requestor presented admissible evidence she did not have actual authority to bind it to LoI worth US$1 million

15 Actual authority China Shipping Development Co. Ltd v. State Bank of Saurashtra [2001] 2 Lloyd’s Rep. 691 (U.K. Comm. Ct.) China Shipping Development Co. Ltd v. State Bank of Saurashtra [2001] 2 Lloyd’s Rep. 691 (U.K. Comm. Ct.) –Signature and bank stamps were forgeries –Bank not bound on basis of actual authority

16 Apparent/ostensible authority Not enough that the person signing seems to have authority Not enough that the person signing seems to have authority For apparent authority to exist, there must be “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction” (Standard Funding Corp. v. Lewitt, 656 N.Y.S.2d 188, 191 (N.Y. 1997)) For apparent authority to exist, there must be “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction” (Standard Funding Corp. v. Lewitt, 656 N.Y.S.2d 188, 191 (N.Y. 1997))

17 Apparent/ostensible authority Thus, requestor or bank itself must give the impression that person signing has authority to do so Thus, requestor or bank itself must give the impression that person signing has authority to do so Difficult, if the only communication from the requestor or bank is the LoI itself Difficult, if the only communication from the requestor or bank is the LoI itself –Agent/employee cannot clothe himself/herself with apparent authority

18 PCL v BNP Paribas Delivery of legumes in Kolkata without presentation of original BLs Delivery of legumes in Kolkata without presentation of original BLs Voyage charterer gives disponent owner LoI, counter-signed by BNP Paribas Voyage charterer gives disponent owner LoI, counter-signed by BNP Paribas Receiver/buyer refuses to pay Receiver/buyer refuses to pay –Shipper claims aginst SO; TC indemnifies SO TC/disponent owner claims on LoI TC/disponent owner claims on LoI Voyage charterer now insolvent Voyage charterer now insolvent

19 PCL v BNP Paribas Bank employee who signed LoI over bank “chop” had no actual authority to do so Bank employee who signed LoI over bank “chop” had no actual authority to do so Trial court (SCNSW) held BNP counter-signature was not a guarantee at all Trial court (SCNSW) held BNP counter-signature was not a guarantee at all CANSW held LoI was a guarantee but BNP not bound CANSW held LoI was a guarantee but BNP not bound –No actual authority –No apparent authority – BNP had not given carrier any representation that she had authority to sign

20 PCL v BNP Paribas High Ct Aust.: there was apparent authority High Ct Aust.: there was apparent authority BNP itself made implied representations about her authority by equipping her with her title, status and facilities, including the “chop” stamp BNP itself made implied representations about her authority by equipping her with her title, status and facilities, including the “chop” stamp Failing to take proper safeguards against misrepresentation can impart appearance of authenticity Failing to take proper safeguards against misrepresentation can impart appearance of authenticity Carrier’s reliance on signature over bank “chop” was reasonable Carrier’s reliance on signature over bank “chop” was reasonable Bank bound Bank bound

21 UK? Similar argument about apparent authority made in China Shipping v. State Bank of Saurashtra Similar argument about apparent authority made in China Shipping v. State Bank of Saurashtra –“[A]ble and…highly ingenious argument” made once it became apparent that signatures and stamps were forgeries –Failed: “not a shred of evidence” that bank (and actually authorised employee) had allowed forgery to happen

22 USA? Similar argument made in OOCL v. Kids International Corp. Similar argument made in OOCL v. Kids International Corp. –Plaintiff not entitled to summary judgment –Argument based only on employee’s job title “Director of Imports” and status in “senior management” –Not enough, says S.D.N.Y.

23 Conclusion Be very careful, even if you get an LoI and even if it is (apparently) counter-signed by a bank Be very careful, even if you get an LoI and even if it is (apparently) counter-signed by a bank Fraud is already a concern if original BLs not present or different port requested Fraud is already a concern if original BLs not present or different port requested Requestor/bank not bound by fraudulent signatures (Saurashtra Bank) Requestor/bank not bound by fraudulent signatures (Saurashtra Bank) If you can, question authority If you can, question authority