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Web alert: The Erin Schulte - A nasty reminder of the risks an owner is taking when complying with a request to deliver cargo without presentation of the original bills of lading

13 November 2014

The recent case of the Erin Schulte[1] demonstrates the risks an owner takes when complying with a charterer’s and/or shipper’s request to deliver cargo without presentation of the original bills of lading (‘B/L’), but instead upon reliance of a Letter of Indemnity (‘LOI’). 
 
This case involved a claim for misdelivery of a gasoil cargo, with the owner of the Erin Schulte having agreed to discharge the cargo against a LOI and without production of the original B/L.  The claim was made by the bank, Standard Chartered, (‘SCB’) which had confirmed a letter of credit (‘LC’) arranged by the buyers of the cargo, Cirrus Oil Services Ltd (‘Cirrus’).  Due to its own error, the bank found itself in a position where it was obliged to pay the sellers of the cargo, Gunvor International BV (‘Gunvor’), under the LC but did not get paid by its customer, the buyer, nor had any recourse against the LC issuing bank.
 
In an attempt to recover their money the bank sued the owners of the Erin Schulte for misdelivery, on the basis that the bank was the lawful holder of the B/L and, therefore, the party entitled to delivery of the cargo.  The case turned on whether the bank (which retained physical possession of the B/L throughout) had title to sue the owner for misdelivery.  This required the bank to show that it became the lawful holder of the B/L for the purposes of s.5(2)(b) of COGSA 1992, i.e. that they had possession of the bill “as a result of the completion, by delivery of the bill, of any indorsement of the bill”.
 
The English High Court held that the bank became lawful holders of the B/L simply by receiving it as part of the documentary presentation under the LC. Whilst we understand that this part of the High Court’s judgment has recently been overturned by the Court of Appeal (still to be reported), we also understand that the Court of Appeal has accepted the bank’s alternative argument; that they became lawful holders of the B/L when they eventually paid the sums, to Gunvor, under the LC.
 
This is a prime example as to why an owner needs to be very careful about delivering cargo without production of original B/L, instead of relying on an LOI. Of course, this is a fundamental principle of shipping law and, whilst delivery under LOI’s allows for fast discharge and most of the time there is no resulting misdelivery claim, sometimes a claim does arise – which is subsequently difficult for an owner to defend. By delivering cargo without the original B/L the owner is also prejudicing their P&I cover and render any liabilities arising out of the same as discretionary.
 
Thus, it is very important that an owner ensures that the party who provides them with an LOI is solvent and, if in any doubt, obtains the buyer’s or charterer bank’s countersignature to join in the LOI – which is provided for in the International Group of P&I Club's wordings (A-C). These wordings can be found on our website.

This article is not intended to provide legal advice in relation to any specific query. Instead, its aim is to assist the club’s members in identifying the issues requiring consideration when asked to deliver cargo without presentation of the original B/L and to decide what further enquiries and/or advice should be sought before doing so. The law on bills of lading is also not static and if in doubt, The Standard Club is always on hand to assist. ​In case of any doubt, the member should not hesitate to contact the authors, or their usual club contact.

1. STANDARD CHARTERED BANK v DORCHESTER LNG (2) LTD (THE ‘ERIN SCHULTE’) [2013] 2 Lloyd's Rep. 338