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Web alert: the Bao Yue - a timely reminder that a lawful bill of lading holder is under a continuing duty to take delivery of their cargo

16 September 2015

Conversion is essentially the act of wrongfully interfering with an individual’s goods in such a way that it constitutes a denial of the lawful owner's rights or an assertion of rights inconsistent with the lawful owner's. [1] In the recent English High Court case of Bao Yue,[2] the shipowner successfully defended a claim for unlawful conversion following storage of cargo that had not been collected within a reasonable time.

Facts
A cargo of iron ore was carried from Bandar Abbas, Iran to Tianjin, China on board the defendant owner’s ship Bao Yue under a voyage charter. The bill of lading (BL) incorporated the provisions of the voyage charter, which provided that in case the original BL was not available upon arrival at Tianjin the owner had the option to discharge the cargo against a letter of indemnity (LOI) to a 'custom-bonded warehouse'. Because of a dispute under the (separate) sale contract, the BL never left the seller’s office. When the ship arrived at Tianjin no BL was presented and the cargo was put into a 'custom-bonded warehouse'. The cargo remained in storage for three and a half years and at no time did the claimant (seller) make any effort to collect it. As a result, the storage charges soon exceeded the value of the cargo and the warehouse owner refused to release the cargo against presentation of the original BL until it had been paid.

Dispute
The seller’s claim against the defendant owner, for unlawful conversion of the cargo, was twofold:

i. Because the “defendant was not entitled without the express or implied authority of the BL holder to arrange for storage of the cargo in a way which gave rise to a lien in favour of the warehouse owner for its charges and that no such authority existed in this case”; and
ii. Because the conduct of the warehouse owner and the shipowner’s agent, who was responsible to store cargo under the terms of the LOI, was such that denied the claimant access to or possession of the cargo.

The Judgment
The seller’s claim failed on both counts before the English High Court and the defendant owner counterclaimed for storage charges. The court found as follows:


i. The owner had express authority to store the cargo and subsequently to create a lien for the storage costs under the terms of the BL. “The creation of a lien was a reasonable and foreseeable incident of the storage contract which the defendant was authorised to conclude”. The carrier also had implied authority to store the cargo and exercise a lien for the necessary resulting storage costs, by virtue of the general principles of bailment applicable where a BL holder fails to take delivery.

ii. In order for the seller’s claim to succeed there had to be a “deliberate encroachment on the rights of the owner so as to exclude him from use and possession of the goods”. In the present case, the claimant could always take control of the goods upon presentation of the BL and the payment of the storage charges.
It was held that the carrier was entitled to be compensated for the storage charges and an order was made requiring the cargo owner to deliver the original BL to the defendant to enable the cargo to be sold.


Comment
The case provides guidance as to the potential liability of cargo owners to shipowners, on the basis that a BL holder is under a continuing duty to take delivery of the cargo. Shipowners can also expect to be reimbursed for expenses they incur as a result of non-delivery, by virtue of this continuing duty under the BL. In addition, although withholding the BL constitutes an effective remedy against the buyer under the sale contract it can have severe financial consequences under the separate charterparty. A BL holder should be aware of their obligation to mitigate any loss or expense they suffer as a result of a failure to claim delivery of the cargo.

This article intends to provide general guidance on the issues arising. It is not intended to provide legal advice in relation to any specific query. The law is also not static. If in doubt, The Standard Club is always on hand to assist.

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[1] Elizabeth A. Martin and Jonathan Law, Oxford Dictionary of Law (7th edn, OUP 2009)
[2] Sang Stone Hamoon Jonoub Co Ltd v Baoyue Shipping Co Ltd [2015] EWHC 2288 (Comm)