Bills of Lading: Indemnities and Bank Guarantees

1. Bills of Lading:Indemnities and Bank Guarantees Prof Martin Davies Tulane Maritime Law Center, New Orleans Intertanko International Chartering Forum Athens, 14 April 2005

2. Why LoIs and guarantees are needed • 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 • 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

4. International Group LoIs • December 1998 Circular • “If you must do it, do it like this” • Later modifications • 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 AA: requestor plus bank • 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 CC: requestor plus bank

6. Amount • If requestor alone, usually unlimited liability • 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 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 • 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): • “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. 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)) • If person who signed had no actual authority, requestor or bank may refuse to honor LoI

11. Actual authority • 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)

12. Actual authority • Pacific Carriers Ltd v. BNP Paribas (2004) 208 ALR 213 (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 76840 (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

13. Actual authority • 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

14. Apparent/ostensible 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))

15. Apparent/ostensible authority • 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 • Agent/employee cannot clothe himself/herself with apparent authority

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

17. PCL v BNP Paribas • 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 • 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

18. PCL v BNP Paribas • 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 • Failing to take proper safeguards against misrepresentation can impart appearance of authenticity • Carrier’s reliance on signature over bank “chop” was reasonable • Bank bound

19. UK? • 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

20. USA? • 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.

21. Conclusion • 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 • Requestor/bank not bound by fraudulent signatures (Saurashtra Bank) • If you can, question authority