The Maersk Katalin: have claims for misdelivery got too complicated and will electronic bills of lading make a difference?  

We previously wrote about the evolving legal risks for financiers in using bills of lading (BLs) as security¹. The trend began when the Singapore High Court (SGHC) issued two judgments denying summary judgment in misdelivery claims brought against owners by trade finance banks as lawful BL holders².

The English Court of Appeal then upheld a first instance decision in The Sienna,³ dismissing the bank’s claim against a carrier on the basis that misdelivery was not causative of the bank’s loss because, if asked, the bank would have permitted discharge without production of the BL. This was a counterfactual scenario considered on the basis of available evidence.

In November 2024, the SGHC handed down the latest judgment in this line of cases, The Maersk Katalin,⁴ in which it applied English law. This has potentially turned the trajectory back in favour of financiers.

The Maersk Katalin

The dispute arose out of the collapse of Hin Leong Trading (Pte) Ltd (Hin Leong) in 2020. United Overseas Bank Ltd (the Bank) brought a claim as BL holder against Maersk Tankers Singapore Ltd (Maersk) for misdelivery of a cargo of gasoil sold to Hin Leong by Winson Oil Trading Pte Ltd (Winson). The cargo was discharged without the original BLs in February 2020, under letters of indemnity (LOIs) provided by Winson to Maersk. In March 2020, Hin Leong applied to the Bank for a letter of credit (LC) to finance its purchase of the cargo, which the Bank approved. Compliant documents were presented under the LC and the Bank approved payment. Soon afterwards, Hin Leong declared that it was insolvent. In the absence of any recovery from Hin Leong, the Bank (which now had possession of the original BLs under the LC) sought to enforce its security by claiming against Maersk for misdelivery. Maersk did not dispute that it had discharged the cargo without presentation of the BLs. However, it raised a number of defences, including a causation defence similar to the one that had succeeded in The Sienna. Maersk argued that the BLs were never seen as security by the Bank, which was content to rely on Hin Leong’s creditworthiness, so it would have consented to the discharge without BLs in any event, meaning it would still have suffered the loss.

The SGHC held that the legal burden of proof was on the Bank to show that Maersk’s breach was the effective cause of loss. However, Maersk had the evidential burden of showing that the Bank would have given authorisation to discharge the cargo without BLs if asked (i.e. the counterfactual scenario). On this point, the SGHC was clear that it started with the “baseline inference” that banks take security for a reason and will not part with it without commercial reasons for doing so. Maersk failed to meet that evidential burden and so the causation defence failed. Unlike in The Sienna, which the SGHC said had involved detailed evidence of what UniCredit would have done if asked whether the cargo could be discharged without BLs, the SGHC found that Maersk had effectively asked the SGHC to assess “in a contextual and factual vacuum” the Bank’s likely response to a request for discharge without BLs.

As part of the causation defence, the SGHC considered whether it could be inferred that the Bank had consented to the discharge without BLs because it issued the LC after discharge has taken place. The SGHC was not persuaded on a balance of probabilities that the Bank knew at the time it issued the LC that the cargo had already been discharged and delivered into Hin Leong’s possession. However, it added that “[i]f presented with the same material, persons more experienced in the operational aspects of international sales may have inferred that the Cargo had already been discharged (or at least, been put on notice of that possibility)…” This demonstrates the intricate evidential questions with which the Courts are now grappling when considering causation defences in misdelivery claims.

The Bank succeeded in its claim against Maersk, but the fact that misdelivery claims now involve such complex counterfactual arguments explains why summary judgments in such claims may become harder to obtain. This complexity and, as in The Sienna, the risk of being left without a remedy against the carrier for delivery without BLs, undermine the security offered to financiers by original BLs. Whilst the outcome of The Maersk Katalin will be welcomed by financiers, we can expect that similar claims will continue to be contested vigorously.

The impact of electronic BLs

How might the wider adoption of electronic BLs impact this security? As we have previously highlighted, with the increased use of electronic BLs, owners may be reluctant to accept requests to discharge against an LOI because they will be able to tell who is the lawful holder of an electronic BL, for example a bank. In such cases, owners would be prudent to seek the bank’s consent to discharge the cargo to the third party and, if this consent is refused (e.g. if the bank intends to keep the cargo as security), this could lead to a stalemate. Such a stalemate would be costly to both owners (who would not be able to trade their vessel) and financiers (who may face exposure to claims for demurrage, storage costs and owners’ lien over the cargo). The banks may therefore have to accept that their security over the cargo by virtue of being BL holder has limited value as they would be under pressure to consent to the discharge.

LOIs as they are currently used allow for discharge of the cargo whilst mitigating the uncertainty of who holds the BL at the time of the discharge, or of the actual physical location of the original BL. The adoption of electronic BLs is likely to remove this uncertainty because owners, financiers and other interested parties will know the status of the cargo and identity of the BL holder. It is anticipated that this will drastically reduce the industry’s reliance on LOIs and, by extension, claims for misdelivery.

When transitioning from paper to electronic BLs, one point to bear in mind is that many charterparties include a contractual obligation on the carrier to deliver without original BLs in return for indemnities, as was the case in The Maersk Katalin. As owners and charterers would want to avoid exposure under LOIs in the context of electronic BLs, at the same time as avoiding a breach of their duties under the charterparties, we may see amendments to these charterparty provisions.

Conclusion

Misdelivery claims have become more challenging to pursue and require complex factual inquiries into causation of loss. We may see the courts addressing these challenges in future judgments but in the meantime, financiers would be prudent to consider alternative or additional types of security. This would also serve them well in the long run as the rate of adoption of electronic bills of lading gradually increases.

_{Disclaimer: Holman Fenwick Willan Singapore LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.}

Footnotes

1. Brave new world? Changing risk profiles in trade and trade finance – HFW
2. [2022] SGHCR 6 and [2022] SGHC 242
3. [2023] EWCA Civ 471
4. [2024] SGHC 282