The Hague-Visby Rules one-year time bar in relation to trade finance issued against a bill of lading as security and a claim for mis-delivery
The bill of lading functions as a receipt for the goods, a document of title, and as evidence of the contract of carriage. In relation to its function as the document of title, the standard practice is for cargo to be delivered to the consignee against the presentation of an original bill of lading. However, it is not uncommon for the carrier (shipping line) to discharge the cargo upon presentation of a letter of indemnity issued by the charterer, who is likely to be the seller of the goods. In circumstances where trade finance for the cargo has been secured against a bill of lading that has been pledged to the bank, the bank will obtain rights of suit as the lawful holder of the bill of lading. However, as demonstrated in the recent case of Fimbank Plc v KCH Shipping Co Ltd (”The Giant Ace”) the bank may only exercise a claim for wrongful discharge of the cargo (mis-delivery) against the carrier within twelve months of the date of the discharge of the cargo, if the bill of lading is subject to the Hague-Visby Rules.
Overview of Fimbank Plc v KCH Shipping Co Ltd (”The Giant Ace”)
This article will discuss the recent decision of the Supreme Court of the United Kingdom issued on 13 November 2024 within Fimbank Plc v KCH Shipping Co Ltd (”The Giant Ace”) [1] discussing the rejection of the bank’s claim for misdelivery, based upon the Hague-Visby Rules’ one year time bar. The analysis will reflect on recent case law within the United Kingdom, and discuss the implications for the trade finance sector.
In the recent case of The Giant Ace a trade finance bank was prevented from exercising a claim for mis-delivery against the carrier of the cargo. The bank was the lawful holder of the bill of lading, and sought to exercise its rights of suit in accordance with the Carriage of Goods by Sea Act 1992, as the carrier ship discharged a cargo of coal financed by the bank against a letter of indemnity – without the presentation of the original bill of lading. The bank was unable to obtain payment from their client for the deal.
In March 2018 a cargo of coal was shipped by Farlin Energy & Commodities FZE (“Farlin”) on the Giant Ace vessel, with a bill of lading issued on the 1994 Congenbill form. As the original bill of lading was not available at the time of arrival at an Indian port in mid-April 2018, the carrier, KCH Shipping, discharged the cargo against a letter of indemnity presented by the charterers. The coal was then sold to third parties by Farlin. Fimbank, the bank that had financed the deal with Farlin held the bill of lading as security against payment under the terms of their financing arrangement. In argument, the bank identified that they took the bill of lading as security by way of a pledge by Farlin, and therefore obtained rights of suit under the Carriage of Goods by Sea Act 1992. The bank alleged that it was not able to obtain payment for the finance of the cargo from Farlin. Fimbank therefore intended to exercise their rights of suit to pursue a claim against KCH Shipping for the wrongful discharge of the cargo without the presentation of an original bill of lading.
The leading question presented in The Giant Ace was “Does Article III, rule 6 of the Hague-Visby Rules apply to claims for misdelivery of cargo occurring after discharge has been completed?”[2] If the Hague-Visby Rules applied, in accordance with the House of Lords’ finding in Aries Tanker Corp v Total Transport (“The Aries”)[3] any claim would be extinguished by the time bar, in order to enable the carrier to clear his books.[4] Whereas if the claim was outside of the scope of the Hague-Visby Rules , in accordance with s (2) and s (5) the Limitation Act 1980 a claim in tort or in contract may respectively be presented within six years of the cause of action. Males LJ identified that the question “has been much debated” in English law.[5]
Fimbank presented a claim against the carrier on 24 April 2020, around twenty-four months after the cargo should have been delivered.
Within the case of Compania Portorafti Commerciale S.A. v Ultramar Panama Inc. and Others (“The Captain Gregos”)[6], although the claim was not directly related to the application of Article III (6), Bingham LJ observed that the time-bar could not be more emphatic in the scope of its application.[7]Discharge and delivery occurred simultaneously within Deep Sea Maritime Limited v Monjasa A/S (“The Alhani”)[8], as the cargo was transshipped, and the application of the time bar was examined within the context of the Hague Rules. Within conclusion, the Article III (6) time bar was found to apply, and therefore the appellant was found not to be liable to Monjasa. In a contrasting separate case, Mediterranean Shipping Company SA v Trafigura Beheer BV[9] where a fraudulent bill of lading had been presented and the cargo had been discharged into a warehouse, Aikens J found that in accordance with the circumstances, the Hague/Hague-Visby Rules did not apply to the period after discharge and liability was not limited by clause 22 within the bill of lading.[10] Longmore LJ found that the expression of views within the case were obiter.[11]
Reed Smith LLP, who represented the defendants within The Giant Ace [12] have identified that the outcome of the case, identifying that Article III (6) was applicable in relation to claim of mis-delivery of cargo established a precedent within English law.[13]
Overview of The Hague-Visby Rules
Prior to World War I (WWI), shipowners had established a dominant position enabling them to issue widely drafted exclusion clauses on bill of lading issued to merchant shippers. Subsequent to WWI, international governments sought to redress the imbalance through the Brussels Convention 1924. The International Convention for the Unification of Certain Rules of Law relating to Bills of Lading (“Hague Rules”) 1924 addressed the minimal obligations of the carrier in Article III and identified contractual defences in Article IV.
The Brussels Protocol 1968 introduced the Hague-Visby Rules as an amendment to the Hague Rules. Around ninety countries have ratified either the Hague or the Hague-Visby Rules. The United Kingdom has given statutory effect to the Hague-Visby Rules as a schedule to the Carriage of Goods by Sea Act 1971. The Hague/Hague-Visby Rules apply mandatorily when a bill of lading is issued in a contracting state; when the carriage departs from a contracting state; they may also apply voluntarily through the inclusion of a ‘clause paramount’ in a bill of lading. Article III (6) of the Hague-Visby Rules protects the carrier, and enables it to close its liability following one year after delivery of the goods. Article III (6) of the Hague-Visby Rules identifies that “Subject to paragraph 6bis the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery or of the date when they should have been delivered.”
Article III, (6bis) identifies that an action for indemnity may be brought outside of the one-year time barred stipulation, providing that it is within the time-period enabled by the national law of the jurisdiction. In England, “the time allowed shall be not less than three months” whereby a claim must be presented against the carrier then subsequently settled by the third party who has indemnified the carrier or “has been served with the process in action.” Article III (6bis) may only be exercised if the claim against the carrier is brought within one year of the event.
Implications for the trade finance sector
The decision in The Giant Ace clarified that the bank would not be able to present a claim in tort against the carrier outside of the scope of the Hague-Visby Rules, and the annual time bar. This is on the basis that the application of the Hague-Visby Rules intends to achieve uniform finality, whereby the carrier may close its accounts or books related to the trade after one year. The implications for the trade finance sector are to scrutinise the date of delivery in accordance with the bills of lading held as security for finance. Even where they may assume that the cargo is being held in a warehouse operated or leased by the carrier following discharge, the consideration of the one-year time limit should place an influential role in reliance of the bill of lading. Furthermore, in consideration of Unicredit Bank A.G. v Euronav N.V.[14] trade finance institutions should maintain awareness that if they are aware that the cargo has been delivered against a letter of indemnity presented by their client, this may be considered as implied approval. The initial judgement in Unicredit Bank A.G. v Euronav N.V [15] found that the bank did not obtain rights of suit as the bill acted as a mere receipt. However,the Court of Appeal overturned this aspect of the judgement, identifying that it became a negotiable document upon indorsement.[16]
Trade financiers Unicredit were not entitled to present a claim for mis-delivery against the carrier in accordance with the Hague-Visby Rules as it was found that the bank had implicitly approved the practice of delivering the cargo to the order of the charterer without the presentation of the original bill of lading.[17]
A question presented within The Giant Ace[18]in an appeal made to the Supreme Court, addressed whether clause 2 (c) of the Congenbill 1994 – echoed within the Olympic’s Congenbill 2022 would disapply the application of the Hague-Visby Rules in the event of a mis-delivery following discharge of the cargo. The argument was disregarded by Lord Hamblen, on the basis that it would be counterintuitive to rely on a clause intended to protect the carrier, in order to increase the carrier’s liability.[19]
The decision is relevant to companies that use trade finance facilities, trade finance banks, charterers and shipowners. In conclusion, as reflected on by Reed Smith LLP who defended KCH Shipping[20], it is recommended that trade finance institutions diarise the one-year period following the intended date of delivery of any transaction that is financed through the pledged security of a bill of lading. Traders and charterers that issue a letter of indemnity against the discharge of the cargo benefit from clarity that if a claim is not presented following one year after discharge, any subsequent claim is unlikely to be successful.
The judgment of the English High Court issued on 17 November 2024 is available online.
Read Alinea Customs’ article on The Electronic Trade Documents Act 2023: here
[1] [2022] EWHC 2400 (Comm).
[2] Fimbank (n 10) [19].
[3] [1977] 1 Lloyd’s Rep 334.
[4] Ibid 336.
[5] [2022] EWHC 2400 (Comm) [16].
[6] [1990] Lloyd’s Rep 310.
[7] Ibid 315.
[8] [2018] EWHC 1495 (Comm).
[9] [2007] EWCA Civ 794.
[10] [2007] EWHC 944 (Comm) [116].
[11] [2007] EWCA Civ 794 [27].
[12] Fimbank (n 10).
[13] Reed Smith LLP, ‘12-Month Time Bar Applies to Claims for Misdelivery of Cargo’ (Perspectives) <https://www.reedsmith.com/en/perspectives/2022/10/12-month-time-bar-applies-to-claims-for-misdelivery-of-cargo> accessed 7 December 2024.
[14] [2022] EWHC 564 (Comm).
[15] Unicredit (n 41).
[16] Unicredit (n 38) [82].
[17] Ibid [20].
[18] [2024] UKSC 38 [117 – 125].
[19] Ibid [120 – 125].
[20] Reed Smith LLP, ‘12-Month Time Bar Applies to Claims for Misdelivery of Cargo’ (Perspectives) <https://www.reedsmith.com/en/perspectives/2022/10/12-month-time-bar-applies-to-claims-for-misdelivery-of-cargo> accessed 28 December 2024.
