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Lawyers: Not end of the road for parties affected by thorny issues of commodity trading mishaps

28 Jul 2020

A webinar discussing topical issues relating to Letter of Credit (LC) payments related to sale and purchase (S&P) of commodities, S&P of ships from financially troubled companies facing fraud allegations, and trafficking in spent bills of lading (BL), was organised by international shipping and commodity law firm Helmsman LLC on Wednesday (22 July).

The event started with Maureen Poh, Director at Helmsman, presenting a scenario of a buyer purchasing an oil cargo from a company affected by fraud allegations; with payment of the cargo on basis letter of credit (LC).

Pausing Letter of Credit bank payments

“The immediate concern for the buyer was try to stop payment under LC. It seems simple to tell the bank that there could be a suspected fraud involved with the transaction so ‘please stop’. But actually, this is not so straightforward,” said Poh, who, together with her colleagues, recently advised clients involved with the above scenario.

She explained the S&P chain and documentary chain, though related, are actually separate chains of contracts.

“You might have action against your counterparty in the S&P chain but that doesn’t mean you can stop payment under documentary chain. Documentary credit payment system is “the lifeblood of commerce”, and allowing others to affect documentary credit payment will spell the death knell of commerce,” noted Poh.

“But, some civil jurisdictions in Europe might have a more flexible position. In some jurisdictions there is a general duty of good faith where the court might be more sympathetic to the victim of an alleged wrongdoing.

“In one case, the client managed to get a temporary injunction to stop the issuing bank from proceeding with payment to the negotiating bank so they can gather more evidence of the alleged fraud.

“So, if you find yourself stuck in the LC chain it might be worth exploring another jurisdiction.”

S&P of ships from group under fraud investigations

A question related to considerations for players interested in the S&P of vessels owned by legally separate entities of a group under fraud investigations was posted by Singapore bunkering publication Manifold Times.

Chen Zhida, Associate Director at Helmsman, replied that it is “very common” for big commodity trading groups to have structures, such as a trading arm and shipping arm, to keep operations separate.

“Based on the question there is nothing to suggest the companies are set up to abuse the corporate structure. That being the case, their obligations would be kept separate,” he said.

“Another angle is if those shipowning entities are involved in the alleged fraud, then they might have an associated liability.”

Ian Teo, Managing Director at Helmsman, provided more details of liabilities and maritime liens.

“Maritime liens follow the vessel regardless of who are the owners. As the new owner you have to be responsible for these claims. In Singapore, the main maritime liens we recognise are claims for unpaid crew, and claims arising out of collision. Some countries recognise claims for unpaid bunkers,” said Teo.

“The danger of maritime liens is you do not know they exist until one day they appear. Technically, you can ask the ship manager for an account of who they owe money to but we will not know how accurate that is.

“In Singapore, you can check in the court system for certain vessel claims. There are many things you can do to make sure the vessel is free of liens but you need to bear in mind you are buying a vessel under such situations.  Do your due diligence.”

Trafficking of spent Bills of Lading

Tang Chong Jun, Executive Director at Helmsman and Managing Director of Tang & Co, shared there could be trafficking of spent BLs in Singapore.

“It is normal to present the Bill of Lading when taking delivery of cargo; but in shipping, many do not do this and there is a widespread practice of parties taking cargo under a Letter of Indemnity. The party which doesn’t surrender those Bills of Lading can take it into the bank and ask for finance,” said Tang.

“We have a recent case on hand where we are acting for the shipowner who did not collect the Bill of Lading. Obviously, when banks found out they sued the shipowner for failing to collect the original Bills of Lading and claimed the shipowner has misdelivered the cargo.

“The court has acknowledged that there could be trafficking in spent BLs.

“Now, the question is of what will be the implication for those banks who are in receipt of those spent BLs? In my view, this creates a lot of uncertainty where banks now need to do a lot more due diligence on whether BLs are spent.”

Teo added that the trafficking of spent BLs has been increasingly unraveling in recent years.

“This whole practice using the Letter of Indemnity has been going on many years and the practice is starting to show cracks and stress. We are seeing possibly the same cargo being resold and refinanced a few times,” he said.

“Most of time, there is no problem at end of day as the cargo is delivered. But if there is no cargo then something is definitely wrong.”

 

Published: 28 July, 2020

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