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Ship owners beware: liability for unlawful means conspiracy. Podcast with @incelaw

By • Nov 14th, 2012 • Category: Ince & Co Podcasts by Coracle, Shipping Law

Maritime Law Podcast from Coracle Online and international law firm Ince & Co

In this podcast we look at: Ship owners beware: liability for unlawful means conspiracy.

The Dolphina [2012] 1 SLR 992, Singapore High Court

In this case, the plaintiffs, a Chinese bank (“the bank”), commenced in rem proceedings against the owners of The Dolphina. Initially, the bank’s cause of action against the owners was for delivery of cargo without production of the original bill of lading (“BL”). During the trial, the bank amended its claim to
include a claim for unlawful means conspiracy against the owners. The bank failed on the mis-delivery claim but succeeded on the conspiracy claim.

The background facts
The decision turned very much on the somewhat unusual facts of the case. In January 2008, the seller, KOSB, contracted to sell a parcel of RBD Palm Olein to the buyer, Zhongguang. Under the contract, shipment was to be effected during March 2008
and in any event before 31 March 2008 and payment was to be made by draft at 90 days after sight by Zhongguang opening an irrevocable letter of credit (“L/C”) seven days before shipment.

KOSB had in turn purchased the Palm Olein to be supplied to Zhongguang from Felda. The cargo was shipped onboard the owners’ vessel, Dolphina, (which was chartered by KOSB) on 23 March 2008 for shipment from Kuantan, Malaysia, to Huangpu, China. The owners issued 4 BLs (including BL4) for the cargo; Felda was named as the shipper, the cargo was consigned “To Order”, and the notify party was Dongma. Despite Zhongguang failing to open the LC prior to shipment, the cargo was shipped to Huangpu and, by 1 April 2008, had been completely discharged. The cargo was discharged against KOSB’s Letter of Indemnity (“LOI”) to the owners; KOSB had, in turn, obtained an LOI from the notify party, Dongma. The cargo was thereafter
released to various end-buyers between April to June 2008.

In relation to BL4, the court found that Felda had indorsed BL4 in blank on or before 1 April 2008 before it was handed to Maybank (as Felda’s collecting agent), who indorsed BL4 to KOSB on or about 2 or 3 April 2008, after receiving payment
for the cargo (on behalf of Felda) from KOSB. The court held that KOSB retained BL4 thereafter until KOSB endorsed BL4 in blank sometime between 4 April 2008 and early June 2008.

Belatedly, on 6 June 2008, Zhongguang applied for an LC from the bank in favour of KOSB, purportedly to pay for the cargo (which had already been shipped and discharged in March/April 2008 and released to various end-buyers between April to June 2008). The bank approved the application. The documents that had to be presented under the LC included the signed commercial invoice indicating the LC and contract numbers and a full set of the clean on board ocean BLs (“the relevant
documents”). On 9 June 2008, KOSB drew a bill of exchange (“BE”) on the bank to the order of Maybank at 90 days after sight. Maybank, in turn, presented the BE and the relevant documents to the bank for payment under the LC. Upon receiving the BE and the relevant documents from Maybank, the bank handed the relevant documents to Zhongguang, which confirmed, in writing, that it had received the relevant documents, examined them and instructed and authorised the bank to make payment to the presenting bank (Maybank) and deduct its account with the bank.

The bank accepted the BE, but was left in the lurch subsequently when, two days later, Zhongguang returned the relevant documents to the bank, citing financial difficulties. As the bank had accepted the BE, they were bound to, and did, pay
Maybank.

The bank had no recourse to the cargo, which had long been discharged and released to the end-buyers before the issuance of the LC in June 2008. The court found, however, that the bank was not aware that the cargo had already been discharged in April 2008 without the production of BL4.

The court decision
Preliminary issue: proper law of the bills of lading
A preliminary issue dealt with by the court was the proper law of BL4. There was no express choice of law clause in BL4, but it expressly incorporated the terms of the charterparty, which was governed by English law. The court held that a three-stage
test would be applied to determine the governing law of BL4.

The court will first determine whether there is an express choice of law, failing which the court will determine whether there is an implied choice of law. If there is no implied choice of law, the court will proceed to determine the system of law
which has the closest and most real connection with the contract.

The court held that general words of incorporation, in this case “all conditions, liberties and exceptions whatsoever of the said Charter apply to and govern the rights of parties concerned in this shipment” were sufficient to incorporate the choice of law clause in the charterparty into BL4 and that the charterparty choice of law clause was a “condition” within the meaning of the words of incorporation in BL4, because it provided a system of law which applied to interpret the contract’s meaning, scope and effect.

Delivery of cargo without presentation of the original BL
The court held that delivering cargo without the production of a BL would amount to a breach of the contract of carriage even if the charterparty contained a term which allowed the delivery of cargo against a LOI. Such a clause in the charterparty merely permitted, but did not oblige, the owners to deliver the goods without presentation of BL4.

Bank’s title to sue
The bank asserted that it was the lawful holder of BL4 because it was “a person with possession of the bill as a result of… any indorsement of the bill.…” under section 5(2)(b) of COGSA 1992. The court held, however that the phrase “any
indorsement” in section 5(2)(b) must mean “any valid indorsement”. Therefore, where the indorsement of the BL is tainted by fraud, the indorsement would itself be invalid and incapable of constituting any subsequent transferee of the BL a “holder”. On the facts, the court held that KOSB’s indorsement of the BL was invalid as it had been made fraudulently. Under KOSB’s LOI, KOSB was to return BL4 to the owners once KOSB received BL4 upon making payment for the cargo. At that point in time, BL4 should have been deemed accomplished or spent and should have been withdrawn from circulation.

Instead, KOSB, despite knowing that it was not entitled to deal with BL4, indorsed BL4, thus falsely misrepresenting that it still had legal effect. The court further held that KOSB’s indorsement was part of “a raft of measures to defraud third
parties”.

As KOSB’s indorsement of BL4 was ineffective, the bank did not become a “holder” of BL4 and therefore did not acquire the requisite rights of suit to sue the owners in contract under BL4.

Bank’s claim for unlawful means conspiracy
Based on the evidence which emerged late into the trial, the bank was given leave to amend its claim to include an alternative claim for unlawful means conspiracy against the owners. To succeed on this cause of action, the bank had to prove that “two or more parties combined to commit an unlawful act with the intention of injuring or damaging the plaintiff, and the act is carried out and the intention achieved”.

On the evidence, it was held that one SK, a common director of the owners, KOSB and Dongma, knew, inter alia, that the cargo had been discharged against a LOI and that BL4 had been fraudulently indorsed by KOSB to Maybank in order to secure payment under the LC. The court reached this conclusion on the basis that SK had, in interlocutory proceedings, given affidavit evidence on matters such as the movement of BL4, the owners’ commercial and operational affairs as well as the terms of KOSB’s LOI, that SK was copied in on correspondence in relation to the operation of the vessel, that he authorised the payment by KOSB to Felda for the cargo as well as the presentation of documents (including BL4) for payment under the LC.

Under the doctrine of identification (or “directing mind and will” or “alter ego” doctrines), the trial judge found that SK’s knowledge of the conspiracy was attributable to the defendants. In this regard, the court also highlighted that the
other directors of the owners had testified at the trial and said that they were not involved in the operations of the owners or the vessel, which gave rise to the inference that SK was the only person managing the owners. Moreover, SK, by not giving evidence at the trial itself, had failed to rebut the adverse inference drawn against the owners that, for the purposes of the unlawful means conspiracy, SK’s knowledge and state of mind ought to be treated as those of the owners.

Having imputed SK’s knowledge to the owners, the court then considered whether the tort of unlawful means conspiracy had been made out. The court held that, even though there was no evidence that the owners had been a party to the conspiracy to
defraud the bank at the stage when Zhongguang (with the conspiracy of KOSB) applied for the LC, the owners knew (through SK’s knowledge) of the conspiracy and participated in it by allowing BL4 to be presented to the bank for payment under the LC. In this regard, the court held that an omission can constitute the requisite unlawful act (in this case, the owners’ omission to take BL4 out of circulation).

The court concluded that the unlawful means conspiracy had been made out and found the owners liable for the amount paid by the bank to Maybank under the BE. The owners’ appeal against the trial judge’s decision was subsequently dismissed by
the Singapore Court of Appeal without any written grounds of decision.

Comment
The Dolphina is an important decision, albeit on somewhat unusual facts. The court’s analysis of when an endorsement of a BL is valid is illuminating. This is also the first time the court in Singapore has had to consider whether an omission to act could constitute conduct sufficient to amount to an unlawful means conspiracy.