Case Commentary – Banks as the Authors of Their Own Misfortune

The article “Banks as the Authors of Their Own Misfortune” by Partner, Probin Dass, published in the [2025] SAL Practitioner 21, explores a series of recent Singapore court decisions concerning banks’ rights as holders of bills of lading in cargo misdelivery claims. Prompted by the collapse of oil trader Hin Leong Trading, the commentary examines how banks—having financed cargo purchases—sought to assert claims against carriers after the cargo had already been delivered without production of the bills. The courts assessed whether banks acted in good faith, whether the bills were “spent,” whether banks had authorised delivery, and whether carriers’ breaches actually caused the banks’ losses. Through analysis of cases such as Navig8 Ametrine, The STI Orchard, and The Maersk Katalin, the article highlights that while banks traditionally held strong positions as bill holders, emerging defences like the “causation” and “good faith” issues now complicate claims, underscoring the need for banks to strictly observe trade documentation practices.

Please click on this link to read the full case commentary.

International Trade – Sanctions and the Sanctity of Documentary Credits

It is a sacrosanct rule of international trade that letters of credit are to be honoured if  complying documents are presented in a timely fashion. This time-honoured rule is  based on the irrevocable undertaking given by issuing banks to honour a credit by paying  against a complying presentation of the stipulated documents. Such banks therefore  assume a simple but seemingly absolute obligation towards beneficiaries of letters of  credit. However, banks also have an obligation to comply with the law and this includes  laws in relation to international sanctions. Therefore, a bank may be faced with the  obligation to honour a letter of credit in circumstances where any such payment would  violate applicable sanctions and place the bank in jeopardy of criminal penalties or other  regulatory sanctions. Banks invariably prefer to avoid such liability even if it means facing  a claim by the beneficiary of a letter of credit for failure to honour a complying  presentation. The solution adopted is to include a sanctions clause in the letter of credit  which gives the bank the right not to honour a complying presentation where to do so  would involve the bank in criminal liability for breaching laws on sanctions. 

A case in Singapore considered the efficacy of such a clause and concluded that in  certain circumstances it may be efficacious to protect a bank against contractual liability. The clause in question was inserted by the confirming bank in its confirmation of the  credit to the beneficiary. Although it was not found in the letter of credit itself this was no  barrier to the confirming bank relying on it. A letter of credit transaction is in reality a  compound transaction involving a number of related but discrete contracts, one of which  being the contract between the confirming bank and the beneficiary. The clause in  question read: 

[JPMorgan] must comply with all sanctions, embargo and other laws and  regulations of the U.S. and of other applicable jurisdictions to the extent they do  not conflict with such U.S. laws and regulations (‘applicable restrictions’). Should  documents be presented involving any country, entity, vessel or individual listed  in or otherwise subject to any applicable restriction, we shall not be liable for  any delay or failure to pay, process or return such documents or for any related  disclosure of information.

The bank took the view that the ship which carried the coal which was the subject of the  sale contract pursuant to which the buyer applied for and obtained the letter of credit  was the subject of US sanctions against Syria because the bank had information to  suggest the ship was previously registered by a Syrian entity and, therefore, a red flag was  raised internally that the change of registration to a non-Syrian entity may not have  resulted in a change in the beneficial ownership. The US Office of Foreign Assets Control 

(OFAC) appeared to support the bank’s position by stating that payment in these  circumstances would involve violation of the US Syrian sanctions regime. 

On appeal to Singapore’s highest court the bank failed. While the sanctions clause in the  bank’s confirmation was upheld as a valid contractual clause, the court decided that the  evidence before the court pointing to the supposed Syrian ownership of the vessel was  inconclusive. OFAC’s opinion did not change the fact that the objective evidence was not  good enough to meet the standard of proof required by a court. In refusing to pay, the  bank was taking a risk-based decision i.e. that it would rather be sued by the beneficiary  for failing to pay against a complying presentation than to be found by OFAC to have  breached US sanctions. This was rational but not a contractually justified approach and  the sanctions clause did not help the bank. 

Having decided against the bank on the basis of the lack of evidence to show that the  vessel remained in the beneficial ownership of a Syrian entity, the court went on to  discuss the question raised by the beneficiary which was whether the sanctions clause  was compatible with the commercial purpose of the bank’s confirmation. It was argued  that under the UCP 600, a confirmation was “a definite undertaking of the confirming  bank … to honour or negotiate a complying presentation”. A sanctions clause giving the  bank the freedom not to do so because it believed the carrying ship was a sanctioned  entity was contrary to this undertaking. It was all the more unjust because a beneficiary usually had no say in nominating the ship and even if it knew which ship was being used  it would be difficult to determine the beneficial ownership of that ship. 

This remains an open question and the court’s views on it were strictly not necessary. The  court did not find the ICC’s Guidance Paper on the Use of Sanctions Clauses useful as it  simply stated that “if the sanctions clauses in … letters of credit … allow the issuer a level  of discretion as to whether or not to honour beyond the statutory or regulatory  requirements applicable to that issuer, they bring into question the irrevocable and  documentary nature of the letter of credit”. There is no guidance as to when a particular  sanctions clause would cross the line. However, the court was clear that the bank’s  position in the present case (i.e. that its sanctions clause entitled it to deny payment  against a complying presentation as long as it finds that, on a risk-based assessment, it  would prefer to be sued by the beneficiary than to risk being penalised by OFAC) would  result in the sanctions clause being incompatible with the commercial purpose of the  confirmations due to the significant unpredictability such an interpretation would  introduce into the confirmations. 

Beneficiaries must therefore be aware that a sanctions clause may be inserted in the  letter of credit or separately in the confirmation of that credit and this may affect the  irrevocable and documentary nature of the credit. The court’s remedy is to construe such  clauses strictly and to require banks to ensure they have sufficient evidence to meet the  civil standard of proof before they are allowed to deny payment to a beneficiary.

For more information relating to this article, kindly contact Partner, Probin Dass.

Disclaimer: This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue.

Demurrage Claims – Mitigating the Risks

Introduction

The possibility of incurring demurrage is unpredictable even though shipowners know that certain ports are prone to delays probably due to congestion or inadequate port infrastructure and equipment required to discharge cargo quickly.

In this article we are going to explore ways of improving demurrage recovery rates as for every successful recovery, a shipowner probably has tens of unsuccessful ones.

The terms of the Charterparty

The starting point for every demurrage claim is usually the charterparty between the parties.

The GENCON 1994 Charterparty has the following clause:

7. Demurrage

Demurrage at the loading and discharging port is payable by the Charterers at the rate stated in Box 20 in the manner stated in Box 20 per day or pro rata for any part of a day. Demurrage shall fall due day by day and shall be payable upon receipt of the Owners’ invoice. In the event the demurrage is not paid in accordance with the above, the Owners shall give the Charterers 96 running hours written notice to rectify the failure. If the demurrage is not paid at the expiration of this time limit and if the vessel is in or at the loading port, the Owners are entitled at any time to terminate the Charter Party and claim damages for any losses caused thereby.

The GENCON form sets out clearly that demurrage shall fall due day by day and shall be payable upon receipt of the owners’ invoice. It is important to note that the only remedy provided for in the said clause, which is the termination of the charterparty, only applies if the vessel is still at the loading port. There are no prescribed remedies for the failure of the charterers to pay demurrage at the discharge port.

The lien terms in Clause 8 may be able to provide some assistance in relation to remedies available to the Shipowners in connection with unpaid demurrage.

8. Lien Clause

The Owners shall have a lien on the cargo and on all sub-freights payable in respect of the cargo, for freight, deadfreight, demurrage, claims for damages and for all other amounts due under this Charter Party including costs of recovering same.

Exercising the lien on the cargo

After laytime at the discharging port has expired, the time for demurrage will start to run. At this time, probably some of the cargo has been discharged and there are some quantities of cargo still onboard. Going by the lien clause in the GENCON form, the shipowner can have a lien on the cargo that is still onboard.

The shipowner will then be required to take possession of the cargo either leaving it onboard, which is usually not the preferred method as it encumbers the vessel, or landing it to the order of the shipowner. However, many ports prohibit such lien activities as the ports are usually controlled by government agencies who will always promote the quick movement of goods out of the port for consumption or use instead of holding onto cargo which will occupy much-needed storage space for the quick turnaround of vessels at berth.

Contractual rights available to the shipowner

If taking possession of the remaining cargo onboard is not an option available to the shipowner, the shipowner will only have a contractual right against the charterers. There is always a contractual right to claim demurrage against the charterers. However, if the charterers are not financially sound, the shipowners will then look to the terms of the bills of lading to see if the receivers or consignees of the cargo can be asked to pay demurrage. Very often, the creditworthiness of the receivers or consignees is not known to the shipowners when the charterparty is executed. Therefore, the shipowner will not be able to ascertain the creditworthiness of the receivers or the consignees at the time of entering the charterparty.

All is well and good if the terms of the charterparty set out clearly that the demurrage shall fall due day by day and become payable when the invoice is issued by the shipowner. However, as is usually the case, shipowner tend to give credit periods for the payment of freight. If additional days are given for the payment of demurrage invoices, the vessel would have left the discharge port when the demurrage invoice becomes due. The shipowner’s best weapon against non-payment which is the right to exercise a lien on the remaining cargo onboard would have been lost in these circumstances as the due date for payment of the demurrage invoice falls after the vessel has left the discharge port. Here again, the shipowner is left with a contractual right to enforce the demurrage claims.

Preventive steps

If the shipowner will eventually rely on contractual rights as opposed to the more superior proprietary right when a lien on the cargo remaining onboard is exercised, the shipowner will have to take steps prior to entering the charterparty to ensure recovery of demurrage that may be incurred at the discharge port.

For a start, the charterparty should not allow any grace period for the payment of demurrage especially for demurrage incurred at the discharge port. More importantly, demurrage should be payable immediately when it falls due “day by day” similar to the terms in clause 7 of GENCON.

The more important step is for the shipowner to carry out financial due diligence on the charterer and if possible, on the receivers and the consignee. With this information on hand, the shipowner can then assess the possibility of the charterers being liable for demurrage and the steps to take in order to successfully recover demurrage.

The best option would be to ensure that a financially sound charterer is always liable to pay demurrage without being able to rely on any cesser clause or other clauses excluding the charterer from paying demurrage that is incurred at the discharge port. In some instances, corporate guarantees or personal guarantees may be demanded by the shipowner to ensure that all payments are received by the shipowner as per the terms of the charterparty.

Additionally, the shipowner should also ensure that a favourable law and jurisdiction clause is chosen so that demurrage claims can be pursued successfully in a jurisdiction where the charterer has assets or where successful awards or judgments from that jurisdiction can be enforced in another jurisdiction where the charterer has assets.  

For more information relating to this article, kindly contact Partner, Captain Mathiew Christophe Rajoo.

Disclaimer: This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue.

Case Law Update: DFM v DFL [2024] SGCA 41

In DFM v DFL [2024] SGCA 41 (“DFM v DFL”) the Singapore Court of Appeal (“CA”) has confirmed that a party to an arbitration may be considered to have acceded to the jurisdiction of the arbitral tribunal for the purposes of an interim application for relief, even where it has challenged the tribunal’s jurisdiction to decide the merits of the substantive dispute in the arbitration.

The judgment of the CA serves as a cautionary statement that a party cannot effectively “reserve” an objection to the arbitral tribunal’s jurisdiction to determine an interim application and raise it subsequently, such as at the enforcement stage. The courts are likely to view this as an impermissible “hedging” exercise.

Read our case law update here

Case Update: Vietnam Oil & Gas Group v Joint Stock Company (Power Machines – ZTL, LMZ, Electrosila Energomachexport) [2024] SGHC 244

Recourse to the Singapore Courts for the setting aside of an arbitration award pursuant to s 24(b) of the International Arbitration Act 1994 (the “IAA”) and/or Arts 34(2)(a)(ii) and (iii) of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”) can be a complex and intricate matter. Under Singapore law, the General Division of the High Court may set aside the award of an arbitral tribunal if there has been a breach of natural justice.

The twin pillars of natural justice are the rule against bias and the fair hearing rule. A breach of the fair hearing rule could possibly arise from the chain of reasoning that an arbitral tribunal adopts in its award, as the chain of reasoning must be one which the parties had reasonable notice of and which has sufficient nexus to the parties’ arguments. In the case where an arbitral tribunal’s chain of reasoning departs from the cases of both parties, the High Court in Vietnam Oil and Gas Group v Joint Stock Company (Power Machines – ZTL, LMZ, Electrosila Energomachexport) [2024] SGHC 244 provides valuable insight into the nuances on the remission and setting aside of arbitral awards.

Read our case law update here

Case Update: Alliance Divine Impex Pte Ltd v Arulappan Tony (DBS Bank Ltd, non-party) [2024] SGHC 227

In its recent decision in Alliance Divine Impex Pte Ltd v Arulappan Tony (DBS Bank Ltd, non-party) [2024] SGHC 227 (“Alliance Divine”), the High Court of Singapore confirmed that a party can obtain bank statements directly from a bank under s 175(1) of the Evidence Act 1893 (the “EA”) for the purpose of formulating tortious claims against a prospective defendant.

However, the court emphasised that s 175(1) of the EA itself did not provide a substantive basis for a party to seek disclosure from a bank. Instead, a party seeking disclosure under s 175(1) had to demonstrate that it had a substantive right to the documents independent of s 175(1).

Therefore, parties seeking to obtain disclosure of banking documents of a prospective defendant directly from such defendant’s bank would be well-advised to seek legal assistance to ensure they can show a substantive right to disclosure, independent of s 175(1) of the EA, prior to making such an application.

Read our case update here

Case Update: Maybank Singapore Limited v Dynamiq Solution Pte Ltd (Official Receiver, non-party) [2024] SGHC 219

Winding up a debtor company based on its inability to make payment on a statutory demand pursuant to s 125(1)(e) read with s 125(2)(a) of the Insolvency, Restructuring and Dissolution Act 2018 (the “IRDA”) is an option that is frequently pursued by creditors. Under Singapore law, both the statutory demand and the subsequent winding up application are required to be duly served on the debtor company before a winding up order can be made by the Courts.

From time to time, the usual method of service by leaving the documents at the registered address of the debtor company pursuant to s 125(2)(a) of the IRDA becomes unavailable and creditors are faced with the dilemma of which alternative method of service should be utilised. In this context the judgment of the Singapore High Court in Maybank Singapore Limited v Dynamiq Solution Pte Ltd (Official Receiver, non-party) [2024] SGHC 219(“Maybank v Dynamic Solution”) provides useful and rare insight into the nuances of the rules of service and potential pitfalls that creditors may face.

Read our case update here

Case Update: “Sea Justice” [2024] SGCA 32

“The Singapore Court of Appeal (the “CA”) has made it clear in its recent decision in The “Sea Justice” [2024] SGCA 32 that where admiralty in rem proceedings in Singapore have been stayed on the ground of forum non conveniens (a “forum non conveniens stay”) a claimant which has previously obtained a security against arrest will not be allowed to retain it with a view to taking advantage of the higher limits on liability that may be available in Singapore.

While the decision was rendered in the context of admiralty proceedings, it suggests that any party seeking to impose conditions on a forum non conveniens stay of Singapore proceedings will have its arguments carefully scrutinized by the Singapore courts.

Read our case update here

Case Update: Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd and another appeal [2024] SGCA 31

“In its recent decision in Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd [2024] SGCA 31, the Singapore Court of Appeal (“CA”) clarified a key principle of the fraud exception to the payment obligation under letters of credit (the “Fraud Exception”)

In particular, the CA confirmed that the common law definition of fraud as enunciated in Derry v Peek (1889) 14 App Case 337 (“Derry v Peek”) and which extends to recklessness in making a false representation applies in considering if a presentation under a letter of credit falls within the Fraud Exception.

Read our case update here