A case of conflicted conversion

In a recent case, the Commercial Court was asked to consider whether discharge of a cargo into a warehouse amounted to conversion if no bill of lading had been presented.

The cargo of iron ore was carried on board the Bao Yue from Bandar Abbas, Iran, to Tianjin, China. The dispute arose between the shipper (to whom the bill of lading was issued) and the buyer of the cargo and, as a result, the bill of lading was retained by the shipper and no bill of lading was presented at the discharge port. Shortly thereafter, the shipowner made arrangements for the cargo to be discharged into storage.

The shipper subsequently claimed that the shipowner had unlawfully converted the cargo. The shipper agreed that the shipowner was entitled to warehouse the cargo by virtue of the express provisions in the bill of lading and charterparty terms incorporated in the bill (in this case, the Gencon 1994 charterparty form). However, the shipper contended that the shipowner had unlawfully converted the cargo because:

1. A lien for storage charges was created in favour of the warehouse company without the shipper’s express or implied authority; and/or
2. Statements were made by the warehouse company and the vessel’s agent which amounted to denying the shipper access to the cargo, regardless of whether the bill of lading was presented.

The shipowner denied that the cargo had been converted and brought a counterclaim for the storage charges.

As at the date of the trial, the cargo had still not been claimed and the storage charges, which had accrued for over three years, had exceeded the value of the cargo.

Under English law, in brief terms, conversion of cargo is an act of dealing with that cargo in a way that is inconsistent with the cargo owner’s rights, such that the cargo owner is deprived of the use or possession of the cargo.

Expressed authorisation

The Court found that the shipper had expressly authorised the storage of the cargo, by virtue of clause 12 of the charterparty as inserted by the parties, which was incorporated into the bill of lading:

“…In case original Bs/L would not be ready upon vessel’s arrival at discharge port, owners allow to discharge cargo upon arrival to custom bonded warehouse area against charterer’s single LOI with owners P&I Club wording signed by Chrs. Release cgo against original bill of lading. In the event cargo being kept in the warehouse in lieu of waiting for OBL to arrive at the discharge port, the expense of warehouse and all relevant costs to be for Chrtrs’ account…”

The Court also considered that the following email from the Shipper permitted the discharge and storage of the cargo:

“…Please kindly be notified that the buyer have not settled the proceed of this shipment to us as yet and hence the whole set of OB/L are resting with us waiting for buyer to pay us against the exchange of this document. Trust you will take appropriate measures to prevent any inconvenience in future.”

The Court further reasoned that the Shipper had authorised the storage impliedly in bailment.

It is also well established under English law that, if an owner of goods does not claim delivery within a reasonable time, in order to avoid the accrual of hire or demurrage, the master of a vessel may discharge and warehouse a cargo at the expense of its owner.

The Court held that the shipper was aware that the warehouse company would insist upon payment before releasing the cargo and that this was also the “obvious commercial reality” as no sensible warehouse company would agree to store cargo on terms that did not include such a lien.

The shipper argued that various statements made on behalf of the shipowner constituted denial of access. However, the Court considered that the matters relied upon “fell well short” of what was required for conversion; the cargo had always been available upon presentation of the bill of lading and settlement of the storage charges.

In conclusion, the claim for damages for conversion failed on both grounds. The shipowner’s counterclaim succeeded and the shipper was ordered to reimburse the shipowner for its reasonable storage charges.

Back to the bill

The Court also granted the shipowner’s request for an order obliging the shipper to deliver the original bill of lading. The Court found that the shipper had breached its obligation to take delivery of the cargo. The shipowner’s liability for storage would have continued to increase until the cargo was sold and the original bill of lading was therefore required in order to clear the cargo. The Court commented that the shipper had showed no intention of taking delivery of the cargo and that, were it left to the shipper, it would have left the cargo at the warehouse “until the crack of doom”.

This case provides a useful summary of the circumstances in which unlawful conversion of a cargo may arise. It also highlights the bill of lading holder’s continuing duty to take delivery of a cargo and, if it is unwilling or unable to do so, to do what is necessary to minimise any loss and expense. While a seller’s ability to withhold a bill of lading may provide leverage in a dispute with the buyer, this will inevitably have an impact on the relationship with the shipowner.

A shipowner should also carefully consider the applicable contractual provisions regarding the discharge and storage of the cargo where an original bill of lading is not presented at the discharge port. In this case, the Judge considered that, had the shipper’s claim for conversion been substantiated, the shipowner would not have been able to rely on the exclusion of liability provision in the bill and the incorporated charterparty terms; “much clearer words” would have been required to achieve that.

Rania Tadros is a partner with Ince & Co, based in Dubai. Rania is experienced in commercial arbitration and litigation with a focus on the energy and shipping industries. She can be contacted on +971 4 307 6000 or rania.tadros@incelaw.com.