Rock the boat: Will UniCredit v Euronav cause a trade finance wobble or help tear up the paper boats?

A 4 May judgment on a $26 million appeal case between Belgian tanker shipping company Euronav and UniCredit Bank prompted alarmist headlines in some parts of the trade media that UniCredit, and other banks, could be prompted to pull out of commodity trade finance. 

If this all sounds a bit esoteric, the case is interesting as it does call into question the status of bills of lading (BLs). TXF asked legal experts, banks and companies to explain the consequences. The banks were quiet, but the lawyers were helpful. (For the record, Euronav’s summary is contained in its annual report). What, if any, will the implications be for trade finance and of trade digitisation? 

“It shows the weaknesses and risks involved in financing physical trades, and the issues which can arise as a result of the predominantly paper trade which has been going on for a very long time, probably way too long,” cautions Marco Crusafio, partner, commodities and shipping group at Squire Patton Boggs. 

What happened and why is it important?

The Court of Appeal dismissed UniCredit Bank’s appeal against an original decision in the UK High Court made in April 2022 [by Justice Clare Moulder, who retired from the court in October 2022], in a claim made in January 2021 for damages against Euronav (the owners) for delivering part of a cargo to a third party without presenting the original BLs. The appeal found that while there was a breach of owners’ obligation under the BL to discharge without the original of the bills, there was no causation of the loss and, therefore, the bank’s appeal was dismissed. 

 The case of UniCredit Bank AG v Euronav NV ([2023] EWCA Civ 471) is significant as it looks at the BL and its status whether as (i) a ‘mere receipt’ for the cargo, or (ii) part of the contract of carriage of goods. 

The original events took place in 2020 against the backdrop of the COVID pandemic when it was very difficult to move physical documents around the world. 

BLs are physical paper documents used as evidence for placing goods, (in this case oil onto the ship, ‘the Sienna’), and would then be used as the means to allow discharge of the cargo at the final port or destination. The legal position is that the carrier issues the BL and is under an obligation not to deliver the cargo without sight of the original BL or it could be exposed to a suit from the lawful holder of the BL. 

The case highlights the practice of using Letters of indemnity (LOIs) in shipping almost as a substitute for BLs, noting that once the goods are discharged, they are not represented by the BL. 

However, the case is quite particular on the facts as it looks at a slightly unusual situation where the charterparty was novated [a legally new contract made] to the buyer of the goods where it had originally been a charterparty between the shipowner and the seller. 

The court held that the BL at the time of discharge of the cargo was then a document evidencing a contract with the buyer from the date of novation of the charterparty and no longer acted as a ‘mere receipt’ between the shipowner and the seller.

 The need to be more careful

What is the potential impact of the ruling on the use of bills of lading by banks? “We anticipate banks will be more careful, ask more questions and potentially reconsider whether the potential risks are worth their investment in commodity trade finance. In extreme instances banks may refuse discharge where a LOI is required but then this will increase the risk of delays,” says Crusafio. “In fact, reports suggested UniCredit was considering whether to exit commodity trade finance following on from the court decision and other banks we spoke to were not at all pleased with the result.”

Banks contacted by TXF, including UniCredit, did not comment. 

Jacqueline Cook, of counsel (trade finance, knowledge and compliance) at Sullivan in London says: “The ruling is a reminder to banks and carriers of the purpose of the BL, and that the BL should be the document provided at port or the ultimate destination to permit discharge of the cargo. The cargo was discharged without production of the BL, instead it was discharged on the back of the LOIs.” 

She continues: “Where BLs form part of the security package where there is a pledge over goods, it is advisable to check whether BLs are also being provided as security, to check whether in fact an LOI is to be used and what the position is in the security documents in relation to the disposal of the cargo or goods. If LOIs might be used, then a security assignment of the rights in the LOI might be useful if it is an assignable right. However, if the issuer of the LOI is not of substance then any claim on the LOI is not valuable. This case does not change the law in relation to BLs or to LOIs, in our view.”

Crusafio agrees that it does not change the status of either document. “The court held that the BL did contain a contract, upturning Justice Moulder’s judgment that the BL was a mere receipt. The facts of the case are specific, and each case will turn on its facts.”

 A cautionary tale, but not a harbinger of doom

Will there be a negative impact on banks wanting to offer trade finance tools as a trade risk mitigant?

“We would hope not, but we anticipate banks to be generally more cautious in their trade finance deals. This case has shown a weakness in the system and until the system changes, with the widespread adoption of electronic bills of lading, we believe the banks will react with caution,” Crusafio says.

“We do not see this case as having a negative impact here,” argues Geoffrey Wynne, head of the Trade & Export Finance Group and Sullivan’s London office. “What is critical for the banks is to look at its whole security package and make sure it is as watertight as possible when the asset is in warehouse, in transit and in port. In this case it was the extent to which the bank had given permission to allow the discharge, that was key.” 

Wynne adds: “In the end, the bank allowed the discharge, however, there is a comment in the judgment that the bank also had, among other things, trade credit insurance on 90% of the receivables from the onsale of the cargo. So, presumably, from a practical point of view, the BL was only one element of the bank’s protection. This was not the nub of the case so there was no substantial argument on it.”

Where trade digitisation could help

Is the case likely to have any impact on electronic bills of lading (eBL) and trade finance digitisation?

“We hope it will contribute to the momentum that trade finance digitisation seems to be enjoying now,” says Crusafio. “We do believe time is ripe for the widespread adoption of electronic bills of lading and trade finance digitisation generally. It will be a drastic change, requiring changes to be made to the way banks and trading houses approach their day-to-day business. The direction of travel is set and there is no turning back, nor would it be wise to push against it in our view. Banks and trading houses should embrace the change and proactively make arrangements for it.”

Clearly, this is a situation where eBLs would have been extremely useful, says Wynne. “Physical documents were stuck in the chain and subject to national and international restrictions due to the COVID pandemic. Here there was a change in the charterer and indeed a change in the ultimate destination. In our view, in the future, an eBL in a reliable electronic system should prevent this situation for both the charterer and the bank. One might expect that LOIs will then no longer be needed.”

Wynne adds: “We welcome BIMCO’s 25 by 25 campaign to promote to carriers to use eBLS for 25% of their “annual seaborne trade volume for at least one commodity” by 2025. The Electronic Trade Documents Bill going through Parliament, once passed and in force, which we expect later this summer, would allow BLs to be used in electronic form as effectively documents of title to cargo with the protection of English law.”

The TXF Perspective 

If you’ve read this far, you’re interested in this kind of thing. Perhaps the case should not have been brought in the first place, but hindsight is perfect vision. 

If trade digitisation, tested under English law, would have been a way of firstly stopping the confusion/error happening, and secondly preventing the first case getting wrong what it got wrong (such as confusing a bill of lading document with being a ‘mere’ receipt), and making sure that bankers knew what they were doing, all to the good. 

Here’s hoping that it gives electronic trade instruments a necessary shot in the arm, rather than causing more banks to pull back from financing international trade. 

In the words of Rabindranath Tagore in his collected works:

 “These paper boats of mine are meant to dance on the ripples of hours, and not reach any destination.”

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