What liabilities shall be borne by the issuer of the letter of guarantee and the Port Authorities?

Case Fact:

In September 2001, Guangzhou Huangpu Dongyue Aluminium Factory (short for “Dongyue Factory”) entrusted the Chinese Structure Import and Export Company to import 10000 tons of alumina from Australia. Then, Dongyue Factory agreed to resell the alumina to the X X Industry Limited Company (short for “Industry Company”). The goods were carried out by the Chinese Structure Import and Export Company by using the foreign ship “Matthew”. The Chinese Nonferrous Metals Group was endorsed as the Bill of Lading holder. The goods arrived in the port of destination on November 4, 2001. Before goods’ arrival, the Industry Company and the Port Authorities concluded a Goods Discharge Operation Contract. On November 13, 2001, the above two parties confirmed the amount of goods discharged. On November 19, 2001, Dongyue Factory issued a letter of guarantee to Industry Company promising that the original B/L shall be presented before November 23 otherwise the Dongyue Factory shall bear all legal liabilities thus incurred. On the basis of this letter of guarantee, Dongyue Factory requested Industry Company to issue further guarantee to the carrier’s agent----XX Foreign Vessel Agency Company (short for “Agency Company”) for the purpose of taking delivery order (D/O) in advance, which could help to avoid unnecessary demurrage fee borne by Dongyue Factory. On the same day, XX Trading Company (short for Trading Company)----an affiliated company of the Industry Company requested to borrow D/O from the Agency Company owing to that Dongyue Factory is urgent to get the D/O for custom clearance. The Trading Company issued guarantee letter to the Agency Company stating that it should produce the original B/L to the Agency Company once obtaining it, otherwise it would bear all legal liabilities thus incurred. On November 20, 2001, the Agency Company provided the Trading Company with the D/O indicating Dongyue Factory as the person in charge of taking delivery of goods. Subsequently, the Trading Company forwarded the D/O to the Industry Company. From November 19 to December 4, 2001, the Industry Company took 4700 tons of alumina from the Port Authorities without producing the D/O. On December 6, 2001, the Industry Company took the remaining alumina from the Port Authorities with presentation of the D/O. On January 8, 2001, the Industry Company issued a confirmation letter to the Agency Company admitting that the fact of taking delivery of goods without presentation of B/L and promising to bear all legal consequence. Due to the delivery of goods without presentation of original B/L, the Agency Company was obliged to pay 5.33 million RMB as compensation to the B/L holder according to an effective court judgment. Now on the basis of right of recourse, the Agency Company filed a lawsuit and required the Port Authorities, the Industry Company and the Trading Company to bear joint and several liabilities.

Legal Analysis:

This is a typical case of international carriage of goods involving several legal issues in relation with the delivery of goods without presentation of B/L, letter of guarantee, agency and port operation. Undoubtedly, according to the Maritime Code of PRC, Interpretation of the Supreme People’s Court on Several Issues about the Application of Laws for the Trial of Cases of Delivery of Goods without Presentation of Original Bill of Lading and international customs, the carrier and the Agency Company are only entitled to release goods against original copies of bill of lading, otherwise, they should bear liabilities of breach of contract or tort and compensate the loss of the B/L holder. Simultaneously, the legal B/L holder can file a lawsuit against the unauthorized cargo possessor and claim for return of the title or possession of the cargos, or for compensation if return is impossible. In this case, the legal B/L holder only filed a claim against the Agency Company but not the carrier for compensation, which reflects its autonomy to dispose its rights. After paying compensation, the Agency Company obtained the right of recourse.

In full knowledge of the illegality of the delivery of goods without presentation of original B/L, the Trading Company is in error, even in fraud due to its intentional activities of requesting the Agency Company to provide D/O against the Trading Company’s letter of guarantee by the reason of use for customs clearance, while actually for the purpose of taking delivery of goods. Therefore, according to the juridical explanation of the Supreme People’s Court, surely the Trading Company shall be responsible for compensation. However, some people point out that issuance of letter of indemnity, as one kind of guarantee, can not come into effect if it is used to guarantee conduct of violation, such as delivery of goods without presentation of B/L. I do not believe this opinion is adoptable because it could seriously disturb the order of international sale and carriage of goods. Actually, in Chinese legal practice, the issuer of letter of indemnity is obliged to bear responsibilities as promised.

Being aware of taking delivery of goods without presentation of B/L, the Industry Company shall bear joint and several liabilities arising from its confirmation of the delivery of goods without B/L and its guarantee of taking all liabilities incurred to the Agency Company.

For the liabilities of the Port Authorities, I think, according to the port operation practice, the carrier shall discharge all goods onboard and hand them over to the Port Authorities after goods’ arrival. The Port Authorities shall release goods to the authorized person indicated on the D/O and shall not release goods before being presented the D/O. In this case, the Port Authorities had released part of the goods before December 6, 2001, which proves the fact that the Port Authorities delivered goods without being presented the D/O. Moreover, according to the wording of the D/O, the person authorized to take delivery is Dongyue Factory rather than the Industry Company. The Port Authorities, failing to examine the D/O and releasing goods to unauthorized person, shall bear liabilities of compensation to the Agency Company.