Comments on the Madras High Court Ruling and Risks of Accepting Charter Party Bills of Lading

Vijay Ramanuiam – a respected expert in export credit and letters of credit – recently shared with me an article titled “Shipowner on Hook for Swiss Bank’s Gulf Petrochem Loss”, authored by Felix Thompson and published in Global Trade Review on 23 July 2025.

Read the article here.

The piece covers a significant decision by the High Court of Madras (India), in which Galaxy Marine Services Ltd., owner of the vessel MV Polaris Galaxy, was ordered to pay US$6.7 million to Banque Cantonale de Genève (BCGE), a Swiss bank.

Vijay asked for my views on the case, and I am pleased to share my thoughts – both on the court’s decision and the broader implications for banks that accept Charter Party Bills of Lading (CPBL) in letter of credit (LC) transactions.

1/ On the Court Ruling

The Madras High Court’s judgment reinforces a long-standing legal principle: a shipowner who delivers cargo without presenting the original bill of lading (BL) does so at their own peril. Even if acting on a Letter of Indemnity (LOI) provided by the charterer, the shipowner remains liable to the lawful holder of the BL — in this case, BCGE.

This ruling is a strong reminder that financing banks are not bound by commercial understandings between charterers and shipowners, especially when original BLs are bypassed in the cargo delivery process.

2/ A Warning to Banks Financing Against CPBLs

This case also serves as a timely caution for banks financing cargoes under CPBLs. Risks are significantly amplified when the seller is also the charterer, as they can instruct the vessel to discharge cargo without production of the original BLs — thereby compromising the bank’s security interest in the goods.

3/ Risks of Using CPBLs in LC Transactions – and How to Mitigate Them

Key Risks to the Applicant

• Cargo loss due to vessel arrest or diversion

→ If the charterer (i.e., the applicant or beneficiary) defaults on charter hire or breaches the charter party, the shipowner may seize or redirect the vessel and cargo.

• Premature or unauthorized delivery

→ The charterer might instruct delivery without presentation of the BL, especially under time or bareboat charters.

• No access to cargo despite payment under LC

→ The applicant may lose the ability to claim goods even after honoring reimbursement obligations.

 Key Risks to the Issuing Bank

• Obligation to pay under LC despite cargo issues

→ Banks must pay if documents are compliant, even if the cargo is seized, misdelivered, or undelivered.

• Non-reimbursement risk

→ If goods are not received, applicants may default, leaving the bank exposed.

• Limited legal recourse

→ CPBLs often contain charter party terms that dilute the legal protections normally afforded by standard bills of lading.

What Issuing Banks Should Do

Deep KYC and Due Diligence

• Determine if the applicant or beneficiary is also the charterer.
• Understand the nature of the charter party: voyage, time, or bareboat.
• Check for any dual roles that might create conflicts of interest.

Accept CPBLs Only for Trusted Clients

• Approve CPBLs only when the applicant:

+ Is financially strong,

+ Has a solid history with chartering arrangements,

+ Has a reliable reimbursement record.

Obtain a Separate Applicant Undertaking

• Require a written commitment outside the LC whereby the applicant:

+ Unconditionally agrees to reimburse the bank,

+ Assumes full responsibility for cargo-related risks, including seizure, diversion, or wrongful delivery.

Impose Strict LC Terms If CPBLs Are Unavoidable

• Structure the LC to:

+ Require original BLs for delivery,

+ Exclude clauses allowing delivery against LOI or charterer instructions,

+ Identify a neutral carrier, unaffiliated with the applicant or seller (where feasible).

Note:

Even the most stringent LC clauses cannot eliminate operational risks associated with CPBLs. LC language provides legal comfort but not always practical protection.

Policy Recommendation

Banks should only accept CPBLs under LCs when:

• Robust due diligence on the applicant has been performed, and
• A comprehensive written undertaking is in place.

In all other cases, standard ocean bills of lading issued by independent, common carriers should be required to preserve the bank’s control over the cargo and mitigate exposure.

 Final Note

I hope these insights are useful for fellow professionals navigating the complex terrain of trade finance. CPBLs have their place in bulk commodity trading, but they demand heightened vigilance and disciplined risk management from banks.

Vijay Ramanuiam’s Feedback:

“Thank you, Mr. Old Man – precise and sagely as always. You’re doing a yeoman’s service to this shrinking club of LC aficionados. In today’s world, bankers talk endlessly about supply chain finance and open account, often dismissing LCs altogether. What extra precautions should banks take when dealing with CPBL LCs, which remain common in bulk trade?”

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Mr. Old Man, July 2025