The Federal Court’s View of ‘Freight Forwarders’ in Malayan Banking Bhd v Punjab National Bank [2022] 4 MLJ 758

There are many issues concerning financing of an international trade transaction in this case. However, the matter which is of interest to a ‘Maritime Law Geek’ (note this is the name of the author’s Twitter account) is whether the bill of lading presented here was an Ocean Bill of Lading (OBL) (also known as a Shipped Bill of Lading, SBL) issued by the ‘sea carrier’, or a House Bill of Lading (HBL) issued by a ‘freight forwarder’. Only the former was valid tender under the international letter of credit (LOC) system, and the latter is a discrepancy in the financing system. In this case, Maybank had paid the seller of the goods, but Punjab Bank refused to reimburse Maybank on the ground that the bill of lading tendered was a HBL issued by a freight forwarder.

In the Hight Court (HC), it was held that, prima facie, the bill of lading was an OBL that complied with the terms of the LOC. Note that under the LOC system, the doctrine of strict compliance was applicable. Hence only documents that strictly complied with the terms of the LOC were valid tender. Punjab’s Bank refusal to honour the undertaking to reimburse Maybank was invalid, as Punjab Bank’s ’notice of refusal to honour the undertaking’ was invalid as it was not sent directly to Maybank as direct by the UCP-600. Note that this is the Uniform Customs and Practice for Documentary Credits, issued by the International Chamber of Commerce (ICC).

The Court of Appeal (CA) set aside the High Court’s decision. Under the terms of the LOC, the Seller was required to present a OBL, not a HBL. Therefore, when Maybank released the money to the Seller based on a HBL issued by a freight forwarder, this was a fundamental breach of the LOC, not merely a discrepancy. Punjab Bank was not required to give notice as this was a case of a fundamental breach.

The Court of Appeal described the HBL issued by a freight forwarder as a ‘weak form of document’ as compared to an OBL. The Court of Appeal noted that an OBL is issued by the owner / charterer / sea carrier. It therefore provides evidence that the goods have been loaded on board the ship. The OBL has details of the sea carrier as well as type, quantity and destination of the goods. By contrast, the Court of Appeal explained that the HBL issued by a freight forwarder is more of a domestic document as there is no assurance that the goods have actually be loaded on board the ship.

Maybank appealed to the Federal Court (FC) and the issue was what was exact the legal nature of the bill of lading. In order to determine this, a related issue is to what extent should a negotiating bank examine the documents submitted under the terms of a LOC. The FC bench was made up of Nallini Pathmanathan FCJ, Zaleha Yusof FCJ and Harmindar Singh FCJ. The judgment of the Federal Court was delivered by Harmindar Singh FCJ.

His Lordship held that Punjab Bank was aware that the notice of refusal was mandatory and a common feature of international LOC transactions if they chose not to reimburse Maybank. Punjab Banks allegation that the document was a HBL issued by a freight forwarder was untenable. Even though the document was signed by a freight forwarder, Harmindar Singh FCJ held that it was not a HBL, nor was it issued by a freight forwarder. There are two reasons for this. First, no evidence was adduced by Punjab Bank to show that Diffreight Agencies (M) Sdn Bhd (DA) was a freight forwarder. A bare assertion that DA was a freight forwarder was misconceived and not sufficient to establish this point. Second, DA signed the document as ‘agent on behalf of’ the sea carrier Diffreight. Therefore, prima facie, a cursory examination of the document showed that it was a OBL issued by Diffreight signed by its agent DA. It could not be a HBL issued by a freight forwarder.

A number of observations could be made of the approach adopted by the Federal Court. First, an in-depth detailed examination of the true nature of the document was not necessary. There was no duty on the banks to investigate and look further into the nature of the document. Harmindar Singh FCJ cited Gian Singh & Co Ltd v Banque de L’Indochonie [1974–1976] SLR(R) 83 in support of this proposition. Hence, it is submitted that there was no need to make an inquiry as to whether DA and Diffreight were actually a single economic unit and whether the veil of incorporation could be lifted to see whether both parties were effectively the same. There was also no need for the argument that DA was effectively operating a forwarding business and the purported agency is a sham.

Second, the Federal Court dealt with the document itself. The Court briefly described some characteristics and did not really sort out what was the fundamental legal nature of a freight forwarder. This author has attempted to describe a freight forwarder in an article titled ‘The Pandora's Box of Unimodal Regimes in a Multimodal World: Reasons Why Malaysia Needs a Multimodal Framework’ [2007] 1 MLJ cxlviii with the following words:

A freight forwarder would arrange for the goods to be collected from the doorstep of the consignor and ensure that it is delivered to the doorstep of the consignee. The task of obtaining the right carrier for each mode of transport would be left to the freight forwarder. From the point of view of the consignor, a daunting practical challenge is simplified as dealings are now confined to the freight forwarder. Documentation is also simplified as the freight forwarder would usually issue a house bill of lading. The consignor need not worry about obtaining a rail consignment note from the rail carrier, shipped bill of lading from the sea carrier, or a road consignment note from the road hauler. The freight forwarder would contract with each of those unimodal carriers and obtain the relevant documents to facilitate the transport of the goods. The only cargo document that would be in the possession of the consignor would be the house bill. The freight forwarder is therefore not a carrier, but merely an auxiliary person, a professional intermediary between cargo interests and the carrier, who arranges and organizes the carriage of goods from departure to destination and who neither undertakes to carry the goods himself nor accepts liability as a carrier.

This passage was referenced in Etonic Garment Manufacturing Sdn Bhd v Kunn-G Freight Systems (M) Sdn Bhd (Malaysian Airline System Bhd, third party) [2011] 3 MLJ 98 (High Court, Kuala Lumpur) per Amelia Tee Abdullah JC at para [75].

In conclusion, the Federal Court merely reasoned that there was no discrepancy in the document tendered. It was indeed an OBL (not a HBL) and was thus in accordance with the doctrine of strict compliance in international LOC transactions. There was no duty to investigate beyond the documents as it would be unrealistic and burdensome. There was no basis for Punjab Bank’s assertion that there was a fundamental breach which authorised the refusal to honour reimbursements to Maybank. The status quo in international LOC transactions was thus preserved, the primacy of the UCP was restored and the Court of Appeal’s attempt to take the financial as well as the insurance industry down a rabbit hole of uncertainty did not materialise in the end.

Thank you for reading IMSML Website Article 17/2022

Stay tuned for the next IMSML Website Article 18/2022:

A Rare Insight into a Decision of the Magistrate’s Court in Quantarad Technologies Sdn Bhd v Everest Integrated Logistics Sdn Bhd [2022] MLJU 733 at the Tail End of a Supply Chain

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

28 October 2022

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my