Why would a shrewd seller even transact with a buyer who must pledge bills of lading, just to finance the transaction?

Question

1. I don't grok the facts of this case. What does refused to redeem the pledge when the bills of lading were tendered to them by Chabbra mean? Why must the buyers redeem the pledge, once Chabbra (seller) tendered the buyers the BoL?

2. Why would a savvy seller even transact with buyers who couldn’t pay for the transaction upfront? Aren't such buyers — who must pledge BoLs to finance a transaction — obviously risky and unreliable?

Chabbra Corp PTE Ltd v Owners of the Jag Shakti (The Jag Shakti) [1986] AC 337 (PC)

FACTS: Chabbra Corp PTE Ltd (the seller) shipped a cargo of salt on board the Jag Shakti (a ship belonging to the defendants). The buyers of the cargo had pledged the bills of lading to Chabbra in order to finance the transaction. The buyers persuaded the defendants to release the goods to them, without presentation of the bills of lading, by providing them with an indemnity, and then refused to redeem the pledge when the bills of lading were tendered to them by Chabbra. Chabbra sued the ship owners for conversion.

HELD: Chabbra was entitled in principle to recover the full market value of the goods at unloading from the carrier, though owing to a lack of evidence as to that value, it must be content with the sum it had advanced to the buyers.

Lee Roach, Commercial Law 2019 3e, p 39.

Answer 1

The note you have quoted does not accurately summarise the decision, which is available on BAILII. What happened was:

• IOC agreed to sell 5,000 tons of salt to Mumtazzudin.
• Atlas paid IOC for the salt on behalf of Mumtazzudin. Because Atlas paid, Atlas received the bills of lading. Thus, the salt was pledged to Atlas to secure the money owed by Mumtazzudin.
• Atlas endorsed the bills of lading over to Chabbra for value. In other words, Atlas sold Chabbra the right to be repaid by Mumtazzudin, and to take delivery of the salt as security for the debt.
• Mumtazzudin persuaded the shipowner to hand over the salt without presenting the bill of lading.
• Chabbra sued the shipowner for conversion (destroying the value of its security).

What does “refused to redeem the pledge when the bills of lading were tendered to them by Chabbra” mean?

Chabbra, as the pledgee of the bills of lading, was entitled to possession of the salt, until Mumtazzudin “redeemed the pledge” by paying Chabbra the amount originally advanced by Atlas. But Mumtazzudin managed to get the salt without the bills of lading, so it refused to pay Chabbra.

Why would a savvy seller even transact with buyers who couldn’t pay for the transaction upfront?

The alternative may be that the sale is not made at all. However, that is not what happened in this case – the seller got paid.

Answer 2

What it says

In international shipping, bills of landing act as a de-facto title deed over the goods in transit - the owner of the goods is the person who holds the bill irrespective of who has actual possession of the goods. So, even though the salt was on board the defendant's vessel it legally belonged to the plaintiff.

However, that all changes when the goods are unloaded. The bill of landing is not, strictly speaking, a title deed but rather it gives the holder the right to take delivery of the goods at the port. The plaintiff was persuaded to allow unloading by the defendant giving an indemnity that they would pay for the salt when the plaintiff gave them the bill of landing. This is the "pledge" that they subsequently refused to honour.

Most B2B goods and services are purchased on unsecured credit

Normal commercial operations of most businesses involve them extending credit from their customers and receiving credit from their suppliers. The business world operates on 30, 60, 90 or even 180-day unsecured credit - I borrow from them so you can borrow from me and it all works so long as everyone pays their bills.

Having security as in this case is a bonus! Giving it up for a promise was, as it turned out, unwise.