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COMMODITIES IN FOCUS

6

Of diamonds and promises

In this article

Andrew Rigden Green

considers the decision in KBC Bank NV v Brink’s Hong Kong Limited and

others (2016).

Stephenson Harwood recently represented the successful Bank before the Court of Final

Appeal of Hong Kong, in respect of a consignment of diamonds that had been misdelivered.

Facts

KBC provided banking facilities to an Indian diamond

supplier called Rupam Impex, who in turn entered

into a Deed of Hypothecation whereby diamonds with

a total value of US$852,339 were pledged to KBC as

security for the banking facilities.

The pledged diamonds were sold to a Hong Kong

buyer and Rupam Impex entrusted Brink’s (as the

carrier) to deliver the diamonds to Hong Kong in

three lots under three air waybills. Bank of East Asia

(“BEA”), agent for KBC, was named as the consignee

in the air waybills. The air waybills were then handed

over to KBC in accordance with the terms of the

banking facilities.

Brink's collected the diamonds when they arrived in

Hong Kong and released them to the buyer without

the consent of KBC or BEA. The buyer had not paid

for the diamonds. KBC therefore commenced

proceedings against Brink’s in the High Court of Hong

Kong for conversion of the diamonds.

Pledge of goods or hypothecation

The main issue in the Court of First Instance was

whether, under the Deed of Hypothecation, the

diamonds were pledged to KBC, or hypothecated.

This determined whether KBC had a right to sue

Brink’s.

A hypothecation only creates an equitable charge

over goods which remain in the possession of the

hypothecator (here Rupam Impex). The bank has no

control over the goods and only has the right to sue

the debtor (Rupam Impex) on the debt and execute

against the goods.

Under a pledge, however, the goods must be

delivered to the pledgee, whether physically or

constructively (by delivery of a document of title, or

key to a warehouse containing the goods). If the

diamonds had been delivered to KBC, then Brink’s

held the diamonds on their behalf and had a duty to

deal with them only in accordance with KBC’s

instructions. Delivery to the buyer was not in

accordance with KBC’s instructions as they had not

been paid.

If there was no pledge of the goods, KBC would not

be able to sue Brink’s for conversion of the diamonds.

“Delivery to the buyer was not in

accordance with KBC’s instructions

as they had not been paid”

Document of Title

In international trade we are familiar with the fact

that a bill of lading is a negotiable document of title.

It can be transferred from one person to another by

indorsement and the lawful holder of the bill of lading

is the person entitled to delivery of the goods.

KBC argued that the handing over of the air waybills

by Rupam Impex to KBC constituted constructive

delivery which perfected the pledge and thereby

allowed KBC, as the pledgee, an immediate right of

possession to the diamonds.

However, under Hong Kong and English law, air

waybills are not negotiable in the same way as bills of

lading. They cannot be transferred from one person

to another by indorsement or any other means.

The court considered the leading Hong Kong and

Commonwealth cases dealing with constructive

possession of goods by delivery of other documents

(such as trust receipts, cargo receipts and mate’s

receipts). It decided that air waybills could not be

treated as giving constructive possession of the

goods to KBC’s agent, BEA. The pledge was not

perfected, therefore KBC had only a hypothecation

and no title to sue Brink’s.

Is a document of title necessary?

KBC appealed. The Court of Appeal held that the

judge below was wrong to fixate on whether or not

the air waybill was a document of title.

The Judge had placed strong reliance on a Malaysian

case where mate’s receipts had apparently been

considered to be documents of title. However, on a

proper analysis of the Privy Counsel’s decision, the

reason for the judgment was not because mate's