COMMODITIES IN FOCUS
Of diamonds and promises
In this article
Andrew Rigden Green
considers the decision in KBC Bank NV v Brink’s Hong Kong Limited and
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.
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
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
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
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