Pitfalls in Bills of lading -taking a peep at its performance in export banking


[19 March 2008]


(This article was previously published in China Foreign Exchange, Feb. Issue, 2008 in Chinese version.)

Many people believe that ocean bills of lading (hereafter, “B/L”) is a document of title i.e. holding the B/L is as having goods in hand. However, how does it work in reality, for instance, in banking settlement of export transaction? Lawsuits and disputes involved in B/L from time to time contradict our notion of what a B/L is. Therefore we are urged to take a new look at the B/L as to its function, especially its pitfalls other than its merits in export sales.

B/L Covering Consolidated Cargo under L/C

In export practice, in order to save shipping charges and container space, the beneficiary of the L/C (usually as exporter) sometimes arranges his cargo under the L/C to be consolidated together with other consignments in one container – if the L/C cargo is not enough to fill the whole container. Therefore it is a usual phenomenon that the carrier would issue several sets of Bs/L for one container. However, such issuance of B/L should be processed with caution when the B/L is to be presented under an LC. Otherwise something not so desirable for the beneficiary could turn out afterwards … …

Here is a lively case taken from banks: Company A in China received an L/C in his favor in January 2007 issued by a bank in Tunisia, LC amount USD37000 covering goods of CD. In March 2007 Company A shipped the cargo and presented documents through its bank to the confirming bank in Hong Kong, with presenting bank’s statement certifying that all terms and conditions of the credit had been complied with. Later, documents were refused by the confirming bank due to the following reason:

B/L showing ‘All bills of lading involved must be surrendered for delivery of the container.’

After a brief investigation, the beneficiary confessed that there were totally 3 sets of Bs/L related to the container. The one presented was only part of the series. They did so just for saving container cost, since the container is big enough for the LC cargo and goods of other sales.

Then any consequence arising? Any reason to justify the confirming bank’s rejection? Obviously, this is a typical case of B/L covering consolidated cargo; the exclusive part is its relationship with LC. In truth, it meets the credit terms as well as the requirement of UCP500 Art.23 which by no means prohibit consolidated shipments. However, the devil lies in the clause above. It implied in B/L with simplicity: the LC cargo was represented not only by this B/L but also by other more; and further, delivery of the cargo should not be determined only by this B/L. In other words, release of such cargo should depend on the surrender of all issued Bs/L. Then we had to face the reality: how many other more B/L involved in the container? How to take the delivery of cargo if other B/L not surrendered? How long to wait for it? … … Things were so uncertain that it had to be concluded that this B/L actually didn’t definitely render its holder to obtain the goods, even if it had been paid by the applicant (usually the importer) under the LC. Imagine the applicant, having paid for the B/L, and still has to wait for other holders involved to come forward just for the delivery of his cargo, is there any assurance for him to possess the goods? In consequence, due to its severe damage to the function of B/L (as a title document), the statement shown above justified the confirming bank’s refusal. This is also in line with ISBP 645 Paragraph 99: If a bill of lading states that the goods in a container are covered by that bill of lading plus one or more other bills of lading and the bill of lading states that all bills of lading must be surrendered, or words of similar effect, this means that all bills of lading related to that container must be presented in order for the container to be released. Such a bill of lading is not acceptable.

Similar case was also addressed in ICC Banking Commission Unpublished Opinions 1994-2004 (ICC PUBLICATION NO.660) Query TA99 (Note 1). The issue: delivery of the goods under the LC was conditional or the production of another B/L and whether this restricted the ability of the receiver to take control of goods on arrival of the vessel? Analysis and conclusion: the bill of lading presented, whilst conforming to the credit terms and the requirement of Art.23 UCP500, including clause “part load with bill of lading MLA02, no separate delivery”. This clause potentially restricts the ability of the receiver to take control of the goods on arrival of the vessel. If the holder of B/L MLA02 does not come forward, the issue of release of the goods could become a long and protracted one. The clause or similar would constitute grounds for rejection.’’

As mentioned above, the pitfall of such B/L is hidden in its notation clause. This, however, should be prudently detected, especially when it is of consolidated shipment under LC. In this regard, exporters need to be cautious enough if they have to present B/L with consolidation shipment under credit. To assure the control of cargo after the surrender of B/L, there are some tips to consider:

  1. The shipped cargo to the applicant should be covered by one B/L; otherwise all B/L should be singly surrendered in order for the container to be released if the cargo is involved in more than one B/L. 
     
  2. Pay special attention to notation of the B/L. In case the B/L includes clause like “all bills of lading involved should be surrendered for the container” or “1/2 part of container, no separate delivery allowed”or of similar wording/effect, just contact the carrier to ^Delete^ it. Those wording, if still remaining there, would inevitably damage the issuing bank’s potential security interests in the cargo and hence constitute the ground for refusal.

Pitfalls in Straight B/L


B/L has played an important role in the international transactions. It is essential to get familiar with its forms and function. In general, according to the consignee, B/L can be classified into 3 types:

  • Order B/L (being consigned to order or order of a designated party), 
     
  • Bearer B/L (being consigned to a bearer) and 
     
  • Named B/L (usually as Straight B/L, being consigned to a named party).

As the most essential part of its function, B/L may serve as evidence of title (Note 2). This is true if the B/L is negotiable, i.e., an Order B/L or a Bearer B/L in which the title to goods can be transferred to another party by mere endorsement and delivery. Acknowledgement of such characteristic is vital for the exporter, who may use such B/L as a security for payment in export sales.

However, things are not the same with a Straight B/L. Since a Straight B/L is made out to a designated consignee, the consignment (merchandize) must be, only released to the named party when the cargo arrives at the destination, therefore absent of the main feature of negotiability as a document of title. Moreover, Straight B/L, in most countries, is not for further transfer according to provisions. In some jurisdictions, it even doesn’t have to present an original Straight B/L for delivery of cargos. Such “practice” was supported in the Brij Case (July 2000, Hong Kong) (Note 3), the judge said that there was no breach in contract and tort if cargo is delivered to the named consignee in Straight B/L without production of original B/L. In this case, the deficiency arising from a Straight B/L will lead to a potential risk for an exporter, who may fail to distinguish the difference between a Straight B/L and an Order B/L and intend to use a Straight bill as a lever or security for payment. In essence, however, a sensible exporter should be aware that retaining a B/L in hand as a security for payment is actually not fully enforceable when the B/L is made out as a Straight B/L. Sometimes it may become a desperate illusion if he has such a naive intention.

Proof of such deficiency in Straight B/L can be found in banking cases. In 2006, Company B in China signed a contract of sales for slippers with Company C in Israel, with an arrangement of documentary collection for payment. After shipping the cargo, Company B presented documents (including a Straight B/L with Company C as the Consignee) to its bank for collection. Consequently, the documents reached the collecting bank in Israel with instructions "deliver the documents against payment".

However, Company B didn’t get the payment long after the cargo arrived at destination. They also found it in vain to keep in touch with Company C: e-mails, cell phones and faxes were all without any reply. To avoid a total loss, they tried to find a new buyer and intended to amend the collection instructions. However, when they traced the cargo on the network, they were shocked to find that the container had been released to whomever they didn’t know while the original documents still remained at the counter of the bank! After a long stretching contact, they got the reply from the shipping agent: the cargo was released to the consignee as stated in the B/L (i.e. to Company C). According to the overleaf clauses, in case of non-negotiable B/L (i.e. Straight B/L), the carrier shall release the cargo to the designated consignee against the evidence of identity without production of original bill…….. What a dreadful nightmare! It was obvious that even the full set of documents returned back to Company B, they would be still unable to obtain the goods against the original B/L. This was the fault of Straight B/L; this was also the fault of their innocent ignorance!

Lawsuits related to Straight B/L are surprisingly numerous, one of which has been published in China Daily dated Mar.02,2002, the case of Jiangsu Light Industrial Products Imp & Exp Group Corp V. Jiangsu Globe Foreign Trade Transportation Co., Brilliant International Corp. USA(2002, China) (Note 4). This was also a case of disputes over release of cargoes without production of original Straight B/L. The plaintiff Jiangsu Light Industrial in China contracted to sell cargoes of suitcases to China (U.S.A.) INC. in U.S.A.. The defendant Jiangsu Globe, on behalf of Brilliant USA, issued Straight B/L for the relative cargo, which showed Jiangsu Light Industrial as shipper and China (U.S.A.) INC. as consignee. Upon arrival at destination in Miami, the cargo was released to China (U.S.A.) INC without surrender of original B/L. As the plaintiff had not been paid for the cargo, they brought an action against the defendant for mis-delivery. The main issue of this case was: what law shall be applied to the dispute resulted from delivery of goods without production of original B/L? The court held: In accordance with the overleaf clauses of the B/L, the validity of B/L should be subject to COGSA 1936. Since it was not expressly stipulated in COGSA 1936, as to how to deliver goods under the Straight B/L, this case should be subject to the common law of USA, such as the Bill of Lading Act 1916, or the Uniform Commercial Code of America. In according to UCCA Art.7, such B/L (Straight B/L) should be non-negotiable. Under a non-negotiable bill, the carrier may deliver the cargo to the named consignee after the arrival at destination if the shipper had made no contrary instructions before such delivery. As the plaintiff had neither included in the Straight B/L the term of “delivery against the original B/L”, nor made a prompt request for stopping delivery before Brilliant USA delivered the cargo to the named consignee, it should be deemed due and lawful for Brilliant USA to deliver the cargo to the designated consignee.

Once again, the conclusion of this case underlines the brilliant view of Benjamin’s Sale of Goods (5th Edition) P990: under a Straight bill (of lading) the Carrier is entitled and bound to deliver the goods to the originally named consignee without production of bill of (lading) (Note 5).

Given that Straight B/L is of no legal effect of a document of title, the exporter should adopt a prudent approach if he has to use such bill in his export sales. Careful consideration should be applied in the relevant export banking:

  1. When the L/C calls for Straight B/L 

    LC is the most widely used finance instrument in export sales, through which the issuing bank furnishes its credit in place of that of the applicant (the importer). However, the bank’s payment undertaking is conditional, depending on complying presentation of export documents. Therefore, when the exporter agrees to use the Straight B/L for a LC payment, he should be sensibly aware that it is not likely to place reliance on such transportation documents, when he is eventually not paid because of his document defects. Moreover, it would allow the applicant to obtain possession of the goods without taking up documents in banks----in this sense; Straight B/L is actually not desirable in LC transactions. 

    I
    n case the LC requires Straight B/L, what the exporter has to do is to ensure his documents strictly satisfying the credit. 
     
  2. Under D/P (Documents against Payment) Collection

    In this arrangement, the shipping documents are released only upon importer’s payment for goods. However, compared with a LC transaction, such arrangement, due to lack of bank’s guarantee, represents a higher level of risk imposed on the exporter. His expects for payment totally relies on the importer’s credit worth. In this regard, it had better not allow Straight B/L if there is no long-term relationship or mutual trust between each other. The great concern is that : it may allow the importer to obtain the goods without having to taking up documents in banks.

    In case the Straight B/L has to be allowed in collection, the exporter should have better knowledge of the terms and clauses of the bill. Bills such as that of Maersk Line has got some small prints on its front: where the bill of lading is non-negotiable, the carrier may give delivery of the goods to the named consignee upon reasonable proof of identity and without requiring surrender of an original bill of lading. Definitely, such clause is an apparent threat to the exporter’s control of his goods if he does not prepare to do so. For a prudent consideration, he should include a specific clause as to confine the delivery of cargo only upon surrender of original B/L in the transportation documents. Accordingly, he can at least remain his title to goods if he is ultimately unpaid. 
     

  3. Straight B/L in Open Account

    In practice, the exporter initially faxes the original B/L to the importer and sends the documents after receiving the payment. However, since the cargo would be already loaded and shipped en route, the exporter has little recourse against the importer if he remains unpaid. Furthermore, even without original B/L, the importer would be also capable of possessing the cargo against the identity of consignee. Therefore, under the unsecured open account, an “Order B/L” is the first option for the exporter to minimize his risk of non-payment.

    If, however, a Straight B/L has to be granted in such arrangement, he should similarly comprise a specific clause in the bill, which needs to confine the delivery of goods only upon production of original B/L. Besides, special care should be taken to trace the shipped cargo for his security concern. Don’t forget to keep close contact with shipping company in case of any unexpected alarm.



    Reference:

    1. ICC Banking Commission Unpublised Opinions 1994-2004 (ICC PUBLICATION NO.660)

    2.International Sale of Goods (1991, published by Croner Publications Ltd.)

    3.Bills of Lading Disputes by Vincent Xu( 2007, Hong Kong)

    4. www.ccmt.org.cn   

    5. Benjamin’s Sale of Goods (5th Edition)


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