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Burning Question

Fit the bill

11/12/2012

Ince & Co LLP

Question

What is the commercial role of a bill of lading?

Answer

A bill of lading is a key document underpinning the carriage of goods by sea and performs several functions in facilitating international trade. Typically, when a cargo is loaded on a ship, the carrier will provide a bill of lading to the cargo owner, who is usually the shipper of the goods. The shipper will be placing the goods on board in order to fulfil a contract of sale with a buyer in another country.

Document of title

A bill of lading is a document of title. Most international buyers will not wish to pay in advance for the goods. They will, as a minimum, want to know that the goods are on a ship making its way to them before making payment. On the other hand, the seller will not want to ship the goods before being guaranteed payment for them. The contract of sale will usually provide therefore that the buyer must pay for the goods against the presentation of documents, including the bill of lading.

During the voyage, the goods will be beyond the physical reach of both buyer and seller. The usual procedure is for the shipper/seller to take possession of the bill of lading from the carrier once the goods have been loaded onto the ship and endorse it to the buyer by signing it. Once the buyer has possession of the bill, and has become its lawful holder, he will have the right to demand delivery from the carrier at the discharge port. In the meantime, the bill of lading acts as the buyer's "key to the floating warehouse".

Alternatively, the buyer may resell the goods under a sub-contract, arrange for the bill to be endorsed to a sub-buyer and pocket the difference in price. The end-buyer who collects the goods from the carrier is known as the receiver. The intermediate buyers may be disinterested traders who are merely speculating on the future value of the goods.

It may be difficult to transfer the bill to the receiver before the ship arrives. If the bill is not available and the goods are discharged to the wrong party, such as a fraudster, the carrier may be liable to the true owner for misdelivery of the goods. However, the carrier may rely on a promise of an indemnity in order to deliver the goods in the absence of the bill of lading. This promise may be given by the receiver who wishes to take delivery of the goods or by a charterer who will be liable for any delay at the discharge port and will therefore want the goods to be discharged promptly to avoid such delay.

Receipt

The bill of lading may contain a description of the goods, their quantity and condition, and will be signed on behalf of the carrier when the goods are loaded. If the bill identifies that the goods are damaged or inferior in some way, the seller may experience difficulty in using the bill of lading to fulfil the contract of sale. Such a bill is known as a "claused bill of lading" and will have a lower commercial value.

Accordingly, the carrier may be under commercial pressure to not clause the bill even where the condition of the goods is questionable. The carrier may even be offered a promise of indemnity for not doing so. However, this promise may be unenforceable as it could constitute a fraud against the receiver, who may be misled into believing that the goods are in a superior condition.

A bill which confirms that the goods have been shipped in apparent good order and condition is known as a "clean" bill of lading. If the goods are then delivered damaged, the bill may be used as evidence that the damage occurred during the voyage.

If the market for the goods falls unexpectedly, there may be a commercial incentive for a receiver to try to escape from their contract of sale or bring a claim to recoup their loss.

Under the sale contract, risk in the goods (ie, liability for third-party events) will pass on loading even if payment takes place later, since it may be impractical to prove at what stage during the voyage goods were damaged. Therefore, if goods carried under a clean bill are delivered damaged, the receiver may have a claim against the carrier and not against the seller, who fulfilled their bargain by tendering a clean bill.

Contract of carriage

The receiver's claim against the carrier lies in contract. This may seem odd if the contract of carriage is originally entered into by the shipper and the receiver is not a party to the contract. However, the Carriage of Goods by Sea Act 1992 provides that the bill of lading holder's rights of suit are transferred when the bill is endorsed, enabling a receiver who is the lawful holder of a bill of lading to sue under the bill.

The terms and conditions of the contract are normally set out on the back of the bill. The bill of lading contract is likely to incorporate international rules for the carriage of goods by sea, such as the Hague or Hague-Visby Rules, which set out the carrier's duties to care for the goods and the available defences to any claim.

As the antiquated name would suggest, a bill of lading is merely a piece of paper. However, it is hard to imagine how all of its commercial functions could otherwise be performed, even using technology.

Chris Ward is a newly qualified solicitor at Ince & Co LLP.


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