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Switch at your own risk! The thing about Switch Bills of Lading – an extension

20 May 2020

#Transport, Shipping & Logistics

Geoff Farnsworth

Published by Geoff Farnsworth

Switch at your own risk! The thing about Switch Bills of Lading – an extension

It’s hard to overemphasise the importance of bills of lading as instruments in international trade.

They are essential but often misunderstood.

As is widely known, bills of lading perform three functions:

  • evidence of a contract of carriage
  • receipt for the goods shipped
  • document of title.

The nature of the contract of the carriage will differ according to the nature of the bill of lading.

For Liner Bills, the contract is generally (and initially, at least) between the shipper and carrier, who may or may not be the owner of the carrying vessel. It is common that the carrier will be entitled to payment of freight by the shipper and will issue a freight invoice to the shipper or the shipper’s agent, who may be, for example, a freight forwarder.

In cases of bulk shipments on chartered vessels, Charterparty Bills of Lading are issued and is evidence of a contract between the shipper and commonly the shipowner. In the case of Charterparty Bills however, the shipowner will usually be paid freight or hire by the party who has chartered the ship known as the charterer. For this reason Charterparty Bills usually contain a notation ‘Freight Payable as per Charterparty’.

Both Liner Bills and Charterparty Bills are issued when the cargo is loaded on the ship and will describe the cargo loaded. They also identify the place of loading of the goods and the intended destination.

The form and content of bills of lading are relevant because Shippers need to negotiate the bills of lading to get paid by the buyers of the cargo, and those traders and merchants will pay for the goods based on the representations and undertakings made by the carrier or shipowner in the bill of lading. If those representations prove to be false or the undertakings are not kept, the carrier or shipowner will be liable in damages.

This brings us to Switch Bills of Lading. As mentioned above, both Liner Bills and Charterparty Bills are issued to the shipper or its agent after the cargo has been loaded and the carrying voyage commences.

Not infrequently, the holder of the original bills of lading may approach the carrier or shipowner and ask that the details on the bills be changed or ‘switched’. There are many good and legitimate commercial reasons why this may be so; the discharge port may change, the holders of the bills may wish to disguise or protect the identity of the original named shipper, or for financing reasons, the bills may need to be consigned to a named financier.

The effect of switching bills is to replace the contract evidenced by the original bills and replace it with a new contract, evidenced by the Switch Bills of Lading.

While switching bills is common practice, the legal consequences can be problematic. Carriers or shipowners are under no obligation to re-issue or switch bills of lading and in doing so will need to protect themselves against any unintended consequences of agreeing to switch. This is usually done by obtaining a letter of indemnity (LOI) from the party making the request.      

While there has always been something a little questionable about Switch Bills of Lading, it’s sometimes hard to explain exactly what. A recent decision of the NSW Supreme Court provides an excellent illustration.

The decision in Wollongong Coal v PCL (Shipping) Pty Ltd[1]

The facts are relatively straightforward and follow a pattern common in international trade.

  1. Wollongong Coal Ltd (WCL) sold coal to its parent company, Gujarat NRE Coke Ltd (Gujarat India).
  2. Gujarat India contracted with PCL (Shipping) Pte Ltd to carry the cargoes from Port Kembla to India. The judgment describes this as a Voyage Charter but it may have been a contract of affreightment, which is a series of Voyage Charters.
  3. PCL had a Time Charter with the Shipowner of the carrying vessel, MV Illawarra Fortune. PCL continued to pay hire to the Shipowner at all times and never defaulted under the Time Charter. 
  4. A cargo was shipped in August 2013 and Charterparty Bills of Lading (Original Bills) were signed by Shipowners, naming WCL as the Shipper. Therefore WCL was a party to the bill of lading contract with the Owners.
  5. At around this it appears that PCL issued a freight invoice to Gujarat India for approximately US$3.2 million under the Voyage Charter.
  6. On 21 August 2013, PCL issued a freight invoice to WCL. The judgment does not explain the basis on which PCL claimed to be entitled to be paid freight by WCL, nor who on 12 September WCL apparently paid PCL US$1M in freight (though it is probably related to the exercise of a lien on the cargo, by Shipowners).
  7. On 24 September 2013, WCL asked for the Original Bills to be “switched” and Switch Bills to be issued, naming New Alloys Trading Pte Ltd (New Alloys) as Shipper in place of WCL.
  8. PCL agreed to facilitate the switch. On 2 October 2013, when a representative from New Alloys delivered the Original Bills to PCL’s office, PCL marked each of the Original Bills ‘Null and Void’ on the Shipowner’s instructions and sent these marked bills to the Shipowner.
  9. On 3 October 2013, PCL sought an LOI from Gujarat India that indemnified PCL against any loss arising from the issue of the Switch Bills and on 4 October 2013, Gujarat India provided the requested LOI.
  10. On 4 October 2013, PCL provided a corresponding LOI to Owners who then released the new Switch Bills to New Alloys.         

As the above events unfolded, Gujarat India defaulted on its obligation to pay freight and charges under the Voyage Charter in the sum of about US$3.2 million. To recover those costs, PCL, who had taken an assignment of the Shipowner’s rights under the Original Bills, commenced proceedings against WCL. PCL claimed that WCL had an obligation to pay freight that paralleled Gujurat India’s as WCL was a party to the Original Bills which incorporated the Voyage Charter.

The effect of ‘cancellation’ of the Original Bills

The Court ordered that PCL’s claim be dismissed. Even if WCL had an obligation to pay freight under the Original Bills, that obligation was discharged when the Original Bills were cancelled and marked ‘Null and Void’.

The Court considered that the transaction was in effect a novation of contract. In routine commerce, novations are often executed by way of deed which usually contains provision preserving the liability of the original party as at the date of novation.

In the absence of a deed, the effect of the novation is that the old promise is discharged and a new promise on a new contract is created.

The Court was satisfied that this was the intention of the parties, as evidenced by the marking of the Original Bills ‘Null and Void’. From the date the Switch Bills were issued, New Alloys as shipper assumed any liability to pay freight.  

Unusual aspects of the facts is that the switching of the bills came at the request of WCL, while the LOI was procured from Gujarat India, not WCL. The Original Bills had also been endorsed by WCL by sign and stamp.

Order Bills of Lading are usually endorsed and marked ‘in blank’ by the shipper to render them negotiable. When endorsed in blank they are rendered Bearer Bills, such that the holder of the bill, whoever that may be, is entitled to possession of the cargo without recourse to the named shipper, who was presumably entitled to possession when the cargo was placed on the ship.

The Court considered that the in blank endorsement here indicated the consent of WCL to the cancellation of the bills. This may be true, to the extent that endorsement in blank by the shipper is a general statement to the effect that the shipper has relinquished its interest in the bills and cargo, by negotiation. Although we query whether it would have been the shipper’s express intention at the time of endorsement.  

But for the ‘cancellation’, would WCL have been liable to pay freight and other charges?

By way of recap, when commodities are sold and shipped in bulk, the following arrangements are regularly made:

  • the Seller sells the commodity to the Buyer (Sales Contract)
  • depending on the nature of the Sales Contract (that is, whether it is FOB, or CIF), the Seller or Buyer will enter into a Voyage Charter with the Carrier to load and carry the commodity to its destination and will pay freight to the Carrier
  • the Carrier will charter, under a Demise Charter, that ship from the Shipowner, and will pay freight to the Shipowner or perhaps hire, if it is a Time Charter
  • when the commodity is loaded on the ship, the Shipowner will issue a bill of lading to the Seller or Shipper which will incorporate the terms of the Voyage Charter and regularly includes the notation ‘Freight Payable as per Charterparty’.

So the question that regularly arises is: Can the Shipowner recover freight from the Shipper under the bill of lading, if the Carrier defaults in payment of hire under the Demise Charter?

In the instant case, WCL submitted that the effect of the notation ‘Freight Payable as per Charterparty’ was to confirm that only the Carrier or charterer under the Voyage Charterparty was liable to pay freight to the Owner.

The Court rejected that argument and applied long established English law under which:

  • the Shipper is prima facie liable to pay freight
  • the ‘Freight Payable’ notation operates as:
    • a direction by the Shipowner to the Shipper as to how the Shipper is to pay that freight
    • a delegation by the Shipowner to the party payable under the relevant Charterparty, being the Carrier
    • the appointment by the Shipper of that party (the Carrier) as its agent for that purpose.

In other words, while a Shipper might have a prima facie obligation to pay freight under the bill of lading, the effect of the notation is to declare that the Shipper’s liability to the Owner under the Bill of Lading will be satisfied by the Carrier paying freight to the Owner. The necessary corollary of this that if the Shipowner does not receive freight from the Carrier, they may recover it from the Shipper who has received the benefit of the carriage of the goods.

In the instant case, PCL had no obvious claim against WCL for freight under the bill of lading, Charterparty or LOI, and the Shipowner had been paid by PCL so it had suffered no loss.

Nevertheless, PCL took an assignment of the Shipowner’s rights under the bill of lading and sought to pursue recovery from WCL. Could it succeed?

Again, following English authority, the Court said it could. The Court cited Tomlinson LJ in the Dry Bulk Handy Holding Inc v Fayette International Holdings Limited [2013] 2 Lloyds Rep 38, where His Honour said: “As between himself and the shipper, I can see no basis upon which it can plausibly be suggested that the shipowner’s right to require payment of the bill of lading freight to himself … can be regarded as conditional upon an intermediate charterer having defaulted his obligations.”

This the Court found was “clear authority that [a Shipowner’s] entitlement to look to the shipper for payment of the freight does not depend on whether the [Shipowner’s] time charterer has made default under the time charter”.

However one element that appears unresolved is that unlike the Shipowner in Bulk Chile, the Shipowner in this case had been paid what it was owed and was not out of pocket. Even if the default of an intermediate charterer was not a condition precedent to the exercise of rights against a shipper, one might have thought that the Shipowner needed to demonstrate that it had suffered a loss, which in this case, it had not.

Could PCL claim unpaid demurrage, dead freight and other costs?

PCL had taken an assignment of the Shipowner’s rights under the bill of lading, which itself incorporated the Charterparty.

Having found that Shipowners and therefore PCL, on assignment were entitled to claim freight from WCL under the bills of lading, were Shipowners or PCL also entitled to claim other amounts payable under the Charterparty? Note that the relevant Charterparty, being the Voyage Charter, was between PCL and Gujarat India.

Following the reasoning of Lord Denning in The Annefield [1971] P 168 at 184, the Court found that for WCL to be liable to pay demurrage, on a proper construction of the Charterparty as incorporated into the bill, the parties to the Original Bill must have intended that the Shipper and not just the Charterer, might be liable to pay demurrage. The Court concluded that it was unlikely that the parties had this intention, given the lack of control the Shipper would have over the loading and discharge of the cargo. The Court made similar findings in relation to dead freight and other charges claimed by PCL.

Conclusion

While the factual scenario behind this decision is not uncommon, it demonstrates the routine complexity of shipping and international trade and how intentional or unintentional manipulation of one element of the structure can result in significant problems and liabilities.

When agreeing to Switch Bills of Lading, the parties must be attentive to ensure that their rights are protected they are not exposed to any unintended consequences.  

Author: Geoff Farnsworth

[1] Wollongong Coal Ltd v PCL (Shipping) Pty Ltd [2020] NSWSC 184

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Geoff Farnsworth

Published by Geoff Farnsworth

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