NSW District Court decision shows the risks in the issue of Bills of Lading

A decision of the NSW District Court delivered on 16 October 2017 has created massive levels of concern in the freight forwarding industry as it led to an order for significant damages against a freight forwarding company based on bills of lading (BL) which it had issued but were used for purposes other than originally intended.

As a result the decision has formed an important part of the Custom Brokers & Forwarders (CBFCA)/Rigby Cooke Lawyers member forums being conducted around the country at the moment. The response of CBFCA members is being collated and will form the basis for a webinar once the forums have been completed. However, in the meantime, some preliminary commentary is warranted on the decision which should be read together with my other comments on the decision in the context of the financing and insurance of the supply chain in a recent edition of the DCN.

Bills of lading – as important as ever

It needs to be remembered that BL in their different forms have formed the backbone to mercantile practice for many years and the importance of the original BL continues even in a digital world. Their status as original paperwork can have a number of impacts. For example, delays in delivery of original BL due to problems in air transport can delay the release of sea cargo. Loss of BL can create delays as those who lose the BL need to negotiate the release of cargo with shipping lines. Purchasers of goods are, on occasion, subject to demands for extra payments by unscrupulous suppliers just to provide the BL, even after agreed payments have been made.

The Court looked carefully into some of the academic commentary on BL including the observations in a textbook on BL that ‘Like an elephant, a bill of lading is generally easier to recognise than to define’. The judgement includes a number of other references to the same text including the following:

‘A bill of lading is a document. Generally it must be signed by, or on behalf of, the carrier by sea. Three common characteristics of a bill of lading are that (a) it constitutes a receipt for the goods shipped or received by the carrier, (b) it constitutes a document of title for such goods and (c) it contains or evidences the contract of carriage by sea relating to the goods. A document which has all these characteristics will almost certainly be a bill of lading, and a document which lacks any of them will rarely be’

‘The tripartite function of bills of lading underlies both their importance and the complexity of the law relating to them. Being documents developed by mercantile custom to facilitate international trade, they formed an essential part of a mechanism for transferring both property in the goods and the right to enforce the contract of carriage. This transfer of property generally occurs by endorsement and delivery of the bill from one holder to another. A bill of lading is thus ‘negotiable’ in the sense of being transferable, although it is not a negotiable instrument in the strict sense of being capable of giving the transferee a better title than the transferor has himself.’ [Emphasis added]

The nature of a BL as a ‘document of title for the goods’ formed the basis of the issues before the Court, with the outcome that a freight forwarder became liable to a financier of an exporter of goods who believed that the BL the freight forwarder provided constituted good title to the goods based on which the financier advanced funds even though the BL had no such effect. As a result the freight forwarder was found liable to the financier for the amount it had advanced pursuant to the BL due to ‘misleading and deceptive conduct’ and ‘breach of warranty’ by the freight forwarder.

The background to the case

At its heart, the decision involved the financing of the export of sheepskins to China. On request of the exporter/shipper, the freight forwarder issued ‘house’ BL which named the purchaser/consignee as ‘TO ORDER’, were stamped ‘ORIGINAL’ and were signed by the freight forwarder as ‘agent’ for the carrier. The creation of the BL in this form proved to be misleading. They were only ‘house’ BL as opposed to the carrier’s ‘ocean’ BL and the freight forwarder had no authority to sign as ‘agent’ for the carrier.

The exporter/shipper provided the BL to the plaintiff finance company as part of the security for the funding to acquire the sheepskins and the finance company advanced funds on the assumption that the BL gave it title to the goods. However, the shipper/exporter defaulted on the loans and the finance company was unable to secure the goods which had already been released to the purchaser of the goods in China pursuant to the ‘real’ and ‘original’ BL issued by the carrier.

Some relevant facts

The evidence before the Court was that the plaintiff finance company was relying heavily on the BL affording it with title to the goods. This was reflected in the terms of its offer of finance insisting on the original BL (meaning the ocean BL), its practice in having the BL kept securely in its office and in its refusal to advance funds until it had been provided with the BL in a form it believed to be original. On one occasion, the finance company refused to advance funds when it believed that the BL provided were not original. There was also evidence of the BL being returned when advances were repaid.

The evidence also supports the notion that the freight forwarder did not intend to mislead anyone on the nature of the BL it issued, merely that it issued its BL intending to facilitate the transactions. However the freight forwarder did acknowledge that the BL were to be used to facilitate finance and admitted that it did not have authority to sign the BL as ‘agent’ for the carrier.

Findings of the Court

The District Court found against the freight forwarder on two main grounds.

1. Misleading and deceptive conduct

The District Court found that in issuing the ‘house’ BL the freight forwarder had misrepresented that the BL were the original ‘ocean’ BL and negotiable instruments giving the holder of the BL the right to take delivery and possession of the goods.

Further to that finding, the Court found there were other false impressions conveyed by the BL, such as being issued by the freight forwarder ‘as agent for the carrier’ and by being endorsed as ‘original’ and consigned ‘to order’ which terminology should only appear on a carrier’s BL.

2. Breach of warranty of authority

Even though the freight forwarder was not party to the contract between the exporter/shipper and the finance company, a remedy for breach of warranty was available to the finance company against the freight forwarder. That claim was successful on the basis that the freight forwarder purported to contract with the exporter/shipper on behalf of the carrier without authority to do so.

Some preliminary thoughts on the decision

Clearly the decision has created real concerns in the freight forwarding industry and no doubt a number of parties would look at the facts as being similar to those which are regularly experienced but without the same adverse consequences.

While the decision may go to appeal the facts alone and the findings by the Court are reason enough to review practices to minimise the risks that may attach to the issue of ‘house’ BL for which a carrier has also issued an original BL. As the Court pointed out, the freight forwarder had caused two sets of similar BL to exist in relation to the same goods and its set had been issued in a form and in circumstances which gave the impression that they were the carrier’s BL.

Some other preliminary cautions are as follows:

• There needs to be real care when BL are issued by freight forwarders including the purpose for which they are being issued. If they are ‘only’ house BL then they should be marked and endorsed that way – and even further marked that they ‘do not give title to the goods’ and are ‘not to be used for finance purposes’.
• Freight forwarders should not be stated as being agents for carriers and should not purport to have been signed by the freight forwarder on behalf of the carrier.
• The use of the terms ‘original’ and ‘to order’ on house BL can be misleading – an original house BL is not an original carrier BL which grants title to the goods.
• Freight forwarders need to make further inquiries on parties to transactions and to whom their documents including BL may be provided and why they are being provided. In circumstances such as these, if the freight forwarder had a wider understanding of the deal and the reason for the provision of the BL and knew that the financier was not legally sophisticated it may have been more cautious on issuing the BL to the shipper and financier.
• Freight forwarders needs to be careful in limiting who can issue BL – shippers and financiers may put pressure on less experienced freight forwarding staff to issue BL in unwarranted circumstances.

The other interesting question is whether a ‘closed’ ledger transaction limited to the parties such as block chain may serve to limit these types of situations. In such an arrangement all the parties to the transaction including financiers would be aware of the exact circumstances of the transaction and who had possession of which documents for what purposes. That may well have eliminated the apparent misunderstanding.