The Use Of Bills Of Lading As Documents Of Title In Commodity Trade
The Transfer Of Rights Under The Bills Of Lading
The way the rights under the Bills of Lading are transferred is in function of whether the Bill of Lading is in negotiable form or in non-negotiable form.
A Bill of Lading is in negotiable form when it is made out to order or to the order of consignee1.
A Bill of Lading is in non-negotiable form when it is not made out to order.
If the Bill of Lading is made out to order, the shipper is the original lawful holder of Bill of Lading. In order to transfer the rights under the Bill of Lading, the shipper can endorse the Bill of Lading either in blank or in full.
If the shipper`s endorsement is in blank, the next holder(s) of Bill of Lading may further transfer the rights thereunder in any of the following ways:
(a) by delivery of the Bill of Lading alone without filling up the blank and without endorsement2;
(b) by re-endorsing the Bill of Lading in blank or to some other person; If re-endorsed in blank, the Bill of Lading will again function like a bearer Bill of Lading and can be transferred simply by delivering the Bill of Lading without any further endorsement. The holder of a blank endorsed Bill of Lading is deemed to be the lawful holder provided that he obtained the Bill of Lading in good faith. If the Bill of Lading is endorsed to a specified person, the endorsee must, if he wishes to further transfer the Bill of Lading, endorse it either specially or in blank3.
(c) by filling in the blank endorsement his own name or the name of some other person. If the holder fills in the blank endorsement the name of other person, such person becomes the lawful holder and only such person may further transfer the Bill of Lading by endorsement. In Keppel TatLee Bank v. Bandung Shipping Pte Ltd.4, the negotiating bank filled in the name of collecting bank onto the shipper`s endorsement in blank. However, the buyer of goods did not pay and the collecting bank returned the Bills of Lading to negotiating bank without making any endorsements. Upon the receipt of the Bills of Lading, the negotiating bank cancelled the shipper`s endorsement in the Bills of Lading. The trial judge said that "only in plain and obvious cases … the power of striking out should be invoked". What the Singapore Courts did not say in that case was that in negotiable instruments law, the holder of bill cannot cancel an endorsement made by another person. Nor the holder can strike out the name of endorsee to turn an endorsement in full into an endorsement in blank, unless such modification was made with the consent of endorser.
If the shipper`s endorsement is in full, the endorsee must, if he wishes to further transfer the Bill of Lading, endorse it either specially or in blank. If this second endorsement is in blank, then thereupon the transfer of Bill of Lading can be made by delivery alone. If the second and following endorsements are in full5, then the ultimate holder of Bill of Lading is deemed to be the lawful holder of Bill of Lading if there is an uninterrupted chain of endorsements, starting with the endorsement written by the shipper and ending with the endorsement made in favour of the ultimate holder6. An uninterrupted chain of endorsements means that each endorsement to be signed as endorser by the person named as endorsee in the previous endorsement. If one of the endorsements is signed by a different person than that named as endorsee in the previous endorsement, the chain of endorsements is deemed interrupted. This is so even if both names belong to the same person, e.g. a company that changed its name. The proof that despite the different names stated in the Bill of Lading the person that made the respective endorsement is the same as the endorsee named in the previous endorsement is not admissible. Less significant differences do not affect the validity of endorsements. For example, a person signs an endorsement with the name in full and surnames in initials, while in the previous endorsement he is named as endorsee with the name and surnames in full. In case of an interrupted chain of endorsements, the lawful holder is the person named as endorsee in the last valid endorsement preceding the interruption.
In case of a Bill of Lading made out to the order of the consignee, the transfer of rights can be made by delivery alone, without the need of shipper`s endorsement in favour of the consignee7. In practice, however, the shippers often endorse the Bills of Lading in favour of the named consignees.
When An Endorsement Can Be Cancelled And By Whom
An endorser can cancel his endorsement when made in the view of a commercial transaction that is no longer made or when the endorser wishes to correct an error as to the name of endorsee. An endorsement becomes irrevocable only after the Bill of Lading reached into the possession of other person. Until then the endorser can cancel it.
In Aegean Sea Traders Corporation v. Repsol Petroleo S.A. (The "Aegean Sea")8, the English Commercial Court held that an endorsement can also be cancelled by endorser when the Bill of Lading has been endorsed by mistake to the wrong person and the latter returned the Bill of Lading to the endorser. In that case a parcel of crude oil shipped at Sullom Voe was sold on FOB terms by Sun Oil Great Britain Ltd. to Louis Dreyfus Energy Ltd., then by Louis Dreyfus Energy Ltd. to ROIL (Repsol Oil International Ltd.) which sold the parcel on ex ship terms to Repsol Petroleo S.A.. The Bill of Lading issued for the parcel of oil was initially endorsed by the shipper Sun Oil Great Britain Ltd. to Louis Dreyfus Energy Ltd. and delivered to Louis Dreyfus Energy Ltd. in New York, a point at which Louis Dreyfus Energy Ltd. became the lawful holder of Bill of Lading.
Although it sold the cargo to ROIL, Louis Dreyfus Energy Ltd. endorsed by mistake the Bill of Lading to Repsol Petroleo S.A. instead of ROIL. Repsol Petroleo S.A. which bought the cargo on DES terms was to pay for it based on the certificates of quantity and quality determined at the time of delivery at the port of discharge. The Bills of Lading are used to transfer the title to the goods in FOB, CFR and CIF sale contracts, not in ex ship sales. The mistake was discovered by the crude oil operations manager of Repsol when he received the shipping documents from ROIL to settle the claim for loss of cargo with the cargo insurers. He pointed out the mistake to the manager of Louis Dreyfus Energy Ltd. who acknowledged that they had made a mistake and it was agreed that the original Bills of Lading would be returned to Louis Dreyfus Energy Ltd. in New York in order to cancel the endorsement in favour of Repsol Petroleo S.A. and re-endorse them to ROIL. The Bills of Lading were returned to Louis Dreyfus Energy Ltd. who cancelled the endorsement in favour of Repsol Petroleo S.A. and endorsed the Bills of Lading in favour of ROIL. Louis Dreyfus Energy Ltd. then returned the Bills of Lading to ROIL pursuant to the terms of sale contract.
The question before the English Commercial Court was whether Repsol Petroleo S.A. became the lawful holder of Bill of Lading as a result of endorsement made by Louis Dreyfus Energy Ltd. in its favour.
The shipowner argued that since Louis Dreyfus Energy Ltd. had endorsed the Bill of Lading to Repsol Petroleo S.A., then the proper course would have been for Repsol Petroleo S.A. to re-endorse the Bill of Lading back to Louis Dreyfus Energy Ltd., otherwise Louis Dreyfus Energy Ltd. could not re-endorse the Bill of Lading to ROIL. The English Commercial Court held that:
"It is clear that there was no endorsement back by Repsol to Louis Dreyfus, but that was no doubt because Repsol never regarded themselves as entitled to endorse the bill as it had been endorsed to them in error. ….. It cannot have been intended by the draftsman of the Act that a person to whom a bill of lading is endorsed and sent in error has then to act as if he was a person entitled to endorse the bill of lading as a precondition of the person who made the mistake being enabled to rectify his error by re-endorsing and delivering it to the correct party; the person to whom it was sent was not the lawful holder and not therefore entitled to endorse it."
Negotiability Of Bills Of Lading
The negotiability of Bills of Lading is relevant in the international trade with bulk commodities sold along a chain of sale contracts. The typical case is when a bulk commodity is shipped on FOB terms and then sold on CIF terms while under carriage. The section 19(2) of the Sale of Goods Act 1979 stipulates that:
"where goods are shipped, and by the bill of lading, the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal."
When the cargo is delivered free on board a ship chartered by the FOB buyer, the right to possession of goods remains to the shipper (i.e. FOB seller) until the delivery of endorsed Bill of Lading to the FOB buyer in exchange for payment9. However, when the FOB seller delivers the endorsed Bill of Lading to the FOB buyer and the latter then transfers the Bill of Lading to a bona fide purchaser (e.g. CIF buyer) for value, the FOB seller`s right of stoppage in transit10 is lost.
In this regard the Sub-sections § 80105 (b) and § 80104 (b) of US Federal Bills of Lading Act have the following provisions:
"When a negotiable bill of lading is negotiated to a person for value in good faith, that person`s right to the goods for which the bill was issued is superior to a seller`s lien or to a right to stop the transportation of the goods."
"The validity of a negotiation of a bill of lading is not affected by the negotiation having been a breach of duty by the person making the negotiation, or by the owner of the bill having been deprived of possession by fraud, accident, mistake, duress, loss, theft, or conversion, if the person to whom the bill is negotiated, or a person to whom the bill is subsequently negotiated, gives value for the bill in good faith and without notice of the breach of duty, fraud, accident, mistake, duress, loss, theft, or conversion."
If, however, there is evidence of bad faith (mala fide) on the part of endorsee, that he knew of the breach of duty, fraud, mistake, duress, loss or theft, the negotiation of the Bill of Lading may be deem invalid by a Court and the endorsement void. If in case of CIF on-sale of cargo by a middleman who bought the cargo on FOB terms, the third party purchaser (i.e. CIF buyer) knew that the middleman was insolvent and took the Bills of Lading with the purpose of defeating the shipper`s right to stop the goods in transit and thus defrauding the shipper, the shipper can preserve the right to stop the goods in transit.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Coal Trade Review Edition No. 2.
Endnotes:
1. Article 1(15) of Rotterdam Rules stipulates that ""Negotiable transport document" means a transport document that indicates, by wording such as "to order" or "negotiable" or other appropriate wording recognized as having the same effect by the law applicable to the document, that the goods have been consigned to the order of the shipper, to the order of the consignee, or to bearer, and is not explicitly stated as being "non-negotiable" or "not negotiable".
2. See the provisions of Article 57(1)(b) of Rotterdam Rules.
3. See Keppel TatLee Bank v. Bandung Shipping Pte Ltd., [2003] 1 SLR 295; [2002] SGCA 46; [2003] 1 Lloyd`s Rep. 619.
4. [2003] 1 SLR 295; [2002] SGCA 46; [2003] 1 Lloyd`s Rep. 619. The case actually involved a sight collection where the bank that negotiated the documents endorsed the Bills of Lading specially to presenting bank as a safety precaution against the loss of Bills of Lading in transit to presenting bank.
5. When an endorsement in blank is followed by another endorsement, the person who signed this last endorsement is deemed to have acquired the Bill of Lading by way of blank endorsement.
6. The chains of endorsements in full can be found in the Bills of Lading for crude oil and LPG cargoes sold along a chain of sellers and buyers. In Aegean Sea Traders Corporation v. Repsol Petroleo S.A. (The "Aegean Sea"), [1998] 2 Lloyd`s Rep. 39, a parcel of crude oil shipped on board the vessel at Sullom Voe was sold by Mobil North Sea Oil to J. Aron and Co., then by J. Aron and Co. to Bear Stearns N.Y. Inc. and ultimately, by Bear Stearns N.Y. Inc. to ROIL. Thus, each party in the chain, i.e. J. Aron and Co., Bear Stearns N.Y. Inc. and ROIL, when it received the Bills of Lading held them as an endorsee from the preceding holder. Similarly, in Borealis AB v. Stargas Limited and Others and Bergesen D.Y. A/S (The "Berge Sisar"), [2001] UKHL 17. In that case a cargo of propane was sold by Saudi Aramco to Stargas Ltd., then by Stargas Ltd. to Statoil Petrokemi AB (i.e. thereafter called Borealis AB) and ultimately, by Statoil Petrokemi AB to Dow Europe. The Bills of Lading for propane were endorsed by each party in the chain to the next: first by the shipper Saudi Aramco to Stargas Ltd., then by Stargas Ltd. to Statoil Petrokemi AB and ultimately, by Statoil Petrokemi AB to Dow Europe.
7. See Article 57(1)(b)(ii) of Rotterdam Rules.
8. [1998] 2 Lloyd`s Rep. 39
9. See The "Cherry" and Others, [2003] 1 SLR 471; [2002] SGCA 49.
10. Under the UK`s Sale of Goods Act 1979, an unpaid seller has a right of lien on the goods, a right of stoppage in transit and a right of resale.