Delivery Of Commodity Cargoes Against A Bill Of Lading Retained On Board

The coal cargoes shipped from Kalimantan to Indian ports are delivered to buyers against an original Bill of Lading retained by the Master on board the vessel, thereby avoiding the problems arising from the late arrival of Bills of Lading at discharge port.
This arrangement requires the seller to tender for payment two original Bills of Lading along with Master`s receipt for the third original Bill of Lading, instead of the full set of three original Bills of Lading. The third original Bill of Lading is given to the Master with the instruction to hand it to the intended receiver at the port of discharge following that the intended receiver presents the original Bill of Lading back to the Master to obtain the cargo. The intended effect of this arrangement is that following the endorsement of the third original Bill of Lading by the receivers to shipowners, the remaining two original Bills of Lading to become void.
The practice of delivering the cargoes against a Bill of Lading retained on board was initiated in the short sea trades with oil cargoes. Sub-clause 33.9 of SHELLVOY 6 charter party has the following provisions:

"Owners hereby agree that original bill(s) of lading, if available, will be allowed to be placed on board.
If original bill(s) of lading are placed on board, Owners agree that vessel will discharge cargo against such bill(s) of lading carried on board, on receipt of receivers` proof of identity."

The shipowners` risk of delivering the cargoes against a Bill of Lading retained on board is that the intended receiver is not the true owner of cargo and the lawful holder of Bills of Lading will later make a misdelivery claim against the shipowner. One such case is presented by Mr. Jørgen Rasch, Manager of Syndicate 2 at Danish Defence Club, in the article “Delivery of cargo against Bill of Lading carried on board” posted on 9th May 1996 on Danish Defence Club`s web site¹.
The claim arose from the sale of an oil cargo to a Finnish buyer on CAD (cash against documents) terms. Four Bills of Lading were issued by the Master for the cargo, of which one Bill of Lading was retained by the Master on board, while the other three Bills of Lading were sent together with the commercial invoice to a Finnish bank to collect the payment.
Upon the vessel`s arrival at discharge port, the Master handed the Bill of Lading to the port agent, discharged the cargo and left the port. The Bill of Lading was duly endorsed by the forwarding agent of the consignee and redelivered to the port agent who sent it to the shipowner.
The Finnish buyer did collect the cargo without paying for it and approximately one month thereafter it went into bankruptcy.
The case reached in Court where the shipper-charterer claimed that the Master was not entitled to deliver the Bill of Lading carried on board to any third party and that the Master and shipowner should have realized that the shipper-charterer had title to the cargo until one of the Bills of Lading sent to the Finnish bank had been collected by the buyer.
On its turn, the shipowner said that it was common practice in the short sea trade to deliver the cargo against a Bill of Lading carried on board and that it was the shipper-charterer`s responsibility to give the Master specific instructions if the cargo was not to be delivered against the Bill of Lading carried on board. The Court agreed and said that by its failure to instruct the Master the shipper-charterer lost its claim for damages.
In the conclusion of article, Mr. Jørgen Rasch recommended a charter party clause to be used by shipowners in case that voyage charterers insist to place an original Bill of Lading on board. The clause has the following wording:

"If charterers or their agents place an original bill of lading on board the vessel, the master is entitled to deliver the cargo against the endorsement of such bill of lading, unless he is instructed to the contrary by charterers prior to arrival at the discharge port.
If a claim is made against owners for delivery against a bill of lading carried on board, charterers to hold harmless and indemnify owners for any and all consequences following therefrom, including the costs of security to free the vessel from arrest and legal expenses."

The International Group of P&I Clubs have issued a circular letter in July 1990 recommending that when carriers are required to deliver cargoes against one original Bill of Lading carried on board, all the original Bills of Lading be issued with the following clause:

"One original bill of lading retained on board against which bill delivery of cargo may properly be made on instructions received from Shippers/Charterers."

It is believed that this clause will give notice to any party purchasing the cargo against an incomplete set of Bills of Lading that delivery may be made in exchange for one original Bill of Lading retained on board and, as such, should reduce the risks of the practice.
If the ultimate destination of cargo is unknown at the time of shipment, the Bills of Lading should show the port of discharge as a range of ports or a geographical area, as stated in the charter party, to avoid vessel`s arrest in case the charterer orders discharge of cargo at a different port than stated in the Bills of Lading. To ensure that Bills of Lading will be issued with the proper wording as to the port of discharge and delivery of cargo, the charter party and letter of authority given to the ship`s agents for signing the Bills of Lading should include clear instructions as to the information and clause required to be included in the Bill of Lading.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Coal Trade Review Edition No. 3.

Endnotes:

1. The article is on the Archive of General Section of Danish Defence Club`s web site www.danishdefenceclub.com