The Functions Of Mate`s Receipt In A Chain Of FOB Sale Contracts
The commodity trading companies, which do not buy the commodities directly from actual suppliers but through a chain of FOB sale contracts and then wish to on-sale the goods abroad on CFR or CIF terms, need Bills of Lading identifying them as shippers for the CFR/CIF sale and to arrange the Customs clearance of the goods at loading port. Such a commodity trader needs to be identified as exporter and shipper in all the commercial documents required for the CFR/CIF sale and Customs clearance of goods, including the Bills of Lading.
If the suppliers and the other FOB sellers in the chain do not wish to arrange the Customs clearance and pay the Customs duty, they do not necessarily need Bills of Lading to transfer title to the goods. In such cases Mate`s Receipts made out to order are used instead of Bills of Lading as evidence of shipment and document of title between the commodity suppliers who shipped the goods, the other FOB sellers and exporter1. The supplier(s) and then each FOB seller in the chain endorses the Mate`s Receipt(s) and delivers them to the next in exchange for payment until the Mate`s Receipt(s) reach in possession of the exporter. Then the exporter surrenders the Mate`s Receipt(s) to the vessel`s agents in exchange for the original Bills of Lading indicating the exporter as shipper.
Quoted below is an example of charter party clause stating the conditions for the issuance of Bills of Lading in exchange for the original Mate`s Receipt(s):
"At the loading port, the Master shall sign Mate`s Receipts made out to order of the shippers and indicating the Charterers as notify party. The Owners shall instruct the vessel`s agents to release the original Bills of Lading only after the presentation by Charterers of the original Mate`s Receipts properly endorsed."
To ensure that the vessel`s agents will not release the original Bills of Lading before obtaining the original Mate`s Receipt(s), the Masters usually give instructions to the vessel`s agents in the letter of authority for signing the Bills of Lading and insert in the Mate`s Receipts a statement setting the charter party condition for the issuance of Bills of Lading to the charterers. Examples of such statement can be found in the US law cases R. L. Rothstein Corporation v. Kerr Steamship Company, Inc.2 and Buckeye Cellulose Corporation v. Atlantic Mutual Insurance Company3.
In R. L. Rothstein Corporation v. Kerr Steamship Company, Inc., a Mate`s Receipt issued for a cargo of tallow contained the following statement:
"OCEAN BILL OF LADING TO BE RELEASED ONLY AGAINST SURRENDER OF THIS MATE`S RECEIPT PROPERLY ENDORSED."
"Bill of Lading may be obtained from the vessel`s master or owner or agent only against surrender of the duly signed and endorsed original of this mate`s receipt."
The cargo was sold along a chain of three FOB sale contracts involving four companies. The third seller in the chain became bankrupt and did not pay the second seller. The final FOB buyer chartered the carrying vessel and on-sold the cargo to a foreign buyer on CFR terms.
In a rush to obtain the payment from the foreign buyer, the charterer asked the vessel`s agents to issue the Bills of Lading without the surrender of the Mate`s Receipt.
The case was a claim made by the second seller in the chain against the carrier for conversion of cargo. The question before the Court was whether these conditions in Mate`s Receipt bound the carrier and vessel`s agents which issued the Bills of Lading.
The Court held that since the Mate`s Receipt is not a negotiable document of title, the condition inserted in the Mate`s Receipt as to the release of Bills of Lading was essential. The relevant comments of the Court are quoted below:
"[I]n this case [...] the mate`s receipt by the stipulation of the parties controlled the issuance of the bill of lading, and thus indirectly the goods. To that extent it served as a document of title, at least between immediate parties to the receipt. […] By the condition in the mate`s receipt, expressly stipulated, the carrier was a party to this mode of protecting the seller`s interest."
This case set the rule in US case law that the conditions stipulated in the Mate`s Receipt as to the issuance of Bills of Lading are enforceable and the carriers and their agents that issue the Bills of Lading before obtaining the original Mate`s Receipt(s) will be liable to the holders of the Mate`s Receipt(s) for conversion of cargo.
In Buckeye Cellulose Corporation v. Atlantic Mutual Insurance Company, the Mate`s Receipts issued for a cargo of cottonseed oil contained the following statement:
"BILL OF LADING NOT TO BE ISSUED UNTIL ORIGINAL DULY SIGNED AND ENDORSED MATE`S RECEIPT HAS BEEN SURRENDERED IN EXCHANGE FOR BILL OF LADING."
The cargo of cottonseed oil was shipped in parcels by various suppliers on 31 January and 2 February 1979. The suppliers sold their parcels to Buckeye Cellulose Corporation on FOB terms. Buckeye Cellulose Corporation on-sold the entire cargo shipped on board the carrying vessel to a company called Thomas P. Gonzalez Corporation. Thomas P. Gonzalez Corporation chartered the carrying vessel and on-sold the cargo on CFR terms to an Egyptian government agency.
Things went wrong due to the late payment of the shippers by Buckeye Cellulose Corporation which in turn could not get paid under L/C due to the late presentation of documents, including the Mate`s Receipts. In the meantime Thomas P. Gonzalez Corporation, which bought the cargo from Buckeye Cellulose Corporation, obtained the original Bills of Lading without the presentation of the original Mate`s Receipts.
Buckeye Cellulose Corporation brought claims against the shipowners and Thomas P. Gonzalez Corporation to recover the value of the cottonseed oil cargo. The claims were eventually settled out of court.
Timing of payment is essential in the FOB sales based on Mate`s Receipt(s).
The shippers selling vegetable oil parcels based on Mate`s Receipts should also give instructions to the vessel`s agents to release the original Bills of Lading only after the presentation of the original Mate`s Receipt(s) properly endorsed. Clause 16 of FOSFA Contract No. 51 has the following provisions:
"If Mate`s Receipts are presented for payment, Sellers shall be entitled to instruct vessel`s agents that the Bill(s) of Lading may only be issued in exchange for the original Mate`s Receipt."
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Biofuels Trade Review Edition No. 3.
Endnotes:
1. See Clause 15 of FOSFA Contract No. 52, Clause 15 of FOSFA Contract No. 60 and Clause 14 of FOSFA Contract No. 82.
2. 21 AD 2d 463 - NY: Appellate Div., 1st Dept. 1964.
3. 643 F.Supp. 1030, United States District Court, S.D. New York (1986)