Switch at your own risk! The thing about Switch Bills of Lading
It's hard to overemphasise the importance of bills of lading as instruments in international trade. A recent decision of the NSW Supreme Court has provided an interesting and relevant insight into the perils and pitfalls around dealing with bills of lading.
The decision in Wollongong Coal v PCL (Shipping) Pty Ltd1
The facts are relatively straightforward and follow a pattern common in international trade:
- Wollongong Coal Ltd (WCL) sold coal to its parent company, Gujarat NRE Coke Ltd (Gujarat India).
- 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.
- 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.
- 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.
- At around this it appears that PCL issued a freight invoice to Gujarat India for approximately US$3.2 million under the Voyage Charter.
- 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$1 million in freight (though it is probably related to the exercise of a lien on the cargo, by Shipowners).
- 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.
- 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.
- On 3 October 2013, PCL sought a letter of indemnity (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.
- 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
Bills of lading are important evidence of the contract of carriage.
For a number of legitimate reasons, one or more of the original parties to the bill of lading (or entities who intend to become parties to the bill of lading contract) may ask the Shipowner who issued the bills to issue new bills of lading with different particulars. This is called 'switching' and the effect is that the original bill of lading contract is replaced by a new contract evidenced by the 'switch bills of lading'.
But what becomes of the original contract when a new contract is created?
In the instant case, 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', which had the effect of unconditionally discharging the original contract.
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 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?
The other important question in this case was the effect of the common notation on the bill of lading – "freight payable as per charter party."
In the instant case, WCL submitted that the effect of the notation 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 is 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  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.
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.
On 19 May 2020, Geoff will be speaking about the functions of bills of lading and further insights into this decision. He will also cover what parties must do to ensure their rights are protected and that they are not exposed to any unintended consequences when agreeing to 'switch' bills of lading. Click here to read more about the webinar and to RSVP.
1 Wollongong Coal Ltd v PCL (Shipping) Pty Ltd  NSWSC 184
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