House v Ocean – the complexities of bills of lading

Publication | March 2018
<em>House v Ocean</em> – the complexities of bills of lading

Introduction

Although bills of lading have existed for centuries, occasionally the basics can still become confused. This was recently highlighted in Australian Capital Financial Management v Freight Solutions (Vic) Pty Ltd, where the New South Wales (NSW) District Court likened bills of lading to an elephant, describing them as easier to recognise than define.

Australian Capital: one carriage, two bills

In this case, the court was asked to consider whether a set of negotiable house bills, issued alongside negotiable ocean bills, was “misleading and deceptive” under the Australian Consumer Law.

The supply chain was fairly straightforward. An exporter approached Australian Capital Financial Management (ACFM) for a loan to enable it to export animal skins to China. Under the loan agreement, the exporter was required to lodge the original shipping documents with ACFM as security.

The exporter engaged Freight Solutions to arrange carriage of the goods to China. Freight Solutions engaged the carrier, who issued a set of negotiable ocean bills (the Ocean Bills). Freight Solutions then issued its own house bills. The house bills were:

  • signed by Freight Solutions as agent for the carrier, who was named on the bill;
  • consigned “To Order”;
  • issued in triplicate stamped “Original”, with a further three copies stamped “copy non-negotiable”; and
  • not endorsed by the shipper.

Freight Solutions provided the house bills to the exporter, who passed them on to ACFM. However, when ACFM sought to obtain delivery of the goods it discovered that the cargo had already been delivered to third parties in China, on production of the original Ocean Bills issued by the carrier.

ACFM sued Freight Solutions on two grounds:

  • that Freight Solutions had engaged in misleading and deceptive conduct under the Australian Consumer Law. ACFM argued that the house bills had the hallmarks of a negotiable instrument, which would entitle the holder to take delivery. Further, ACFM argued that Freight Solutions should have been aware that the bills may be provided to a third party as security, as they were marked “To Order”; and
  • that Freight Solutions had breached a warranty of authority, by signing each of the bills on the carriers’ behalf.

ACFM was successful on both grounds and was awarded over A$800,000 in damages.

What is a house bill?

The decision prompted debate about the practice of issuing house bills. This is common practice in the freight forwarding industry and, if done correctly, should pose minimal risks.

The three well-known hallmarks of a bill of lading are that it is:

  • a receipt for goods shipped and received by the carrier;
  • a document of title providing certain rights to the holder; and
  • evidence of a contract of carriage.

In this case, the Ocean Bills satisfied these hallmarks, but Freight Solutions’ documents did not (despite their outward appearance).

So what functions do “House” bills serve?

Where the freight forwarder is offering a door to door multimodal service, then a single document evidencing the entire geographical extent of the contractual arrangement may be what the shipper or consignee prefers. The freight forwarder must then make all the necessary separate carriage arrangements with the sea, air or land carriers (but can thereby benefit from the various freight differentials negotiated).

Also, in what is becoming an increasingly aggressive market, freight forwarders prefer to keep their customers’ identities to themselves – they contract with the shipping lines on the basis that the relevant freight forwarders (and not the parties with an interest in the goods) appear as the shippers and consignees on the ocean bill.

A further reason for the use of “House” bills is where goods need to be consolidated – house bills are issued for each of the smaller parcels of goods vanned into a container. A further “house” bill may then be issued by the consolidator, who will then contract with the shipping line to produce an ocean bill.

It follows from the above that there is no golden rule regarding when “House” bills of lading may be used.

Where the freight forwarder acts as agent for the shipper, it does not contract with the carrier on its own behalf, but on behalf of the shipper. In these circumstances the forwarder’s “house bill” (if issued) is akin to a consignment note and serves to acknowledge receipt of the goods and the forwarder’s authority to act on the shipper’s behalf.

That’s not to say that a forwarder can never issue a true bill of lading (one that satisfies the three “hallmarks” above). A forwarder is often a carrier in its own right, particularly for “door to door” service. Australian Capital is a warning to forwarders to take particular care when issuing documents to accurately capture information that has important legal consequences.  

A bill of lading as security

A party who wishes to hold a bill of lading as security must carefully consider the bill that has been provided.

For example, if the secured party has been provided with a negotiable bill of lading, does it carry a valid endorsement? If not, they will not be entitled to demand delivery of the goods. If the bill is a non-negotiable straight bill, it is generally not good security, as it will not entitle any person to delivery unless they are the named shipper or consignee on the bill.

In Australian Capital, the forwarder’s greatest difficulty was that the carrier was named on the bill, but the bill was signed by the freight forwarder. This indicated that the forwarder was not in fact carrier in its own right. This ought to have been a red flag that another “true” bill was in existence. A secured party will always wish to ensure that any bill of lading it relies on for security purposes is clear on its face as to the roles and responsibilities of each of the players.

Key takeaways for freight forwarders

Australian Capital highlights three key considerations for freight forwarders who may issue a house bill:

  • should a house bill be issued?;
  • who may use the house bill?; and
  • what should the house bill look like?

Forwarders should consider the facts of each case to determine whether a house bill needs to be issued, rather than relying on a standard procedure. In some cases, there may be no need to issue a house bill at all.

Forwarders should also consider who may use their house bill once it has been released. If the bill is negotiable, then it can be endorsed by the shipper and provided to (and relied on by) a range of third parties, or financial institutions. Stamping a house bill as “ORIGINAL” may cause unnecessary confusion, especially if there is nothing to identify it as a house bill.

Finally, forwarders should always issue any house bill in their own name. Freight Solutions had signed the bills as agents for the carrier, whereas in fact the forwarder generally represents the shipper. A false representation of authority, would potentially be grounds for an action for damages in its own right.

If forwarders do make a mistake with their paperwork, then they will need to look at the terms of their insurance policy to determine if they have cover. Insurers usually specify that they must approve the fine print general terms used in forwarders’ standard documentation. However, it was commercial information (authority to issue bills) that caused Freight Solutions’ problem. That kind of information is not usually approved by an insurer.

Blockchain – eliminating the problems of the future?

Blockchain promises to simplify both payment and delivery of goods. So, in future, can we look to blockchain to overcome risks inherent in a paper documentary process? A number of electronic bill of lading solutions are on the market and in November 2017, Zim Integrated Shipping Services Ltd, an Israeli container shipping company, announced that it had successfully piloted blockchain for a paperless bill of lading.

There are still a number of issues to overcome with e-bills and blockchain (find out more about e-bills of lading here) but in theory, if all stakeholders, including the financial institutions who might otherwise rely on information being passed onto them by the shipper, transact on one ledger, this should eliminate the need to issue multiple bills of lading.

While blockchain may one day be the solution to overcoming the complexities that bills of lading pose, for now, there is no substitute to understanding primarily their functions, negotiability and the passing of title in and to the goods being shipped.


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