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Web alert: a brief reminder - as to the risk associated with delivering goods without the production of original bills of lading

21 August 2015

Recently the Guangzhou Maritime Court in China had to consider a claim where the claimant shipper sued the defendant carrier for RMB 3.8m (approximately $600,000) on the grounds that the carrier had delivered the subject goods at the disport without presentation of the original bill of lading [1].

The defendant carrier eventually settled the claim through a court led mediation, no doubt due to commercial considerations. Whilst not privy to the mediation, it should be noted that:

1. In this case, there was no contract at all between this shipper and the carrier. The transport had instead been arranged by the consignee, on the basis that the sale contract between the shipper and consignee had been on free on board (FOB) terms.

2. Therefore, the carrier had contended that actually the shipper should be presenting their claim against the consignee, their counterpart in the subject sale contract, and not against the carrier.

3. Furthermore, it seems that the claim by the plaintiff shipper was out of time, given the action was commenced well after the one year time bar - from the date of cargo delivery.

4. However, the shipper plaintiff was able to submit the original bills of lading before the Chinese court and, in so doing, placed the burden on the defendant (foreign) owner to prove that delivery hadn’t occurred without presentation of the original bills.

5. It should also be noted that Chinese law (specifically Article 2 of the Supreme People's Court Provisions on Certain Issues Concerning the Application of Law to the Trial of Cases Involving Delivery of Goods Without Original Bills of Lading) states:

"Where a carrier, in violation of laws, delivers goods without the original bill of lading (B/L), thus injuring the original B/L holder's rights under the B/L, the original B/L holder may request the carrier to bear the civil liability for the resultant loss."

6. Furthermore, Article 4 stipulates that: "[w]here a carrier bears any civil liability for delivery of goods without the original B/L, the provisions of Article 56 of the Maritime Code relevant to limited compensation liability shall not apply".

7. The owner wasn’t able to disprove the allegation made, simply because the necessary evidence could no longer be located on account of the time which had passed since the delivery of the cargo, and the commencement of this action in China.

Whilst an unfair outcome for the owner, this recent case in China does highlight the need for any carrier to collect and preserve evidence whenever instructed (by the consignee and/or shipper and/or charterer) to deliver goods without production of the original bill.

It is to be remembered that a bill of lading does not only act as a receipt, but is also a document of title to the goods and (unless issued ‘straight’) is a negotiable instrument. It is also not uncommon for an owner to be asked to deliver cargo without production of the original bills of lading.

One risk associated with doing so is that it will prejudice the owner’s P&I club cover. This is because the consequences of mis-delivery claims are serious. The owner indeed exposes itself to claims for which it may very well be held fully liable, such as having to compensate the rightful cargo owner for the full value of the cargo - which can be substantial.
A master should immediately inform its owner and P&I club whenever an original bill of lading cannot be produced by the party demanding delivery of the cargo at the discharge port. The P&I club may very well be able to send a local correspondent to attend on site, if immediate assistance is required.

Charterers and or shippers will often try to persuade an owner to accept a letter of undertaking (LOI) in return for delivering cargo without the production of an original bill of lading. Whilst there may very well be legitimate reasons behind such a request, an owner should always exercise caution and take great care if/when they comply with such a request. For example, they should make sure that the LOI is properly worded and, wherever possible, counter-signed by a first class bank. Furthermore, and turning back to China for a moment, whenever negotiating with Chinese counterparts it is also sensible to ensure any LOI issued by or on behalf of a Chinese counterpart has a law and jurisdiction clause which makes allowance for arbitration, rather than litigation. This is because English High Court decisions are unenforceable in China.

Nevertheless, whether or not to accept an LOI in return for delivering cargo without an original bill is a commercial decision that an owner has to make, because such an LOI effectively replaces the owner’s P&I club cover for any misdelivery claims.

Due to the fact that owners are frequently asked to deliver cargo without the production of original bills of lading, the IG Clubs have drafted suitable wordings to be used when faced with such requests (though the law & jurisdiction clause may need amending - see our comment above). These standard form LOI’s can be found on our website here.

This article intends to provide general guidance on the issues arising. It is not intended to provide legal advice in relation to any specific query. The law is also not static. If in doubt, The Standard Club is always on hand to assist.

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[1] See the ILO article ‘Burden of proof in cases involving delivery of goods without original bills of lading’, contributed by Shanghai Kai-Rong Law Firm, dated 12.08.2015, which can be found here.