Article

Factual Summary: Beneficiary of an LC obtained a bill of lading from Carrier's Agent that read consigned "To Order" without specifying a named person. The bills of lading were issued by a California corporation and stated that they were subject to the Carriage of Goods by Sea Act and the International Convention for the Unification of certain rules of law relating to bills of lading as amended by the "protocol" signed at Brussels February 23, 1968 (Visby Rules or Hague-Visby Rules). In order to finance its operation, Beneficiary assigned its rights under the LC to financing company and endorsed and delivered to it the bills of lading and other documents required by the LC. When the documents were presented to Issuer, it dishonored due to discrepancies.

Unbeknownst to the financing company, Beneficiary authorized release of goods to Applicant/ Buyer without requiring presentation of the bills of lading subsequent to the assignment of the LC rights and the endorsement and delivery of the bill of lading.

Unable to obtain payment under the LC or from Beneficiary which was insolvent, financing company settled for partial payment from Applicant, sued the Agent in Hong Kong where it was determined that the Agent was not personally liable, and brought this action against Carrier and its Agent for breach of contract and conversion for the misdelivery of the goods. The trial court entered judgment for the financing bank. On appeal, affirmed.

Legal Analysis:

1. Applicable Law: The court noted that the bill of lading incorporated the US Carriage of Goods by Sea Act and the Hague Visby Protocol. Noting that the Federal Bills of Lading Act applied only to shipments involving a US state, the court concluded that these statutes were not applicable and looked to UCC Article 7 (Warehouse Receipts, Bills of Lading and other Documents of Title) for the applicable law.

2. Negotiability of the Bill of Lading: Not a Bearer Instrument. The court noted that the bill of lading was not consigned to a named person. To determine whether the bill of lading was negotiable, it looked to UCC Section 7-104(1) which provided that "A warehouse receipt, bill of lading or other document of title is negotiable (a) if by its terms the goods are to be delivered to bearer or to the order of a named person; or (b) where recognized in overseas trade, if it runs to a named person or assigns." The assignee argued that UCC Section 3-109 indicated that the bill should be regarded as bearer paper. Noting that this section related to commercial paper rather than documents of title, the court stated that it did "not override [UCC Section] 7's treatment of documents of title such as the bills of lading in this case." The court also distinguished cases in other jurisdictions in which bills were found to be negotiable even though they did not use the precise term "order" because "[n]one of those authorities involved a nonbearer instrument that did not specify the person to whom the 'Order' was made." Concluding that the bill was not an order or bearer bill, the court ruled that it did not meet the requirements of UCC Section 7-104(1).

3. Negotiability of the Bill of Lading: Estoppel: Notwithstanding its conclusion that the bill did not fall within the scope of UCC Secetion 7-104(1), the court noted that the parties had "considered the bills of lading to be negotiable," and so, concluded that under UCC Section 7-104(3) they were read as imposing on the bailee the same duties as if the bill were negotiable since they were not conspicuously marked non negotiable.

4. Misdelivery of the Goods: Having concluded that the bill of lading was, in effect, to be regarded as if it were negotiable, the court considered the effect of delivery of the goods without having taken up the bill of lading. The carrier argued that the requirement of surrender of the original bills of lading is not applicable as a provision states, "[i]f required by the Carrier on (1) original Bill of Lading must be surrendered duly endorsed in exchange for the Goods or delivery order." Carrier contends that this provision gives it the option to require the bill of lading or not. The court rejected this argument, noting that it delivered the goods without the bill on the instructions of the shipper at its own peril in the event that a third person was the holder of the bill of lading, as was the situation in this case.

Comments:

1. Having correctly determined that the Federal Bills of Lading Act does not apply to the bills of lading in the instant case, the court applies UCC Article 7 (Warehouse Receipts, Bills of Lading and other Documents of Title). Application of this statute, which is usually regarded as being applicable to intrastate commerce, to a bill of lading issued by a California carrier for transportation from Hong Kong to Glasgow Scotland that by its terms incorporates the US Carriage of Goods by Sea Act and the Hague- 15 2002 LC CASE SUMMARIES Visby Rules is curious, to say the least. What the court does not consider or even address is the effect of the parties' choice of law and, in the absence of the application of this law, the law that would govern a shipment having no nexus to the US other than the situs of the carrier for purposes of jurisdiction. However, since the principles regarding bills of lading are reflections of the universal law merchant, the specific statute applied should not be determinative as to general questions.

2. As issued, the bill of lading was consigned to order without naming a person to whose order it was consigned. Based on UCC Section 7-104(1), the court concluded that the bill of lading was not negotiable. It is apparent that it is not an order bill. What is less apparent is that it is not a bearer bill. While Article 7 does not define the term "bearer", UCC Section 1- 201 defines "bearer" as "the person in possession of an instrument, document of title, or certificated security payable to bearer or indorsed in blank." Moreover, the term is commonly understood to include situations such as the one in this case where the bill is issued in order form without naming a specific person. Had it been consigned to the order of a "bucket of bolts", it would be regarded as bearer paper. That is the import of UCC Article 3. The court rejected the application of its rule with the casual comment that Article 3 related to commercial paper. What difference this distinction makes with regard to negotiability, however, it fails to state. What is the difference between being issued to the order of a non-person and to the order of a blank line? Perhaps the only difference (if it is not to be regarded as bearer paper) is that in the first case the bill is complete whereas in the second case, it is incomplete. If so, then the case should be decided on whether or not the bill can be completed or its terms implied. In addition, these arguments overlook the endorsement and delivery of the bill of lading by the shipper to the financing company. In possession of a bill of lading endorsed to it or in blank, it is the bearer and there should be no difficulty in determining what to insert on the blank line.

The court, however, eschewed this approach, concluding that the bill of lading was not negotiable but should be treated as negotiable under Subsection (3) because it was not marked non-negotiable and the parties reasonably regarded it as negotiable.

While this result is not controversial, the path to it is highly unusual. Having concluded that the bill should be treated as negotiable, the court reaches a result that would be expect, namely that the carrier bears the risk of delivery of the goods without having taken up the bill of lading.

3. Not mentioned is the import of the presentation of documents by the assignee of the bill of lading. Under LC law and practice, that person is merely an extension of the beneficiary since there has been no assignment or transfer of the credit. This issue is not relevant to this case, but it reflects a troubling deterioration of LC practice, namely that persons with no status under the credit are asserting rights. The real question, unanswered in this case, is to whom payment would have been made had the documents complied. If it was requested to the assignee, the issuer should have refused absent the assignment of the LC proceeds.

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