Article

By T.O. Lee

A set of switch bills of lading is the second set issued by the carrier against the surrender of the first set, with part of the data content changed in order that the seller as the shipper can comply with the provisions of the underlying sales/purchase contract, the letter of credit and/or to reflect any changes in material facts. Obviously, this unofficial "definition" does not cover abuses as elaborated below.

There are several reasons, as indicated in the following paragraphs, to issue a switch bill of lading.

1. To change the name of the shipper and/or the consignee

In a transferable or a back-to-back letter of credit, the middleman may not want the end buyer to know the name and address of the supplier that contracted for the sea carriage. He may also not want the supplier to know the name and address of the end buyer. Hence, the middleman may surrender the first set of bills of lading to the carrier in exchange for a second set, with the name of the shipper and/or consignee changed. He replaces the supplier as the shipper, and the end buyer replaces the middleman as the consignee. Such a switch B/L is also known as "global" bill of lading. A letter of indemnity (LOI) is required by the carrier, often to be countersigned by a reputable bank.

2. To change the port of loading and/or port of discharge

a. For one reason or another, for example if the original port of discharge is inaccessible due to a dock strike, earthquake, or other force majeure events, the master may exercise his right under the terms and conditions of carriage to unload the goods, especially perishables, in a convenient port near the original port of discharge. A new set has to be issued to reflect the change under the Carriage of Goods by Sea Act (COGSA).

b. But not all changes in the port of loading or discharge are factual and legal. For example, in the past China and Taiwan were hostile to one another, and all forms of trade, transport and communication were prohibited. However, there was strong demand in Taiwan for rare herbal medicines and gastronomy ingredients available only in China. Procuring these luxurious items was much less expensive in China than in Hong Kong or Singapore. Where there is a lucrative profit, an improvisation is always possible. An importer in Taipei might be tempted to buy from a supplier in China who happened to be his cousin. The adventurous seafarers in a cargo ship weighing less than, say, ten thousand tonnes (just strong enough to combat the stormy weather in the Taiwan Strait) might be ready to provide a "ghost" carriage from Xiamen, China to Kaohsiung, Taiwan, for a handsome freight charge. Of course, such an adventure would not be recorded squarely on the ship's log book. At Xiamen, a first set of B/Ls could be issued with the port of loading being Xiamen and the port of discharge Hong Kong, a British colony at that time. Then it could be replaced with another set showing the port of loading as Hong Kong and port of discharge as Kaohsiung. Hence, both the export and import trade policies and legislation in China and Taiwan could be satisfied "on their face".

3. Removal of unfavourable remarks

From time to time, the first mate who supervises loading of goods on board may add unfavourable remarks on the bill of lading to protect the shipowner from exposure to claims due to defective goods - such as rusty and dented steel i-beams, failure to meet requirements on "adequacy" (using nylon straps instead of steel bands) and "sufficiency" (using oneply cartons instead of two-ply cartons) in packing materials, which is an obligation of the seller/shipper under Incoterms®2010.These remarks can turn an "unclean" (or claused) bill of lading into a "clean" one.

4. Changing date of loading for more profit

In the commodities trade, prices can fluctuate widely at times. For example, in hydrocarbon trade, prices is based on the daily price index published by PLATTS: "5-day mean PLATTS index value" (two days before and two days after the date of loading plus the date of loading) is often used. The purpose is to iron out the wide fluctuations in price. Subsequently, a premium may be added and an adjustment factor applied to form the "price formula" used in invoicing for the goods. An unscrupulous seller may ask for a switch bill of lading, changing the date of loading to another date on which the price is higher. This normally is the result of a conspiracy between a charterer and the seafarer. In one case I'm familiar with, the master of a small tanker came up with a lot of excuses not to set sail until he had received "lucky money or red packet" from the voyage charterer.

5. Combining or splitting bill(s) of lading

Goods may be loaded on the same cargo ship in instalments, arriving at the port of loading by train, truck and/or inland waterway from different suppliers. A separate set of B/Ls may be issued against each instalment. In these cases, the seller may surrender all sets of B/Ls issued and request the issue of one new set of bill of lading to cover them all (also known as "hitchment bill of lading"). This would facilitate sales to a bulk-quantity buyer and, at the same time, simplify import procedures, such as declaration, taxation, inspection and warehousing. Conversely, one set could be split into two or more sets - loosely known as a "split bill of lading", which may also be used to reflect any change in the quantity of goods as required by the US Customs and Border Protection, such as after partial discharge at a port other than the originally designated port of discharge - so the seller can sell the goods to different buyers.

6. Collaboration between a commodities broker and a shipowner

A commodities broker may have built up an excellent relationship with a shipowner by regularly chartering the latter's dry cargo ships or tankers. To reciprocate, the shipowner may allow his agent to issue a set of switch B/Ls without surrendering the first set against an LOI. The broker can obtain prompt payment from the end buyer with the switch B/L before the cargo ship arrives at the port of discharge. Then the broker could use the funds to pay off the original supplier against the first set of B/Ls presented through a bank, thereby allowing the broker to access a readily available fund, bypassing credit rating checks, eliminating collaterals and saving interest costs. In such a case, the shipowner would be acting indirectly as a "silent" financier to the broker in exchange for more business. This practice would have to be strictly confidential between the shipowner and the broker to avoid interference from the shipowner's insurance agencies, regulators and other key financiers.

Legality

Some practitioners may hold a sympathetic view of the switch bill of lading, arguing that it can fulfil specific market needs and help to achieve document compliance in transferable and back-to-back credits. Otherwise, compliance "on their face" might be a mission impossible (or at least improbable) where the middleman does not want the supplier and the buyer to know each other.

Use of the switch bill of lading might be acceptable in certain situations such as those described in nos. 1, 2 (a) and 5 above. The carrier would require an LOI countersigned by a reputable bank to hold the carrier harmless in case of claims by other parties. In no. 6 above, the shipowner takes all the risks by issuing two sets of B/Ls to two parties.

Some scholars regard the switch bill of lading practice as illegal in nos. 2 (b), 3, 4 and possibly 6, where the principle of "utmost good faith" is not upheld.

Moreover, some courts of law may regard this as a trade fraud, with a wilfully malignant intent to hide undesirable events or data from the other parties, particularly the buyer. This view is reflected in the Singapore case of Samsung Corporation v Devon Industries Sdn Bhd [1996] 1 SLR 469.

My personal view is that if the use of the switch bill of lading is exclusively confined to nos. 1, 2 (a) and 5, it should be an acceptable practice, particularly in transferable and back-to-back credits. It is a lubricant to make the commodities trade work more effectively. I realize some readers will disagree with me on this. Other uses, such as in nos. 2 (b), 3, 4 and perhaps 6, would be unethical and possibly illegal, depending on the applicable law. The carrier may run a great risk, as the LOI may not be enforceable due to illegality, as reflected in the UK case of Brown Jenkinson v Percy Dalton [1957] 2 QB 621.

T.O. Lee is a member of Int'l Multimodal Transport Association, Geneva, a Fellow of the Academy of Experts (L/C), Gray's Inn, UK and a member of the UCP 600 Consulting Group. His website is www.tolee.com and his email is experts@tolee.com.