Article

by Sheilar T. Shaffer

For a document checker, examination of a B/L is one of the most challenging tasks. Several years ago, a Maersk B/L created a stir by introducing a clause that would allow a shipping line to release cargo to consignees without presenting the original B/L when the B/L was consigned "to order". Since that time, the question of how to treat such a B/L clause has been of growing concern for document checkers.

"If required by the carrier ... "

A negotiable bill of lading consigned to order, to order of a designated person or to bearer has played an important role in international transactions. A negotiable B/L has three primary functions: (1) as a receipt and confirmation of shipment; (2) as evidence of the terms of the contract with the carrier; and (3) as a document of title1. As a document of title, a negotiable B/L is significant if a documentary security is required by banks in an L/C operation. As traditionally understood in English common law, a document of title provides its holder with the exclusive right to demand delivery of the goods it covers2. Since the goods will be released to the holder only against surrender of the document, possession of the document amounts to constructive possession of the goods.

However, it's not surprising that some B/Ls incorporate a clause on the front page reading: "if required by the carrier, one of the original bills of lading duly endorsed must be surrendered in exchange for the goods or delivery order." There are reported cases in which this language has made approval of such B/Ls difficult when the beneficiary approaches its bank for financing, since banks may question the status of these B/Ls as documents of title. The major concern is that the wording implies that surrender of the document is not necessarily required to obtain delivery, but shall be "at the carrier's option".

Even though the real effect of such a clause is far from clear and needs to be tested in court, the clause has negatively affected L/C operations in several respects. On one hand, if a bank needs to realize the security inherent in a negotiable document of title, it would not seem to be in bank's interest to accept tender of such bills of lading. There can also a destructive impact on the beneficiary when the documents are refused due to discrepancies and are held by the issuing bank pending the applicant's approval. In case of a discrepant presentation, the documents should still belong to the beneficiary; however, if the beneficiary were to find that its cargo under the B/Ls had been released even though the discrepant documents were still held by the issuing bank, then we would have to question how bills of lading with this or similar language work in reality.

Delivery clause vs terms and conditions

According to UCP 600 sub-article 20 (a) (v), bankers will not examine the contents of the terms and conditions of carriage, which normally appear in fine print on the reverse of bills of lading. However, when the clause "if required by the carrier ... " appears on the front page of a bill of lading, document checkers may question whether it is also to be treated as terms and conditions of carriage and whether it should therefore be disregarded.

ICC Banking Commission Opinion TA 675rev concerned a credit which included a clause "bills of lading that on their face indicate that goods may be released without presentation of an original bill of lading are not acceptable." The presented bill of lading was issued to order and blank endorsed and included pre-printed wording reading: "where the bill of lading is non-negotiable, the carrier may give delivery of the goods to the named consignee upon reasonable proof of identity and without requiring surrender of an original bill of lading. Where a bill of lading is negotiable, the Merchant is obliged to surrender one original, duly endorsed, in exchange for the goods."

The issuing bank claimed a discrepancy, asserting that the "B/L indicates that goods may be released without presentation of an original B/L." In its Opinion, the Banking Commission ruled that the pre-printed wording was terms and conditions of carriage and would not be examined according to sub-article 20 (a) (v), i.e, should not be examined for compliance.

However, the question remains: would the Banking Commission treat all kinds of delivery clauses in a B/L as terms and conditions that should be disregarded? One opinion that appeared to question this was ICC Opinion R 560 in which the presented B/L contained a clause "Part load with bill of lading MLA02 no separate delivery". The issuing bank refused the B/L, claiming that the clause jeopardized the applicant's rights to take delivery of the merchandise and/or any interest the issuing bank might have in the cargo. This position was supported by the Banking Commission, which concluded that "this clause or similar would constitute grounds for rejection."

Dilemma

One challenge for document examiners is how to examine a B/L if an L/C expressly prohibits such a B/L clause. Consider for instance query TA 675rev. Some L/Cs incorporate a clause which expressly prohibits an "if required by the carrier ... " clause. Should the document checker follow sub-article 20 (a) (v) and disregard the B/L clause or consider that the L/C requirement overrides sub-article 20 (a) (v) and refuse these B/Ls?

According to the definition of complying presentation in UCP 600 article 2 and the standard for examination of documents in article 14, a presented B/L must comply with UCP article 20, international standard banking practice and the terms and conditions of the credit. However, in Opinion TA 675 rev, in which the L/C expressly prohibited an "if required by carrier ... "clause, it seems that the conclusion of the ICC opinion did not take the L/C clause into account; it just stated that "the pre-printed wording [is] considered to be terms and conditions of carriage and will not be examined according to sub-article 20 (a) (v)." Even though the refusal was unjustified because the "if required by carrier ... " clause had no bearing on the captioned B/L, which was made out "to order", the analysis of TA675rev was not clear as to how to treat such a delivery clause when an L/C expressly bans it.

Conclusion

ICC has not taken a firm stance with regard to a delivery clause of a B/L which includes wording that negatively affects the negotiable bill of lading (consigned to order, to order of a designated person or to bearer) as a document of title. The clause "if required by the carrier ... " is just one example. To achieve predictability in L/C processing, ICC's position on this issue should be clarified accordingly.

Sheilar T. Shaffer is Manager of International Settlements in the International Department of the Agricultural Bank of China (ABC), Shantou Br. Her e-mail is sheilar@sina.com

1 International Sale of Goods (1991) published by Croner Publications Ltd.

2 The End of the Bill of Lading as We Know It by Dr. Regina Asariotis.