Switch Bill of Lading

“Switch” bills of lading are a second set of bills of lading issued by the carrier (or by the carrier’s agent) in substitution for the set issued at the time of shipment. The agent who is asked to produce the second set is often not at the load port. The holder of the bills may decide, for one reason or another, that the first set of bills is unsuitable, and the carrier is put under commercial pressure to issue switch bills to satisfy his new requirements. Some of these reasons are:

• The original bill names a discharge port which is subsequently changed (perhaps because the goods have been resold);
• A seller of the goods in a chain of contracts does not wish the name of the original shipper to be known;
• The goods were shipped originally in small parcels, and the buyer requires one bill of lading covering all of the parcels to facilitate his on-sale.

The perils of having two sets of bills of lading in circulation for the same cargo are obvious and shipagents must make sure they follow these rules:

• The principal’s written authority should be obtained to issue switch bills;
• They should only be issued if the first complete set has been surrendered;
• They should not contain misrepresentations, eg as to the true port of loading, or the condition of the cargo. If switch bills contain misrepresentations, the carrier/agent will be at risk of claims from parties who have suffered a loss because of such misrepresentations.

A warning to shipagents

In practice “switch” bills of lading are often issued in addition to, and not against surrender of, the first set. The reasons for this practice are various; the first set of bills may be held up in the country of shipment, or the ship may arrive at the discharge port in advance of the first set of bills. Another reason, however, is that the party trading the goods wants to assist his cash flow by receiving payment from the end receiver before he pays the shipper. The shipagent may be instructed by his principal to issue a second set of bills of lading and may be offered a letter of indemnity by the principal, or by the party who receives the “switch” bills.

Shipagents have found themselves on the receiving end of claims from the holders of the first set of bills of lading (eg the shipper, a bank or a party to whom the bills of lading have been negotiated) with nothing to rely on but a worthless indemnity. A long established or multinational shipagent may make a more worthwhile target for the bill of lading holder than a charterer with no assets or a shipowner who has sold the ship in question, or a trader who has become bankrupt.

To protect himself or herself the agent must:

• Ask whether the principal authorising the issuance of the second set is reliable;
• Obtain the principal’s authority in writing, and a letter of indemnity signed by the principal (and countersigned by a bank if deemed necessary by the agent) indemnifying the agent for all consequences of issuing the second set of bills of lading.

The agent should also consider whether it is necessary to obtain authority from any other party who might be adversely affected by his action (eg the shipowner or the shipper). If the agent is authorised by the charterer, but issues bills of lading on behalf of the master, the shipowner would have a valid claim against him if he has acted without the owner’s prior knowledge and consent.

If the principal has asked the agent to obtain a letter of indemnity from the party receiving the second set of bills of lading, the agent should get the wording and security (eg counter-signature by a bank or not) approved in writing by the principal. The agent should keep the indemnity in a safe place and make reasonable efforts to obtain the first set of bills.

The practice of issuing switch bills of lading is increasing.
What are they, why are they issued, and what are the risks?
A "Switch bill of Lading" is issued by, or on behalf of, the carrier in substitution for the bill of lading issued at the time of shipment.

There are number of reasons why switch bills are issued. The common link is that, from the point of view of the holder of the bills, the first set of bills is unsuitable under one of the sale and purchase contracts for the goods in question. Carriers often feel under commercial pressure to issue switch bills in order to satisfy the requirements of the customers. Examples of reasons why switch bills are issued are that:- the original bill names a discharge port which is subsequently changed (e.g. because the receiver has an option or the good are resold) and new bills are required naming the new discharge port: a seller of the goods in a chain of contracts does not wish the name of the original shipper to appear on the bill of lading, and so a new set is issued, sometimes naming the seller as the shipper. A variation on this is where party does not wish the true port of loading to be named on the bill; the first set of bills may be held up in the country of shipment, or the ship may arrive at the discharge port in advance of the first set of bills. A second set may therefore be issued in order to expedite payment, or to ensure that delivery can take place against an original bill; shipment of goods may originally have been in small parcels, and the buyer of those goods may require one bill of lading covering all of the parcels to facilitate his on sale. The converse may also happen i.e. one bill is issued for a bulk shipment which is then to be split.

Where switch bills are issued, the first set should be surrendered to the carrier in exchange for the new set. There is usually no objection to this practice. However, the switch bills may contain misrepresentations e.g., as to the true port of loading. If a receiver suffers loss as a result of this, then the carrier and his agent may be at risk.

In practice the switch bill set is often issued not against surrender of the first, set, but against a letter of indemnity. That may happen in any of the examples given above, and clearly will be the case where the first set has been delayed. Switch bills of lading issued in these circumstances may leave the carrier and his agents extremely exposed. The switch bills may be negotiated to a buyer who expects the goods to be delivered to him. The shipper holding the first set might not yet be paid by his buyer. The carrier may therefore be faced with claims from the shipper holding the first set of bills, and from the holders of the second set. The carrier will probably deliver the goods to one of these parties, and be liable to compensate the other. Any indemnity which the carrier has obtained may well be worthless.

In a recent case decided by the High Court of Singapore (Samsung Corporation v Devon Industries Sdn Bhd [1996] 1 SLR 469) a vessel had loaded a total cargo of 10,500 MT of soya bean oil. It appeared that the goods had been shipped by a number of different shippers in small parcels. The plaintiffs were the holders of bills of lading covering two parcels of 1,000 MT and 1,500 MT respectively. They tendered the shipping documents to the defendant buyers, who did not pay for the goods. The buyer was also the charterer of the vessel, and arranged for the shipowners to issue what were described as "global" bills of lading naming the buyer as the shipper. The defendants were able to negotiate those bills of lading, and were paid for the cargo (which they had not themselves paid for). In an action brought by the seller to recover the original first set of bills held by the buyer, the court said that the ship agent (combined with the buyer) had unlawfully issued a second set of bills of lading in abject disregard of the sellers' interests. The buyer had acted fraudulently, with the co- operation of the ship agent.
Although the court did not expressly address the liability of the shipowners, or their agents, for having issued the second set of bills, there is little doubt that the owners and their agents would have faced claims from the holders of either the first set or the second set. There is no mention in the report of this case of whether the second set was issued against a letter of indemnity from the buyer/charterer, but the buyer was in dire financial straits, and so any letter of indemnity is likely to have been worthless. In any event, a letter of indemnity given in these circumstances may well be null and void.

How should the shipowner protect itself in the event when receives a request to substitute the original set of Bills of Lading with a new set of Bills of Lading?

A trading company acting as middleman in back to back can sales conceal the identity of its supplier to the ultimate buyer (and vice versa) is to arrange with the carrier and his bank to substitute the supplier’s Bills of Lading with Bills of Lading showing the middleman as shipper.

The typical scenario in charter trades where substitution of Bills of Lading is required arises a middleman buys a bulk commodity from on FOB terms and then sells to the ultimate buyer on CFR or CIF terms.

The middleman charters a ship under a Voyage Charter Party in which the shipowner agrees to the substitution of Bills of Lading. After the loading the commodity on board the shipowner issues an original set of Bills of Lading to supplier naming the supplier as shipper to be exchanged with a new set of Bills of Lading issued by the carrier indicating the middleman as shipper, which hides the identity of supplier to the ultimate buyer. Obviously, the conditions in which the substitution of the original set of Bills of Lading with the new set of Bills of Lading may take place must be addressed in the Voyage Charter Party, using a clause such as:

The Charterers shall have the right to request the issuance of a new set of Bills of Lading (after the Master or Agents have received and cancelled the original set of Bills of Lading) stating shipper, consignee and notify party other than in the Mate’s Receipts. The new set of Bills of Lading shall be presented to and signed by the Master or by the Agents provided the cargo name, quantity, quality and condition does not differ in any way from those indicated in the Mate’s Receipts.

The Charterers shall instruct the Agents to issue the Shipping Orders/Mate’s Receipts indicating the Charterers as consignee and notify party and the new set of of Bills of Lading indicating the Charterers as shipper.

The Charterers shall indemnify the Owners against all consequences or liabilities that may arise from the switching of the original set of Bills of Lading with a new set of Bills of Lading.“

In containerised trades, the conditions in which the substitution of the Bills of Lading may take place should be first agreed between the shipper and the multimodal transport operator. The particularity in the substitution of Bills of Lading issued by multimodal transport operators consists in the necessity of changing the notations indicating the supplier’s declared value with the middleman’s declared value for the same cargo and freight rates if calculated ad valorem.

In the case of Combined/Multimodal Transport Bills of Lading, an original set of Bills of Lading (made out to order) is issued by the carrier/forwarder to supplier selling on FCA terms at the transport terminal (Container Yard in the case of FCL cargo and Container Freight Station in the case of LCL cargo. This set of bills of lading will name the supplier as shipper, and contain the supplier’s identification mark, the supplier’s declared value for cargo, that the freight is to be paid on delivery, and the middleman’s bank reference number (if required) for letter of credit issued in favour of supplier.

The carrier/forwarder issues Switched set of Bills of Lading (made out to order) to the middleman selling on CPT or CIP terms and naming the middleman as shipper, and containing the middleman’s identification mark, the middleman’s declared value for cargo, that the freight is prepaid, and the buyer’s bank reference number (if required) for letter of credit issued in favour of the middleman.

There are a series of risks involved in the switching of Bills of Lading. Carriers and forwarders must not issue a switched set of Bills of Lading prior to receiving the original set of Bills of Lading for cancellation as there is a risk that the middleman will not pay its supplier resulting in competing claims from different consignees. See UCO Bank v. Golden Shore Transportation Pte Ltd. – The Asean Pioneer(2003 Singapore). In a typical fraud scenario a middleman who is also voyage charterer requests the carrier to deliver the cargo against a letter of indemnity signed by the middleman alone. In order to avoid being cheated by the middleman, the shipowner to not agree to deliver the cargo otherwise than against the presentation of a Bill of Lading from the second (switched) set.

Carriers and forwarders must also refuse to sign the switched set of Bills of Lading if the middleman changed the details referring to the cargo in question, i.e. nature of goods, quantity, quality and condition. See Feoso Maritime Co Ltd. v. Faith Maritime Co Ltd. The Daphne L(Singapore 2003). This example is relevant for what is actually happen in charter trades where the ship’s agent is appointed by the charterer (CFR/or CIF seller) and so, the ship’s agent tend to put the charterer’s interests ahead of those of shipowner. The risk is that the ship’s agent will issue the switched set of Bills of Lading without first notifying the shipowner, which actually happened in the case of „The Daphne L“. See also Noble Resources Ltd. v. Cavalier Shipping CorporationThe Atlas [1996] 1 Lloyd’s Rep. 642, where the middleman made the agreement for the issuance of switched set of Bills of Lading with the ship’s agent only. The consequence is that the shipowner is not bound in any way by the terms of switched Bills of Lading. Neither the Master nor ship’s agent should issue a second set of Bills of Lading without the express authorization of shipowners.

When the Master wishes to delegate authority to sign Bills of Lading to the ship’s agent, then the usual procedure is to issue a Power of Attorney that stipulates the conditions allowing the ship’s agent to sign Bills of Lading, e.g. the ship’s agent should be allowed to sign Bills of Lading only subject to a written confirmation received from shipowner for each set of Bills of Lading in question. Then the ship’s agent must send by e-mail or fax the Bill of Lading completed with the details to be included therein and wait to receive a written confirmation from the shipowner prior to sign the Bills of Lading.

A further measure of protection for the shipowner/multimodal transport operator is a requirement that the middleman provide a letter of indemnity whereby the middleman agrees to indemnify the shipowner/multimodal transport operator against all consequences or liabilities that may arise from the switching of the original set of Bills of Lading with a new set of Bills of Lading. Such letter of indemnity would also have to contain the middleman requirements with regard to the changes to be made in the information showed by Bills of Lading and be given to the shipowner/multimodal transport operator at the time of surrendering the original set of Bills of Lading for cancellation.

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