Davies Johnson’s Nico Saunders and Henry Stockley summarise the legal and practical consequences associated with the practice of issuing switch or split bills of lading.
By way of simple summary of industry practice, upon shipment of a cargo a bill of lading is issued to the shipper who, once they receive payment, transfers the bill to the consignee, enabling them to take delivery of the cargo at the discharge port by presenting the bill of lading to the Master. When a bill of lading is ‘negotiable’, it may be transferred multiple times before delivery is taken by the ultimate purchaser of the goods.
Bills of lading therefore usually constitute:
- a receipt for the goods (evidence of quantity & condition);
- evidence of the contract of carriage and its terms; and
- a document of title to the goods (giving the lawful holder the right to claim delivery upon presentation, the power to transfer that right, symbolic possession of the goods and title to sue the carrier).
A bill of lading also often forms an important part of a credit arrangement and represents a bank’s security in respect of any credit advanced to a buyer.
The practice of “switching” bills of lading involves a second bill being issued in substitution for the first bill of lading.
Although the practice is widespread and often has a sound commercial basis, potential issues arise as to whether the carrier can and should comply with such request.
The issuance of switch bills may involve risk and uncertainty for the carrier. The primary questions are whether the party requesting switch bills has the right to do so, and what a carrier can do to mitigate risk.
Why are Switch Bills required?
Switch bills are often requested for reasons such as:
- There may be a change to the contracting parties because a sale has fallen through. Therefore the cargo may have to be redirected to a new buyer.
- A seller of the goods in a chain of contracts may not want the original shipper to appear on the bills of lading. Instead the seller is named as the shipper (this is not uncommon in practice).
- A change in discharge port because the goods have been resold, the onward transport arrangement has changed or the seller has an option to discharge at one of a number of ports.
- The buyer requires one bill of lading to cover multiple small parcels to facilitate on-sale or requires multiple bills of lading which effectively break a bulk shipment into smaller parcels.
- To take account of commingling, consolidation or blending of cargo or to change the description of the goods.
- If the cargo is discharged and reloaded other than at the original loadport.
Who can request Switch Bills?
The owner of the goods (i.e. the holder of the first bills) at the time of the request.
What are the risks associated with Switch Bills?
Switching bills of lading is not prohibited as a matter of English law, provided there is no fraudulent purpose behind the request. However, the practice potentially exposes the carrier to risks such as:
- Theft and misdelivery claims
Issuing switch bills of lading risks there being multiple bills of lading in circulation for the same cargo, in which case the carrier could face a claim in misdelivery for the value of the cargo covered by the bill(s). For example, a fraudulent shipper may sell the goods to two consignees, facilitated by the issuance of a second bill. If the first set is not cancelled and surrendered, both consignees may present bills of lading purportedly entitling them to delivery, putting the carrier in a very difficult (and potentially very costly) position.
- Claims in Deceit / Misrepresentation
A false or negligent representation in switch bills could expose the carrier. In the case of intentional deception or fraud a claim could be brought under the tort of deceit and in the case of negligence or innocent misrepresentations claims could be brought under the Misrepresentation Act 1967 or via the tort of negligent misstatement.
Particular concerns arise if bills are switched in order:
- To hide the place the cargo was loaded (which may be an attempt to avoid import duty on the cargo, or circumvent a sanctions regime).
- To amend the date of shipment (which may be to avoid problems in the sale contract with letter of credit terms where bills of lading must be issued within certain dates of loading).
- Prejudiced insurance cover
Some P&I insurers exclude cover for liability arising from or under switch bills. Cover may be refused for cargo claims or, in the case of fines and loss, due to custom laws infringements.
Often a letter of indemnity (“LOI”) is requested by the carrier from the person requesting the second bill. An LOI issued to facilitate an unlawful purpose will not be enforceable.
- Other issues
The applicable international convention may be altered by issuing a switch bill. For example, a Hague-Visby Rules bill of lading could become subject to the Hague Rules by the insertion of different terms or depending on how, where and by whom the new switch bill is issued.
Letters of credit could be declined in the case of discrepancies.
Minimising the risks
Certain considerations will always apply when the parties request a bill of lading to be switched or amended:
- Ask why the switch is being done; simple due diligence may flush out any untoward practice. Beware of any evasive answers and indicators of fraud.
- Consider whether the process of switching the bills of lading may amend, vary or replace the contract of carriage. Particular care must be given to the charterparty and other terms incorporated into the original and switch bills.
- Consider whether any feature of the proposed switch bill of lading will mislead a third party about the representations in the bills which are being changed.
- The first set of bills of lading should be surrendered and cancelled before releasing the switch bill. This is the only way the carrier is able to confirm that all the parties to the carriage consent to the switch, and that the requestor is the true owner of the cargo. Surrender and cancellation will also reduce the risk of misdelivery claims.
- Seek the consent of the relevant parties to the contract of carriage (the carrier and the holder of the bills).
- Consult insurers as to whether the switch bill of lading, in the circumstances, will prejudice cover.
- If an LOI is offered in return for switching bills of lading, the carrier must consider whether the LOI will be enforceable. This includes whether the requestor has sufficient assets against which to enforce; how well the requestor knows the entity offering the LOI; how often the parties have done business together before; and, whether the requestor can be “trusted”.
- The use of electronic bills of lading. These can be mutably stored in, for example, a centralised digitalised system using blockchain, helping to decrease document exchange and enable carriers to track bills of lading in real time. Such systems may reduce the risks associated with switch bills of lading outlined above. However, any idiosyncratic risks involved in the use of electronic bills of lading are not considered in this brief article.
Whilst it is not uncommon in practice for switch bills to be requested for valid and honest commercial reasons, as Longmore J. said in The Atlas  1 Lloyd’s Rep. 642, issuing such bills is a practice fraught with danger. A carrier opens himself to potential claims for which insurance cover may be refused. Before issuing switch bills, it is crucial for a carrier to insist upon surrender of the first set of bills, ensure all parties to the ‘bill of lading contract’ consent and obtain guidance from insurers, in particular P&I insurers.
For further guidance or questions on this topic please contact Davies Johnson’s Plymouth office.