Switch Bills of Lading: a commercial necessity or a tool for fraud?

Working in shipping blind to commercial reality is a recipe for disaster. However, the line between being commercial and fraud can occasionally be finely drawn.

“….Honest commerce requires that those who put important documents, like bills of lading, into circulation do so only where the bill of lading, as far as they know, represents the true facts  ….”

A bill of lading is a document, a bill of exchange, representing the goods shipped.  It is that simple point which is behind both their negotiability and importance.  When they are transferred to a third party, he relies on the accuracy of the statements contained in the bill of lading.

When an owner or time charterer is asked for “switch bills” he must tread carefully. A letter of indemnity is little consolation.  In Brown Jenkinson v Percy Dalton a letter of indemnity indemnifying owners for issuing clean bills when the cargo was not in apparent good order, was held unenforceable even though the Owners did not ‘intend to defraud’ and only the tort of deceit had been committed.

“They are now seeking to recover on the indemnity in consideration of which they committed a tort. Had they been actively intending that someone should be defrauded  by their misrepresentation, their case would have been unarguable.”    

Inaccurate statements, such as the date of shipment, name of shipper/consignee, quantity/condition of cargo constitute misrepresentations. Sometimes a different charterparty with different freight/demurrage rates is incorporated thereby defrauding the receiver. Switch bills might be used to draw fraudulently on a letter of credit or to defraud a seller/buyer.

In Samsung Corp v Devon Industries [1996] the buyers of the cargo arranged with the carrier to have switch bills issued naming the buyers as shippers of the cargo. These bills were negotiated without the buyers having paid the original sellers. The Singapore Court nonetheless stated:

“The practice of cutting and releasing ‘global bills of lading’ is perfectly in order provided the [original] bills of lading issued to the real shippers … have been received lawfully by the [buyers] duly indorsed and surrendered to the ship owners or their agents. In other words, ship owners may issue ‘global bills of lading’ in exchange for the first set of bills of lading issued to the shippers.”

It is essential that the original set of bills of lading are returned to the owner, otherwise several versions of bills may be circulating at the same time and the carrier risks delivering to the wrong party and being forced to compensate the holders of the true ‘original’ bills.  In the Lycaon two sets were in circulation and there was a dispute as to who was entitled to take delivery. The Owners paid the costs of the interpleader proceedings as the proceedings arose out of the default of owners’ agents in issuing the switch bill while the original was still in circulation.

It is well established that a Master does not have authority to issue more than one set of bills in respect of the same cargo. Once the first set is issued the Master has no authority to issue a second set until the original bill is surrendered and cancelled.  Charterparty clauses permitting the issuance of switch bills do not displace this clear rule of law and must be treated with caution, especially if the charterparty is not with the original owner, whose consent will in any event be required.  An unauthorised bill of lading gives no rights to possession of goods represented by it.

In one arbitration a bank was left with the receivers’ documents after the receiver refused to take them up. The bank paid under the LC on presentation of switch bills of lading, having been told by the sellers (which were also the time charterers and who had sub chartered to a subsidiary of theirs) that they were in fact the original bills of lading. The sellers/charterers claimed demurrage from the bank. The bank presented a counterclaim for misrepresentation and/or fraud. The seller/charterer had presented the unauthorised switch bills to the bank at a time when the seller/charterer knew that the original bills were still in circulation.  The bank lost the opportunity to reject the bills as it was only after the letter of credit expired that the original bills had been returned and the switch bills authorised. The tribunal frowned upon the conduct of the seller/charterer but stopped short of making a finding of fraud. The charterparty between the seller/charterer and their subsidiary presented as being incorporated into the switch bills contained a US$20,000/day demurrage rate whereas the true rate under the head charter which was in fact incorporated to both the original and switch bills contained a daily demurrage rate of US$8,000. The tribunal awarded the demurrage in the seller/charterers’ favour but at the reduced rate of US$8,000/day and penalised the seller/charterer in its recovery of costs.

When the object of the switch bills is to avoid customs duties by misrepresenting the ports of loading/discharge the contract of carriage evidenced/contained in the bill might be unenforceable under public policy on the basis that the parties conspired to break custom laws.  It was common practice when trade between mainland China and other countries was formally forbidden (but actually thriving) to use Hong Kong as the port to issue customs switch bills.  But there, the only fraud was against the customs authorities, (who actually turned a blind eye), not against the parties.

Where a time charterer is asked to issue switch bills he must ensure he has the head owner’s approval before they are issued if the bills are Owners’ bills. Clauses in the charterparty permitting the charterer to demand switch bills do not suffice. He must obtain head owners’ approval and check whether the charterparty(/ies) up the line also contain such a clause. In The Atlas the court dismissed a claim for short delivery of cargo based on a contract of carriage evidenced by a switch bill on the basis that the switched bill was unauthorised, it having been issued without the authority of the shipowner.

“No doubt this provision for a second set of bills of lading … was agreed for not unreasonable commercial motives but it is a practice fraught with danger; not only does it give rise to obvious opportunities for fraud (…) but also, if it is intended that the bills of lading should constitute contracts of carriage with the actual owner of the ship (…), the greatest care has to be taken to ensure that the practice has the ship owners’ authority.”

Where owners refuse to agree to issue switch bills they are not being difficult but are concerned about problems that may arise such as: (1) differences in the description of the cargo causing conflict as to the validity of the bills as receipts of the cargo shipped; (2) discrepancies in whether the Hague/Visby or Hamburg Rules apply rendering an entirely different and heavier onus on the carrier than originally intended. (3) One set might incorporate a different voyage charter with e.g. a different jurisdiction clause. (4) One set might be freight payable and the switch set marked freight pre-paid thereby affecting owners’ right to lien.

One Christmas eve the writers received a call from disponent owners asking whether they should give in to charterers and issue switch bills. On examining the switch bills against the originals the only seemingly slight difference was the form. The switch bills were in the CONGEN 1978 form and, had they been issued to replace the original bills which were in the 1994 form, the owners would have lost their right to insist on English law and LMAA arbitration.

The above are but some examples of the complications that arise. It would be wise for a disponent owner to refuse to include a clause permitting the charterer to demand switch bills in the charter. In the event that it cannot be avoided care must be taken for it to be drafted so as to give the owner the right to: (a) insist that he first receive the originals for cancellation (b) to refuse if the head owner does not give authority (c) to refuse where there is reasonable suspicion of fraud.

Sometimes a genuine mistake in the original bill(s) needs correction.  Even then the court may decide that it is preferable to amend the originals than issue fresh ones. In the Wiloma Tanana the Master was presented with and signed wrongly dated bills of lading. Owners applied for a declaration as to the date the bills should bear; permission to amend or authority to re-issue corrected bills.  Hobhouse J said at page 45 “It is out of the power of the owners now unilaterally to recall the bills of lading”.  However the owners should correct the bills. The charterers could not forbid owners from doing so provided that the owners did not issue fresh bills.

If a time charterer/disponent an Owner is asked to issue switch bills it is highly recommended that their P&I Club is informed and legal advice is obtained. The switch bills need to be checked carefully against the originals to ensure that the above cited complications are avoided. It is essential that the original bills are returned to head owners for cancellation prior to circulating the switch bills.

Co-author  Maria Gerakaris
Co-author  David Hughes

David Hughes

Joint article originally published in the Charterers’ Club magazine in October 2011.

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