BILLS OF LADING PLAY A VITAL ROLE IN INTERNATIONAL TRADE
ALL CARGOES which are carried by sea are carried in terms of contracts. Each shipper of goods will have an agreement with the vessel owner or charterer to ship his goods to a particular place. Goods which are carried on board a ship are usually carried in terms of a document called a bill of lading. A bill of lading is a commercial transport document which is used when some or all of the carriage of the goods in question will be by sea.
The bill of lading will state that the particular goods have been shipped by the shipper on a particular vessel, or that the goods have been received by the “carrier” (the owner or charterer of the carrying ship) for shipment. The bill is signed by or on behalf of the carrier and states the terms on which those goods have been delivered to and received by the carrier.
Bills of lading function as a cargo receipt, evidence of a contract of carriage, as well as a document of title.
A bill of lading is issued by the carrier or its agent to the shipper or its agent as proof of receipt, also recording the cargo’s condition and quantity. The carrier agrees in the document to deliver the goods at the destination in like good order and condition.
The actual contract of carriage is usually concluded before the bill of lading is issued, so the bill is strictly speaking only evidence of the contract of carriage already entered into between the carrier and the shipper to transport the cargo (recording the terms agreed). As the bill of lading is only evidence of (and not the actual) contract of carriage, as a general rule the parties to a contract of carriage are free to bring evidence to show that the bill of lading terms do not in fact accurately reflect those of the contract of carriage as agreed by the parties.
However, if the bill of lading is in the hands of a third party holder (if the goods have been sold to a third party while the carriage is being performed and the bill has been delivered and endorsed to the third party buyer in return for payment for the goods) then the carrier will be bound by the terms of the bill itself in respect of a claim by that third party holder of the bill. This is due to the fact that the third party was never a party to the original contract of carriage between the shipper and the carrier and has, in paying for the goods and receiving the bill of lading, relied on the terms contained in it.
The third function of a bill of lading, as a document of title, is arguably its most important function, as it allows for cargo to be sold while in transit, which is vital to international trade. A “bearer” or “order” (negotiable) bill of lading is capable of being transferred from the shipper and seller of the goods to a buyer. As such, it is considered to be a document of title (giving the bearer title to the goods, or entitlement to delivery of the goods to it at destination).
An original negotiable bill of lading may be transferred to a lawful holder by physical delivery alone in the case of a bearer bill or by delivery plus indorsement (signature by the shipper on the reverse side indicating transfer to the buyer) in the case of an order bill. That new holder of the bill is then entitled to delivery of the cargo at destination upon presentation to the carrier of the original, endorsed bill.
In this way it is possible to trade (sell) cargoes while they are still at sea. In many jurisdictions, goods must be physically transferred (handed over) in order to transfer title (ownership). Where the bill of lading is negotiable, it may represent the physical cargo and thereby fulfil the requirement of physical transfer. There is no limit to the number of times a bill may be on-sold while still in transit.
The contractual terms printed on a negotiable bill of lading will almost always create an obligation for the carrier to deliver the cargo to the first person to present an original bill of lading at the discharge port or place of delivery (bearing in mind that three originals are usually issued by the carrier). A bill of lading, therefore, can be said to enable the lawful holder to take delivery of the cargo at its final destination against presentation of the original.
The bill of lading can also be used by a buyer of goods to acquire finance from a bank. In terms of the contract for the sale of the goods, the shipper (and seller) is required to present the original bill to the buyer’s bank in order to receive payment for the goods from the buyer’s bank, under a letter of credit.
The bill is generally endorsed by the shipper to the bank, which can then hold on to the bill until its client, the buyer, in turn pays, or effectively reimburses, the bank the purchase price advanced by the bank. This means that if the bank is not paid by its client, it is in possession of and the holder of the original bill of lading and can legally claim delivery of the cargo. The bank is accordingly secured for the loan to its client.
It is evident that bills of lading perform vital functions in international trade and are very important to commerce.
Goscelin Gordon is an associate at Bowmans Durban.