What is Switch Bill of Lading?
The practice of issuing a Switch Bill of Lading involves surrendering the original Bill of Lading (B/L), under which the cargo was initially shipped, to the carrier or its agents in exchange for a new set of B/Ls that have modified details such as the shipper’s name and address, the issue date, or the port of shipment. This procedure can be utilized for various commercial purposes, including concealing the cargo’s origin if the source is politically sensitive, or for fraudulent objectives like evading customs duties or misrepresenting shipment dates which may affect the purchase price of the goods.
Switch Bills of Lading are inherently risky due to their potential for facilitating fraud. Additionally, when such bills are intended to establish contracts of carriage with the actual shipowner (not merely a disponent shipowner), it is critical to secure the shipowner’s explicit authorization. This is because a provision in a Time Charter (T/C) that allows the charterer to issue B/Ls does not automatically extend to the issuance of Switch B/Ls. Furthermore, even if a sub-charter contains express permission for issuing Switch B/Ls, these do not bind the shipowner unless similar permissions are included in the head charter.
A significant hazard of this practice is the risk of the carrier issuing a new set of B/Ls without first ensuring the surrender of the original set. The presence of two conflicting sets of B/Ls not only raises the likelihood of fraudulent activities but also complicates the carrier’s responsibility in guaranteeing that the cargo is delivered to the legitimate recipient. Normally, the shipowner or the shipowner’s agent, who issues the B/Ls, should bear any resulting losses from such discrepancies.
Differences between the terms of the original and the switch B/Ls can also pose challenges. An endorsee of a Switch B/L might find the terms of the original B/L more favorable, potentially leading to disputes or dissatisfaction. Legally, replacing the original B/L with a Switch B/L could be seen as a mutual amendment of the carriage contract by the involved parties. However, complications might arise if the B/Ls were issued under different legal jurisdictions, particularly concerning the applicability of the Hague-Visby Rules.
A critical question is whether the Hague-Visby Rules, if applicable to the original B/L, continue to apply following the issuance of a Switch B/L. Moreover, complexities might emerge when the carriage is part of an international sale transaction, especially those financed by documentary credits (Letters of Credit). It is essential to determine whether the terms and representations in the Switch B/L satisfy the documentary requirements of the credit and provide the buyer with the necessary continuous documentary coverage from the port of shipment to the destination.
Despite the growing use of Switch B/Ls, there has been limited litigation addressing these issues, leaving many legal questions unresolved and the practice shrouded in uncertainty.
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Why a Switch Bill of Lading?
The process of transporting goods often necessitates changes to the original bill of lading, leading to the issuance of a switch bill of lading that reflects updated information.
Minor adjustments might be directly endorsed on the original bill, but more significant modifications like alterations to the discharge port, changes in the buyer or receiver, detailed updates in the goods description, or trading terms usually require a new bill of lading.
Occasionally, shippers use switch bills of lading to conceal the true seller or the cargo’s actual origin country. While this practice raises ethical questions, it is sometimes employed for various reasons.
A switch bill of lading can only be issued when the original bill is not in use, and the cargo hasn’t been delivered to the buyer. The original shipper, typically the one authorized to request changes, must return the first set of the original bill of lading to the shipping company, along with a signed, stamped request and the buyer’s written consent.
Upon issuing the switch bill of lading, the original set becomes obsolete. It is crucial that there aren’t two different bill of lading sets for the same cargo.
Global trade and goods transportation are constantly evolving. Negotiations often lead to changes in the sale terms and conditions, which might require updating the original bill of lading during the cargo’s voyage.
Changes could be due to alterations in the discharge port, corrections in the cargo description for customs, or the buyer reselling the in-transit goods. In such instances, the original bill needs updating to reflect these new details.
If the original bill of lading is not updated, it could complicate the cargo clearance at the destination port. A new, updated bill of lading – the switch bill – is therefore issued to ensure smooth clearance by the rightful buyer at the new port.
What is Stack Dates?
Stack dates and switch bills are distinct concepts in shipping logistics, each addressing different aspects of the transportation process.
A switch bill of lading is essentially a revised version of an existing bill of lading, used to update or alter information such as the destination port, the description of the goods, or the identity of the buyer. It’s issued when there’s a need to change significant details after the original bill of lading has been issued.
On the other hand, stack dates refer to specific deadlines set by the port for when containers must arrive to be loaded onto a scheduled vessel. These dates typically range from 2 to 5 days and are crucial for maintaining shipping schedules. Missing a stack date means the container hasn’t arrived at the port within the allocated time frame and, therefore, cannot be loaded onto the intended vessel. Reasons for missing stack dates can vary, including poor planning, unforeseen delays like strikes or natural disasters, etc. In such cases, the container will have to wait for the next available sailing, possibly on a different ship.
It’s important to note that switch bills of lading are not applicable for situations involving missed stack dates because, in these scenarios, the original bill of lading hasn’t been issued yet. The switch bill of lading is only relevant when there’s already an existing bill that needs to be updated or altered.
What Should Not be Changed in a Switch Bill of Lading?
When issuing a switch bill of lading, it’s crucial to maintain certain aspects of the original bill unchanged, as they are fundamental to the cargo’s transportation contract.
- Cargo Description: The fundamental description of the cargo must remain the same. The contract of sale and purchase is for specific commodities, and altering the basic description effectively changes the contract itself. However, further details can be added to the description in the switch bill of lading for clarity or to fulfill specific requirements.
- Quantity of Cargo: The quantity of cargo cannot be altered in a switch bill of lading since the cargo has already been shipped and its quantity is fixed.
- Dangerous Goods Declaration (DGD): For hazardous cargo, the DGD remains unchanged. This declaration includes information about the dangerous goods category, special packaging and packing requirements, and necessary marks and labels. The switch bill of lading must reflect the same DGD as in the original.
- Legal Compliance Undertaking: The statement confirming adherence to national and international laws for transporting hazardous goods remains unaltered in the switch bill of lading.
- Cargo Dimensions: For Out-of-Gauge (OOG) cargo, the dimensions specified in the original bill of lading remain constant. The switch bill of lading won’t show any changes to the cargo’s dimensions.
- Port of Loading and Sailing Date: The port of loading and the date of sailing are also fixed and won’t change in the switch bill of lading, as the cargo’s voyage has already commenced from a specific port.
- Original Clauses: The original clauses stated in the original bill of lading will be carried over and remain unchanged in the switch bill of lading.
It’s essential to adhere to these stipulations to ensure the switch bill of lading is valid and accurately reflects the transported cargo while complying with legal and contractual obligations.
Misuse of Switch Bill of Lading
P&I Cover and Switch Bill of Lading
Protection and Indemnity Clubs (P&I Clubs) frequently encounter inquiries from shipowners about switching bills of lading. Despite the commonality of this practice, it often leads to confusion about the shipowners’ ability to comply, the proper issuance of new bills, and the implications for P&I Cover. Addressing these concerns, this article will outline key considerations for shipowners when responding to requests for switch bills and offer practical guidelines to minimize associated risks.
Key Concerns for Shipowners:
- Legal and Contractual Implications: Switching bills of lading can have legal ramifications, particularly if the changes are substantial or if they are made without the consent of all parties involved. Shipowners should be aware of the potential for contractual breaches and the legal consequences that could follow.
- Risk of Fraud: There is a risk of fraud, especially if the switch bill of lading is used to misrepresent the cargo’s origin, condition, or value. Shipowners need to ensure that the switch does not facilitate fraudulent activities.
- Impact on P&I Cover: Switching bills may affect the shipowner’s protection and indemnity cover. It’s crucial to understand how such changes might impact the insurance terms and conditions.
Practical Guidelines for Minimizing Risks:
- Verify the Legitimacy of the Request: Shipowners should confirm that the request for a switch bill of lading comes from a legitimate party with the right to make such a request, usually the shipper or consignee.
- Ensure Written Consent: Obtain written consent from all relevant parties, including the shipper, consignee, and any other stakeholders. This consent should detail the changes and acknowledge agreement to them.
- Consult with P&I Clubs: Before proceeding with the switch, consult with the P&I Club to understand the potential implications on insurance cover and seek advice on the best practices.
- Accurate and Transparent Documentation: Ensure that the new bill of lading accurately reflects the cargo and the terms of carriage. Transparency in documentation can prevent misunderstandings and potential legal issues.
- Legal Advice: In cases of uncertainty or complexity, seeking legal advice can provide clarity and help in navigating the potential risks associated with switching bills.
By following these guidelines, shipowners can better navigate the complexities of switch bills of lading, ensuring compliance with legal requirements and minimizing risks to their operations and P&I cover.
Concerns with Switch Bill of Lading (B/L)
Under usual circumstances, with various exceptions, a bill of lading is endorsed by the master or their representative and given to the shipper after the cargo is loaded onto the ship. In exchange for payment, the shipper then passes this bill to the consignee. At the destination port, the consignee submits this bill to the carrier to collect the cargo.
However, when bills of lading are switched, the document tendered at the destination port differs from the one initially issued at the port of loading. This situation can raise several issues for a careful shipowner, of which three key concerns will be outlined here.
The key element in determining if a switch bill issue is a novation or a variation of the contract of carriage lies in the consent of the bill’s issuer. While cases haven’t explicitly labeled the switch as either, the authorization from the original bill’s issuer, or their agent, is crucial. To ensure a successful switch request, obtaining the issuer’s consent at the start of the contractual relationship is advisable. In practice, charterparties may include clauses that allow the shipowner or disponent owner to issue switch bills under certain conditions. However, when issuing switch bills as the shipowner’s agent, it’s important to adhere to the clause’s terms.
For instance, in the Islamic Republic of Iran Shipping Lines (IRISL) v Phiniqia International Shipping LLC case, a breach of contract occurred as the switch bill was issued without surrendering the first set of the original bill, despite a clause requiring this action and a letter of indemnity. Similarly, in Daewoo Hong Kong v Mana Maritime Inc, the switch bill, which changed the shipper’s name, was unauthorized due to the absence of a consent clause in the charterparty. The question then arises whether a clause stating ‘Bills of Lading shall be signed as Charterers direct, without prejudice to this Charter’ provides adequate authority for issuing switch bills at will. The Atlas case suggests a more specific clause might be needed for proper authorization.
Ad hoc agreements for switches are also possible at the time of the request. These typically hinge on the surrender of the original bill of lading and other imposed conditions, without which the issuer is not obligated to proceed with the switch.
Cancellation of the Original Bill of Lading (B/L)
International Law and Switch Bill of Lading (B/L)
In cases where a switch bill of lading alters or replaces an original contract, it’s essential to assess its impact on mandatory international public law. Two main situations can arise: firstly, if the switch bill originates from a different jurisdiction with a different international transport convention than the original; and secondly, if the switch bill shows a different port of loading or discharge. These situations raise questions about whether a different legal regime applies to the switch bill and, if so, whether this new regime’s limitations and liability exclusions for the carrier will be recognized.
The criteria for applying different conventions vary. For instance, the Hague Rules consider the bill of lading’s place of issue, while the Hague-Visby Rules also include the bill’s issuance in a Contracting State or carriage from a port in a Contracting State. The Hamburg Rules have a more extensive list of criteria. Conflicts can arise if the switch bill changes the port of loading or discharge or if it’s issued in a different place than the original bill, potentially altering the carrier’s liability.
Regarding the applicability of these conventions, if a switch bill indicates a different port of loading than the original, it may be considered a misrepresentation. However, this issue doesn’t arise if the goods are transhipped at an intermediate port with a new bill issued. In cases where the actual port of loading is under sanctions, the switch bill’s contract might be void due to illegality or public policy concerns.
If the switch bill is a contract variation, the applicable regime might be that of the port indicated in the switch bill. Issues arise if goods are lost or damaged between the actual and indicated ports of loading. In such cases, liability and risk assessments become complex, especially in cases of gradual damage.
Difficulties also emerge when the switch bill’s place of issue imposes a different legal regime than the original place of shipment, potentially altering liabilities and rights. Such variations might be upheld unless they are seen as attempts to circumvent mandatory legal rules. Therefore, replacing regimes like the Hamburg Rules with the Hague or Hague-Visby Rules might be problematic.
Risks of consenting to the issue of Switch Bill of Lading (B/L)
The issuance of switch bills of lading presents significant risks for the carrier, even though they might consent to it for business-related reasons. Recognizing and understanding these risks is vital for taking steps to prevent and mitigate potential issues.
1- Risk of Liability for Misrepresentation
As previously mentioned, switching a bill of lading without a corresponding change or amendment in the contract can be equivalent to intentionally including false information or errors in the bill of lading. If a loss occurs because of accepting such a bill as part of the contract of carriage, the holder is entitled to a remedy. A key question is whether using the same date on the switch bill as on the original bill of lading amounts to misrepresentation. Notably, in a CIF (Cost, Insurance, and Freight) transaction, the buyer may reject a switch bill dated later than the actual shipment. The Hansson case demonstrated that in CIF sales, the freight contract must be secured at shipment time, and a bill of lading issued much later and in a different location than the original was deemed unacceptable. This case highlighted the ambiguity of certain notations on the switch bill, leading to uncertainty about the holder’s rights. Thus, a bill of lading tendered under these circumstances may not be considered a through bill of lading. This presents a potential issue when a switch bill, issued significantly later or in a different place than the original, needs to be tendered for a CIF contract.
There are valid reasons for dating the switch bill the same as the original, even if it’s issued later, but it raises the question of potential misrepresentation. According to UCP 600, Article 20(a)(ii), the bill of lading’s issuance date is considered the shipment date unless an on board notation states otherwise. This suggests that backdating a switch bill to reflect the shipment date might not be misleading if the goods were indeed shipped on that date. Practices like dating switch bills for split bulk cargo with the original bill’s date support this. However, as shown in IRISL v Phiniqia, in disputes, especially those involving fraud allegations, the issue date can be contested. A safer approach might be to indicate the actual issue date along with a note that the switch bill replaces an earlier bill and mention the original bill’s issue date.
2- Risk of Fraud against Buyer and Seller
Protection and Indemnity (P&I) Clubs advise their members on the correct procedures for issuing alternate bills of lading. This advice highlights several key points: verifying the requester’s authorization, securing consent from all involved parties, ensuring the wording of the new bill is clear and non-misleading, and confirming a valid reason for the change. Additionally, it’s crucial that the requester holds all original bills, which must be ready for surrender and cancellation. The effectiveness of any indemnity provided in return for the bill switch also plays a role. The degree to which failing in these aspects affects P&I coverage depends on the specific terms of coverage in each situation.
Due to the potential risk of losing coverage, the issuer usually demands an indemnity from the person asking for the bill switch. In such instances, it’s vital for the issuer or their agent to act strictly within the boundaries defined by the indemnity, adhering precisely to its instructions. As Manaadier notes, if an agent is instructed to issue a switch bill based on a customer’s indemnity, they should confirm the wording with the principal and get the indemnity approved before proceeding.
However, caution is advised when relying too heavily on an indemnity. Particularly, if the switch is requested for an illegal purpose, the indemnity might be invalid, depending on the issuer’s awareness. The case of Brown Jenkinson v Percy Dalton demonstrated that an indemnity provided for issuing a clean bill of lading for known defective cargo, with an intent to deceive, was unenforceable due to its fraudulent nature. Similarly, from The Jag Ravi case, it’s inferred that an indemnity is unenforceable if it’s intended for an illegal purpose. This includes not only fraud but also evasion of administrative laws like import regulations, tax laws, or sanctions.
4- Risk of Lack of Enforceability for Illegality
Mitigating Risks of Switch Bill of Lading (B/L)
The risks in international trade transactions often arise because parties involved don’t have sufficient access to accurate and consistent information about goods or the confirmation of ownership rights. This lack of clarity can lead to unauthorized individuals requesting switch bills of lading. The issue is further compounded when agents might issue these bills without proper authority, resulting in the holders of these bills having either no rights or unenforceable rights due to legal complications. Adopting centralized or distributed ledger systems, which act as a single source of truth, could significantly reduce these risks by providing transparency.
In recent years, there’s been a shift towards electronic transport documents. Significant steps have been taken by various organizations and groups, such as the International Group of P&I Clubs and BIMCO, to incorporate electronic bills of lading in their operations. These changes are a response to the growing adoption of electronic systems, especially by large chartering corporations. The interest in distributed ledger technology, particularly blockchain, to replace paper bills of lading is also on the rise.
These electronic systems can mitigate risks associated with switch bills by ensuring that any substitution for a bill can only be issued with the original issuer’s consent and following the cancellation of the original bill. This process would prevent unauthorized issuance and provide real-time information about contractual terms and entitlements. Additionally, these systems could make the reasons for switch requests more transparent, enabling quicker and more informed decision-making. The audit trail created by these systems would offer clear obligations regarding the goods in question.
However, it’s surprising that INTERTANKO advises against using the essDOCS system as per Clause 30 of BP VOY 5, which facilitates the electronic issuance and signing of bills of lading. This reluctance might stem from the requirement for shipowners to subscribe to and understand the system. Nonetheless, when implemented, these systems can greatly reduce the risks in switching bills of lading by providing clear visibility into contractual terms and entitlements.