Bill of Lading as a Negotiable or Transferable Document of Title

Chapter 2

Paper Bill of Lading and Electronic Bill of Lading

Bill of Lading as a Negotiable or Transferable Document of Title

The bill of lading is a typical document of title. The bill of lading is invested with particular attributes of great practical importance commercially. This enables it to become one of the key instruments in international trade.

The bill of lading is often referred to as a negotiable document of title, and there is some confusion as to whether the bill of lading is really a negotiable or is merely a transferable document. This is especially the case in English law. According to English law, bills of lading are not considered to be negotiable documents in their full legal sense, even though they possess some of the legal characteristics of negotiable documents, such as transferability by endorsement In fact, what is meant is that they are transferable. The bill of lading does not have the essential characteristic of a negotiable document: the transferee of the bill cannot acquire a better title than that of a predecessor. If a bill of lading is stolen or endorsed without the shipper’s authority, a subsequent bona fide transferee cannot acquire the rights to the goods represented by the bill. The rule that a bona fide holder of a lost or stolen bill of exchange endorsed in blank or payable to bearer is not bound to look beyond the instrument has no application to the case of a lost or stolen bill of lading. A finder or thief can give no title to bills of lading even in the case of a bill endorsed in blank.

English law is based on the concept that the bill of lading represents the goods and therefore its transfer should not have greater effect than the transfer of what it represents. Since the goods themselves are not negotiable, there is no reason why the bill of lading should be. Possession of a bill of lading cannot have a greater force than the actual possession of the goods. If a buyer has acquired the bill of lading without having paid the price, and has endorsed the bill of lading to a third party, such third party, even if it has acquired the bill of lading acting in good faith for value, cannot acquire a valid title to the goods.

It is obvious that in English law there is some confusion in the use of the terms “transferable” and “negotiable”. The distinction between transferable and negotiable documents is that a document is transferable when it can be transferred by one person to another, passing to the transferee the rights of the original holder but no more, while a negotiable document can give to the transferee rights that are better or greater than the right of the transferor, provided that consideration is given for the transfer. Therefore, only negotiable documents are an exception to the rule that nobody can transfer to another person more rights than he has (“nemo plus iuris ad alium transferre potest quam ipse habet ”).

The bill of lading therefore lacks the most important and characteristic element of negotiability: it may not give to a transferee a better title than that possessed by the transferor. The question which logically arises is whether this means that the bill of lading is not a negotiable document. This is impossible to answer without an explanation of the character and functions of the bill of lading.

The transferee for value, who takes a negotiable instrument in good faith and without notice of any defect in the title of his transferor, acquires an indefeasible right to the property in the instrument and to the benefits represented thereby. He acquires not merely possession but property. However, the bill of lading is not a negotiable document of title in the sense that it is able to carry title with it. Unlike a bill of exchange or promissory note, the bill of lading is not a negotiable instrument which is able to pass a good title to a bona fide transferee, regardless of the title of the transferor. The sole fact that the bill of lading is issued to the shipper does not enable him to give any title to a transferee. In fact, the shipper can be an agent of the seller or the buyer.

There is one point where it is possible to say that the transferee has even better rights than the transferor: the transferee may have better rights against the carrier than the transferor. The bill of lading in the hands of a transferor is only prima facie evidence against the carrier, while against a transferee of the bill the carrier is precluded from denying accuracy of its content.

The better position of the transferee of the bill of lading in respect of the right to delivery of the goods, and stronger evidential value of the bill of lading in his hands can be explained by the fact that the carrier serves as an intermediary in delivery of the goods between the seller and the buyer. The seller as shipper delivers the goods to the carrier and in exchange, as evidence, he receives the bill of lading from the carrier. By the contract of carriage evidenced by the bill, the carrier undertakes to deliver the goods as described in the bill to the consignee, i.e. to the buyer, to whom the shipper transfers the bill. After the bill has been transferred to the buyer, it represents the contract between the carrier and the buyer as a third-party holder of the bill. The buyer as a third-party holder of the bill has an independent right against the carrier, under the contract of carriage evidenced by the bill of lading, to demand delivery of the goods as described in the bill.

Under American law, on the basis of the provisions of Federal Bills of Lading Act (FBLA) and Uniform Commercial Code (UCC), bills of lading are clearly defined as negotiable documents, with the exclusion of straight bills of lading. The purchaser of bill of lading acting in good faith will have an indefeasible title to the goods, regardless of whether the bill of lading has been wrongfully transferred. The only situation that might defeat the right of a transferee is where the bill of lading has been wrongfully procured. Despite the clear intention of this legislation to make bills of lading fully negotiable, some American courts were reluctant to give the statutes this meaning. The reasoning is based on the idea that the bill of lading represents the goods, and possession of the bill of lading cannot have greater force than the actual possession of the goods.

The straight bill of lading, as defined by the FBLA, has some peculiar features which make unclear the legal status of this document. It has been suggested that the straight bill is in effect a waybill. Actually, the straight bill of lading is a hybrid document which contains the elements of both the waybill and the named bill of lading. The straight bill of lading is not a negotiable document, but it can be transferred by assignment with the effect similar to the transfer of a named bill of lading in civil law. The fact that the straight bill is transferable and capable of transferring certain rights to the transferee indicates the status of a document of title. In this respect, the straight bill differs from the waybill which is not a document of title and its transfer does not operate as a transfer of any rights. On the other hand, differently from a named bill and the same as a waybill, the consignee named in the straight bill does not need to present the document to the carrier but only to identify himself, which indicates that the straight bill is not a document of title. The controversy whether the straight bill of lading is a document of title is caused by section 32 of the FBLA which provides that:

“a person, to whom a bill had been transferred, but not negotiated, acquires thereby as against the transferor the title to the goods, subject to the terms of any agreement with a transferor. If the bill of lading is a straight bill such person also acquires the right to notify the carrier of the transfer to him of such bill and thereby to become the direct obligee of whatever obligations the carrier owed to the transferor of the bill immediately before the notification.”

This provision clearly distinguishes the straight bill from a waybill. It can be concluded that the straight bill is a sui generis document of title, since it enables the transfer to the transferee of certain rights against the transferor and the carrier, but it does not need to be produced in order to obtain delivery of the goods.

In civil law, the bill of lading is a negotiable document, on the same footing as the bill of exchange, provided that it is made out to order. This means that the nemo dat principle is not applicable to the transfer of bills of lading. The transferee of a bill of lading acquires all rights as stipulated in the bill, regardless of the rights of his predecessor. The only exception is the bill of lading to a named person, which is a transferable document of title, but is not negotiable. This means that the person named in the bill as consignee has to produce the bill in order to obtain delivery of the goods. In this respect, bills of lading to a named person are different from straight bills of lading in American law, which need not be produced to obtain the goods. The transfer of the bill to a named person is effected by a written assignment (cession) in accordance with civil law rules. The transferee acquires the same rights the transferor had against the carrier, which derive from the right of the transferor (ex iure cesso ), and can exist independently from the bill of lading. The civil law rules on cession are so cumbersome that bills of lading to a named person are actually never transferred in practice.

The Effect of the Transfer of a Bill of Lading

The bill of lading as a document of title can have several functions:

(a) the bill of lading represents the goods so that possession of a bill of lading is equivalent to possession of the goods;

(b) under certain conditions, the transfer of the bill of lading may have the effect of transferring the property of the goods; and

(c) the lawful holder of a bill of lading is entitled to sue the carrier.

The effect of the transfer of a bill of lading depends on the intention of the parties, and on the applicable law. The only right that is indisputably transferred by the endorsement of a bill of lading is the right to demand and have possession of goods described in it. This right is guaranteed to a legal holder of the bill of lading in all jurisdictions. However, this is not the case in respect of the transfer of property and the transfer of contractual rights.

Received for Shipment Bill of Lading

The “received for shipment” bill of lading is considered as a document of title in civil law, while in common law its legal status is not quite clear. The main distinction is that a “received” bill represents the goods as they are received for shipment, while the shipped bill represents the goods as loaded aboard the vessel. It is submitted that this does not prevent the “received” bill from being a document of title.

A contrary view is expressed by the learned authors of Benjamin’s Sale of Goods. The argument put forward is that it is impossible or extremely difficult to deal with the goods physically, once the goods are loaded, and that it was this difficulty which originally led to the recognition of shipped bills as documents of title, while the same level of impossibility or extreme difficulty does not exist before the goods are loaded, so there was “correspondingly less need to regard documents relating to them as documents of title”. Arguably however, this is not relevant for the status of the “received” bill as a document of title. Actually, the seller’s need for disposal of the goods by the transfer of a bill of lading may even be greater in the case of a “received” bill, especially when it is expected that the period between delivery of the goods into the charge of a carrier and their loading will be protracted.

A “received” bill arguably has weaker evidential value as compared to a “shipped” bill, since the goods may be lost or damaged after a “received” bill is issue. Besides, a “received” bill does not contain the date of shipment which is usually required by the contract of sale. This is why a CIF buyer or a bank usually does not accept “received” bills, not because the “received” bill is not a document of title.

There is little doubt that the “received” bill is capable of representing the goods and that its transfer can transfer constructive possession. It is true that the goods may perish after a “received” bill is issued, but even a “shipped” bill does not represent an absolutely secure document, e.g. if a “shipped” bill is wrongfully issued for the goods which have never actually been shipped. If the goods delivered at the port of destination to a consignee do not correspond to the description in the “received” bill, the consignee will be entitled to sue for damages the carrier who issued the bill. Actually, the main risk associated with “received” bills is that under the Hague Rules the carrier may not be liable for any damage which occurs before the goods are loaded.

Ship’s Delivery Order

The ship’s delivery order has some similarities to bills of lading: it is issued by or on behalf of the carrier and it confers on their holders rights against the carrier which are nearly the same as those of bill of lading holders. The main distinction is that ship’s delivery order is not a transport document stricto sensu. Ship’s delivery orders are issued after the carriage has started or even when it is finished. They do not necessarily contain a duty to carry the goods but only to deliver them. The contract of carriage may provide for issuance of delivery orders, but their legal basis is the contract of sale, not the contract of carriage.

Article 1(4) of the Carriage of Goods by Sea Act 1992 (COGSA 1992) defines the delivery order as a document which includes “an undertaking by the carrier to the person identified in the document to deliver the goods to which the document relates”. The COGSA 1992 obviously fell short of fully recognising the status of a document of title to the ship’s delivery order, since it implies the carrier’s liability against the “person identified in the document” and not against the holder of the document.

It is not clear why ships’ delivery orders were denied the status of documents of title, since the holders of a delivery order may also have an interest to dispose of the goods in transit. In order to grant the status of a document of title to the ship’s delivery order it would be sufficient to replace the expression “the person identified in the document” by the expression “the lawful holder of the document”. This is simpler, more practical, legally feasible and in accordance with other national legislation which regulates delivery orders.

Electronic Bill of Lading

For centuries the bill of lading had been issued on a piece of paper in standard A-size format. The end of the “paper” age and the start of a new “paperless” age have been announced by the introduction of computers, which in combination with telecommunication systems has enabled development of a new kind of transmission of business data. This new way of creating and communicating information is something referred to as “electronic commerce”, and “includes any computer or other technology by means of which information or other matter may be recorded or communicated without being reduced to documentary form”.

Replacement of paper bills of lading with electronic bills of lading means that a paper bill of lading issued in a well-defined standard form containing data on the parties, goods, conditions of carriage and so on, signed by or on behalf of the carrier, issued in several originals which are delivered to the hands of shipper, who sends them by mail to the consignee, should be replaced by an electronic bill of lading. An electronic bill of lading does not mean simply that a bill of lading is generated by a computer and contains the same data as a paper bill of lading. An electronic bill of lading means something more: the data inserted in a computer is transmitted electronically using electronic messages, so that an electronic bill of lading is consisted of the series of electronic messages sent and received among a carrier, shipper and consignee. Obviously, an electronic bill of lading cannot be issued in several originals, nor can it be signed in the same sense as a paper bill of lading. However, the important question is: can it perform the same functions as a paper bill of lading?

Electronic messages are aimed at replacing paper documents, but not their functions. An electronic bill of lading is supposed to perform the same functions as its paper equivalent and the only difference should be in the manner of performance. It is well established that the bill of lading serves as: (a) a receipt of the cargo by the carrier, (b) an evidence of the contract of carriage, and (c) a document of title. The functions of receipt and evidence do not represent any particular problem for an electronic bill of lading, since the information about the cargo and the terms and conditions of contract could be transmitted easily through electronic messages, provided the proper security and authentication procedures are applied.

The negotiability of paper documents, typical for documents of title such as bills of lading, represents a serious problem for an electronic bill of lading. Documents of title control the transfer of certain legal rights, such as constructive possession and the right to delivery of goods, which are based on physical possession of an original document. The electronic bill has an important handicap, which puts into doubt its capability of playing the role of a document of title: it is impossible to have it in physical possession. This means that it cannot be produced on delivery, nor endorsed to a new holder. Traditionally, the concept of transferability has been linked to paper documents, since only something tangible can be physically transferred from one party to another. In order to compensate for this handicap, it is necessary to find a way to initiate physical possession of a document, so that the negotiability of documents of title can be simulated.

The law has already made several attempts to create a new legal framework for the use of electronic transport documents. Some of these attempts have been the result of independent efforts of private companies, while some have resulted from the co-operation of various international organisations. The idea of a “bill of lading registry” was first put forward in 1985 by the Chase Manhattan Bank and INTERTANKO which has established Sea Dock Registry Ltd. This attempt only survived for about six months. The idea of the registry was further developed by the CMI Uniform Rules for Electronic Bills of Lading adopted in 1990. It is important to note that the CMI Rules provide that the carrier plays the central role in the transfer of right of control and transfer. It is also important to mention the UNCITRAL Model Law on Electronic Commerce adopted in 1996 which is aimed at eliminating many of the barriers which have prevented electronic documents from having the same legal effect as paper documents.

The attempts to create electronic transport documents are aimed at developing methods for cloning transferability of rights and liabilities electronically, with the objective of creating electronic documents which will be able to perform all functions of paper documents. All of these attempts are based on a “registry” system, where the parties agree to use a trusted third party as a registry for electronic messages. The basic concept is that all parties to a transaction should use a registry, which is responsible for the integrity of the messages and the identity of the parties with which it communicates. The registry acts as a depository for documents, while the rights to the goods are transferred by the communicating of authenticated messages between the registry and the parties who have an interest in the goods. The registry is responsible for transfer of title from one party to another, cancelling the first party’s title at the moment the title is transferred to the new holder.

The latest attempt based on the registry system is a project known as “Bolero”, whose name stands for Bill of Lading Electronic Registry Organisation. The Bolero project has further developed the concept of the CMI Rules, but differently from the CMI Rules it employs a central registry as a trusted third party. The parties which decide to accede to Bolero are bound to accept that their relationship shall be governed by a so-called “Rulebook”, which defines the standardisation of messages, their evidential value and duties of the parties. The Bolero Rulebook is based on traditional concept of paper bills of lading, but it adapts them to the electronic commerce environment.

The Bolero has set up an electronic registry for bills of lading called “title registry”, which is a database application allowing the creation and transfer of rights and obligations related to an electronic bill of lading. Bolero bills of lading are created, exchanged and delivered through title registry instructions. The title registry will register any change of interest in the goods bailed to the carrier. The carrier who creates a Bolero bill of lading sends the instructions to the title registry where the shipper is logged as holder of the Bolero bill. If the holder wishes to transfer the constructive possession to the goods to a subsequent holder, he can make this transfer by attornment (section 3.4 of Bolero Rulebook). The holder can attorn his constructive possession by sending to the registry instructions that identify the new holder. Upon receipt of this message, the registry sends a message confirming the new holder.

The title registry employs security procedures to ensure that, once there is a record of holdership, only the party recorded as holder can give message instructions to effect a transfer of rights in the goods. There can be only one electronic bill of lading in circulation and its holder is basically in the same position as the holder of a paper bill of lading: he can claim delivery of the cargo against the carrier, or dispose with the goods by transferring the title to a new party. The central registry also ensures that the holder can receive a paper bill of lading, if required. When the ship arrives at the port of destination, the registry surrenders the Bolero bill to the carrier, so that cargo can be delivered to the last holder of the bill.

Bolero employs cryptography technology to provide high levels of security for all transactions. Thanks to digital signatures, all messages are authenticated, no changes are possible, and all messages are secure from unauthorised access. It is important to note that Bolero is an Internet based system, which makes its use rather inexpensive compared to the services of closed network systems.

From the technical perspective, the registry system can electronically simulate the negotiability of a paper bill of lading. The problem is how to implement this concept in practice and how to give it legal validity. The common law requires a document of title to be in tangible form and to be signed, so it is highly doubtful that electronic bills of lading can have the status of a document of title. Since electronic bills are of modern invention, and they are still not recognised as documents of title by the merchant’s custom, the best way they can achieve the status of documents of title is to amend existing legislation which should explicitly provide such recognition.

A Critique

Some of the problems related to the commercial use of electronic documents seem to be more psychological than real. This is a consequence of anxiety which is normally associated with radical changes, such as switching from paper documents which were in use for centuries to electronic messages which are a genuinely new method for transferring information. The impact of this change, however, should not be exaggerated. This is not a change which will happen at once; it will be a step-by-step process. Paper bills of lading will not disappear overnight; they will continue to be used and their replacement will be gradual.

The adjustment of law should also be gradual. The law based on paper documents has developed over centuries and it would not be wise to replace those old rules too fast. The new rules should be adopted only in the area where the need for new legal rules is clear, as in the case of digital signature. There is no need for hasty adoption of rules in the area where the problems are still not clearly identified or are only expected to appear in the future. In any case, the fact that many legal issues relating to EDI are still not solved has not prevented its commercial use in practice.

In law, there are not problems which cannot be solved, nor perfect solutions. The fate of law is that it is not and never will be perfect. From the point of view of us lawyers, there is nothing wrong with the fact that the law is not perfect. Otherwise, what would we do?