The elephant in the room

The importance of understanding the functions of bills of lading.

Bills of lading have long been described as the cardinal documents for the carriage of goods by sea.

Since their advent, the interpretation of bills of lading and the complexities they pose have given rise to ongoing disputes. In a recent court case, in the New South Wales District (NSW), in Australia, the court likened bills of lading to an elephant; describing them as easier to recognise than to define.

Bills of lading have a tripartite function in that they constitute:

1. A receipt for goods shipped and received by the carrier;

2. A document of title providing certain rights to the holder; and

3. Evidence of a contract of carriage.

The interpretation of bills of lading and their tripartite function came under consideration in the NSW case. This case concerned a finance company – Australia Capital Financial Management (ACFM) – that lent money to an exporter.

The exporter engaged a freight forwarder – Freight Solutions (FS) – to arrange shipment of its products to China. Freight Solutions then created documents which had the characteristics of a bill of lading.

The exporter provided the documents generated by FS to ACFM as security for the money that it borrowed from ACFM. When the exporter defaulted, it was found that the bills of lading issued by FS were not valid securities that would enable ACFM to take action to obtain possession of the cargo.

ACFM sued FS for damages. Its case was based on two causes of action.

First, it sued FS for misleading or deceptive conduct within the meaning of the Australian consumer law. ACFM alleged that:

(1) Each bill of lading generated by FS purported to be (and had the hallmarks of) a negotiable instrument that provided an entitlement to the holder to present the bill of lading to obtain delivery of the goods;

(2) The fact that each bill of lading was consigned “to order”, meant that FS was (or ought to have been) aware that the bills would, or might, be provided to third parties as security for payment for the goods and/or to secure financial arrangements.

The second was for a breach of warranty of authority, in which ACFM alleged that, by signing each of the bills of lading, FS held itself out as having authority to act on behalf of each relevant carrier described in each bill, including the authority to issue bills of lading that provided an entitlement to the holder to present the bill of lading to obtain delivery of the goods described.

The court found that the conduct of FS in issuing the bills of lading was misleading and/or deceptive within the meaning of Australian consumer law. The court further found FS liable for breach of warranty of authority, as it did not have the authority to act on behalf of each of the relevant carriers in executing each bill.

The court found that the bills issued by FS were merely “house bills” and, unless they were endorsed, did not give ACFM any security of over the goods.

The South African Consumer Protection Act 68 of 2008 (CPA), in particular Section 41, is in certain respects similar to the Australian consumer legislation. Section 41 prohibits a supplier from engaging in misleading or deceptive conduct.

The CPA does not apply to a consumer (as defined) which is a juristic person whose asset value or turnover equals, or exceeds, the current threshold set at R2 000 000. It is probable that most local freight forwarders would fall outside of the threshold.

Many freight forwarders still do not understand the fundamentals of bills of lading and the complexities they present. It is likely that a South African court will take a similar stance to the one adopted by the NSW court if presented with the similar facts, especially since there is a shift to afford consumers more protection through the enactment and amendment of  legislation.