What are "switch" bills of lading?
“Switch” bills of lading are a second set of bills of lading issued by the carrier (or by the carrier’s agent) in substitution for the bills of lading issued at the time of shipment. The agent who is asked to issue the second set is often at a port other than the load port. The holder of the bills may decide (for one reason or another) that the first set of bills is unsuitable, and the carrier is requested to issue switch bills to satisfy the new requirements of the bill of lading holder. Some of the reasons are:-
- the original bill names a discharge port which is subsequently changed (e.g. because the receiver has an option or the goods have been resold) and new bills are required naming the new discharge port;
- a seller of the goods in a chain of contracts does not wish the name of the original shipper to appear on the bill of lading, and so a new set is issued, sometimes naming the seller as the shipper;
- the goods were shipped originally in small parcels, and the buyer of those goods requires one bill of lading covering all of the parcels to facilitate his on-sale. Conversely one bill may be issued for a bulk shipment which is then to be split into multiple bills covering smaller parcels.
When can “switch” bills be issued?
The issuance of a second set of bills of lading is an extremely dangerous practice. The perils of having two sets of bills of lading for the same cargo in circulation are obvious and ship agents must make sure they follow these rules:
- the principal’s written authority should be obtained not only to issue switch bills of lading but also to any changes to be made to the content of the original bills of lading;
- the second set of bills of lading should only be issued if the complete first set has been surrendered for cancellation;
- the second set of bills of lading should not contain misrepresentations, e.g. as to the true port of loading, or the condition of the cargo, or the date of loading. If switch bills are issued containing misrepresentations, then the carrier and his agent (if the agent has issued the switch bills) will be at risk of claims from parties who have suffered a loss because of such misrepresentations.
A warning to agents
In practice “switch” bills of lading are often issued in addition to, and not against cancellation of, the first set. The reasons for this practice are various; the first set may be held up in the country of shipment, or the ship may arrive at the discharge port in advance of the first set of bills. Another reason is, however, that the party trading the goods wants to improve his cash flow by receiving payment from the final receiver before he pays the shipper. The ship agent may be instructed by his principal to issue a second set of bills of lading without collecting the first set, and may be offered a letter of indemnity by the principal, or by the party who receives the second set of bills. This dangerous practice has all too often resulted in ship agents facing claims from the holders of the first set of bills of lading (eg. the shipper, a bank or a party to whom the bills of lading have been negotiated) with nothing to rely on but a worthless indemnity. A long established or multinational ship agent may make a more worthwhile target for the bill of lading holder than a charterer with no assets or a ship owner who has sold the ship in question.
How should agents protect themselves?
- first of all – the agent must consider what he is being asked to do and the possible consequences to himself. Is the principal authorising the issuance of the second set reliable? Even if an indemnity is offered by the principal, the agent should bear in mind the fact that an indemnity is only worth as much as the person giving it;
- the agent obtain the principal’s authority , and a letter of indemnity signed by the principal (and counter-signed by a bank if deemed necessary by the agent) indemnifying the agent for all consequences of issuing the second set of bills of lading;
- the agent should also consider whether it is necessary to obtain written authority from any other party who might be adversely affected by his action (eg. the ship owner or the shipper or a bank). If an agent is authorised by a charterer to issue a second set of bills of lading on behalf of the master, he must also obtain the master or ship owner’s written authority. The ship owner would otherwise have a valid claim against the agent for losses resulting from the issuance of the second set on the basis that the agent had done this without authority;
- if the principal has asked the agent to obtain a letter of indemnity from the party receiving the second set of bills of lading, the agent should get the wording and security (e.g. counter-signature by a bank or not) approved in writing by the principal. The agent should keep the indemnity in a safe place and make reasonable efforts to obtain the first set of bills. If the first set of bills of lading have not been produced within, say, one month, the agent should notify his principal and ask for instructions.
The issuance of this circular has been prompted by a spate of very large claims against ship agents by banks, ship owners and shippers, resulting from the issuance of a second set of bills of lading to trading companies or middlemen without cancellation of the first set, against letters of indemnity from those companies. The trading companies in all cases have become bankrupt after negotiating both sets of bills of lading for cash. The fact that the agents may have acted in good faith pursuant to their principal’s instructions does not provide a defence to claims by third parties who have sustained losses. If Members require any further information, or would like to discuss this matter with the Club, they should contact the Managers, who suggest that the contents of this circular should be brought to the attention of all members of staff who are involved in the issuance of bills of lading.
ITIM Co Limited, Managers
International Transport Intermediaries Club Ltd