Switch bills of lading

The practice of issuing switch bills of lading is increasing. What are they, why are they issued, and what are the risks?A "Switch bill of Lading" is issued by, or on behalf of, the carrier in substitution for the bill of lading issued at the time of shipment.

There are number of reasons why switch bills are issued. The common link is that, from the point of view of the holder of the bills, the first set of bills is unsuitable under one of the sale and purchase contracts for the goods in question. Carriers often feel under commercial pressure to issue switch bills in order to satisfy the requirements of the customers. Examples of reasons why switch bills are issued are that:-

(a) the original bill names a discharge port which is subsequently changed (e.g. because the receiver has an option or the good are resold) and new bills are required naming the new discharge port:

(b) 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. A variation on this is where party does not wish the true port of loading to be named on the bill;

(c) the first set of bills 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. A second set may therefore be issued in order to expedite payment, or to ensure that delivery can take place against an original bill;

(d) shipment of goods may originally have been in small parcels, and the buyer of those goods may require one bill of lading covering all of the parcels to facilitate his on sale. The converse may also happen i.e. one bill is issued for a bulk shipment which is then to be split.

Where switch bills are issued, the first set should be surrendered to the carrier in exchange for the new set. There is usually no objection to this practice. However, the switch bills may contain misrepresentations e.g., as to the true port of loading. If a receiver suffers loss as a result of this, then the carrier and his agent may be at risk.

In practice the switch bill set is often issued not against surrender of the first, set, but against a letter of indemnity. That may happen in any of the examples given above, and clearly will be the case where the first set has been delayed. Switch bills of lading issued in these circumstances may leave the carrier and his agents extremely exposed. The switch bills may be negotiated to a buyer who expects the goods to be delivered to him. The shipper holding the first set might not yet be paid by his buyer. The carrier may therefore be faced with claims from the shipper holding the first set of bills, and from the holders of the second set. The carrier will probably deliver the goods to one of these parties, and be liable to compensate the other. Any indemnity which the carrier has obtained may well be worthless.

In a recent case decided by the High Court of Singapore (Samsung Corporation v Devon Industries Sdn Bhd [1996] 1 SLR 469) a vessel had loaded a total cargo of 10,500 MT of soya bean oil. It appeared that the goods had been shipped by a number of different shippers in small parcels. The plaintiffs were the holders of bills of lading covering two parcels of 1,000 MT and 1,500 MT respectively. They tendered the shipping documents to the defendant buyers, who did not pay for the goods. The buyer was also the charterer of the vessel, and arranged for the shipowners to issue what were described as "global" bills of lading naming the buyer as the shipper. The defendants were able to negotiate those bills of lading, and were paid for the cargo (which they had not themselves paid for). In an action brought by the seller to recover the original first set of bills held by the buyer, the court said that the ship agent (combined with the buyer) had unlawfully issued a second set of bills of lading in abject disregard of the sellers' interests. The buyer had acted fraudulently, with the cooperation of the ship agent.

Although the court did not expressly address the liability of the shipowners, or their agents, for having issued the second set of bills, there is little doubt that the owners and their agents would have faced claims from the holders of either the first set or the second set. There is no mention in the report of this case of whether the second set was issued against a letter of indemnity from the buyer/charterer, but the buyer was in dire financial straits, and so any letter of indemnity is likely to have been worthless. In any event, a letter of indemnity given in these circumstances may well be null and void.