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Switch Bills of Lading – Revisited

Jagan - August 10, 2014 - 3 comments

At the request of their customers, Carriers regularly issue Switch Bills of Lading. This articles touches on the risks together with the risk management procedures which should be considered by the Carriers prior to issue of any Switch Bills of Lading

  1. There have been many articles written on the Switch Bills of Lading (“SBL”) and therefore our intention is not to revisit the ground already covered but to focus on the process to be followed by a Carrier issuing a SBL. SBL’s are generally issued to mask the details of the Shipper, Consignee or Notify Party from one of the contractual parties. It is often done so that one of the parties is able to shield the name of the supplier from the buyer or vice versa. Issue of SBL’s are commercial arrangement which is obviously fraught with danger but given that this is frequently required to facilitate trade, it is often given without a proper understanding of the risks involved.
  2. The first question to be asked is what can be amended in a SBL? The details which can be amended are the details of the Shipper, Consignee and / or notify party. If a request for the change in cargo or any other details is requested, Carriers should not agree as any changes of this sort would be akin to participating in fraud.
    1. However, Carriers may agree to incorporate details of the relevant letters of credit of the second sale in the SBL as it does not materially change the details of the cargo / shipment mentioned in the SBL.
    2. In some circumstances, if the cargo details on the first set of Bill of Lading (“B/L”) are incorrectly stated, the Carrier must direct the party seeking changes in the SBL to get the first set of B/L amended (if the amendment process requires the custom authorities of load port to be notified, then they must be notified so that this is above-board). Once the original B/L is amended with the correct cargo details, the SBL would mention the cargo listed in the first set of B/L issued.
  3. The second question to be asked is when should a Carrier proceed to issue a SBL? Many a times, cargo interests would request for SBL and provide relevant details for manifestation purposes and only surrender the first set of B/L at the time when they collect the SBL. We would caution against following this process and instead suggest that if a request is made for switching a B/L, the Carrier must first seek surrender of all originals of the first set of B/L’s issued. Only when this has been accomplished, should the Carrier consider making any changes in the manifest and proceeding with the SBL. The reason why we state this is that if the Carrier proceeds to manifest the details prior to collecting the first set of B/L’s and if the switch requestor has a change of mind, the carrier may be faced with a situation in that they may have to expend time, energy and costs in getting the details again amended in the manifest. Moreover, in certain countries, once the name of the consignee has been listed in the manifest and filed with the appropriate authorities (custom/revenue), it may be difficult if not impossible to amend them as the law in these countries would recognise them as the owners of the cargo even though they may not have title to the cargo!
  4. We would recommend that Carriers seek a properly worded Letter of Indemnity (“LOI”) from the party seeking the SBL. Both the wordings of the LOI and the antecedents of the party providing the LOI (is the party good for the Letter of Indemnity provided?) are important in managing the risks to the Carrier. If the Carrier is not comfortable with the party providing the LOI, they must ask for a LOI from a party who can satisfy their risk management process. The reason why we recommend that a LOI be sought is that while the B/L contract is a contract in which the shipper’s liability subsists throughout as they are the original parties to the contract, an argument could be made that once the B/L has been surrendered with the Carrier for a SBL, the original Shipper’s liability ceases (as the Carrier has agreed to vary the contract). This being the case, Carriers may not be able to recover from the original Shippers to the contract should there be any mis-declaration, or other issues with the shipment and instead may have to consider pursuit of the party who has sought the SBL. If the party seeking the SBL is impecunious, then the carrier may not have any recourse available to recover their losses. Further, if there any claims from other parties or from competing interests, the Carrier may be drawn into the dispute due to their having released a SBL and for which they would have to expend monies to defend themselves (the LOI would assist in recovering costs incurred by the Carrier for defending and / or paying any award/judgement against them).
  5. It is our understanding that none of the Transport Liability Insurers exclude cover for liability arising from the issue of SBL’s. However, all of the transport liability policies would require that their member/insured (as the case may be) have proper standard operating procedure for their operations. Otherwise, failure to have proper standard operating procedure may be considered as reckless behaviour and which is generally one of the exclusions in the Rules/Policy of the Mutual/Liability Insurers. This being the case, Carriers may find themselves without cover should a claim arise out of their releasing a SBL without having a proper process in place.
  6. In conclusions, Carriers must ensure to :
    1. have a Standard Operating Procedure for the issue of SBL’s which ideally should have been endorsed by their liability insurers.
    2. seek a LOI from the party requesting for a SBL.
    3. check that the parties signing the LOI are good for their word.
    4. vet this process regularly to ensure that their (Carrier’s) risk are appropriately managed.

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    Another thing to note is the possible impact of the Switch B/L to the contract of sale, Incoterms, costs, insurance, import documentation requirements in the importing country etc.

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