To be a named shipper

In our experience, many “free on board” (FOB) sales are undertaken on standard forms.

The sellers take comfort in the fact that all they have to do is load the cargo and procure the bills of lading (bill).

Often FOB sellers would instruct their clearing and forwarding agents to issue a bill naming the FOB sellers as shippers.

If the seller is named as shipper, however, there is always the danger that a carrier, if it is not paid freight or demurrage by a buyer up the chain of sales, or even by a time charterer, will claim the freight and demurrage from the shipper – who is often an easy target!

Freight and demurrage claims can, as everyone knows, run into many millions of dollars.

The process of issuing bills of lading follows commercial custom, and sale contracts are rarely specific on the issuing of a bill.

ICC Incoterms do not deal with the question of who should appear as shipper or consignee on the bill.

While the FOB seller may have no obligation to make a contract of carriage, all too often the seller will become a party to the contract of carriage either unwittingly, or because the seller believed that it was required, or because the ship’s agents simply inferred that the mate’s receipt, and consequently the bill, would follow this format.

There are obvious benefits of being a shipper under a bill. A bill issued to the shipper can be retained pending payment. In the event that the buyer does not pay, or becomes insolvent, then the shipper can resell the cargo. This is more easily said than done, but being the holder of a bill certainly gives a seller useful leverage.

Where the shipper has, to the extent possible, secured payment (by letter of credit or otherwise), there may be little need for the seller to be named as shipper. FOB sellers sometimes take the view that they require a bill in their name in order to trigger payment under a letter of credit. This is not so -the requirement is that the seller presents conforming shipping documents. UCP articles concerning transport documents are concerned with the transport document as proof that goods are in the custody of a carrier. There is no requirement in UCP for the seller to be the named shipper.

If payment for the goods is not a concern, a remaining risk for the FOB seller is loss of, or damage to, the goods before risk transfers to the buyer, even if this does not mean the seller is without recourse. Depending on the relevant law applicable, the seller ought to have a claim against a negligent stevedore or shipowner that can be enforced by the arrest of the ship.

As against this residual risk, recent shipping line insolvencies are a fresh reminder of the reality that cargo interests are at risk for double payment of freight.

When doing business on standardised terms, FOB sellers can usefully take all the circumstances into consideration and decide whether it is in their interests to be named as the shipper under the bill. Usual practice is for a bill to be issued based on information provided by the seller, so the seller is free to make it clear to the carrier, as well as in the sale agreement, that it acts as the buyer’s agent in procuring the bill. The FOB seller may wish to weigh up the risks of the potential claim by the owner for freight, against the risk of non-payment by the buyer.

To be a named consignee

Naturally the buyer of goods is concerned with obtaining possession and control of the goods, and preferably at the earliest opportunity, considering money has passed in expectation of their receipt. Being the named consignee of the bill confers the necessary rights of immediate possession.

With those rights, however, comes the unavoidable obligation of paying freight to an unpaid carrier. Under “C” INCOTERMS 2010, the seller is obliged to arrange and pay for carriage up to the agreed point of delivery, so that if the seller fails to pay freight, it would be a breach of the sale contract terms. However, a right to sue the seller and ultimately recover damages is not much comfort when an unpaid carrier is refusing delivery, or asserting a lien, and the goods are needed urgently. Furthermore, the seller may have actually paid freight and the problem rests with another party in a string or charter chain.

Another topical issue for receivers who are not making the freight arrangements, is the threat of sanctions. The receiver is likely to be unaware of the connections or ownership of the seller’s contracted carrier. Moreover, exclusions may well have been written in to the bill that limit the receiver’s remedies if the ship or cargo is caught by sanctions. A buyer faced with non-delivery could be better off cancelling (subject to sale contract terms) and procuring a substitute cargo. If the buyer is a named consignee on the bill, however, he may be unable to cancel, and may even find that the shipowner claims an indemnity for the cost of deviation or disposal of the cargo.

Banks who are named “to order” consignee or endorsee on a negotiable bill, gain tighter control over the transaction than when holding the bill under pledge. But on the downside a bank in this position may incur liability for freight and other charges as a result. What with the difficulty of releasing and selling goods once they are in a known distressed situation, the pledgee’s lot can indeed be an unhappy one.

If goods are (or might become) dangerous, there are other considerations. Standard bill definitions of “merchant” are broadly worded and include both a receiver and a consignee. The “merchant” often must give express contractual indemnities for loss and damage caused by dangerous goods, notwithstanding that (in the receiver’s case) it will not have been responsible for the packing and declaration of the goods. The shipper carries the heaviest exposure, with additional common law liabilities, but an express contractual indemnity operates regardless of whether the person indemnifying is at fault. In this way, a receiver who has been named on the bill as consignee could be liable if there is damage to the vessel or to other cargo through a shipper’s fault.

For most receivers, the security of knowing that goods now on the water have passed into their control is the key consideration. Customs, audit and other regulations may be easier to comply with when the importer is also the consignee named on the bill. Nevertheless it is worth asking whether, in every case, a receiver’s or bank’s interests are best served by being the named delivery party on a bill.