TT Talk - The receipt function of a bill of lading, and the status of a "clean" bill

Harry Lee, from the Club's office in Hong Kong has provided this look at one of the important functions of a bill of lading.

In previous editions, TT Talk has addressed the function of bill of lading as a document of title. We would now like to look at another important function of a bill of lading, namely its use as a cargo receipt.

A bill of lading serves as an acknowledgement by the carriers as to the quantity, condition, and quality of the consignment. This information about the cargo is cardinal to sale of goods. It also forms the evidential basis on which cargo owners can prove their loss.

A "clean" bill of lading, in contrast to a "claused" bill, bears no reservation as to the apparent good order and condition of the goods received by the carriers. A carrier thus admits to the shipper that he has received the goods in the stated quantity and condition, unless evidence to the contrary can be adduced.

However, to a third party (say the endorsee or consignee) who has obtained the bill of lading in good faith, a "clean" bill of lading becomes conclusive evidence that the quality of the cargo was as described. At common law, this means the carriers are prevented (or, as lawyers say, "estopped") from providing evidence to demonstrate that the cargo was not in that condition at the time it was received for carriage; this rule is generally also upheld in most other legal systems. The Hague and Hague-Visby Rules, which apply to most bills of lading, have codified the position in Article III, Rule 4.

As banks would normally reject a "claused" bill of lading, the shipper will normally want to obtain a "clean" bill from the carriers. Frequently, shippers who fail to provide a shipment in entirely sound condition may offer the carrier a letter of indemnity in exchange for a "clean" bill of lading, agreeing to compensate him for any cargo claims. It is dangerous for any carrier, whether a shipowner or an NVOC, to accept such an arrangement and members should not do so for the following reasons:

Firstly, as explained above the carrier has no defence to cargo claims brought about by the consignees or holders of the bill of lading, even if they can show that the damage existed before the cargo was shipped.

Secondly, it may turn out to be difficult to enforce a letter of indemnity if it comes from a shipper who never intended to compensate you. In the 1957 case of Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd the English High Court held that a letter of indemnity or undertaking produced by the shippers constituted a fraud on subsequent buyers. The letter was void for illegality and the carriers could not sue on it.

Lastly, members may prejudice their liability insurance cover if they knowingly ship damaged goods but do not clause their bill of lading.

In a future edition, Harry will consider how reservations on a bill of lading may be made if the shipper insists that his goods be shipped.