Switch at Your Own Risk

Trishelea Sandosam discusses the perils of releasing cargo against ‘switch’ bills of lading.

On 9 October 2015, the Kuala Lumpur High Court in P T Karya Sumiden Indonesia v. Oceanmasters Marine Services Sdn Bhd & Anor1 handed down a judgment in favour of a shipper who claimed damages against a carrier and its agent for loss of cargo which was delivered against ‘switch’ bills of lading2, without presentation of the original bills of lading.
The Plaintiff, PT Karya Sumiden Indonesia (“PT Karya”), entered into a long term agreement with Jawad and Malik Metal LLC (“JMM”) for the sale of copper wire rods under 16 consignments, three of which (“Cargo”) formed the subject matter of PT Karya’s claim. The sale by PT Karya was on ‘free on board’ (“FOB”) basis with “Document against Payment” payment terms. The shipments were to be made from Tanjong Priok in Indonesia to the Port of Dammam in Saudi Arabia.
As the sale was on FOB terms, JMM as buyer was responsible to arrange for shipment of Cargo and accordingly, appointed a non-vessel owning common carrier, Oceanmasters Marine Services Sdn Bhd (“Oceanmasters”) to do so. Oceanmasters in turn appointed Sapphire Line Private Limited (“Sapphire”) as its agent for this purpose. At all material times, PT Karya was not aware of the existence of Oceanmasters.
Sapphire issued ‘house’ bills of lading3 in relation to each of these three consignments. These bills of lading named PT Karya as shipper and JMM as consignee. One Super Express Cargo (“Super Express”) who was the delivery agent was named by Sapphire as agent in the bills of lading upon the instruction of Oceanmasters. These bills of lading were to be released by PT Karya’s bank to JMM upon receipt of payment, to enable JMM to obtain delivery of the Cargo.
JMM failed to make payment of the purchase price. It however managed to obtain ‘switch’ bills of lading which were issued by Super Express. Thereafter, JMM gave instructions to Oceanmasters to deliver the Cargo against these ‘switch’ bills of lading and not the original bills of lading issued by Sapphire.
When the Cargo arrived in Saudi Arabia, Oceanmasters complied with JMM’s instructions and delivered the Cargo to JMM’s customer, Al-Fanar Electrical Systems (“Al-Fanar”). Upon discovering that the Cargo had been released against ‘switch’ bills without payment having been made by JMM, PT Karya initiated a claim against both Oceanmasters and Sapphire (collectively “Defendants”) claiming loss and damage in the sum of USD$5,914,010.40, being the undisputed value of the Cargo, together with interest and costs.
The three main issues requiring determination by the High Court were as follows:-  
(1)     Whether PT Karya has locus standi to bring this action?
(2)     Whether the action brought by PT Karya is time barred under Article III Rule 6 of the Hague Rules which applied to the terms of Sapphire’s ‘house’ bills of lading? and
(3)     Whether Oceanmasters and/or Sapphire breached their contract of carriage as carrier and/or breached their duty as bailees for reward by releasing and/or allowing release of the Cargo without production of Sapphire’s original ‘house’ bills of lading?
Locus standi
The Learned Judge, Nallini Pathmanathan J (as she then was) held that PT Karya had locus to initiate the claim against Oceanmasters and Sapphire. The approach taken by the Court was to give primacy to the intention of parties rather than strict labels used in the contract.
The crux of Oceanmasters’ argument was that title to the Cargo had been transferred to JMM and therefore PT Karya had lost the right to sue for loss of the Cargo. They argued that the FOB basis of the contract of sale incorporating INCOTERMS 2000 would effectively result in a transfer of the risk of loss and damage to the buyer when the cargo passes the ship’s rail, and as the contract of sale provided that title to the Cargo would pass at the same time as risk, title to the Cargo had been passed to JMM when the Cargo passed the ship’s rail. Oceanmasters also cited section 1 of the antiquated Bills of Lading Act 1855 (“BoLA 1855”) which states that rights of suit are transferred to and vested in the consignee of a bill of lading “… where property in the goods has passed to him upon or by reason of such consignment …”.   
The High Court rejected Oceanmasters’ arguments and agreed with the submissions put forth by PT Karya. First, the Court found that the issue of title is irrelevant in claims founded on breach of contract and bailment, which was the basis of PT Karya’s claim. Secondly, the Court considered the factual matrix of the case to determine when property had passed, relying on section 19 of the Contracts Act 1950 which provides that property in goods is transferred to the buyer when parties to the contract intend it to be transferred.
Despite the sale being on FOB terms, the Learned Judge was of the view that it was the intention of parties that title to the Cargo would not pass until payment of the purchase price was made. The “Document against Payment” payment term and the correspondences between PT Karya and JMM whereby both parties had agreed that JMM would have no rights and title to the Cargo until the purchase price was paid were important facts which led to the finding of the Court.
Thirdly, applying section 25(3) of the Sale of Goods Act 1957 which deals with reservation of rights of disposal, the Court held that as payment had not been made and the original bills of lading had not been transferred to JMM, PT Karya still retained a right of disposal over the goods and therefore property in the Cargo did not pass to JMM.
Having found that title in the Cargo had not passed due to non-payment, the Court went on to consider whether the effect of section 1 of BoLA 1855 effectively transfers title to the consignee despite non-payment. Her Ladyship examined the purpose of the section as enumerated in the case of Borealis AB v Stargas Ltd and Another [1999] QB 863 and found that its purpose was to prevent the mischief of consignees being unable to sue for loss of damage if they were not in possession of the bills of lading, despite the fact that property had passed to them. As property in the Cargo had not passed to JMM, the contemplated mischief did not arise. On the contrary, since the property still remained with PT Karya, PT Karya was held to have the right to sue for loss of the Cargo.
Time bar
The High Court ruled that PT Karya’s action was not time barred by virtue of Article III rule 6 of the Hague Rules. In reaching this decision, the Learned Judge considered the questions of (i) whether an action for misdelivery falls within the scope  of the Hague Rules and (ii) whether it was possible to determine if the claim  was time barred given the lack of evidence showing the exact dates on which the Cargo was delivered.
The two relevant articles for this purpose are Article III rule 6 of the Hague Rules which discharges the carrier from all liability if an action is brought after 1 year of delivery or the date when the goods should have been delivered; and Article II which states that “…under every contract of carriage of goods by sea the carrier, in relation to the loading, handling, stowage, carriage, custody, care and discharge of such goods, shall be subject to the responsibilities and liabilities, and entitled to the rights and immunities hereinafter set forth”.
The High Court found that based on a strict reading of Article II of the Hague Rules, the Hague Rules limit the carriers’ scope of responsibility from the point of loading to discharge, and therefore do not apply to cases of misdelivery, which often take place after discharge has occurred. Nallini J considered conflicting views by foreign courts but ultimately applied the 1964 binding authority of the Singapore Federal Court in Peninsular & Oriental Steam Navigation Co Ltd & Ors v Rambler Cycle Co Ltd (1964) 30 MLJ 443.
In Peninsular & Oriental Steam Navigation, the Singapore Federal Court reached the decision that the Hague Rules do not apply after discharge by considering the wording of Article II and opined that if the drafters of the Hague Rules intended for the Hague Rules to apply to delivery of goods, they would have used the word ‘delivery’ after ‘discharge’ in Article II. The same finding was also reached in more recent cases in Hong Kong and Australia. This persuaded Her Ladyship to reach a finding that liability of the carrier ceases upon discharge and therefore the time bar under the Hague Rules cannot be used to extinguish PT Karya’s claim for misdelivery.
In addition, the High Court also ruled that given the uncertainty of the dates of delivery, PT Karya’s claim is not time-barred. The Court drew a distinction between the date the Cargo arrived at the port of loading and the date of delivery to Al-Fanar, and stated that time would begin to run from the latter date. The lack of consistent testimony from the witnesses and the absence of delivery orders to evidence the date of delivery of the Cargo to Al-Fanar greatly weakened the Defendants’ case in this respect and led to a finding in PT Karya’s favour.
The Court upheld the long-standing proposition of law that delivery of cargo should only be made against the presentation of the bill of lading. The Court cited the leading Privy Council decision of Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] 1 MLJ 200, which has been applied in several local decisions, as authority for this proposition. The Court also made specific reference to the nature of straight bills of lading, and held that despite its non-transferable nature, presentation of the bill was still required for delivery of cargo. The Court drew support for this finding from a prominent English decision on straight bills of lading, The Rafaela S J I Mac William Company lnc v Mediterranean Shipping company SA  [2005] 2 AC 423.
It was undisputed by the Defendants that ‘switch’ bills of lading could only be issued by the original carrier or its agent upon production of the original bills of lading. However, as mentioned earlier, the original bills of lading were held by PT Karya’s bank and they were to be released to JMM only upon receipt of payment, but no payment had been made. Therefore, as held in the case of The Feng Hang [2002] 2 SLR 205, the issuance of a second set of bills of lading to a different shipper to cover goods already covered by a set of bills of lading is a breach of the contract of carriage. The Court relied on the Contracts Act 1950, as authority for PT Karya’s entitlement to sue both Oceanmasters as undisclosed principal (sections 179 and 184) and Sapphire as agent (section 186) for breach of contract and breach of duty as bailees.
Oceanmasters’ arguments, inter alia, that its duty was to JMM and not PT Karya as the contract was on an FOB basis and it had no knowledge that Super Express had issued the ‘switch’ bills of lading without obtaining surrender of the original ‘house’ bills of lading were rejected by the Court. Nallini J held that as the Sapphire ‘house’ bill of lading was issued on the instruction of Oceanmasters, there existed a contract of carriage between Oceanmasters as principal, and PT Karya as shipper. Oceanmasters was held to be in breach of its obligations to PT Karya as it, inter alia, failed to verify if the ‘switch’ bills of lading have been issued after surrender of the original bills or if PT Karya had consented to delivery against ‘switch’ bills; and by ultimately allowing the Cargo to be delivered against these switch bills.
With regard to the liability of Sapphire, the Court reached a decision on this issue by considering whether Sapphire owed a duty to PT Karya to deliver goods only against the original bills of lading. This question was decided in the affirmative as the Court was of the view that the ‘house’ bills of lading issued by Sapphire represented evidence of the contract of carriage and secured the cargo from release except against production of the original bills of lading. This was sufficient to impose liability on Sapphire. The Court refused to accept Sapphire’s defence that it was acting under the instructions of its principal, Oceanmasters, or was unaware that ‘switch’ bills of lading were used to procure delivery of the Cargo.
The overarching principle in the mind of the Learned Judge appears to be that of certainty. This is evident from her statement that “... the long-standing principle of allowing delivery against production of the original bill of lading requires protection in law. The law in this area has been certain for some considerable time. In the event an agent is able to carve out instances when delivery against production of the original bill of lading is waived, this will dilute the legal principle and give rise to considerable uncertainty. It is important for cargo owners to be entitled to rely on this rule of custom and practice with certainty”.
This decision serves as a reminder that delivery of goods which are shipped under bills of lading should only be done upon presentation of the original bills of lading. It has also confirmed the Malaysian position that this presentation rule is applicable not only to transferable bills of lading but also to straight, i.e. non-transferable, bills of lading. This judgment is welcome and is in conformity with the position in other foremost shipping jurisdictions such as Australia, Hong Kong, Singapore and England.
Carriers and their agents should exercise prudence and deliver goods only against presentation of original bills of lading. They should also refuse to issue ‘switch’ bills of lading or deliver cargo against them without inquiring if there has been surrender of the original bills of lading. Ignorance of the fact that the ‘switch’ bills of lading were obtained without surrender of the originals will not absolve the carrier from liability.

1 [2016] 7 MLJ 589.
2  ‘Switch’ bills of lading are essentially fresh bills of lading which are issued upon request and are usually issued after the original bills of lading have been signed.
3 ‘House’ bills of lading are issued by non-vessel owning/operating common carriers, often a forwarding agent, who does not own or operate the ship which carries the cargo but who contracts with a shipping line for the carriage of goods.