On 30 June 2020, the Liangjiang New District People’s Court, Chongqing (“the Court”) handed down a judgment following legal proceedings over the ownership of goods filed by the holder of a Rail Bill of Lading (“Rail B/L”). The judgment ruled that the goods belonged to the holder of the Rail B/L and found in favour of the Rail B/L holder. This first Court judgment involving a dispute over a Rail B/L has drawn much attention from legal, business and financial circles at both a domestic and international level.
- Imsa (Chongqing) Trading Co., Ltd. (“Imsa “) imported cars from Duren, Germany, and resold the cars in China. The cars were transported via the China-Europe freight trains (Chongqing).
- Imsa signed a tripartite agreement with Chongqing Sinotrans Logistics Co Ltd (“Sinotrans”) and Chongqing Logistics Finance Service Co Ltd (“Logistics Finance”) on importation and financing matters:
- Sinotrans was appointed as “Non-Rail Operating Common Carrier” to transport the cars from Duren, Germany, to Chongqing, China, on the China-Europe freight trains (Chongqing). Sinotrans issued the Rail B/L to the seller in German, on receipt of the cars
- The payment term under the sales contract was based on documentary collection. To help Imsa Company obtain financing from the bank, Logistics Finance provided a guarantee to Imsa ‘s bank, and Imsa pledged the Rail B/L to Logistics Finance as counter-guarantee.
- After Imsa paid for the cargo and the relevant fees to the bank, the guarantee provided by Logistics Finance was released and the Rail B/L was endorsed to Imsa.
- Imsa resold the imported cars to Chongqing Fuqi Automobile Sales Co Ltd (“Fuqi”). The parties agreed under the sales contract that the delivery of the Rail B/L should be deemed delivery of the cars. Imsa delivered the Rail B/L to Fuqi. Fuqi presented the Rail B/L to Sinotrans for delivery of the cars. Sinotrans refused to deliver the cars to Fuqi on the ground that Sinotrans should deliver the cars to Imsa pursuant to the tripartite agreement and that the freight has not been paid in full.
Fuqi instituted legal proceedings against Sinotrans as defendant and Imsa and Logistics Finance as third parties, requesting confirmation of its ownership of the cars under the Rail B/L and delivery of the same by Sinotrans. The Court ruled that Fuqi were the legal owners of the cars under the Rail B/L and that Sinotrans should deliver the cars to Fuqi.
Reasoning behind the Court’s Judgment:
Article 26 of Property Law of the PRC provides that: where movable property is in the possession of a third party at the time that the ownership of the movable property is created or transferred, party A, who is obliged to deliver the movable property to party B, can transfer the right to demand delivery from the third party instead of executing the physical delivery of the movable property to party B. In the present matter, the delivery of the Rail B/L by Imsa to Fuqi had to be deemed performance of the obligation of delivery of the cars by Imsa. The Court thus confirmed that the ownership of the cars had passed to Fuqi in consideration of the terms of the resale contract between Imsa and Fuqi and Article 26 mentioned above.
With the successful implementation of the Belt and Road Initiative, international trade by land has ushered in new development opportunities. Countries along the route of China-Europe freight trains are either members of the Agreement on the International Goods Transport by Rail (SMGS) or the Convention Concerning International Carriage of Goods by Rail (COTIF), which makes the legal position relating to the goods transported by China-Europe freight trains more complicated. Both international conventions adopt the concept of rail waybills, which are non-negotiable, and where the party needs to prove its identity as the consignee when taking delivery of goods under the rail waybills. This poses obstacles for the resale of the goods and for obtaining finance by Chinese importers. As a solution, some freight forwarders (such as Sinotrans in the present claim) issue Rail B/Ls as contractual carrier for goods transported by China-Europe freight trains instead of rail waybills, which enables the importers to resell the goods and obtain financing.
The judgment is not available to the public yet, and its specific details will be discussed further after they are made public. In the meantime, it is not clear (at the time of release of this newsletter) whether Sinotrans will file an appeal. We will be following up this legal briefing with another in due course.
In the meantime, this Court judgment can be viewed as the acceptance by local courts that a Rail B/L has similar legal effects as a bill of lading under the Maritime Code of the PRC (which means that the Rail B/L is negotiable and that the carriers undertake to deliver the goods against presentation of the same). However, it should be noted that the legal effects of a Rail B/L have only achieved preliminary recognition in the Chinese judicial system. Unless the laws of other countries recognize the same legal effects for a Rail B/L, there will be legal risks for traders from other countries who accept a Rail B/L as opposed to a generally acknowledged rail waybills under the applicable international conventions.
We will continue to follow the progress of international and domestic legislation and judicial practice on Rail B/Ls. If you would like to know more about this subject or need further advice on any of the issues discussed in this article, we would be happy to assist.