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The Forwarder’s Obligation to Deliver Bills of Lading in FOB Contracts

by George Wang + Yidan Sun (Dentons)

The practices of cargo forwarding businesses are always contentious, especially in Chinese jurisdiction, where the industry is governed by several statutory laws and regulations. Every party involved should be scrupulous when doing the relevant businesses.

Introduction: It is well-known that Bills of Lading (hereinafter referred to as B/L) are treated as the documents of title; and the buyer takes delivery of the cargo by presenting the original B/L to the carrier. That is to say, before being fully paid, the seller should take control of the original B/L. In most circumstances, the B/L is issued by the carrier, and then be transferred to the seller by the cargo forwarder. Nevertheless, under an FOB contract, the cargo forwarder is entrusted by the buyer, commonly in form of an agent-principal contract. In such circumstance, the FOB buyer is the contractual shipper, and the actual shipper shall be the FOB seller. In such situation, where the buyer instructs the forwarder to deliver the B/L to the buyer itself, the seller takes the risk to loss control of the cargo without being fully paid. In 2015, the Supreme People’s Court held a judgment analyzing the issue above (citation: (2015) Min Ti Zi No. 19).

Facts: On 24 October 2012, the Claimant, a Chinese Seller named Huayu, signed a contract of sale with a foreign Buyer named Homestar. The contract adopted Incoterms, FOB Ningbo. On 11 December 2012, Homestar entrusted the Respondent, a Chinese cargo forwarder named Jincheng to book shipping space for the cargo. In the meantime, Huayu entrusted a third party named Baidu to deal with the inland transportation and export declaration. On 20 December 2012, Baidu collected containers from the carrier, and then loaded the cargo at Huayu, and then delivered the containers with cargoes to the carrier’s container yard as instructed by Jincheng. Correspondingly, Jincheng provided Baidu with the equipment interchange receipts, packing lists and yard’s receipts. On 24 December 2012, the carrier issued B/L to Jincheng, and Jincheng delivered it to Homestar directly. By presenting the original B/L, Homestar took delivery of the cargo without fully paying for the cargo.

The Arguments Asserted by the Claimant:
1. Huayu was the actual shipper, and there was a cargo forwarding contractual relationship between Huayu and Jincheng.
2. As per Article 8 of the Provisions of the Supreme People’s Court on Several Issues about the Trial of Cases Concerning Marine Freight Agency Disputes ( Fa Shi (2012) No. 3) ( hereinafter referred to as Provisions),
“In case a freight agency enterprise handles the matter of booking cargo space as entrusted by the contractual consignor, and at the same time, delivers the cargo to the carrier as entrusted by the actual consignor, if the actual consignor requests the freight agency enterprise to deliver the bills of lading, sea waybills or other waybills obtained by the freight agency enterprise, the people’s courts shall support the actual consignor’s request.”
As the cargo forwarder, Jincheng was obliged to deliver the B/L to the actual shipper, i.e. Huayu. However, Jincheng delivered the B/L to the Buyer Homestar, which directly caused the loss of Huayu.

The Arguments Defended by the Respondent:
1. Huayu was neither the contractual shipper, nor the actual shipper in this case; and there was no contractual relationship between Huayu and Jincheng. Jincheng was even unaware of the existence of Huayu before this litigation.
2. Huayu should ask for the B/L in a reasonable time. However, before the delivery of B/L to Homestar, Jincheng rarely received any notice, declaring that Huayu was the actual shipper, nor any request to transfer the B/L to Huayu.

Core issues in dispute:

1. Whether there was a forwarding contractual relationship between Huayu and Jincheng;
2. Whether Jincheng should be liable for the loss suffered by Huayu.

The first instance conducted by Ningbo Maritime Court and the second instance conducted by Higher People’s Court of Zhejiang Province:

In respect of the first issue, as per Article 8 of the Provisions, Huayu was the actual shipper who entrusted others to deliver the cargo to the carrier in its name. The forwarding contractual relationship between the actual shipper and the cargo forwarder should not depend on the forwarder’s awareness of the identity of the actual shipper. Besides, considering the fact that Jincheng was the party who provided equipment interchange receipt, packing list and yard’s receipt, there should be a forwarding contractual relationship between cargo forwarder and the actual shipper. Moreover, as a reasonable forwarder, Jincheng should identify the actual shipper, i.e. the receiver of the B/L, diligently.

In respect of the second issue, on one hand, Chinese statutes never provide that under FOB contract, the actual shipper shall ask the forwarder to transfer the B/L within a period of time. Therefore the actual shipper, Huayu was entitled to ask for the B/L in any time within the statute of limitation. On the other hand, under the Article 8 of the Provisions, the cargo forwarder shall be obliged to deliver the B/L to the actual shipper. In case the actual shipper fails to make a prompt request, the forwarder shall contact and confirm with the actual shipper in a written form. Jincheng’s transferring the B/L to Homestar directly caused the loss of Huayu. However, Huayu should be liable for the failure to give prompt notice of the identity and the request to B/L. In conclusion, the parties shall split the loss suffered by Huayu.

The decision made by the Supreme People’s Court:

For the first issue, it is confirmed that Huayu was the actual shipper in the present case; however, it does not certainly construct a forwarding contractual relationship between Huayu and Jincheng. As per Article 3 of the Provisions:

“According to the nature of rights and obligations agreed in written contracts, and in consideration of the name under which and the method by which the freight agency enterprises obtain the remuneration, the type of invoicing and charging items, the transaction practice between the parties and other details on actual performance of contracts, the people’s courts shall determine whether the marine freight agency contract is formed.”

To construct a contractual relationship between the forwarder and the actual shipper, Huayu shall prove either there was a contract between the parties, or Jincheng did be entrusted by the actual shipper to do any forwarding work. In the current dispute, the inland transportation, export declaration were performed by Baidu employed by Huayu, and it was also Baidu, who took the empty containers from carrier and then delivered them with cargo to the carrier’s yard. There was no evidence showing that Huayu entrusted or sub-entrusted Jincheng for cargo forwarding or delivering the cargo to the carrier. There was also no evidence for any commission paid by Huayu to Jincheng. In conclusion, Huayu was the actual shipper, but there was no forwarding contractual relationship between Huayu and Jincheng.

For the second issue, Article 8 of the Provisions did stipulate the forwarder’s obligation to transfer the B/L to the actual shipper. Nevertheless, it shall only be applicable in case both of the following requirements are fulfilled: (a) the forwarder is entrusted by the contractual shipper to book shipping space; (b) the forwarder is entrusted by the actual shipper to deliver the cargo to the carrier. In the present dispute, instead of Jincheng, Baidu was entrusted by Huayu to deliver the cargo to the carrier, as a result, Article 8 is not applicable in this case and Jincheng was entitled to transfer B/L to its principal Homestar.

The first instance’s decision and the second instance’s decision were set aside.

Significant principles:

1. A forwarding contractual relationship could not be automatically constructed between the actual shipper and the cargo forwarder. To construct such relationship between the parties, there shall be an agency contract, or the forwarder shall be entrusted by the actual shipper in fact.
2. The fact that the forwarder only provided several documents, such as equipment interchange receipt, packing list and container yard’s receipt is not strong enough to prove the forwarder is entrusted to do the forwarding work.
3. The application of the Article 8 of the Provisions, which stipulates forwarder’s obligation to deliver the B/L to the actual shipper, is conditional, i.e. the forwarder shall be entrusted by the contractual shipper to book shipping space; and the forwarder shall also be entrusted by the actual shipper to deliver the cargo to the carrier. That is to say, the FOB seller should pay high attention to the situation that, under FOB contract, the forwarder is entrusted by the Buyer; in case the delivery of cargo to the carrier is not entrusted and performed by the forwarder, under certain circumstances, the forwarder maybe entitled to transfer the B/L to the FOB buyer directly.
4. However, the Supreme People’s Court kept silent on the following issues: (1) Under FOB contract, if it is necessary, who shall be liable for the disclosure of the identity of the actual shipper? (2) If the forwarder is clearly understand the identity of the actual shipper under a FOB contract, but not entrusted by it to deliver its cargo to the carrier; in the meantime, the forwarder is entrusted by the FOB buyer and is instructed to transfer the B/L to the buyer, what shall the forwarder do? To transfer the B/L to its principal? Or to the seller who shall be entitled to hold the B/L? (3) Is there a reasonable time limitation for a FOB seller to ask for the B/L from the cargo forwarder?

Suggestions for FOB sellers:
1. In negotiation with the buyer under a FOB contract, inserting a clause that once a cargo forwarder is entrusted by the buyer, the buyer should notify the seller, and disclose the seller to the forwarder, and instruct the forwarder to transfer the B/L to the seller.
2. Once the forwarder is appointed by the FOB buyer, the seller should contact with the forwarder promptly and require the forwarder to deliver the B/L to it clearly.

November 7, 2016

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