Name: Hook Ching Hue

Dear sir,

Do you have information about following clause under charter b/l:

"This shipment of  xxxxxx metric tons was loaded on board the vessel as part of the original  xxxxx lot of metric tons stowed in xxxxxxx with no segregation as to parcels. For the whole shipment xxxxxx sets of bill of lading have been issued for which the vessel is relieved from all responsibilities to the extent it would be if one set only would have been issued. The vessel undertakes to deliver only that portion of the cargo actually loaded which is represented by the percentage that the total amount specified in the bill(s) of lading bears to the total of the commingling shipment delivered at destination. Neither the vessel nor the owner assume any responsibility for the consequences of such commingling nor for the separation thereof at the time of delivery  " 

--I guess the  above clause is "commingle shipment clause" for shipment of commodity in liquid form  like oil, methanol. If the credit mentioned commingle shipment is acceptable. It would not constitute any discrepancy.

--however if the credit do not mention commingle shipment is acceptable (in other word the credit do not mention commingle shipment is not acceptable). Is he issuing banking entitled to raise a discrepancy concerning the above exclusion clauses appear on the bill of lading?

I think under ISBP681 Para.114 it should be acceptable.

Please comment.

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Other information provided for reference:
 

13.1 What is the legal effect, if any, of a warehouse receipt or a warrant under the laws of your country?  Are they documents of title?

English law does not recognise a warehouse receipt or a warehouse warrant as a document of title except where such documents acquire the status of title documents through trade custom or usage or by Acts of Parliament.  There are very few examples of a commercial custom having been proven in relation to warrants.  It is widely thought that warrants traded on London Metal Exchange are very likely to be given recognition as documents of title by virtue of trade custom and usage in relation to LME warrants.

There are very few examples of relevant “statutory documents on title”.

13.2 If not, how is title over goods held in storage transferred and proven?

Title in respect of goods held in storage is transferred by agreement.  As with any contract of sale, there is no formal document necessary in order to convey title in moveable goods.

Commonly, a contractual transfer of title will and should be accompanied by the transfer or the issuance of a warehouse receipt or other storage contract conferring rights of delivery in favour of the holder of the warehouse receipt, the owner of the goods.

Proving title over goods requires evidence.  Usually, in the absence of a dispute or a challenge to a party’s ownership, proof of the rights to delivery conferred by the warehouse receipt or storage contract, accompanied by a copy of the agreement pursuant to which title was transferred will be sufficient.

In cases where the assertion of title is challenged by a third party or parties asserting an interest in stored goods, title needs to be deduced by reference to all of the evidence.

13.3 Is it necessary to register an interest in goods in order to protect such interest against third party claims or interests?

Rights of ownership in moveable goods are best protected by notice to the outside world.  However, it is not possible to register a title interest in respect of moveable goods in the UK.  Accordingly, it is common practice and advisable for the owner of goods to place an easily visible notice within the vicinity of the goods in storage stating clearly the name of the owner and requiring that all dealings in respect of the goods present be directed to the owner.

13.4 Are there any other interests over moveable goods that the laws of your country will recognise?  For example, a pledge or a charge?

The English law recognises a pledge or a charge over moveable goods. 

A pledge is a bailment, that is, a delivery of possession, of goods, or of documents of title to goods, in order to secure a debt.  Ownership of the goods remains with the debtor/pledgor.  The pledgee has a common law right, in the event of default in payment of the debt of the pledgor, to sell the goods without first obtaining the authority of the court.

A charge gives neither ownership to nor possession of the goods but gives a right to the chargee to have specified property of the debtor applied to the discharge of the debt.  A charge must always be equitable, unlike a pledge which is a matter of common law and which therefore takes priority over a charge.

13.5 If so, how are such interests created?  Is it necessary to protect them by registration?

Security interests, such as a pledge, are simple to create: what is needed is a transfer of possession and an intent to create a pledge.  Possession gives the pledgee full control over the relevant goods, accompanied by effective powers of enforcement and a legal interest which prevails against third parties.

Security, once granted, needs to be properly perfected before it is fully valid against third parties and the debtor.  Perfection can involve possession of the charged asset, registration or notice.  Failure to perfect security will mean that the security is void against other creditors, liquidators, administrators and other parties.

A pledge, however, is exempted from the requirement of the Bills of Sale Acts for registration.  It can be created by mere oral agreement and physical delivery, and need not be generated, constituted or evidenced by any written instrument. Of course, it is always in practice sensible for it to be in writing.  If however a pledge has the effect of creating a charge over an asset, it will have to be registered.

A charge over an asset requires registration in order to be effective. 

In relation to all of the questions at paragraphs 13.1 to 13.5 what if anything is the effect upon title or other security interests of co-mingling the relevant goods with other goods?

Subject to the conditions specified in Section 20A of the SGA 1979 it is possible for a party to become the “owner in common” of a part of a commingled “bulk” or quantity of goods.  It is theoretically possible for that party to create a security interest by way of a pledge in respect of its interest in its share of the collective bulk or quantity.

Instances of security being granted in respect of a part share in a larger bulk of goods appear to be relatively rare.

The co-mingling of goods inevitably substantially diminishes the value of a pledgee’s security from a legal perspective.  Unless the conditions of Section 20A of the SGA as fulfilled, the owner of the goods cannot retain title to goods that he has allowed to commingle or which have in fact become commingled with other goods and the efficacy of any pledge in respect of the goods is similarly lost.

There are numerous other practical disadvantages and risks that arise when pledged goods held as security are commingled.  They include difficulties in properly allocating losses caused by theft or other damage; the risk of loss is greater and commingled goods are difficult to insure.
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ICC Banking Commission has just released Document No. 470/1106rev on 3 September 2008 in a proposal form to restrict putting multi issues in one query.  I think the L/C View should endorse such proposal.  It is difficult for us to switch our minds to completely different queries at the same time.
This query puts forward many highly conceptual issues, without providing
adequate data for our determination.

Regarding title, it is not as simple as the enquirer thinks.  Title is affected by many things, such as the local governing laws, the nature of the goods (different goods lead to different title issues, for example, goods may be classified as ascertain goods, unascertained goods, future goods, etc. and each may lead to a different consequences in term of title.  So I cannot answer the questions unless the enquirer specifies the nature of the goods and has determined the applicable law.  England does not rule the rest of the world now, like India and Hong Kong, as they did in the past.  So we cannot determine these issues based on English law.

For such issues, it is more appropriate to consult a lawyer who is familiar with the applicable law on the title part.  Not all lawyers are experts in title laws, particularly based on a specific code of applicable law.

Best regards,

T. O.

Dear Hook Ching Hue,

I agree with T.O. that you are raising a lot of conceptual issues. However, let me give you some direction.
First, title in commercial transactions, particularly those of cross-border nature, became largely irrelevant. See Articles 4 and 67 of the Vienna Sales Convention that does not regulate property rules, but deals with the passage of risk. INCOTERMS have followed the same dichotomy as well. In this case, the passage of risk depends on the identification of the goods to the contract. The goods may be identified by marks, shipping documents, notice to the buyer or otherwise. Furthermore, the risk passes even if the seller retains the shipping documents.

My point is that at the moment the goods become identified and the buyer assumes the risk, s/he acquires a property right. International rules do not classify this right and leave it to the national law. For instance, under the US Law, UCC Article 2-401, if the seller reserves title, the UCC will characterize it only as a "reservation of a security interest." Which means that the seller ceases to be the owner and must protect its property right (i.e., the security interest). Typically, the seller would file a purchase money security interest under UCC Article 9 in the location of the buyer. UCC also belongs to this category of rules that disregard ownership or title. You can also add Canada to that list that also re-characterizes title as a reservation of a security interest under its Personal Property Security Act.

On the other hand, you have the EU Directive on Combating Late Payments (2000/35/EC), which in Article 4 recognizes a retention of title clause that has been properly agreed on between the seller and the buyer. In other words, the EU Directive does not re-characterize property or ownership rights of the parties that are measured according to the law they chose. UCC and Canadian laws would not respect that characterization.

Finally, commingling does not erase your property rights. However, it may affect your absolute title right that could become a pro-rata co-ownership right. This is another important point because in case of bankruptcy of the intermediary (e.g., the warehouseman), you need to be protected by a property right. Unsecured claim pays nothing.

Overall, ownership is not that relevant in commercial transactions, as long as you can identify who bears the risk and as long as the law recognizes some kind of property right, even though short of absolute title. As T.O. pointed out, you need to identify the final destination of your goods and then determine what the law does to your ownership right.

Finally, at the London Metal Exchange claims to warehouse receipts are traded not the actual title documents. It is a futures exchange where claims to commodities are typically settled by offset rather than delivery of title documents. However, the parties have an option to take/make delivery of the commodity. LME uses a SWORD system that delivers warehouse receipts electronically to the parties. But, this question of whether an electronic warehouse receipt has the same legal nature as a paper document is a totally different question.

I hope I did not confuse anybody.
Good day!

Marek

Dear Marek,

Your answers are very informative and clear for those who know a little about title issues.  Otherwise, process like registration for security interest in USA may not be fully understood.

Conceptual terms like title, ownership, rights, etc. are difficult to define and are used interchangeably in the market place but they may not mean the same in terms of local law. This is the difficult part.

Yes, Incoterms do not deal with title for obvious reasons, although some traders think they would.  I have seen some handouts saying that Incoterms deal with title.  So be very careful to choose a speaker.

Now I have one small query for you to comment on.

The English law regards the bill of lading only as a quasi-negotiable instrument, not like a draft which is a fully negotiable instrument.

Q1    How about the rights of an endorsee of a bill if lading in case of frauds.  Is the rights of the endorsee unaffected by discovery of frauds?

Q2    Does this matter if the frauds are uncovered before or after the maturity date?

I know from another lawyer that in USA the endorsee is protected in case of frauds under UCC.  This is another example to show that these two countries are different although sharing a common language.  I prefer the USA law on bill of lading and discounting in LC as it has more common sense.

What is the situation under English law?

Many thanks for your elaboration.

T. O.

UCC 7-502 regulates rights acquired by "due negotiation" and UCC 7-504 rights acquired in the absence of due negotiation. UCC 7 applies equally to warehouse receipts and bills of lading. Due negotiation must be made in the regular course of business and any notice of defenses will frustrate due negotiation. The document of title holder that took the document by negotiation acquires title to the document and title to the goods. Due negotiation operates similarly like a negotiation of a negotiable instrument and insulates from defenses of misrepresentation, mistake, fraud and duress. I do not agree with the usage of the term title in these sections. See also below what I stated with respect to the English law. This property right may not be defeated even if the transferor retained the right to stop the goods in transit. However, then you have UCC 7-504 that deals with situations where the document has not been duly negotiated. If the document has not been duly negotiated, then the transferee may acquire only the rights that the transferor had. The doctrine of abstraction that allows the endorsee of a bill of exchange acquire a better rights that his predecessor does not apply! A document of title is not duly negotiated if an indorsement has been forged. Which means that the transferee may not defeat the defenses that the bailee may have against the transferor. T.O., please keep in mind that UCC Article 7 applies only to intra-state transactions (it is a state law) and federal law governs international shipping. I am no maritime lawyer, but I assume that the principle is the same.

Regarding the English law, I will cite Prof. Roy Goode’s book, Commercial Law (3rd ed. 2004). The holder of a bill of lading acquires the rights of constructive possession to the goods, rather than title! This just proves that the name "document of title" is sometimes misleading and some merchants may associate it with the title even though it in fact transfers property rights of a different quality (e.g., constructive possession). When you have a document of title, you do not necessarily acquire title to the goods. I think that these situations are rather rare. If your goods are commingled, you don't acquire title but a co-property right.

Overall, neither US for undue negotiation nor English law seems to recognize the doctrine of holder in due course for negotiable documents. However, unlike the English law, UCC Article 7 recognizes due negotiation that may create abstract rights. Furthermore, if the goods had been subject to a security interest before they were placed on a ship or moved to a warehouse, the document of title holder takes subject to the security interest.
All of these statements are not to provide legal advice, they are just to facilitate the discussion in this forum.
Hope this helps,
Marek