Irrevocable letters of credit and ocean bills of lading are commonly used to finance the sale of goods carried on merchant ships throughout the world. Letters of credit assure sellers payment for their goods by foreign buyers. Letters are issued by foreign banks at the request of their customers (buyers). Issuing banks promise to pay sellers through local confirming banks if the sellers’ drafts are presented in a timely manner and accompanied by documents specified in the letters by the buyers.
Confirming banks examine documents (not cargoes) to determine if they conform with the terms of the letters. If documents are in order, drafts are honored and sellers are paid. The documents examined usually include a commercial invoice, certificates of insurance, inspection and origin, as well as a clean on board ocean bill of lading. The last document is issued by the ship after goods are loaded aboard. What is meant by “clean” is often a question of fact.
The recent Continental case (1991 AMC 1989) in a New York federal court sheds light on the meaning of a “clean” bill of lading. In the Continental case, the plaintiff, an American grain supplier, agreed to sell 45,000 tons of wheat to an Egyptian buyer for $5.2 million freight charge. The freight payment to the shipowner was also to be made under a letter of credit arranged by the chartering buyer.
After loading, the letter of credit in favor of the seller was in place, but the letter in favor of the shipowner for freight was not. When the seller presented bills of lading to the ship for clean endorsement, he was advised that the shipowner intended to preserve its maritime freight lien on the cargo by endorsing a notice of lien clause on the bills. The confirming bank advised the seller that bills bearing the freight lien endorsement would not be honored under the letter of credit. The seller then sued the shipowner, claiming the bills bearing the freight line were not clean and delayed its payment efforts with the bank.
The straight bills of lading in the Continental case incorporated the charter party. The charter provided that the shipowner would release “clean” bills upon the completion of loading and that the vessel would have a lien on the cargo for unpaid freight.
The seller unsuccessfully argued that the freight lien claused bills were not clean. The court noted that the Carriage of Goods by Sea Act does not address the presence of freight lien clauses in bills of lading. The Act concerns the marking of bills for identification of quantity or weight, and the condition of the goods. A clean bill “bears no notation which indicated the goods. . . were, when received by the carrier, in any manner defective.
The seller then argued that the freight lien provision in the charter rendered the freight clause on the bills of lading superfluous. The court acknowledged that the clause might be superfluous. However, since it was possible that the freight claim on cargo destined for Egypt could be solved by an missible attempt to preserve the shipowner’s freight lien. Furthermore, the seller could cite no authority that would preclude the use of the clause, even if superfluous.
The Continental case indicates that when certain bills of lading incorporate charter freight lien provisions, shipowners can clause bills if freight is owing. It may be safer to superfluous than sorry when freight is at risk.