The draft as a bill of exchange

[I am not the author of this extract. The venerable Mr. T. O. Lee is. This was originally posted by him on 8 February 2012 in Kim's Garden under "The negotiability of bill of lading and draft". Re-published here with the permission of the author. - Rupnarayan Bose]

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A Draft is an instrument dealing with a payment obligation and the “negotiability” deals with the right of a holder to pass on his rights under the draft to another person including the right to demand payment on maturity.

The Bill of Lading (BL) as a transport document:

A BL is more complicated. It deals with (i) receipt of goods (ii) evidence of contract of carriage and (iii) title attached to the cargoes (transformed from “goods” as used in an invoice). “Negotiability” here should cover all these three functions. We have to deal with them one by one.

A.    For the first function, a BL is a prima facie evidence in favour of an indorsee that the quantity of goods alleged to have been shipped has, in fact, been shipped as adjudicated in the landmark case in UK: Smith & Co. v Bedouin Steam Navigation Co. Ltd. [1896] A. C. 70.

B.    For the second function, a BL is a very good evidence of the contract of carriage, but it is NOT the contract of carriage itself as ruled by the famous UK case: The “Ardennes” (cargo owner) v the “Ardennes” (ship owners) [1950] 2 All E.R. 517 in which Lord Goddard C. J. adjudicated: “The contract has come into existence before the bill of lading is signed”. In practice the shipper and the carrier may have entered into a contract of carriage verbally or otherwise even before the BL is issued.

C.    On the third function, it would open the Pandora box and create business for a lawyer, consultant or expert witness:-)

Now let us look at the draft on “negotiability”.

1. It is a FULLY negotiable instrument, not a quasi-negotiable instrument like a B/L.
2. It is clearly governed by the Bills of Exchange Act 1882 (BOEA), The Geneva Conventions 1930, UNCITRAL Convention on International Bills of Exchange and International Promissory Notes and revisions thereof.
3. BOEA has been modelled in many legislations around the world to enable universal application of the same doctrine.
4. The original drafting intent is to provide utmost protection to the innocent third party as a holder so that the draft can be passed on freely from one person to another in the market place as a means of providing financing. Under absolute protection in BOEA, all parties are comfortable to deal with a total stranger. This makes the draft tick as an effective financing tool globally.
5. A holder’s rights and obligations under “negotiability” are classified into three layers (i) holder in due course; (ii) holder for value and (iii) holder without value (obtain it as a gift without paying any value or cost “consideration”).
6. The financial obligation of the drawee is always there. It cannot relinquish like title in a BL. Please refer to second part for details.

Then let us look at BL on “negotiability”

1. The BL is only a QUASI-NEGOTIABLE instrument as elaborated in many textbooks on sea carriage.
2. As a result, the maritime legislations and conventions cannot govern “negotiability” to such an extent as in BOEA. To make it simple, a draft is a whole apple but a BL is only half an apple.
3. Hence “negotiability” issues (such as the right of the innocent holder in due course of a BL to sue the third party as the endorser etc.) do not exist in half of an apple, the BL. It can only be found in the whole apple, the Draft. The maritime legislations and conventions quoted by Pradeep (COGSA, Hamburg Rules etc.) cover only half an apple. We cannot try to squeeze apple juice from the missing half that contains this goodie, a mission impossible.
4. For a BL covering comingle goods (regarded as “unascertained goods” in title laws of UK), like hydrocarbons stowed in the same hold in a tanker with similar goods owned by other shippers, there is no title until the hydrocarbons are separated into distinct tanks, according to the title laws of UK on “unascertained goods”. Hence there is no issue of “negotiability” when the BL carries no title for “unascertained goods” as evidenced by the landmark cases from UK: McDougall v Aeromarine of Emsworth Ltd. [1958] Q.B.; Blyth Shipbuilding and Dry Dock Co. [1926] C. A. and Wait [1927] C.A.  
5. Similarly if the goods covered by a BL has been destroyed by a fire, turning into ashes, the title will be gone even if the BL is still intact. Again there is no issue of “negotiability” when the title is relinquished due to fire, a peril of the seas.
6. In 4 & 5, if half an apple has been eaten by a mouse (fire), there is no apple left any more. There goes also the apple juice (“negotiability”).
7. Therefore we should not try to dovetail the BOEA concepts to the BL as far as “negotiability” is concern. Similarly we cannot dovetail the LC practices to fit in the legal context. This is another subject worth detailed discussions.

For more information on these, please visit www.tolee.com (now closed after my full retirement in 2020).

Regards,

T. O.