Fraud and bills of lading. A modern case may help to introduce the problems that can arise and identify some of the important issues.
A sale contract requires the cargo to be loaded and bills of lading to be dated no later than 15 July. The loading is actually completed on 26 July. The bills of lading, signed and issued by the shipowner’s port agents, are nevertheless dated 15 July, indicating that the goods were loaded on that date and not later. The buyers are unaware of the false dating and accept the bills of lading. The late shipment would have been a breach of the sale contract and the buyers would have been justified in rejecting the documents and the goods. The buyers claim damages from the shipowners for misrepresentation. The court in The Saudi Crown, 1986, held the owners liable. In discussing the agents’ wrongful issue of the falsely dated bills of lading, the judge said:
“…..they must have had authority to insert the name of the place at which and the date on which each bill of lading was issued. It is clearly within the authority of an agent to put the date of issue on a bill of lading. If that agent puts the wrong date on a bill of lading he must do so by mistake or deliberately…..
One of the questions which arises is whether the loss resulting from a false statement as to that date is to be borne by the defendants … (that is, the shipowners, who employed the agent) … or by the plaintiff, who had no voice in selecting that agent.
The general principle is well known. An innocent principal is civilly responsible for the fraud of his authorized agent, acting within his authority, to the same extent as if it were his own fraud….
Putting the correct date on a bill of lading is a routine clerical task, which does not require any skill. An erroneous date may be inserted negligently or fraudulently … The plaintiffs suffered loss as a result of a false statement made by the defendants’ agents as to the date on which the cargo was loaded….
That misrepresentation was made by the agents of the shipowners in the course of their normal duties. It was a fraud committed by the defendants’ representatives in the course of their employment.’’
The word ‘‘fraud’’ can be linked with ‘‘criminal deception’’ in which case the fraud is “criminal fraud”. In shipping, we meet “maritime fraud” which is one form of “commercial fraud”. It can mean the use of false representations to gain an unjust advantage. Dishonesty and deceit are at the centre of fraud.
Although the English courts seem reluctant to define fraud, thus making it difficult for investigators to determine if fraud has occurred or not, a definition is helpful to prevent fraud taking place. The reluctance of the courts sterns from judges’ opinion that definition would restrict their being able to determine if certain activities arc fraudulent. Fraud is infinite, say eminent judges, and if precisely defined, courts would have to follow strict rules. The result would be that the jurisdiction of the courts would be restricted and perpetually eluded by new schemes which human inventiveness would develop.
Fraud is proved when it is shown that a false representation has been made:
(a) knowingly, or
(b) without belief in its truth, or
(c) recklessly, careless whether it be true or false: Derry v. Peek, 1886.
“To defraud is to deprive by deceit…”: Re London and Globe Finance Corporation Ltd, 1900.
“Fraud” therefore occurs if a misrepresentation has been made dishonestly, rather than merely carelessly. It is “deceit” that causes a person to believe and act to his detriment on a statement that is false or untrue in a material fact or creates a false impression. Its fraudulent nature is increased if it is successful in misleading the deceived person.
“Maritime fraud” occurs in the following manner as described by the International Chamber of Commerce (ICC), 1980:
‘‘Aim international trade transaction involves several parties–buyer, seller, shipowner, charterer, ship’s master or crew, insurer, banker, broker or agent. Maritime fraud occurs when one of these parties succeeds, unjustly and illegally, in obtaining money or goods from another party to whom, on the face of it, he has undertaken specific trade, transport and financial obligations.”
Forgery or falsification of shipping documents is one form of maritime fraud. The falsification can relate to the goods on the vessel or even to the vessel itself, for example, issuing a bill of lading for goods to be shipped on board a non-existent vessel. Documentary fraud is a common form of maritime fraud and bills of lading are very much part of the fraud.
If material facts are misrepresented, a documentary fraud may take place. Fraud can also occur if the bill of lading is wrongly dated but proof of fraud may be a problem. In United City Merchants v. Royal Bank of Canada, 1983, goods were shipped on board a vessel after the date in the contract of sale. The bill of lading was wrongly dated. It could not be proved that the seller or shipper was fraudulent. It was said in the House of Lords:
“As respects the confirming bank’s contractual duty to the seller to honor the credit, the bank, it is submitted, is only bound to pay on presentation of documents which not only appear on their face to be in accordance with the terms and conditions of the credit but also do not in fact contain any material statement that is inaccurate. . .. If there be any such right of refusal it must depend on whether the bank, when sued by the seller/beneficiary for breach of its contract to honor the credit, is able to prove that one of the documents did in fact contain what was a material misstatement.
It is conceded that to justify refusal the misstatement must be ‘material’ but this invites the query: ‘material to what?’ The suggested answer to this query was: a misstatement of fact which if the true fact had been disclosed would have entitled the buyer to reject the goods; date of shipment (as in the instant case) or misdescription of the goods are examples.”
The fraud can occur on the part of both the shipper and the carrier. Examples will be used below to indicate fraudulent practices related to the use of bills of lading.
In the middle of the 1980s, during the widespread shipping recession, many documentary frauds surfaced. The International Maritime Bureau (IMB) of the ICC has been instrumental directly and through “FERIT” (the “Far East Regional Investigation Team”, set up in 1979), in identifying minor and major fraudulent practices in an attempt to cause these dishonest practices to reduce. However, “businessmen”, especially in the Far East, are notorious in finding ways of “doing business” that would meet the description of “fraud”. If they do not get caught, they are either very good or very lucky because there may be serious problems with investigating and prosecuting fraudulent practices, particularly in developing countries.
Documentary fraud is involved in about 40 per cent of all maritime fraud. The bill of lading is very prone to being used in documentary fraud mainly because of its major characteristic as being a “document of title” and its featuring importantly in the documentary credits system of payments for international trade.Article 4 of the UCP 1983 states that “In credit operations all parties concerned deal in documents, and not in goods, services and/or other performances to which the documents may relate.
” In November, 1986, a barrister, Mr. J. R. Russell, presented a paper to a conference in London on “Modern Bills of Lading”, in which he said:
“The types of situation in which forged or fraudulent shipping documents may be utilised to obtain payment under a letter of credit are many and varied. Some of the more common examples are as follows:
(1)The goods described do not exist.
(2)The goods described exist, but were never shipped.
(3)The goods described exist, but were shipped outside the contract period.
(4)The goods described exist, but only some of them were shipped.
(5)What has in fact been shipped does not conform to the contract description.
(This can range from the situation where the goods shipped are damaged or are of inferior quality to the situation where merely crates containing rubbish or builders’ rubble have been shipped.)”
International trade and terms of trade are subject to documentary fraud, especially in the very common system of CIF (“Cost, Insurance and Freight” or just C and F) contracts of sale. The banks are required to pay on presentation of documents if the documents conform, even if the goods do not. The documents must be accepted on trust unless it can be shown that the seller himself is fraudulent as the United City Merchants case above demonstrates. The delivery of the documents to the bank for payment is “constructive delivery” of the goods to the buyer.
Examples of fraud involving bills of lading:
Fake bills of lading. Some fraudsters are capable of forging bills of lading using high quality colour photocopiers that can reproduce even the printed logo of the earner. These fake bills of lading are usually used in persuading buyers or banks to pay for non-existent cargo. This practice can be prevented if the innocent parties check the name and movements of the vessel named on the bill of lading. In 1989, Security Investigation Services of London reported a number of cases of this type of fraud. For example, “cargoes” of Nigerian oil described in bills of lading exceeded the tonnage of vessels supposed to be carrying the oil.
False date on the bill of lading. The contract of sale between the buyer and seller may impose a condition whereby the goods must be shipped and “on-board, shipped bills of lading” obtained by a certain date. If the seller or shipper cannot comply with this condition, he may request (or pressure) the master or vessel’s agent to issue an antedated bill of lading. The Hague-Visby Rules state in Art. III, r. 7 that after the goods are loaded the bill of lading to be issued to the shipper shall, if the shipper demands, be a “shipped bill of lading”. The bill of lading, which is a document of title, may be noted at the loading port with the date or dates of shipment, among other information. If the “shipment” or actual “loading” is after the “date of shipment”, this would be a fraudulent misrepresentation. Cases in which the dates were fraudulently inserted, whether by antedating or by alteration, include: Kwei Tek Chao v. British Traders and Shippers, 1954; United City Merchants v. Royal Bank of Canada, 1983; carrier to become liable for damages, usually to the buyer of the goods, because of the seller’s possible fraud, although the carrier himself may be innocent.
Switched bills of lading. A country may not have diplomatic relations with another country but traders in one or the other may wish to have goods transported between these countries. An example would be Taiwan and the People’s Republic of China. Goods may be loaded on board a vessel in a Chinese port, the bill of lading correctly showing the name of the loading port, then another bill of lading may be issued showing, for example, Hong Kong as the loading port, and a Taiwanese port as the discharging port. The vessel may never call at Hong Kong. This may be acceptable to businessmen but is a misrepresentation as to the actual name of the place of loading or shipment and could be fraudulent. Another example was experienced in 1989 where a vessel was on time charter to a Japanese firm. The vessel loaded fertilizer at Shuaiba, in Kuwait and was bound for a North Chinese port. There would have been problems for the vessel, its master and charterers if documents on board the vessel showed that the cargo had been loaded at Kuwait. Kuwaiti cargo was not permitted into the PRC. The time charterers attempted to pressure the ship-owners to accept bills of lading showing Singapore as the port of loading. The vessel had called into Singapore on her passage to the Far East but only to bunker outside the port limits; the cargo was not discharged and reloaded, as the document would have represented.
Misdescription of the goods. The nature and value of the goods can be misdescribed by the shipper for a number of reasons. The “nature” of the goods includes the amount of the goods and the identifying marks as are required to be furnished in writing by the shipper under the Hague Rules (and the United States Carriage of Goods by Sea Act 1936), Hague-Visby Rules and the Hamburg Rules. The misrepresentation can occur because the seller/shipper attempts to secure a lower freight rate, or because he is attempting to comply with the terms and conditions of a contract of sale, or because he is attempting to evade restrictions imposed by Customs and/or other national authorities. Between the shipper and the carrier the sanction on the shipper is high: the carrier and the ship are not responsible”… for loss or damage to, or in connection with, goods if the nature or value thereof has been knowingly mis-stated by the shipper in the bill of lading”. (Art. IV, r. 5(h) of the Hague-Visby Rules.) A similar exception to the carrier’s liability is found in the United States Carriage of Goods by Sea Act 1936, section 4(5), which adds to “knowingly” the words “and fraudulently”. The shipper is deemed to have guaranteed the accuracy of the information furnished by him (Art. III, r. 5 of the Hague-Visby Rules). Article 17, r. 1 of the Hamburg Rules also requires the shipper to guarantee the information, including the general nature of the goods.
The misdescription can include a general description of “spare parts” when the goods actually shipped, within cases or containers, may have attracted a higher freight rate if the freight rate depended on the commodity shipped. Such misdescription could be a breach of contract and the carrier may be able to bring an action for the proper freight that should have been paid ( according to a United States case Sea Land Service v. Purdy, 1982). If the goods are damaged during loading, carriage or before discharge the carrier may be relieved from liability for damage, because of the breach of contract by the shipper. For example another U.S. case dealing with the U.S. Carriage of Goods by Sea Act 1936, the shipper mis-stated the nature of the goods on the bill of lading as compared with the commercial invoice. The bill of lading description was “wire rods in bundles”. The invoice description was for coils of “bright basic wire in Thomas quality”. The freight rate for coils was about double that for rods and the handling methods were different. The shipper’s claim for damages was dismissed because of his knowing and fraudulent mis-statement of the nature and value of the goods. (La Fortune v. Irish Larch, 1974.)
Similar “misdescription” may occur if the cargo and/or its packaging is in defective condition but the shipper insists on a clean bill of lading.