7 Reasons Why Charter Party Bills of Lading are Risky
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A Charter Party Bill of Lading (CPBL) is typically issued under a charter party agreement for bulk cargo shipments. High-volume and relatively low-value goods are usually transported through chartered ships, which is cost-effective. For bulk shipments, appropriate Incoterms include FAS, FOB, CFR, and CIF. Although this method is cost-effective and widely used for bulk commodities such as rice, wheat, coal, and crude oil, it is considered riskier compared to a Bill of Lading issued by a carrier due to the following reasons:
1. Lack of Transparency in Terms of the Contract of Carriage
The Charter Party Bill of Lading is governed by the terms of the charter party agreement between the charterer and the shipowner. However, the terms and conditions of the charter party agreement may not be transparent to other parties. For instance, under FAS or FOB terms, the seller may not be aware of the details of the charter party agreement. Similarly, under CFR or CIF terms, the buyer may lack access to this information. In contrast, a Bill of Lading issued by the carrier typically includes standardized and transparent terms and conditions of the contract of carriage. This lack of transparency can result in unexpected liabilities or misunderstandings for the buyer or seller.
2. Charterer May Issue a Bill of Lading
UCP 600 allows a Charter Party Bill of Lading to be signed by the charterer of the ship. In the case of a time charter, which is typically for a longer duration, the charterer acquires the right to sign the Bill of Lading to avoid dependence on the shipowner for every shipment. In such cases, the charterer, who could be a party to the sale contract, may sign the Bill of Lading either as the buyer under FAS or FOB terms or as the seller under CFR or CIF terms.
If the seller itself signs a Charter Party Bill of Lading, it can create uncertainty for the buyer or the banks involved, as the Bill of Lading might not carry the same level of impartiality or reliability. Consequently, several banks impose a condition in the Letter of Credit (LC) stating that “Charter Party Bill of Lading signed by the charterer is not acceptable.”
3. Quasi-Negotiability of the Document
A Charter Party Bill of Lading is classified as a quasi-negotiable document, meaning it lacks the full negotiable attributes of a standard Bill of Lading issued by a carrier. While it can be transferred to another party, its transferability is limited and subject to the terms of the underlying charter party agreement. This limitation poses challenges, particularly for the buyer in a CFR or CIF transaction, as it may restrict their ability to assert control over the goods or transfer ownership rights. The quasi-negotiable nature of the document, therefore, increases the risk and complexity of the transaction.
4. Risk of Non-Delivery
In a CFR or CIF transaction using a Charter Party Bill of Lading, the buyer faces an increased risk of non-delivery or delays. These risks arise from potential disputes between the charterer and the shipowner or from the shipowner’s failure to deliver the goods as agreed. Unlike a standard Bill of Lading, a Charter Party Bill of Lading does not guarantee the actual delivery of goods, leaving the buyer with limited recourse in such situations, even if the issuing bank honors a complying presentation under UCP 600.
5. Uncertainty Regarding the Port of Discharge
A Charter Party Bill of Lading may specify a geographical range or a broad area for the port of discharge, as permitted under the terms of the credit. In transactions under FAS or FOB terms, the seller’s contractual responsibility ends once the goods are delivered at the port of loading. However, the seller must maintain effective control over the goods until payment is received under the terms of the credit.
The lack of clarity regarding the final destination of the goods, as the charterer or shipowner retains control over the vessel’s route and discharge plans, can undermine the seller’s ability to maintain control and manage the transaction effectively.
6. Increased Risk of Fraud
Fraud poses a significant concern with Charter Party Bills of Lading due to the operational vulnerabilities associated with chartered ships. Unlike liner vessels operating under strict schedules and standardized terms, charter party ships can be more susceptible to fraudulent activities.
In particular, there have been instances where ships carrying goods deviated from the intended destination, with the crew selling the goods at unknown ports. In extreme cases, fraudulent operators have even scrapped the ship itself for profit.
7. Legal Jurisdiction and Dispute Resolution
Charter Party Bills of Lading may specify a legal jurisdiction for resolving disputes that differs from the jurisdiction of the sales contract. This can complicate legal proceedings in cases involving issues such as delivery, freight payment, or demurrage calculations. Since the terms of the charter party are governed by maritime law, disputes may fall under a different legal framework than the sales contract.
This discrepancy in legal jurisdictions creates challenges for buyers and sellers, especially when they are based in different countries with varying legal systems. It can make it more difficult to enforce rights or resolve conflicts efficiently.