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Qualifying Statements in Bills of Lading - Goods in a Sealed Container - Bill of Lading no evidence as to contents of container - Forwarding and Consolidation Practice - Daewood America v. Round the World Corporation (US 10TH Circuit CA)

by Peter Jones (Paterson, MacDougall)

A bank that issues a letter of credit payable upon presentation of a bill of lading and related documents such as an insurance certificate, accepts a risk that its customer is credit worthy. In the event that goods covered by the bill of lading are lost or damaged, or not even shipped, a bank that has properly paid can demand re-imbursement of its "loan" from its customer. If the credit risk materializes, the bank as holder of the bill of lading and certificate of insurance can exercise rights against the carrier and the insurer.

Most occasions it is the customer who has to pay the Bank, and seek to recover the funds from other parties. The most troublesome cases are where the bill of lading appears regular, but the shipper has committed an outright fraud, as happened to Daewoo International (Daewoo).

Daewoo purchased over one million plastic videocassette tape holders shipped in sealed containers by a Hong Kong supplier. When Daewoo opened the containers, which it received with the seals intact, it found nothing but cement blocks! The supplier had long since been paid under letters of credit opened by Daewoo, and had disappeared.

The bills of lading issued by the defendant NVOCC's listed the weights and contents of the containers as declared by the shipper, who represented that each container held pallets of "V/O Housing" and weighed 17,500 kilograms. The container references on the bills of lading were qualified with the terms, "Shipper's Load and Count" and "S.T.C.," (or "said to contain."). Neither the NVOCC's nor the ocean carriers weighed the containers or break the seals to inspect the contents. Daewoo concedes that the containers held cement blocks even before they were delivered to the NVOCC's.

The Trial Court dismissed the action, as Daewoo had not proved that the missing videocassettes were delivered to the carriers. Daewoo's only evidence was the bills of lading that did not prove the contents of the sealed containers, which were not ascertainable from the outside.

Daewoo appealed. The Appeal Court confirmed the dismissal of the claim on the ground that "a bill of lading is not prima facie evidence of the contents of a sealed container because the contents are not discoverable from an external examination." (Ed Note: The judgement is not based on the effect of the STC language.)

The Appeal Court distinguished cases where a carrier was held liable despite an STC endorsement on the ground that a weight discrepancy was evidence of a shortage when the balance of the cargo in the container corresponded to the description in the bill of lading. In effect, the difference between the weight recorded by the bill of lading and the actual weight could be evidence of a shortage, but not of a fraudulent substitution, of cargo.

Daewoo argued that the weight differential should have put the carriers on notice that the shipment was not as described. The carriers should then have broken the seals to inspect the contents of the containers, when they would have discovered the substituted cement blocks.

The Court disagreed, stating:

The only way that the carriers could have discovered the substitution was if they had broken the seals on the containers. We conclude, however, that, absent notice that something was amiss, the carriers did not have an independent duty to break the seals. Instead, Daewoo, the owner and consignee, was better positioned to prevent the loss. For instance, it could have instructed the carriers to break the seals for inspection at loading, or it could have designated a representative to be present when the containers were loaded. Daewoo could also have required the bank to withhold payment for thirty days after delivery or until the containers had been inspected.

November 20, 2005

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