Focus on downstream freight forwarders withholding bill of lading

Freight forwarders often sub-contract some or all of their forwarding tasks to others. When they default on payment, sub-contractors typically withhold the bill of lading, refusing to release the cargo until outstanding agency fees or advance expenses have been paid.

While this has become customary practice in the freight forwarding industry, the withholding of bills of lading by downstream forwarders poses significant risks for the various parties involved including the cargo owner, upstream forwarder and their downstream sub-contractors.

Even if there are contract provisions allowing the withholding of documents in case of payment default between forwarders, these are generally limited to the contracting parties and made without the cargo owner’s authorisation. In many cases, the cargo owner may not even approve of or authorise the sub-contracting actions taken by the upstream forwarder.

The key question is whether downstream forwarders, who accept sub-contracted tasks, can legally withhold the cargo owner’s bill of lading based on an agreement with the upstream forwarder. This article delves into three legal issues surrounding the practice of downstream forwarders withholding bills of lading.

Is the practice of withholding bills of lading by forwarders a right of the defence of refusal to perform or a statutory lien? Article 7 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Disputes over Maritime Freight Forwarding Contracts clearly states that, “In cases where a maritime freight forwarding contract stipulates that the forwarding enterprise shall deliver documents acquired in handling of maritime freight forwarding business only upon payment of the relevant fees by the principal, the people’s court should support the forwarding enterprise if they refuse to deliver the documents on the grounds of the principal’s failure to pay the relevant fees. If the contract lacks clear provisions or is ambiguous, and the forwarding enterprise refuses to deliver the documents due to the principal’s non-payment of the relevant fees, the people’s court should also support this, with the exception of bills of lading, sea waybills, or other transport documents.”

The Supreme Court deems that forwarding enterprises can exercise the right to withhold documents under certain conditions, and this right is based on the defence of refusal to perform, rather than a statutory lien. The court takes a cautious approach to forwarding enterprises exercising the right of a statutory lien, as the provisions do not explicitly grant forwarding enterprises the right to exercise a lien.

However, for disputes arising from the payment of land transportation fees, warehousing fees and other related matters subsequent to the retrieval of goods, the law has stipulated that carriers and storage providers have the right to retain goods. If forwarding enterprises have the above-mentioned status in such cases, they can exercise their right of a lien by the law.

Are bill of lading withholding clauses between freight forwarders effective against cargo owners? One of the essential elements for exercising the defence of refusal to perform is that both parties owe obligations under the same bilateral contract. Freight forwarders who exercise this right should be subject to contractual relativity constraints.

In Sinotrans Xiamen Greating Container Services v Xiamen Longzhi Logistics and Jia Congliang, the court ruled that without the cargo owner’s consent, the upstream forwarder, in this case, transferred the freight forwarding business to the plaintiff, the downstream forwarder. As there was no direct entrustment relationship between the cargo owner and the downstream forwarder, the owner was not bound by the contract between the forwarders. Consequently, the clause allowing the withholding of bills of lading did not apply to the cargo owner.

To safeguard the interests of cargo owners and standardise the freight forwarding market, downstream forwarders who accept sub-contracted tasks cannot arbitrarily withhold a cargo owner’s bill of lading based on an agreement with the upstream forwarder.

Does the downstream forwarder’s bill of lading withholding constitute an infringement to the cargo owner when causing losses? In cases where there is no direct entrustment relationship between the cargo owner and the downstream forwarder, the key factor in determining whether the downstream forwarder should bear liability for infringement in existing judicial practice is whether the cargo owner consents to the sub-contracting.

In Shanghai Kingline Logistics v Maga Logistics, the court held that one of the prerequisites for a downstream forwarder to be liable for infringement is that they have committed a fault. While there was no evidence to prove that the plaintiff, i.e. forwarder A, agreed to their agent, forwarder B, sub-contracting for freight matters, combining the fact that forwarder A subsequently directly instructed the defendant, forwarder C, to co-ordinate cargo unloading at the destination port and expressed willingness to pay the fees, along with the wording of the lawyer’s letter sent by forwarder A and the content of the lawsuit, forwarder A effectively ratified forwarder B’s sub-contracting.

According to the provisions, forwarder C on the sub-contracting chain, based on the freight forwarding agreement signed with forwarder B, did not deliver the bill of lading to forwarder A and did not deliver the cargo as per forwarder B’s instructions as considered an exercise of their rights under the agreement.

This agreement does not violate legal provisions, thus the bill of lading withholding by forwarder C is legitimate and does not constitute an infringement against forwarder A. Similarly, if the cargo owner acknowledges the sub-contracting relationship, then in cases where a downstream forwarder withholds the bill of lading as per the contract, it does not breach legal provisions and does not constitute infringement.

However, if the cargo owner does not explicitly consent or authorise the upstream forwarder to engage in sub-contracting, but experiences losses due to the downstream forwarder’s withholding of the bill of lading, then not only the upstream forwarder, who directly received the cargo owner’s commission, should bear the responsibility for unauthorised sub-contracting, but the downstream forwarder, engaging in bill withholding, also demonstrates negligence and lack of proper review in the unauthorised sub-contracting actions of the upstream forwarder, which may entail potential infringement liability.

Sun Pinghui is a partner at Joint-Win Partners. She can be contacted at +86 138 1687 2836 or by e-mail at sunpinghui@joint-win.com.