Liens over bills of lading

In the freight forwarding business it is common practice for a freight forwarder which has not received its freight forwarding fee to detain the bill of lading until the fee is paid. The issue of whether a freight forwarder has the right to do this has long been the subject of debate. Recently, the Shanghai Maritime Court settled this debate in the negative.

In the case, the freight forwarder received an instruction from its client to handle the export forwarding of a load of cargo. After shipment of the cargo, the client failed to pay the freight forwarding fee. The freight forwarder therefore detained two sets of original bills of lading, and demanded that the client pay all of the freight forwarding charges.

As the cargo was released at the destination port without the original bills of lading, the freight forwarder instituted a tort action against the carrier, on the grounds that it lawfully held the original bills of lading and legally had a lien against the cargo, and asserting that the release of the cargo by the carrier without the original bills of lading had made it impossible for it to realize its claim through a lien on the cargo, thus constituting infringement of its lien. Accordingly, it demanded compensation from the carrier for the outstanding freight forwarding fee.

The main point at issue in the case was whether, when a client has failed to pay the freight forwarding fee, the freight forwarder can place a lien on the cargo under a bill of lading by placing a lien on the bill of lading. The trial court responded in the negative, from the following perspectives.

B/L not movable property

A bill of lading is not movable property and thus does not satisfy the provisions of Chinese law on the creation of liens.

Article 230 of the PRC Property Law specifies that “if a debtor fails to perform its matured debt obligation, the creditor may place a lien on any movable property of the debtor’s which is legally in his possession, and receive repayment from such movable property on a priority basis” . Pursuant to the provisions of this article, Chinese law requires that property over which a lien may be placed be movable property. The trial court held that a bill of lading is a document which evidences a contract of carriage by sea and acceptance or loading of the cargo by the carrier, on the basis of which the carrier warrants that it will deliver the cargo (see article 71 of the PRC Maritime Law), and therefore it does not fall within the scope of movable property. However, the trial court did not provide any explanation as to why this should be the case.

Unfortunately, the definitions of “movable property” and “immovable property” in the PRC Property Law are unclear.

According to article 92 of the PRC Security Law, the term “immovable property” means land and attachments thereto such as premises and trees, and the term “movable property” means anything other than immovable property. In other words, if something is not immovable property, it will fall within the definition of movable property. There is no doubt that the cargo under a bill of lading is movable property, however, whether the document on the basis of which the cargo is delivered falls within the scope of movable property remains unclear.

No lien on bills of lading

A freight forwarder may not place a lien on a bill of lading on the grounds that he has lawful possession thereof.

The trial court held that the freight forwarder’s possession of the bills of lading was based on the circulation of the documents under the freight forwarding contract, and that such possession did not constitute possession as understood in law. However, the trial court did not explain what constitutes possession of a bill of lading as understood in law.

Pursuant to Article 241 of the PRC Property Law, possession may arise based on a contractual relationship or at law. Possession should be a simple fact. The freight forwarder’s possession of the bills of lading was based on the freight forwarding contract with the client, and should therefore be the possession relationship affirmed in Chinese laws.

Not proof of title

The trial court held that because the bills of lading were straight bills of lading, they were not valid as proof of title. Accordingly, the holding of the bills of lading by the freight forwarder could not be deemed as his having secured possession of the cargo. The PRC Maritime Law specifies that a straight bill of lading cannot be transferred. However, there are differing opinions in legal circles as to whether a straight bill of lading itself is valid as proof of title, as transferability is a key feature of a proof of title. In this case, even though the freight forwarder held the bills of lading, he could not be deemed as having possession or ownership of the cargo.

Exercise of lien not practicable

The trial court held that even though the freight forwarder had lawfully obtained the bills of lading, it could not realize its claim by auctioning the straight bills of lading when the client failed to pay the freight forwarding fee.

A lien is realized by auctioning or selling off the property under that lien and receiving payment from the proceeds on a priority basis. In this case, as the freight forwarder did not have actual control of the cargo and had no means of disposing of it after detaining the bills of lading, he could not realize the lien after his claim went unpaid.

Accordingly, the trial court’s determination that asserting that possession of the bills of lading equalled possession of the cargo and exercise of the lien was untenable is correct.

In summary, a freight forwarder may not put a lien on the cargo under a bill of lading by putting a lien on the bill of lading itself. In the absence of a contractual and a legal basis, where a freight forwarder detains a bill of lading and demands that his client “pay to redeem the bill of lading” , the freight forwarder’s refusal to deliver the bill of lading constitutes a breach under the freight forwarding contracting that he has entered into, and he is therefore required to assume liability to his client for breach of contract.

Li Feng is a partner at LC & Co
Pan Rui is a lawyer at LC & Co