Commercial Law

by Richard D. Currier; Richard William Hill; Samuel Williston

STRAIGHT BILLS OF LADING GIVE NO SECURITY TO BANK.—The first and fundamental requirement, then, for any bank which may deal with bills of lading is never to have anything to do with straight bills. They give no security. A straight bill is readily distinguishable from an order bill on railroads in most parts of the country, at least, because uniform bills of lading are now in use, and the straight bill is always white and the order bill is always yellow. In foreign bills a greater variety of forms are used, and you may have to examine the terms of the bill before you can feel satisfied that it is of a sort that will give security. The vital words in bills of lading, as in negotiable paper, are the words, "order of" or "or order." If those are in a bill of lading it is all right as far as this matter is concerned. Therefore the third and fourth possible ways in which the seller may take the bill of lading to secure himself are the only ones which will enable him to finance the shipment at once.

BILLS OF LADING TO BUYER'S ORDER.—The third way which the seller may act in order to fulfill his purpose is to take an order bill of lading to the buyer's order. Although the bill of lading runs to the buyer's order, and although, therefore, title to the goods will pass to the buyer on shipment, the buyer cannot get the goods without that bill of lading. Therefore, so long as the seller retains the bill of lading nobody can get the goods from the carrier; and though the seller has parted with title to the goods, since he made the bill of lading run to the buyer's order, still he has retained control of them. Though it gives a security to the seller, and would give security to the bank, if the bank discounted a bill of exchange drawn on the buyer and took this bill of lading as security, it is not a desirable method for this reason: though the buyer cannot get the goods without the bill of lading, nobody else can get the goods without a lot of trouble, unless he has not only the bill of lading but the buyer's indorsement upon it. The bill of lading is drawn to the buyer's order, and if the buyer fails to pay and repudiates his contract, the bank or the seller will have trouble in getting back the goods. They will have to prove to the railroad that the buyer really has made default and that he no longer has any real interest in the goods.

BILLS OF LADING TO THE SELLER'S ORDER.—Accordingly, it is the fourth method which is in general use and which should be exclusively used. The seller takes the bill of lading to his own order and indorses it in blank; then he delivers it to his bank as security for a bill of exchange. If the bill of exchange is paid by the drawee on presentment at his city, he is given the bill of lading at once and he gets what he wants. On the other hand, if the buyer does not pay the draft on presentment, then the bank can realize on the security at once, if it wants to, because it has a bill of lading in its hands indorsed by the consignee to whose order it was drawn. If the bank proceeds against the seller as the drawer of the draft, when the latter pays and takes up the bill of lading he can similarly realize on the security, or get the goods back, because he will have a bill of lading in his possession which runs to his own order.

BILLS OF LADING TO "ORDER NOTIFY."—A slight modification of this form of bill of lading is made in order to let the buyer know when the goods arrive. When goods arrive at their destination it is a customary courtesy of railroads to notify the consignee; but if goods are consigned to the seller's order, the man who is really trying to buy the goods gets no notice, as his name does not appear on the bill of lading. To avoid that difficulty there is generally put on bills of lading, taken out to the seller's order when the goods are shipped in fulfillment of some contract or order, the words, "Notify X Y," X Y being the prospective buyer of the goods. Then when the goods arrive the railroad notifies X Y; he learns the goods are there and makes his plans accordingly. These bills of lading are often called "bills to order notify." The person who is to be notified is sometimes incorrectly called the consignee of the bill. The consignee is the person to whom the goods are deliverable, not the person who is to be notified necessarily; and where a bill is to the seller's order the goods are, by the terms of the bill of lading, deliverable to the seller and he is the consignee.

CROPS ARE MOVED BY USE OF BILLS OF LADING.—The various uses of bills of lading by sellers in order to insure concurrent payment by the buyer, and in order, with the aid of banks, to put themselves in funds while the goods are in transit, is a very important function of bills of lading. It is by such means the great crops of the country are moved, especially the cotton crop, which is moved almost wholly in this manner. The southern banks discount bills of exchange, which are customarily secured by bills of lading. The New York banks rediscount these bills of exchange and draw for a great part of the price of the cotton on English bankers. This use by sellers of bills of lading, however, is not the only mercantile use of bills of lading.

BILLS OF LADING TO BANKER'S ORDER.—Here is another method used, especially common in foreign commerce. A merchant in Boston wants to buy a cargo of goods from Europe, but he has not the money to do it. The seller in Europe does not know him and will not give him credit, so the merchant goes to bankers who have available foreign correspondents and states his case, and if he is in good credit with the bankers they say, "Order the goods from the man in Germany of whom you were planning to order them, and tell him to make the bill of lading out to us, and draw on us or on our correspondents in Berlin or London or Paris. On receipt of those bills of lading naming us as consignee we will pay, or cause to be paid, the bills of exchange attached thereto for the price." In this way the goods are shipped directly to the banker. In the cases mentioned before, the banker took an indorsed bill of lading, but in this mode of dealing the banker is himself the consignee, and on the faith of the consignment he pays the price of the goods. Then he delivers the bill of lading, indorsed, to the buyer, his customer, on the buyer's making a settlement or giving him security.

SURRENDER OF BILLS OF LADING FOR TRUST RECEIPTS.—There is one method of doing business in this connection which causes some risk to the bankers who engage in it. They frequently allow their customer, the buyer, to take the bill of lading, indorsed, for the purpose of entering the goods at the Custom House, or warehousing them, or even for the purpose of selling the goods, so that the buyer will be in funds to enable him to discharge his debt to the banker. The banker takes, when he does this, from the buyer to whom he delivers the indorsed bill of lading, what are called "trust receipts." These receipts state that the buyer has taken these bills of lading, that he holds them as a trustee, that they really belong to the banker, and that the buyer holds them simply for a special purpose, such as to enter them at the Custom House or to resell them and turn the proceeds over to the banker. If the buyer is honest, well and good; but if he should be financially pressed and dispose of that bill of lading, many courts, at least, would not protect the banker, but would protect the bona fide purchaser. What the banker ought to do is to stamp upon the bill of lading, if he delivers it to the buyer, that a trust receipt has been issued for certain specified purposes. In that case any purchaser of the bill of lading would have notice of the terms of the trust.

CHANGE OF ROUTING.—An analogous problem also may be supposed. A bank holds a draft for collection with bill of lading attached. It sometimes allows the drawee to take possession of the bill of lading and change the routing of the car. That is done because the buyer sometimes sells the goods before he receives them, and to save additional freight bills, he changes the routing on the original bills of lading. What risk does the bank run if it allows him to have possession of the bill of lading indorsed in blank? It runs the same risk as in case of trust receipts. The fact that the purpose was to change the routing of the goods is apparently immaterial. The change of destination does not do the bank any actual harm, except that the goods will be sent elsewhere, and perhaps to a point some distance from their original destination. The great risk involved is in allowing a man to have possession of a document which in effect is negotiable. If the bank does not get back its bill of lading it is in a bad position. If it did get back its bill of lading it would still have its security, only it would be subject to this difficulty, that the goods instead of coming to a place where the bank could conveniently get at them, have perhaps gone to a distant city, where it would be more trouble. If, however, changing the routing and the reselling involve a surrender of the old bill to the railroad and the issuing of a new bill of lading not only on a new route but with the purchaser from the consignee named as a new consignee, then the bank has thrown away everything, unless it actually obtains possession of the new bill, and even if it does it has only an inferior security.

ACCOMMODATION BILLS.—Let us now enumerate the risks which a purchaser or a lender runs in dealing with bills of lading, even with order bills, and consider how these risks can be obviated and how far they are inherent in the nature of the business. The first risk is that the bill may have no goods behind it, because it was originally issued without any goods. It has been quite a common practice, at some points where there is competition for freight, to accommodate customers by issuing a bill of lading for goods before the goods were received. Suppose a seller in Chicago deals with a man in Boston; what the seller normally ought to do is to buy goods, and ship them, getting a bill of lading, then take the bill of lading to a bank and get money on the faith of that bill of lading. You will see that that method requires the seller to have had money or credit in the first place, in order to buy those goods to ship. It would be very much more convenient for him if he could reverse the order and get the money from the bank first, then buy the goods and then ship them; and the kindness of the railroad agent frequently has enabled him to do that. The railroad agent, trusting to the seller's word that he will ship goods to-morrow, issues a bill of lading to him for the goods which the seller promises to ship. The seller dashes around to the bank, gets money and then buys the goods and ships them. He may carry on business in that way for a long time; no trouble occurs, nobody knows anything about it until the seller either goes bankrupt or becomes dishonest and fails to ship the goods after he has got the bill of lading, and then somebody finds himself with a bill of lading for which no goods have ever been received. Such bills have been called "accommodation" bills of lading, issued by the railroad for the accommodation of the shipper.

FICTITIOUS BILLS OF LADING.—In some cases the whole transaction is a fraud. In the case we have thus far been supposing, the railroad agent believed the seller was going to ship goods, and the seller intended to do so, only he wanted the bill of lading first; but money is so easily obtained, frequently, on bills of lading, that sometimes a shipper and a railroad agent put their heads together and say, "Let's make a few bills of lading," and as a pure fraud the agent writes bills of lading. These may be called fictitious bills. They are not exactly forgeries, you will see, since they are drawn by the regular agent of the railroad on the regular railroad form. One who took such a bill as this, however, would be protected if the carrier were liable. Railroads are generally, and other carriers are generally, financially responsible, and therefore the great question that interests the holder of such a bill is, are the railroads liable in damages because no goods are behind the bill of lading? It was held in an English case, seventy-five years ago, that in such a case the carrier was not liable on the ground that the agent who wrote the bill was acting beyond the scope of his authority in signing a bill of lading when no goods had been received. That decision has been much criticized, and justly criticized, because the carrier has put that agent in a position to determine when bills of lading shall be issued and when not. Of course, the agent ought to exercise his choice properly, but if the carrier has given him the power it ought to be responsible for the results. Nevertheless, in a majority of the States of this country, and in the Supreme Court of the United States, the English case has been followed; and the carrier would be liable neither on an accommodation bill nor a fictitious bill where no goods were shipped. There have been some attempts to change this rule by statutes, and in some States there is a statute, the Uniform Bill of Lading Act, so called, which provides among other things that the carrier shall be liable in the case supposed; but the trouble is that bills of lading dealt with in one State will not generally originate in that State. If a fictitious bill was issued in Chicago, although the bill named as a consignee a person in Boston, and was bought by a Boston bank, the liability of the carrier on that bill of lading would be determined by the law of Illinois. So, unless you have a satisfactory law where the bill originates, you will not be protected. Fortunately, the same statute has been passed in several States, and it is hoped that it will be in more. This, then, is the first risk, and the only way of obviating it is to have the law in satisfactory shape, passing a statute wherever it is necessary, so as to make the carrier liable for the wrongful act of its agent in issuing a bill of lading when no goods have been received.