Draft Uniform Documents of Title Act 1995

PART 4 - WAREHOUSE RECEIPTS AND BILLS OF LADING:

NEGOTIATION AND TRANSFER

Form of negotiation and requirements of "due negotiation"

17. The following principles govern the negotiation of a document of title:

(a)    A negotiable document of title running to the order of a named person is negotiated by the endorsement of the named person and delivery;

(b)    After the endorsement of a negotiable document mentioned in paragraph (a) by the named person in blank or to bearer, any person can negotiate it by delivery alone;

(c)    A negotiable document of title may also be negotiated by delivery alone when by its original terms it runs to bearer;

(d)    When a document running to the order of a named person is delivered to that named person, the effect is the same as if the document had been negotiated;

(e)    Negotiation of a negotiable document of title after it has been endorsed to a specified person requires endorsement by the special endorsee as well as delivery;

(f)    A negotiable document of title is "duly negotiated" when it is negotiated to a holder who purchases it in good faith without notice of any defence against or claim to it on the part of any person and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves receiving the document in settlement or payment of a money obligation;

(g)    Endorsement of a non-negotiable document neither makes it negotiable nor adds to the transferee's rights;

(h)    The naming in a negotiable bill of a person to be notified of the arrival of the goods does not limit the negotiability of the bill nor constitute notice to a purchaser thereof of any interest of that person in the goods.

Legislation
UCC 7-501; UWRA (Can.), s. 19

Comment

1.    This provision sets out the rules governing negotiation of a negotiable document of title. Paragraphs (1), (2) and (4) restate the contents of section 19 of the UWRA (Can.) and extend its application to all negotiable documents of title. In addition, paragraph (3) makes it clear that a negotiation results from a delivery of the document of title to a banker or buyer to whose order the document has been taken by the person making the bailment. The position under the present law is not entirely clear: under negotiable instruments law, a distinction is drawn between issuance of a bill and negotiation of it. See R.E. Jones Ltd. v. Waring and Gillow Ltd., [1926] A.C. 670. If this position were extended to the UWRA (Can.), it would follow that a bank to whom a negotiable warehouse receipt is transferred by the person who warehoused the goods would not be considered to have obtained a negotiation of it. As a consequence, the bank would not obtain the benefits of negotiability: i.e., the insulation from defect of title defences that exist between other parties. This result is contrary to the common law position which regarded the purchaser as a remote party who could take the bill free from such defences even though the purchaser may have been named as an immediate party on the instrument. See Munroe v. Bordier (1849), 8 C.B. 862.

2.    Paragraph (4) introduces a new requirement of negotiation in the ordinary course of business or financing. The requirement can be derived from the whole purpose behind the negotiability of documents. The principle of negotiability emerged out of the need to protect dealings in the ordinary course of trade. There is no good commercial purpose to be satisfied if the transaction in question is one that does not take place in the ordinary course of business. The Official Comment to UCC 7-501 indicates that there are two aspects to the usual and normal course of mercantile dealings. The first centres around the person making the transfer and requires that the transferor be a person who ordinarily deals in such documents. The second aspect centres around the nature of the transaction itself and requires that the transaction be one that occurs in the regular course of business.

Rights acquired by due negotiations

18 (1)    Subject to section 19 and to section 4, a holder to whom a negotiable document of title has been duly negotiated acquires thereby:

(a)    title to the document;

(b)    title to the goods;

(c)    all rights accruing under the law of agency or estoppel, including rights to goods delivered to the bailee after the document was issued; and

(d)    the direct obligation of the issuer to hold or deliver the goods according to the terms of the document free of any defence or claim by the issuer, except those arising under the

terms of the document or under this section.

(2)    In the case of a delivery order, the bailee's obligation accrues only upon acceptance and the obligation acquired by the holder is that the issuer and any endorser will procure the acceptance of the bailee.

(3)    Subject to section 20, title and rights acquired under this section are not defeated by any stoppage of the goods represented by the document or by surrender of such goods by the bailee, and are not impaired even though

(a)    the negotiation or any prior negotiation constituted a breach of duty;

(b)    any person has been deprived of possession of the document by misrepresentation, fraud, accident, mistake, duress, loss, theft or conversion; or

(c)    a previous sale or other transfer of the goods or document has been made to a third person.

Legislation
UCC 7-502; UWRA (Can.), ss.22, 26-28.

Comment

1.    This provision largely restates the substance of sections 22 and 26 to 28 of the UWRA (Can.) and extends their application to all forms of negotiable documents of title. The provision will substantially change the law as it relates to negotiable bills of lading in two major areas: (1) effect of the transfer on the obligation of the issuer; and (2) introduction of a true notion of negotiability to bills of lading.

2.    Under the common law, contracts were not assignable. Accordingly, although the transfer of a bill of lading could effect a transfer of property in the goods, it did not operate as an assignment of the contract of carriage. As a result, the transferee could not claim damages from the carrier for breach of contract in failing to deliver the goods. In order to overcome this problem, the Bills of Lading Act, 1855 (U.K.) was enacted. The equivalent provisions can be found in the Bills of Lading Act, R.S.C. 1985, c.B-5; The Mercantile Law Amendment Act, R.S.O. 1980, s.265, ss.7-8; the Bills of Lading Act, R.S.N.S. 1967, c.22. In other provinces (such as Alberta and Saskatchewan) it is possible that legislation is in force as an Imperial statute. See The Status of English Statute Law in Saskatchewan, Law Reform Commission of Saskatchewan (1990) at pp. 156-7.

The statute provided that the transferee of a bill of lading to whom the property in the goods has passed "shall have transferred to and vested in him all rights of suit, and be subject to the same liabilities in respect of such goods as if the contract contained

in the bill of lading had been made with himself". This provision not only made the carrier liable to the transferee for any default under the contract of carriage; it also made the transferee liable on the contract for freight. The provision has created difficulties because the Act will not apply where property passes either before or after the consignment or endorsement (which is a persistent problem in the case of bulk cargo) and does not apply at all if a document other than an order bill of lading is issued. This aspect has been criticized by a number of commentators who have called for reform of the legislation. See B.J. Davenport (1989) 105 L.Q.R. 174; F.M.B. Reynolds, (1990) 106 L.Q.R.l.

The Uniform Documents of Title Act resolves this problem by providing that the person to whom the document of title is negotiated obtains the direct obligation of the issuer. The provision does not render the consignee or endorsee liable on the contract, presumably on the theory that the carrier has a lien on the goods. The enactment of the Uniform Documents of Title Act would operate to supplement the Bills of Lading Act. The Uniform Documents of Title Act would give an additional remedy to a person to whom a document of title was negotiated and likely would not result in an operational conflict. If it were determined that there was a conflict between the two provisions, the federal provision would govern by virtue of federal paramountcy and by the provision of the Uniform Act which subordinates it to federal legislation. See section 27. In any case, the provision would operate in any situation falling outside the scope of the Bills of Lading Act. Provinces which have enacted a provincial version of the Bills of Lading Act could repeal the legislation upon adoption of the Uniform Documents of Title Act.

3.    The provision also changes the law pertaining to the negotiability of documents of title in two ways ("negotiability" is used here to denote the ability of a transferee to obtain a better title than the transferor had). First, the notion of negotiability is extended to bills of lading. Under the UWRA (Can.), negotiable warehouse receipts are afforded negotiability in the true sense, whereas bills of lading, which remain governed by the common law, are transferable by delivery and any necessary endorsement but are not negotiable in the strict sense. This difference in treatment is unjustified. At common law, only bills of lading were considered transferable (i.e., they did not require attornment on the part of the bailee: possession of the goods was locked up in the document). It was only by virtue of statute that warehouse receipts became acquired the same attribute. However, section 26 of the UWRA (Can.) went even further and provided that the validity of a negotiation of a warehouse receipt is not impaired by the fact that "the negotiation was a breach of duty on the part of the person making the negotiation" or "the owner of the receipt was induced by fraud, misrepresentation or duress to entrust the possession or custody of the receipt to such person". It makes no sense to afford negotiability to warehouse receipts but not to bills of lading - the same principle should be applied to both kinds of documents of title.

The second change involves a slight expansion in the notion of negotiability itself.

The American Uniform Warehouse Receipts Act (U.S.), upon which the UWRA (Can.) was modelled provided that negotiation was not impaired by "breach of duty on the part of the person making the negotiation, or by the fact that the owner of the receipt was deprived of the same by loss, theft, fraud, accident, mistake or conversion". The Uniform Law Conference of Canada adopted in its place a somewhat watered down version of negotiability found in the Washington Warehouse Receipts Act and restricted the concept by eliminating the reference to "loss", "theft", "accident" and "conversion". The Uniform Documents of Title Act employs the full notion of negotiability. There are good policy reasons for not maintaining the restricted version of negotiability found in the UWRA (Can.). First, it is easy for the parties to minimize the risk of loss through theft or conversion of the document of title simply by ensuring that the document is made out to the order of a named person. If a party takes a document of title made out to bearer or endorses a document of title in blank thereby rendering it a bearer instrument, the risk of loss is properly placed on that party and not upon an innocent transferee for value without knowledge.

4.    The provision regarding the seller's lien and right to stoppage of delivery does not constitute any change in the law. The provision is found in section 28 of the UWRA (Can.) and section 104(a) of the Uniform Sale of Goods Act. A similar provision is found in the provincial Sale of Goods Act. See, e.g., Ontario Sale of Goods Act, R.S.O. 1980, c.462, s.45.

5.    The reference to delivery orders is new. Prior legislation in both the United States and Canada failed to deal with the operation of delivery orders despite their widespread use in commercial dealings (particularly in the case of bulk cargo that is split into more parcels than there are bills of lading). A delivery order is a written order to deliver goods addressed to a warehouseman or carrier (the document is sometimes referred to as a delivery warrant). At common law, a delivery order was not regarded as a document of title. Attornment by the bailee was required when the delivery order was transferred. See The Julia [1949] 1 A.C. 293. In addition, a subsequent transfer of the delivery order after an attornment, a fresh attornment is required. The provision rationalizes the law relating to delivery orders. A delivery order may be negotiated if it is by its terms made out to a named person or to bearer, but the transferee does not obtain the direct obligation of the bailee until the bailee accepts the delivery order. After acceptance of the delivery order by the bailee, the legal position of a delivery order is identical to any other document of title.

6.    The common law is changed in one other respect. At common law, transfer of an order bill of lading could operate to transfer the transferor's property in the goods if the transfer was made with that intention, but this presumption could be rebutted if it were shown that it was not the intention of the parties that property should pass. See Lickbarrow v. Mason (1787), 2 T.R. 64. The provision adopts the rule that a due negotiation of a bill of lading transfers the property in the goods. The passage of property is of much less importance under the Uniform Sale of Goods Act,

and therefore this change will usually not be central to many disputes. This provision coordinates with section 60(3) of the Uniform Sale of Goods Act.

Document of title defeated in certain cases

19(1)     A document of title confers no right in goods against a person who, before issuance of the document, had a legal interest or a perfected security interest in the goods and who neither

(a)    delivered nor entrusted the goods or any document of title covering them to the bailor or the bailee's nominee with actual or apparent authority to ship, store or sell or with power to obtain delivery or with power of disposition under any statute or law; nor

(b)    acquiesced in the procurement by the bailor or the bailor's nominee of any document of title.

(2)    Title to goods based upon an unaccepted delivery order is subject to the rights of anyone to whom a negotiable warehouse receipt or bill of lading covering the goods has been duly negotiated.

(3)    Title to goods mentioned in subsection (2) may be defeated under section 20 to the same extent as the rights of the issuer or a transferee from the issuer.

(4)    Title to goods based upon a bill of lading issued to a freight forwarder is subject to the rights of anyone to whom a bill issued by the freight forwarder is duly negotiated, but delivery by the carrier pursuant to its own bill of lading discharges the carrier's obligation to deliver.

Legislation
UCC 7-503

Comment

1.    The concept of negotiability involves the idea that a good faith purchaser of a negotiable document of title cuts off a substantial portion of outstanding equities and claims of prior parties both to the document of title and to the goods it covers. However, not all claims are cut off. This provision recognizes that the simple procurement and negotiation of a document of title will not give the purchaser good title to stolen goods. It is only when the owner of goods introduces the goods into the stream of commerce by authorizing or acquiescing in the issuance of a negotiable document of title that the owner's title may be defeated through the operation of negotiability. This provision incorporates through reference the provision of the Uniform Documents of Title Act that deals with power to direct delivery (section 15) as well as other bodies of commercial law: agency law principles of actual and apparent authority, factors legislation, the ordinary course buyer rule in section 28 of the Uniform Personal Property Security Act and the entrustment provisions in section 64 of the Uniform Sale of Goods Act.

2.    This provision contains a rule that an unaccepted delivery order may be defeated by due negotiation of a negotiable warehouse receipt or bill of lading that covers the same goods. Until a delivery order is accepted by the bailee, the bailee is not obligated on it. Therefore, the subsequent negotiation of a negotiable document of title covering the goods will defeat the holder of the unaccepted delivery order.

3.    This provision also covers the potential for conflict between a bill of lading that is issued by a freight forwarder to its customer and a bill that is issued by the carrier to the freight forwarder. A bill of lading issued to a freight forwarder by the carrier is subordinated on the theory that the bill on its face gives notice that a freight forwarder is involved. Accordingly, if the forwarder issues a bill which is duly negotiated, the holder will prevail over the holder of a bill issued to the forwarder by the carrier. The carrier is, however, discharged if it complies with the delivery term in the bill it issued.

Rights acquired in tje absence of due negotiation; effect of diversion; seller's stopage of delivery

20
(1)    A transferee of a document, whether negotiable or non-negotiable, to whom the document has been delivered but not duly negotiated, acquires the title and rights which the transferor had or had actual authority to convey.

(2)    In the case of a non-negotiable document, until but not after the bailee
of delivery receives notification of the transfer, the rights of the transferee may be defeated

(a)    by a buyer from the transferor in the ordinary course of business if the bailee has delivered the goods to the buyer or received notification of the buyer's rights; or

(b)    as against the bailee by good faith dealings of the bailee with the transferor.

(3)    A diversion or other change of shipping instructions by the consignor in a non-negotiable bill of lading, which causes the bailee not to deliver to the consignee, defeats the consignee's title to the goods if they have been delivered to a buyer in ordinary course of business and in any event defeats the consignee's rights against the bailee.

(4)     A bailee honouring the seller's instructions is entitled to be indemnified by the seller against any resulting loss or expense.

Legislation
UCC 7-503; UWRA (Can.), s.21

Comment

1.    This provision covers essentially two kinds of transfers that do not amount to a "due negotiation". First, it applies to the transfer of non-negotiable documents of title, since these can only be transferred and not negotiated. Second, it applies to

negotiable documents of title where any element of due negotiation is lacking. In such cases, the transferee does not take title to the goods free from the equities and defences that may have been available to more remote parties.

2.    This provision departs from UCC 7-504(1) which provides that a transferee obtains "the title and rights which his transferor had or had actual authority to give". This creates the anomaly, identified by many American commentators, that the transferee of a negotiable document of title covering the goods will sometimes acquire less of a title than if the transferee had dealt directly in the goods themselves in the first place. No convincing reason has ever been given for this rule, and the better position is to treat a transferee of a non-negotiable document of title (or of a negotiable document of title who does not satisfy the criteria of due negotiation) in the same manner as a purchaser of the goods themselves. See R. A. Riegert, The Rights of a Transferee of a Document of Title Who is Not a Holder by Due Negotiation (1978), 9 Cumberland L. Rev. 27. Accordingly, the provision refers to "the title and rights which his transferor had or had actual or apparent authority to convey" (emphasis added).

3.    The transferee of a non-negotiable document of title should generally notify the bailee immediately. Failure to do so will place the transferee at risk that the transfer will be defeated by an ordinary course of sale if the bailee has delivered the goods to the buyer or received notification of the buyer's rights. Therefore, in a competition between two transferees of a non-negotiable document of title, priority is given to the first to take delivery of the goods or notify the bailee. Failure to give notice also places the transferee at risk that the transferor will deal with the bailee (for instance, by obtaining delivery of the goods or by obtaining a negotiable document of title in substitution of the non-negotiable document).

4.    The provision deals with the case where a carrier delivers or disposes of the goods on the instructions of the consignor under a non-negotiable bill of lading (See section 10). The consignee's rights against the bailee are defeated if the bailee obeys the consignor's instructions to divert.

5.    The provision gives the carrier an express right to indemnity where it honours a seller's request to stop delivery. See Uniform Sale of Goods Act, s. 104.

Endorser not a guarantor

21 The endorsement of a document of title issued by a bailee does not make the endorser liable for any default by the bailee or by previous endorsers.


Legislation

UCC 7-505; UWRA (Can.), s.25

Comment


The endorsement of a negotiable document of title differs from the endorsement of a negotiable instrument. Endorsement of a negotiable instrument is regarded as both a contractual act that renders the endorser liable on the instrument, as well as an act of conveyance of a property interest. Endorsement of a negotiable document of title is regarded simply as a conveyance of the property interest with the result that the endorsement does not render the endorsee liable for any default by the bailee or by previous endorsers. This provision simply codifies the common law position, which is also set out in section 25 of the UWRA (Can.)

Delivery without endorsement: right to compel endorsement

22 The transferee of a negotiable document of title has a specifically enforceable right to have the transferor supply any necessary endorsement, but the transfer becomes a negotiation only as of the time the endorsement is supplied.

Legislation
UCC 7-506; UWRA (Can.), s.23.

Comment

Where a negotiable document of title is delivered without a necessary endorsement, the party to whom it is delivered takes as a transferee since the requirements of due negotiation have not been satisfied. However, the transferee obtains the right to obtain an endorsement from the transferor at which time the transfer becomes a negotiation. A similar provision in relation to negotiable instruments is found in section 60(1) of the Bills of Exchange Act, R.S.C. 1985, c.B- 4.

Warranties on negotiation or transfer of warehouse receipt or bill

23 Unless otherwise agreed, a person who negotiates or transfers a document of title for value warrants to the immediate purchaser from that person only, in addition to any warranty made in selling the goods, that

(a)     the document is genuine;

(b)    the person has no knowledge of any fact which would impair its validity or worth; and

(c)    the negotiation or transfer is rightful and fully effective with respect to the title to the document and the goods it represents.

Legislation
UCC 7-507; UWRA (Can.), s.24.

Comment

The provision is a rewritten version of section 24 of the UWRA (Can.) that is extended to apply to all forms of documents of title. An analogous provision relating to negotiable instruments is found in section 137 of the Bills of Exchange Act, R.S.C. 1985, c.B-4. The reference to the implied terms of merchantability and fitness for purpose that appear in the UWRA (Can.) are omitted because these terms derive from the contract of sale and not from the transfer of the document of title.

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