Reflections on Bills of Lading and Silo Receipts used in the South African Futures Market

• Author: Sarel F. du Toit
• Position: University of Johannesburg
• Pages: 105-111

A version of this paper was published in Kierkegaard, S. (2006) Business Law and Technology Vol.2 and presented in the 2006 IBLT Conference, Denmark.

Page 105

1. 0 Introduction

South African law, as a mixed legal system (see Zimmermann and Visser, 1996), is founded upon both civil law and common law principles (although there are also many other influences, such as indigenous law and in particular the Constitution, 1996). The legal principles surrounding the bill of lading provide an interesting illustration of how divergent legal systems are harmonised in South Africa. Although the rules regarding the bill of lading (in South Africa) are based on English law, principles relating to the law of property, such as possession and ownership, are based on Roman-Dutch law (also see the Admiralty Jurisdiction Regulation Act, 1983 section 6). Care should therefore be taken to ensure that the rules relating to bills of lading, although based on English law, are fitted into the fabric of existing South African law. It is not suggested, however, that the fact that South African law is a hybrid legal system, as such, causes more confusion than in other jurisdictions, even though there is undoubtedly an added dimension of complexity.

The bill of lading is a well-known instrument with a "long and distinguished history", stretching over many centuries, and has been described as "one of the most remarkable products of mercantile genius" (Lloyd, 1989 p. 48). In comparison, a Safex (abbreviation of "South African Futures Exchange", now part of the JSE Ltd, the South African securities exchange) silo receipt demands further explanation, although, at first glance, it displays obvious similarities to the bill of lading. A farmer delivering grain to a silo for storage will receive a confirmation of delivery receipt from the silo owner after each delivery. The Agricultural Products Division (APD) of the JSE describes the process ("How Silo Receipts are Issued and Traded with Particular Reference to the Agricultural Products Division (APD) of the JSE"):

"The farmer will keep on delivering grain at the silo and when he has delivered 100 tons (or amounts as per the standardized futures contract) he may request the silo owner to issue a Safex silo receipt in his name. The Safex silo receipts are sequentially numbered and forwarded to each registered silo owner by the JSE. The silo owner issues the receipt in triplicate and hands the original to the owner of the grain in question. The silo owner keeps a copy for his own records and the other copy is forwarded to the APD by courier. The Safex silo receipt has unique security features, being a hologram and distinct watermark. The receipts are individually numbered with [the] APD keeping records of the receipts issued. These security features coupled with the retention of the two copies by the silo owner and the APD make it virtually impossible to forge a receipt or to obtain grain by producing a forged silo receipt. There [have] not been any forgeries of any Safex silo receipt to date."

The commodities traded on the APD are white and yellow maize, wheat, soybeans and sunflower seeds (reference will be made to "grain" in this paper as a generic term). In the case of an "agricultural commodity futures contract", which is a "physically settled futures contract" the underlying instrument is an agricultural commodity (Derivative Rules, 2005 section 2.10). The Safex silo receipt can be used to effect delivery in compliance with the futures contract, although the receipts can be used to trade commodities on the spot market as well.

Page 106

2. Legal Nature of Bills of Lading and Silo Receipts

Both the bill of lading and the Safex silo receipt can be regarded as Wertpapiere (see e.g. Hueck and Canaris, 1986 p. 1; Malan, 1976 imported the concept into South African law), as the documents embody a right to delivery of the goods and a right to delivery of the grain, respectively. The Safex silo receipt provides:

"Upon return of this receipt properly endorsed ... physical delivery of said product will be made free on truck (rail or road) alongside the above-named silo to the above-named depositor or his ORDER described as transferee on the record of transfer overleaf. The silo owner is obliged to deliver the commodity covered by this receipt to the holder thereof, unless prohibited to do so by an order of court."

Neither document is, however, regarded as a negotiable instrument. The traditional test to determine whether a document is a negotiable instrument is whether the instrument, by the custom of trade, is transferable like cash by delivery and capable of being sued upon by the person holding it pro tempore (Blackburn J in Crouch v The Credit Foncier of England Ltd, 1873 p. 381). A further requirement is that, "Probably the instrument must be a contract to pay money or to deliver another negotiable security representing money" (Holden, 1955 p. 269). Referring to this requirement, Holden (1955 pp. 260-261) wrote, "If this is so, documents of title to goods are for ever excluded from the category of negotiability - apart, of course, from express statutory provision." The reason Holden used the words "probably" and "if", is that the case cited as authority for this requirement, Dixon v Bovill (1886), where the House of Lords held that a written promise to deliver 1000 tons of iron to bearer was not a negotiable instrument, was not based on this further requirement, but on the fact that no evidence had been given to show a general commercial usage regarding these instruments (Holden, 1955 p. 260; Chorley, 1932 p. 56). However, the validity of the Dixon decision as authority for this proposition is not of much practical importance regarding bills of lading. Although there are no numerus clauses of negotiable instruments, it may be safely assumed that there is no usage or custom in existence today by which the bill of lading will acquire the attributes of negotiability.

The bill of lading is therefore not a negotiable instrument in the technical or traditional sense. Although it may be transferred freely (unless it is non-transferable or straight), the bona fide transferee for value of a bill of lading, does not necessarily acquire good and complete title to the instrument. A bill of lading is therefore only negotiable in the sense that it is transferable (Gurney v Behrend, 1854 pp. 633-634; Kum v Wah Tat Bank Ltd, 1971 p. 446; Lendalease Finance (Pty) Ltd v Corporacion de Mercadeo Agricola, 1976 p. 492). It is suggested that a Safex silo receipt is also not regarded as a negotiable instrument in the absence of - the unlikely - proof of a mercantile custom to that effect. It is further suggested that the requirement that negotiable instruments should embody a right to the payment of money, although based on doubtful authority, is nevertheless convincing, and that both bills of lading and silo receipts will be excluded from the purview of negotiable instruments.

3. Functions of Bills of Lading and Silo Receipts

The bill of lading has three well-known functions: it serves as evidence of the contract of carriage, it is a receipt for the goods shipped and it is a document of title. The bill of lading evidences the contract of carriage, but it does not contain the contract itself, as the bill of lading is often issued after the shipment of the goods and the conclusion of the contract of carriage. However, when the bill of lading has been transferred to an endorsee, it is the only evidence of the contract of carriage (see e.g. Guest, 2002 pp. 999-1001). A Safex silo receipt also contains references to the contract for the storage of grain. The fact that a bill of lading in the hands of an endorsee is the only evidence of the contract of carriage, is (in South African law) a result of an interpretation of section 1 of the repealed...