Key Cases
Trade terms in export sales
Pyrene & Co v Scindia Steam Navigation Co
Mr. Justice Devlin instanced three types of f.o.b contracts.
In the first, or classic type, the buyer nominates the ship and the seller puts the goods on board for account of the buyer, procuring a bill of lading. The seller is then a party to the contract of carriage and if he has taken the bill of lading to his order, the only contract of carriage to which the buyer can become a party is that contained in the bill of lading which is endorsed to him by the seller.
The second is a variant of the first, in that the seller arranges for the ship to come on the dock, but the legal incidents are the same.
The third is where the seller puts the goods on board, takes a mate's receipt and gives this to the buyer or his agent who then take a bill of lading. In this latter type the buyer is a party to the contract of carriage ab initio."
Alternatively, it can be argued that the seller has fulfilled his obligations under an f.o.b. contract only if the goods are deposited safely on board the vessel and the loading operation is completed.
In the Pyrene case an f.o.b. contract of the third type was in issue.
The learned judge held further that as far as the defendants as carriers were concerned the "loading" for which they were responsible was the whole loading operation undertaken by them, and not only that stage of the loading occurring after the goods crossed the ship's rail. Devlin 1. gave judgment for the sellers for £200." The position may be different in multimodal transport, where different international conventions apply to different stages of the loading operation.
Performance of the contract
Aluminium Industrie Vaasen v Romalpa
The extended retention of title clause
Of greater practical importance is the extended retention of title clause but it raises difficult legal problems. Two types of extended clauses are used but other clauses may also be devised. A combination of the features of the two main types is sometimes found in practice. First, the clause may provide that the buyer, if he sells the goods, shall do so as an agent of the seller and shall be a trustee of the proceeds of sale for the benefit of the seller. This clause gives the buyer a licence to sell and, at the same time, attempts to safeguard the position of the seller. The buyer is made the bailee (person or party to whom goods are delivered for a purpose, such as custody or repair, without transfer of ownership) of the goods supplied by the seller who is in the position of a bailor. This is the most common type of extended retention of title clause. It is recommended that the exporter shall include this clause into his general conditions of business.J8 These extended clauses are frequently used in Germany, the Netherlands and in France.'" In the United Kingdom such a clause has been upheld in the Ramalpa case." Aluminium Industrie Vaassen BV (AIV), a Dutch private company, sold a quantity of aluminium foil to Romalpa, an English company. The terms of delivery were ex works AIV in Holland and the price was expressed in Dutch currency. The contract contained an extended title clause which was worded in great detail.'! A receiver was appointed for Romalpa. Although the contract was closely connected with Dutch law, that law was not pleaded and the case was decided according to English law. The Court of Appeal held that AIV were entitled to the property in the goods supplied by them and which was still in existencc. As regards the goods resold by Romalpa, the court held that Romalpa had acted as agents for AIV.
and were, therefore, in a fiduciary relationship to them; that admitted the application of the equitable doctrine of tracing, as developed in Re Hallett's Estate.
Acceptance and rejection of goods
The Hansa Nord
Innominate Terms
Principle
The innominate term
This is a contractual term which is neither a condition nor a warranty. Its characteristic is that, if the contract is breached, the effect of the breach depends on its nature and gravity." If the breach is grave, the innocent party can treat the contract as repudiated, but if the breach is not serious the contract subsists and the innocent party can only claim damages for any loss which he may have suffered.
The concept of the innominate term was developed in shipping contracts with respect to the stipulation that the ship should be seaworthy.
The Hansa Nord." Bremer Handelsgesellschaft, a
German company, sold a quantity of US orange pellets c.i.f Rotterdam to Cehave, a Dutch company. The pellets were to be used in the manufacture of cattle food. The contract was made on a form of the Cattle Food Trade Association which contained the term "Shipment to be made in good condition". The consignment in issue was about 3,400 metric tonnes and was carried in The Hansa Nord.
The contract price, converted into sterling, was about £100,000 but the market price at the time of arrival of the ship had fallen considerably. On discharge from The Hansa Nord the cargo ex hold no.l (1,260 tonnes) was found to be damaged but the cargo ex hold no.2 (2,053 tonnes) was in good condition. The buyers rejected thc whole consignment. The Rotterdam court ordered its sale. It was purchased by a middleman for a sum which, after deduction of the expenses, amounted to an equivalent of £29,903. The middleman
sold the pellets the same day for the same price to the original buyers who took them to their factory and used them for the manufacture of cattle food although they received a somewhat smaller quantity of pellets than they would have done if part of the consignment had not been damaged. The total result of the transaction
was that the Dutch buyers received goods which they had agreed to buy for £100,000 at the reduced price of about £30,000.
The case went to arbitration and then to the courts. The Court of
Appeal held that the contractual term "shipment to be made in good
condition" was not a condition within the meaning of the Sale of
Goods Act but was an innominate term. Lord Denning M.R. said": "If a small proportion of the goods sold was a little below that standard, it
would be mel by commercial men by an allowance off the price. The buyer
would have no right to reject the whole lot unless the divergence was serious
and substantial" The court held that the buyers were not entitled to reject the whole consignment but were entitled to damages for the difference in value between the damaged and sound goods on arrival in Rotterdam. The case was remitted to the arbitrators for the determination of these damages.
Bunge v Tradax
🡪terms as to time are held to be a condition of the contract.
🡪in mercantile contracts stipulations as to time are usually of the essence of the contract.
A ship is suitable if it is ready, able and willing to carry the contract goods. It may be that the contract will provide that the buyer give notice within a stated time of the probable readiness of the nominated ship to load. If there is no such provision the buyer will be required to give such notice as is reasonable" It has been held that the requirement to give such notice was a condition of the contract and not an innominate term.
On this type of loading notice see Bunge Corporation v Tradax Export SA (198011 lloyd's
Rep. 294, CA where it was held that the obligation to give such notice was a condition, and not an innominate term, because in mercantile contracts stipulations as to time are usually of the essence of the contract.
However, the concept of the innominate term should not be overused. Many terms arc regarded by the parties to the contract as so essential that they qualify as conditions in the legal sense. This applies. in particular, to most time clauses in commercial contracts, e.g. in an f.o.b. contract a clause that "buyers shall give at least [15] consecutive days' notice of probable readiness of vessel(s)”
Kwei Tek Chao v British Traders and Shippers
Right or rejection in c.i.f. contracts.
The property in the rejected goods revests in the seller when he accepts the rejection.
When he does not accept the rejection it is believed that if it is later decided by the court or arbitration tribunal that the rejection was justified, the property likewise revests in the seller because, as Devlin 1. Observed in the Kwei Tek Chao case," the property passes to the buyer subject to a condition subsequent that on examination the goods are found to be in accordance with the contract. A buyer who has paid the price in advance and then rejects the goods is not entitled to retain them by virtue of an "unpaid buyer's lien"" until the price is refunded. In the case of c.i.f. contracts dealings with the documents do not affect the right of the buyer to reject the goods. This right normally arises only after the arrival of the goods when they can be examined')
Where under a CIF or C and f. contract, or under an F.o.b. contract in which the seller has taken out the bill of lading, the bill is delivcred to the buyer or his agent, the inference is that the property which is intended to pass to the buyer is only conditional. This means that the property in the goods shall revert to the seller if upon examination thcy are found to bc not in accordance with the contract.
In a c.i.f. contract the right to reject the documents is distinct from the right to reject the goods. Devlin J. observed in Kwei Tek Chao v
British Traders and Shippers Ltd'" that:
"the right to reject the documents arises when the documents are tendered, and the right to reject the goods arises when they are landed and when after examination they are not found to be in conformity with the contract,"
The buyer must be aware that the right to reject the documents is
lost when he or the bank which advises a letter of credit for the
payment of the price takes up the documents, even if inaccurate, and
pays against them without objection. The documents are inaccurate
if, when taken together'JO they disclose a defect to a person who
reads them or could have rcad them.
Some observations have to be added on c.i.f. contracts. As has been explained earlier, the characteristic feature of these contracts is the importance attributed to the shipping documents. It has been held, obiter, in Kwei Tek Chao v British Traders alld Shippers Ltd," that a disposal of the bill of lading (which is part of the shipping documents) is not necessarily an act inconsistent with the seller's ownership of the goods and that, in principle, a c.i.f. buyer does not lose his right to reject the goods by dealings with forged documents, e.g.
by pledging the bill of lading to a bank. In that case, the question whether by dealing with the documents the buyers had done an act inconsistent with the sellers' ownership in the goods did not arise, but in the interest of "those who may be concerned" Devlin J.
observed that so long as a buyer was merely dealing with the
documents, he did not commit an act inconsistent with the seller's
ownership in the goods and retained the right of rejecting the goods
if upon examination after their arrival they were found not to be in
conformity with the contract. The argument that the buyer, when
reselling the bill of lading or pledging it to a bank, intended to give
the sub-purchaser or pledgee a proprietary interest in the goods and
passed tiUe to him, was rejected by Devlin J. on the grounds that the
buyer himself had only conditional property, viz. property conditional
on the goods being in accordance with the contract and that
therefore he could not deal with more than conditional property.
Devlin J. said":
"I think that the true view is that what the buyer obtains when the title under the documents is given to him, is the property in the goods, subject to the condition that they revest if upon examination he finds them to be not in accordance with the contract. That means that he gets only conditional property in the goods, the condition being a condition subsequent. AJI his dealings with the documents are dealings only with that conditional property in the goods. It follows, therefore, that there can be no dealing which is inconsistent with the seller's ownership.
LIoyd’s Bank v Bank of America National Trust
Third parties(such as mercantile agants of the sellers ) that are acting in good faith are protected . As a general rule, The Factors Act 1889 aims at the protection of third parties dealing in good faith with the consignment agent and provides in
particular that, where such an agent, in his capacity of mercantile agent with the consent of the principal is in possession of goods or documents of title to the goods, any sale or other disposition transacted by him in the ordinary course of business in respect of these goods is as valid as if it were expressly authorised by the principal, provided the third party did not know of the lack of the mercantile agent's authority. The Act cannot be invoked in export
On the other hand, the Act provides a valuable protection in import transactions, as shown in the Lioyds bank v bank of America case”: importers obtained an advance from Lloyd's Bank on the security of bills of lading in respect of certain merchandise and the bank returned the bills ·of lading to the importers in order to enable them to sell the goods. On receipt of the bills of lading, the importers gave the bank a trust receipt,'89 wherein they acknowledged their holding of the documents under lien of the bank and agreed to clear the goods as trustees of the bank. The importers, who were in financial difficulties, pledged (promised) the bills of lading, in breach of trust, with the Bank of America, which was unaware of the true position. The court decided that the importers received the documents of title as mercantile agents of Lloyd's Bank and that the pledging of the documents with the Bank of America was valid as against Lloyd's Bank.
The pioneer container
However, a Himalaya clause in a bill of lading which provides that
a third party shall have the benefit of exceptions and limitations does not extend to the benefit of an exclusive jurisdiction clause since, as a matter of construction, that provision is not an exception or limitation but creates mutual rights and obligations between the contracting parties.
The law of bailment so has been invoked to bypass the doctrine of privity of contract.'" In The Pioneer Container; where the contract of carriage provided for the sub-contracting of carriage "on any terms", the Privy Council held that a sub-contractor, as sub-bailee, could rely on the terms of the contract of carriage, (including the exclusive jurisdiction clause.)
Own notes (A common clause in most international contracts is the jurisdiction clause in which the parties to a contract agree at the outset of their contractual relationship which country's or countries' courts are to have legal authority ('jurisdiction') to hear disputes arising from that contract.)
The Rafaela S.
The Rules thus apply by statute to outward bills of lading relating to all goods exported from ports in Great Britain and Northern Ireland or from any other Contracting State and also to bills issued in these countries.
In the Rafaela S (2005) I Lloyd's Rep. 347, the Court of Appeal held that the Rules (Rules of COGSA) were to apply in a situation of transhipment from a UK port. Goods were shipped from Durban ill South Africa to Fetixstowe in the UK on one vessel and then from felixstowc to Roston in the US on the Rafaela S. The Rules were held to be applicable despite the fact that the goods were shipped pursuant to one through bill of lading;
In The Rafaela S the Court of Appeal held that the Rules were to apply in a situation of transhipment from a UK port. Goods were shipped from Durban in South Africa to Felixstowe in the UK on one vessel and then from Felixstowe to Boston in the US on the Rafaela S. The Rulse were held to be applicable despite the fact that the goods were shipped pursuant to one through b/l
Bills of lading made out "to order", or to a named party with the words "or to order", are generally known as "order bills of lading". They are transferable, and are accepted as documents of title. Where a bill of lading is made out to a named consignee without adding the words "to order", the cargo is deliverable straight to the named consignee and the bill is non-transferable. Such a bill is known as a "straight" bill of lading.
It was generally accepted that where a straight bill of lading was used, the carrier was to deliver the goods to the named consignee without the production of the original bill of lading. In The "Brij"[2000] 3 HKC 313, consignments of cargo were the subject of both "straight" ocean bills of lading and "to order" forwarders' bills. The previous course of dealing demonstrated that cargo interests relied solely on the negotiable forwarders' bills of lading as being the operative documents of title, the "straight" ocean bills being no more than receipts and evidence of the contract of carriage between the forwarders and the ocean carriers. In that regard the straight ocean bills of lading had remained in a drawer at the forwarders' office. The Hong Kong Admiralty Court observed that "the essence of Straight Bills is that they are not negotiable and the contractual mandate is to deliver to the named consignee without the production of the original document".It dismissed the action against the owners, holding that the owners were not in breach of their duty of care by delivering the cargo to the named consignee under the straight bill without production of the original bill.
However, in The "Rafaela S" [2005] 1 Lloyd's Rep. 347 the House of Lords affirmed the English Court of Appeal's decision that a straight bill of lading, otherwise in the form of a classic bill of lading, should be viewed as a bill of lading within the meaning of the Hague-Visby Rules notwithstanding that it was non-negotiable, and that the original bill should be produced to obtain delivery where there are express terms to such effect in the bill in question.
The MSC Amsterdam
Mediterranean Shipping Company SA v Trafigura Beheer BV - “MSC Amsterdam” [2007] EWCA Civ 794 27th July 2007
Trafigura, as cargo owners sued MSC, as ship owners, for conversion and breach of contract in relation to a cargo of copper stowed in 18 containers and shipped from Durban to Shanghai on board “MSC Amsterdam.”
The containers were discharged at Shanghai into a container terminal. Fraudsters, using employees of MSC’s agents at Durban, procured a second set of bills of lading, which were used to obtain a delivery order from the ship’s agents in Shanghai. Using this, the fraudsters paid duty and vat, thus obtaining customs authority at Shanghai. When Trafigura sought a delivery order they were advised this had already been issued and immediate investigations revealed the fraud. MSC were in fact able to prevent delivery to the fraudsters and there is ongoing litigation in Shanghai over ownership of the copper. At that time the cargo was worth just in excess of US$1.3 million.
Pursuant to an English High Court jurisdiction clause in the bill of lading, Trafigura pursued MSC for delivery up of the cargo or damages for conversion. The case concerned to what extent MSC could exclude or limit liability and what losses Trafigura were entitled to recover. Trafigura were in the main successful at first instance and again before the Court of Appeal.
Misdelivery
The Court had to consider 4 issues:
Did the Hague or Hague-Visby Rules apply to the bill of lading? If the latter, was this by contract or by force of law?
Did the Rules apply to the period after the cargo had been discharged from the ship but remained in the container terminal?
If yes to 2 above, could MSC limit their monetary liability and if so, to how much?
If no to 2 above, did a clause in the bill of lading limit or exclude MSC’s monetary liability?
The first question was important as it would affect the quantum of MSC’s liability to Trafigura. If the Hague Rules applied, MSC could limit in the sum of £1,800 per container. The Paramount clause in the bill of lading provided:
“For all trades..this B/L shall be subject to the 1924 Hague Rules..or, if compulsorily applicable, subject to the 1968 Protocol (Hague-Visby) or any compulsory legislation based on the Hague Rules and/or said Protocols. Where Hague-Visby or similar legislation is compulsorily applicable, the Hague-Visby 1979 Protocol (“SDR” Protocol”) shall also apply whether or not mandatory.”
Both MSC and Trafigura agreed that if the Hague-Visby Rules (“HVR”) did not apply, then the Hague Rules did. Whether or not the HVR did apply was a taxing question of construction that occupies much of the judgment of first instance and was in fact overturned by the Court of Appeal.
The issue was whether the HVR only applied if compulsorily applicable under English law or whether also as a matter of contractual incorporation. Trafigura’s argument was that the HVR themselves provide at Article X (c) that the HVR will apply if the contract provides that the legislation of any State giving effect to them is to govern the contract. South Africa, the country of shipment, although not a Contracting State, had compulsory legislation giving effect to the HVR. In the alternative Trafigura submitted that the HVR could be applicable by contractual incorporation because the parties had not intended they would apply only if compulsorily applicable under English law. At first instance, Aikens J preferred the latter submission.
The Court of Appeal disagreed. The words “compulsorily applicable” meant applicable according to the proper law of the contract, English law. As South Africa was not a Contracting State, the HVR were not compulsorily applicable. Thus the Hague Rules applied in default.
Having thus decided the lower financial limit would apply the second question of whether the Rules applied to the period after discharge whilst the containers remained in the terminal was considered. On this, both Courts came to the same conclusion. The Rules concern the carriage of goods by sea and cease to apply on discharge of the cargo (Gosse Millard v Canadian Government Merchant Marine Ltd [1927] 2 KB 432)but parties are free to extend and define the temporal limit themselves and agree to apply the Rules after the end of the carriage.
Certain clauses of the bill of lading in question sought to limit MSC’s responsibility to the time commencing with loading and ending with discharge and in one instance referred to “after the end of the Hague rules period.” So the Rules did not apply to the period after discharge whilst the containers were still in MSC’s custody at the terminal.
The third issue was therefore redundant, leaving for consideration Clause 22 of the bill of lading and whether it excluded or limited MSC’s liability. The clause is long and rambling. Although earlier clauses of the bill of lading, as referred to in the paragraph above, sought to exclude MSC’s liability after discharge, MSC accepted such exclusion could not apply to misdelivery claims. Very clear words are needed to exclude such a serious breach of duty and MSC contended Clause 22 did just that.
We need not consider the whole clause, only the following:
“Neither the Carrier nor the ship shall in any event become liable for any loss or damage in connection with the goods in an amount exceeding the limitation allowed under the Hague Rules or the Hague-Visby Rules SDR limitation or the COGSA limitation, depending on which of these is contractually or compulsorily applicable...This limitation of liability shall apply to all contractual claims as well as to any claims arising from other causes.”
Both Courts again agreed that the Clause did not exclude or limit MSC’s monetary limitation although for different reasons. Aikens J found that the parties could not have intended the contractual limitation of liability provisions to apply to a period after which the Carrier did not accept responsibility for the cargo. As earlier clauses in the B/L limited MSC’s liability to the end of the Hague Rules period so Clause 22 must be read in that context.
The Court of Appeal however felt it was unlikely to have been the parties’ intention that liability for failure to perform obligations of such importance as delivering the goods against presentation of a properly indorsed original bill of lading should be limited by sentences buried within this clause. It was in fact so unlikely as not to be the case and the clause was not “apt to limit liability for the essential obligation to deliver against original bills of lading. Any exemption or limitation of liability for such a breach has to be clearly expressed and clause 22 does not clearly do so”
Having thus decided MSC were unable to limit or exclude any liability for misdelivery, what losses were Trafigura actually able to recover? This focussed primarily on whether “hedging” losses Trafigura had suffered could be recoverable against MSC. An essay on hedging is beyond the scope of this article but Aikens J accepted that it is common practice these days for commodity traders to hedge their sale and purchase deals but felt that most Carriers would have insufficient knowledge to have foreseen such hedging losses. Trafigura did not appeal that finding.
The Torts Interference with Goods Act (1977) allows the Court to make a variety of orders, including an order for delivery of the goods and consequential damages or an order for delivery with an option to pay damages by reference to the value of the goods or finally damages for the innocent party’s interest in the goods.
In respect of this last type of order, the Court may either award damages calculated by reference to the value of the goods at the date of conversion or at the date of judgment. Depending on market movements, the difference in the two could, and in this case was, substantial.
Having dismissed Trafigura’s hedging losses as not sufficiently foreseeable, Aikens J instead awarded the value of the copper at the date of the judgment, the market having moved significantly upwards (the copper was worth close to US$2.8 million at the time of the Court of Appeal judgment), this had the effect of extinguishing most of the hedging losses anyway.
The Court of Appeal, despite MSC’s submissions to the contrary for the very reason that it did in effect compensate them for losses that were irrecoverable, agreed that this was the fairest way to compensate Trafigura.
“Once the judgment is satisfied, the shipowners will have title to the goods and can sell them to the fraudsters or any one else and they will no doubt obtain the value at the time of that sale. In these circumstances I agree with the judge that the fairest way to compensate the claimants is to award them the value of the cargo at the time when he made his judgment.”
However Aikens J had also awarded Trafigura interest on the invoice value of the copper between the date of conversion and the date of judgment. The Court of Appeal overturned this as being a double benefit. Trafigura had already been compensated for being out of their money by the increase in the value of the copper between those dates.
The Jordan II
The carrier is practically bound to play some part in the loading operation but the scope and area of the part which he has to play is determined by the contract of the parties, and may further depend upon the custom and practice of the port and the nature of the cargo. The phrase "shall properly and carefully load" in Art.IlI r.2 is not designed to define the scope and area of the carrier's part in the loading operation but defines the terms on which that service is to be performed.
The House of Lords held (upholding the Renton case) the a clause shifting the duty of loading to the shipper did not fall foul of art.III(8) of the Rules as an attempt to contract out of r.III(2)
Published 03 September 2013
Case Study: The Jordan II
[2003] 2 Lloyd’s Rep. 319
Facts:
A cargo of steel coils was to be carried from Bombay to Barcelona and Motril
The claimants alleged that damage to the cargo was due to rough handling during loading and/or discharge and/or inadequate stowage
Charter party:
The charter was effected on a Stemmor 1983 form
Clause 3: Freight to be paid on a FIOST (Free In and Out, Stowed and Trimmed) basis
Clause 7: charterers to have full use of all vessel’s gear to assist in loading and discharging cargo
Clause 17: Shippers/charterers/ receivers to put the cargo on board, trim and discharge cargo free of expense to the vessel
Bills of Lading:
The bills of lading provided that freight was payable “as per the charter party” and it incorporated the Hague Visby Rules (HVR)
Article III r.2 HVR: the carrier is responsible for properly and carefully loading, stowing and discharging the goods carried
Article III r.8 HVR: Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to goods … shall be null and void and of no effect
Issue:
Were the owners liable for any damage to the cargo caused as a result of loading, discharging or stowage?
Decision:
Clause 3 would not have stood alone to transfer responsibility to the charterer but with clause 17 it did
Clause 17 clearly places the obligation to load and discharge the cargo on the charterers
As all cargo work had to be performed by charterers, it follows that they would be liable if it was not properly or carefully carried out
Incorporation of the Hague Visby Rules, specifically Article III r.2 and r.8, did not render clause 3 and clause 17 of the contract null and void. Parties are free to determine and allocate responsibility by their own contract
Lessons Learnt:
A charter party clause seeking to transfer the responsibility to load, discharge and stow cargo on the charterers/ shippers / receivers must be extremely clear and precise
It must specifically mention the cargo handling activities it aims to transfer on the charterer/ shipper/ receiver
The Heliopolis Star
In a Dutch case, Heliopolis Shipping Co. v. Damco Maritime BV (“The Heliopolis Star”), 44 the bill of lading marked “van Meer” as the shipper and the order of a bank as consignee. Because of disputes with van Meer on earlier services, the freight forwarder, Damco Maritime BV, retained the bill of lading according to the Article 19 of general forwarding conditions. After the goods had been delivered on the instruction of the shipper, the suit arises. The Supreme Court reversed the decisions made by the first and second instance courts and rejected the claims by the freight forwarder. It observed, “Although the bill of lading were physically in the hands of the Damco (the plaintiff), it was not the ‘rightful holder’ thereof.”
Damco v Meister
Takes three to Tango
DUTCH law has seen much debate recently about the precise situations in which contractual clauses between two parties are binding upon a third party. Deciding where third parties stand in relation to legal agreements to which they have not put their signature is not a straightforward matter. And if shipowners and charterers understand the Dutch legal position, they can leverage an advantage for themselves when it comes to ascertaining liability in the event of a dispute.
In a recent case between owners and stevedores over liability for damage to the Angela Jurgens caused during cargo unloading operations by stevedores, the Court of Rotterdam ruled that the stevedore could not rely on the limitation of liability clause in its contract with the charterer. The stevedore in Angela Jurgens argued that it was entitled to benefit from its contract terms with the charterer because, by its actions, the owner had caused the stevedore to believe that it could rely on the terms of that contract.
The stevedore mounted a vigorous defence. It maintained that the owner was aware that stevedores in Rotterdam relied on limitation clauses which form part of the Rotterdam stevedoring conditions. It also argued that the terms of the charter party between the owners and charterers gave the stevedore cause to believe that it could rely on its limitation clauses against the owner. Other arguments relating to the commercial necessity of limitation clauses were also put forward.
The Court of Rotterdam, however, was not convinced that the stevedore was entitled to limit its liability, and did not allow the stevedore to benefit from the limitation clause in its contract with the charterer.
The conclusion that can be drawn from this ruling is that, under Dutch law, it remains extremely difficult for a stevedore to rely on its contract terms in a dispute involving a third party. By implication, owners and charterers have room for manoeuvre when deciding how best to pursue a claim. In cases involving alleged stevedore damage, we can expect that claims will be filed by whichever party – the owner or charterer – who has not signed a contract with the stevedore. The chances of the stevedore then successfully invoking the limitation clause in its contract become remote.
Another point for principals to consider is that they may be liable for the actions of the third parties they contract. In certain situations it has been shown that the principal is effectively vouching for the actions of the third party and may be liable for its actions.
One example is the recent ruling in the Dutch Supreme Court in the case of Meisterwerke v Damco, which shows that carriers are liable to the consignee for the actions of their agents. Meisterwerke, the consignee, bought 44 containers of ladders from a Korean company, using letters. The sellers contracted sea carrier Damco on a C&F Rotterdam basis to ship these containers from Korea to Holland.
To make payment for the ladders, Meisterwerke’s bank needed to be provided with four bills of lading, covering all 44 containers. These were provided by Damco's ship agent, Eastern Transport Co. Meisterwerke’s bank paid against the documents. When the first vessel arrived in the port of Rotterdam, most of the containers were missing without explanation. Meisterwerke immediately tried to stop payment, but the funds had already been transferred to Damco.
After investigation, it was revealed that Damco’s ship agent in Korea, Eastern Transport Co, had fraudulently provided Meisterwerke with misleading bills of lading. With almost no cargo in its possession and the amount already debited from its account, Meisterwerke made a claim against Damco to recover funds. Damco disputed any liability on its part, saying that the blame lay with the agent.
Was Damco liable for a fraudulent bill of lading issued by the agent on its behalf?
Damco argued that it was not. Damco’s argument was that it had not given permission to its agent to issue false bills of lading. In other words, Eastern Transport Co did not have the power to issue a false bill of lading in Damco’s name, and Damco should not be liable for any such fraudulent actions.
Meisterwerke’s argument was that Damco had given its agent the power to issue bills of lading, and this power existed regardless of whether the bills were accurate or not. Meistewerke said that fraudulent bills of lading should be treated in the same way as erroneous bills of lading when it comes to ascertaining who is responsible for them, because third-party bill of lading holders should always have the confidence that the bills of lading they are paying against are truthful and are backed by the full force of the law.
The Dutch Supreme Court agreed. It ruled in favour of Meisterwerke, saying that the agent was empowered to issue bills of lading on behalf of Damco and that this was not limited to whether or not the bills of lading were true. The court said that the agent had misused its power, and this made the agent liable to the carrier. But this did not mean that the agent had acted outside the limits of its powers. Therefore, liability for the fraud was attributed to Damco.
United City Merchants v Royal Bank of Canada
The only case in whichexceptionally- the bank should refuse to pay under the credit occurs if it is proved to its satisfaction that the documents, though apparently in order on their face, are fraudulent and that the beneficiary (the seller) was involved in the fraud.
Where payment is arranged under a letter of credit, the credit
often states a date for shipment of the goods, in addition to the
expiry date which every credit contains"· Here the date of the bill of
lading is likewise relevant. An issuer of a bill of lading, who
deliberately backdates it in order to bring it within the shipment
time in the credit, acts fraudulently, and, as far as the issue of the bill
is concerned, there is no differcnce between the case where he has
forged the bill and where he has deliberately backdated it. However,
in the hands of an innocent person, the fraudulently backdated bill is
far from being a nullity; in fact, it is perfectly valid. In United City
Merchants (Investments) Ltd v Royal Bank of Canada'" the bill was
backdated by an employee of the forwarder but the shipper had no
knowledge of the fraud. It was held that the bank, which had
confirmed the credit, was bound to pay on tender of the backdated
bill.
Secondly, where it is clearly established to the satisfaction of the bank that a fraud has occurred. There is unambiguous evidence before it, for instance that the documents, or some of them, are fraudulent or forged. But there is no evidence before the bank which shows that the beneficiary (the seller) knew of the fraud. There is the possibility that the fraud was committed by a third party, e.g. a
forwarder or loading broker, who intended to cover up the fact that
the goods were shipped out of time, and that the beneficiary himself
was unaware of this fraud. One should have thought that even in this
case the rule applies that "fraud unravels all"'91 But not so. The
House of Lords decided in United City Merchants (Investments) Ltd v
Royal Bank of Canada'" that in this case the bank must pay. The
case concerned the purchase of a glass fibre manufacturing plant by
Peruvian buyers from English sellers and at the request of the buyers
the purchase price was doubled in the invoice in order to evade
Peruvian exchange control regulations. The case raised two issues:
the "Bretton Woods Agreement point", which was considered
earlier,'" and the letter of credit point, which arose in the following
manner. The bills of lading were antedated. They showed the date of
shipmcnt as December 15, 1976, which was the latest date for
shipment required by the credit, but the goods were, in fact, loaded a
day later, which was out of time. The bank (the Royal Bank of
Canada) which had confirmed the credit, knew of this fraud because
in the first tender of the bills of lading the date was blanked out and
the date of December IS, 1976 was superimposed, but later, before
the expiry of the credit, a second tender of unamended bills of lading
was made which showed the date of December IS, 1976. The
documents were thus correct on their face. The false date was
inserted by an employee of the loading brokers and the sellers knew
nothing about it. The House of Lords held, as observed, that the
bank was obliged to pay, in spite of its knowledge of the fraud,
because not only the bank and the buyers, but also the sellers, were
deceived by the fraud of the third party. Lord Diploek observed"':
" ... what rational ground can there be for drawing any distinction between
apparently conforming documents that, unknown to the seller, in fact contain a
statement of fact that is inaccurate where the inaccuracy was due to inadver·
tence by the maker of the document, and the like document where the same
inaccuracy had been inserted by the maker of the document with intent to
deceive, among others, the seller/bcneficiary himself?"
The Uniled City Merchants decision caused unease in banking circles.
It is contrary to the common sense of the ordinary banker to pay under a credit if he knows that the tendered documents.''' Though apparently correct on their face, are in fact fraudulent or forged. Moreover, he fears that, by doing so, he may incur legal liability. The beneficiary (seller) may raise a contractual claim on the ground that the bank has paid against a document which, as it knew, was a nullity, owing to its forgery or the fraud. It is thought that in some of these cases, if the credit is operated under the UCP, the bank is protected by Art.34, which provides: "A bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document. ..... . " But these questions were not decided in United City Merchants and the legal position remains doubtful.
Banco Santander SA v Banque Paribas
A bank which negotiates a deferred payment credit without previously obtaining authority to do so from the issuing bank is exposed to the risk of discovery of fraud by the issuing bank prior to the due payment date, entitling the issuing bank to refuse to pay the credit.
Documentary letters of credit are well known instruments used primarily in financing international trade. Most, if not all, credits are issued subject to the rules of the Uniform Customs and Practice for Documentary Credits (UCP) sponsored by and published by the International Chamber of Commerce (ICC).
The first UCP was published in 1933, and the rules have been revised periodically since that time. The latest version is the 2007 revision and is known as the UCP 600. The previous reversion, the UCP 500, was published in 1993.
In a standard documentary credit transaction, the applicant for the credit, the 'account party', is the buyer in an international sale of goods. The beneficiary of the credit is the seller who obtains payment by presenting required documents at a bank where the credit is available.
Provided the documents are in order, a so-called 'complying presentation', the bank must pay unless the presentation of documents is known by the beneficiary and the bank to be fraudulent: the so-called 'fraud rule'.
Both the UCP 500 and the UCP 600 provide for credits to be 'realised', that is, paid to the beneficiary in different ways. The most favourable for the beneficiary is a 'sight payment' credit which must be paid by the bank on the acceptance of documents.
Where the bargaining position of the account party is stronger, payment under the credit may be delayed. The UCP provides two types of credit which involve delayed payment, the acceptance credit and the deferred payment credit.
An acceptance credit is honoured by the bank accepting a bill of exchange drawn on the issuing bank or the bank where the credit is available. A deferred payment credit is honoured by the bank making a promise to pay at a later date. An acceptance credit is obviously more favourable to the beneficiary since the bank bill may then be discounted in the bill market.
Deferred credits were developed in those countries which still have stamp duty on bills of exchange. The practice developed of 'discounting' deferred credits by advancing sums to the beneficiary before the payment due date.
What happens if fraud by the beneficiary is discovered after the deferred credit is discounted, but before the due date for payment? In particular, is the issuing bank required to reimburse a bank that has discounted the credit? Since the issuing bank cannot recover from the account party, the question is one of which bank bears the risk of fraud by the beneficiary.
2 Banco Santander
The issue arose in a stark form in Banco Santander S A v Banque Paribas [2000] EWCA Civ 57. Paribas had issued a deferred payment letter of credit in favour of Bayfern as beneficiary for a sum in excess of US$20m. Santander was a confirming bank, and the credit was issued subject to the UCP 500.
Bayfern presented documents to Santander which appeared to be in order and were accepted by Santander. Payment under the credit was due 180 days after the date on the bill of lading, and the credit expressly provided that Paribas undertook 'at maturity … to cover Santander in accordance with their instruction.'
Santander offered to discount the letter of credit, an offer which Bayfern accepted. As security, Santander asked and received a letter from Bayfern 'irrevocably and unconditionally assign[ing] to you our rights under this letter of credit.' No notice of this assignment was given to Paribus but the documents were handed by Santander to Paribus.
Fraud on the part of Bayfern was discovered before the maturity date of the credit, and Paribas refused to reimburse Santander. The UK Court of Appeal considered that:
if Santander was claiming as assignee, then it had to overcome the problem that it was, like any assignee, subject to the defences which could be raised against the assignor;
if, on the other hand, Santander was claiming as a confirming bank under the UCP, it had to overcome the problem that it had not followed its mandate, namely to pay at the maturity date.
The court held that if Santander was claiming as an assignee, there was no reason to displace the general rule concerning defences. The court based part of its reasoning on the existence of acceptance credits: if the parties wished to allow discounting, an acceptance credit could have been used. Since Paribas had a defence against a claim for payment from Bayfern, the fraud rule, it also had a defence against Santander claiming as assignee.
As to the claim under Art 14 of the UCP 500, the court noted that reimbursement under that article could only occur on payment, but payment could not be made before the maturity date. Art 14(A)(i) of the UCP 500 states that the Issuing bank is bound:
to reimburse the Nominated Bank which has paid, incurred or deferred payment undertaking, accepted Draft(s) or negotiated
The court also considered the instructions by the issuing bank. Paribas did not request Santander to discount, merely to incur a deferred payment undertaking. Santander had no authority from Paribas to discount although it was something that they were entitled to do on their own account.
Santander attempted to argue that the discounting practice and reimbursement was established banking practice but failed on the evidence.
3 Should deferred credits = acceptance credits?
The ICC considered the question of deferred credits when considering the revision of the UCP 500. Much of the banking community thought that deferred credits should be on a par with acceptance credits.
However, there were strong arguments that the decision in the Santander case was the right one. If the parties wished to provide for discounting then acceptance credits could be used. Further, case law showed that, had Santander sought and obtained approval from Paribas for discounting the credit, then Paribas would have been liable to reimburse: see European Asian Bank AG v Punjab & Sind Bank (No.2) [1983] 1 WLR 642.
On another view, the question is one of allocation of the risk of fraud. With an acceptance credit, if fraud is discovered after discounting but before maturity, the issuing bank bears the loss. With a deferred payment credit, if Banco Santander is correct, the loss falls on the discounting bank.
In the end, the proponents of equality succeeded, and the UCP 600 includes provisions intended to elevate the deferred credit to the status of the acceptance credit.
4 Deferred credits under the UCP 600
One of the more important changes in the UCP 600 is the treatment of deferred credits. Picking up on the major reasons given by the court in Banco Santander, the UCP 600 makes it clear that a nominated bank has authority to discount a deferred credit.
The first step in this procedure is to grant authority to the nominated bank to discount. This is achieved in Art 12(b) which provides that by nominating a bank to incur a deferred payment undertaking, the issuing bank authorises the nominated bank to prepay.
Art 12(b) would probably be enough to achieve the aim of overturning Banco Santander, but Art 7(c) provides that the issuing bank must reimburse the nominated bank 'whether or not the nominated bank prepaid…before maturity.' Art 8(c) places a similar obligation on a confirming bank.
5 Conclusions
The UCP 600 seems to have succeeded in making deferred payment credits the equal of acceptance credits so far as the initial discounting is concerned. This is good news for beneficiaries and nominated banks, bad news for issuing banks.
It is still theoretically possible for an issuing bank to prohibit the nominated bank from discounting a deferred credit. The UCP 600 applies only to the extent that the credit does not modify or exclude them: Art 1. Thus, an issuing bank could issue a credit that excluded the operation of the new articles. This action might, however, result in a breach of the contract between the applicant and the beneficiary is that contract called for a credit 'on usual terms' or some such requirement.
Unless there is some good reason to use deferred payment credits, such as the stamp duty issue, acceptance credits provide a better solution for the nominated bank since it may further discount the bill of exchange if desired.
Brandt v Liverpool
Prior to the coming into force of the 1992 Act, where the shipowner delivered tlW goods on presentation of the bill of lading and the holder did not have property in the goods,'" the court could imply a Brandt v Liverpool'" contract between the carrier and the bill of lading holder. A Brandt v Liverpool contract was implied wherethe shipowner delivered goods to a person without presentation of the bill of lading.
The leading UK case is Brandt v. Liverpool, Brazil and River Steam Navigation Co. Ltd [1924] 1 K.B.575. The pre-conditions for implying a contract were held to be: the holder of the bill must have some interest in the property; the actions of the parties must be construed as offer and acceptance and sufficient consideration must be provided.
Kum v Wah Tat Bank
Bills of lading can perform their principal function of enabling a person to dispose of goods which are not in his possession only if they are, at least to some extent, negotiable. But a bill of lading is not a negotiable instrument as is a bill of exchange I"; the term negotiable when used in relation to a bill of lading merely means transferable.
NYK v Ramjiban Serowgee
The mate's receipt is prima facie evidence of ownership of the goods. The shipowner may safely assume, unless he has knowledge to the contrary, that the holder of the receipt or the person named therein" is the owner of the goods and the person entitled to receive the bil1 of lading in exchange for the mate's receipt. However the mate's receipt is not a document of title; its transfer docs not pass possession of the goods and therefore it is of less significance than the bill of lading" Consequently, the shipowner is within his rights if he issues a bill of lading without insisting on the return of the mates receipt.
Definition of a mates receipt The mates receipt is a document of some importance. When the goods are at the docks for loading on board ship, they are inspected by tally clerks who take down a "record or tally of their date of loading, identification marks, individual package, numbers, their weight and/or measurement, and any defect or comment about the condition in which the goods are received. In particular, the tally clerks note any damage to packages, lack of protection, old cases, ambiguous markings, etc. When the loading is completed, the ship's officer in charge of loading operations signs the mate's receipt, which is based on the notes of the tally clerks and embodies any comments and qualifications in respect of the condition of the goods received. If the mate's receipt is qualified, it is said to be caused"; if it does not contain adverse observations, it is a clean receipt
Lebosch v Zurich
Ming Universe
M and W v Sphere drake
Section 18(2) provides that every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. Thus, in one case" the goods wereleather jerkins ex government surplus and were manufactured at least 20 years earlier, but they were declared to the insurers simply as "new men's clothing in bales for export". The court held that there was a failure to disclose material facts and the assured could not recover under the policy when the goods were stolen. Section 20 deals with the effect of various representations. A material representation must be true, otherwise the insurer can avoid the contract." A material representation is one which would influence the judgment of a prudent insurer in fixing the premium or
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