Bill of Lading Function in Charterparty

Bill of Lading Function in Charterparty

The prime function of a bill of lading as a document of title is in relation to the contract of carriage. However, in the context of the contract of carriage, the fact that the bill is a symbol representing the goods during transit has the following consequences:

1- The holder of the bill controls the goods during transit.
2- A lawful holder of the bill of lading, by of the Carriage of Goods by Sea Act 1992, has title to sue under the contract of carriage as if he had been an original party to it. The holder of the bill of lading becomes subject to liabilities under the contract only when he takes or demands delivery of the goods from the carrier, or initiates a claim for loss or damage.
3- The holder of the bill of lading is entitled to delivery of the cargo at the port of discharge on presentation of the bill of lading.

The second proposition requires further consideration. While indorsement and delivery of a bill of lading will normally transfer ownership of the goods covered by it, such indorsement has always been ineffective at common law in transferring to the endorsee the rights and obligations arising under the contract of carriage. The reason is to be found in the traditional doctrine of privity of contract, which prescribes that only the original parties to the contract can sue or be sued on it.

Over the years English law has sought to bridge this gap by a variety of statutory and judicial devices which have enabled receivers of cargo, in the majority of cargo disputes, to acquire title to sue the carrier. Initially the legislature sought to solve the problem by the introduction of a statutory form of assignment by of the Bills of Lading Act 1855.

Under this statute, title to sue was linked to the property in the goods and a consignee or endorsee of the bill of lading acquired title to sue provided that property in the goods passed to him ‘upon or by reason of such consignment or endorsement. To reinforce this statutory provision, the common law subsequently developed two complementary remedies.

First, the courts were prepared to imply a contract between consignee or endorsee and the carrier – a contract separate and distinct from the original contract of carriage between shipper and carrier – from delivery of the goods at the port of discharge against presentation of the bill of lading.

Secondly, in appropriate cases, a remedy in tort was available where the damage or loss had resulted from the negligence of the carrier or his servants.

Court decisions over the years, however, highlighted the inherent limitations of these stratagems and indicated the necessity for more fundamental reform. The Law Commission responded by proposing a radical solution to the problem which was given statutory force in the Carriage of Goods by Sea Act 1992. Title to sue on a carriage contract is now governed by the provisions of this statute, although the implied contract approach is still available should the need arise for an alternative remedy.

A- The Carriage of Goods by Sea Act 1992

This Act, drafted by the Law Commission, came into force on 16 September 1992 and governs all contracts of carriage concluded on or after that date. Unlike its predecessor, the Bills of Lading Act 1855 which applied only to bills of lading, the provisions of the
1992 Act also cover sea waybills and ships’ delivery orders. In the case of bills of lading , it is immaterial whether the document is a shipped or received for shipment bill. The Secretary of State is also empowered to draft regulations extending the provisions of the Act to cover any electronic transmission of information which might in the future replace written documentation.

The legislation envisages two significant departures from existing law:

A- Title to sue is no longer linked to property in the goods;
B- The transfer of rights under a contract of carriage is effected independently of any transfer of liabilities.

The new law can be stated as follows:

1. Title to sue is now vested in the lawful holder of a bill of lading, the consignee identified in a sea waybill or the person entitled to delivery under a ship’s delivery order, irrespective of whether or not they are owners of the goods covered by the document.
2. The lawful holder of a bill of lading is defined as a person in possession of the bill in good faith who is either:
a- identified in the bill as consignee
b- an 3ndorsee of the bill
c- a person who would have fallen within categories (a) or (b) if he had come into possession of the bill before it ceased to be a document of title.

The final provision will cover a situation such as that where goods are delivered against a bank guarantee before the bill comes into the possession of a consignee or an endorsee.
By the time such a bill eventually comes into their possession, it is no longer a transfer- able document of title in the sense of entitling its holder to possession of the goods.

The provision will also cover the case where goods are lost in transit before the bill comes into the hands of a consignee or ultimate endorsee. In both cases, however, the ultimate holder of the bill will obtain title to sue only provided that he became holder of the bill in pursuance of contractual or other arrangements made before the bill ceased to be a transferable document of title.

3. The transfer of the right to sue under the Act, from one lawful holder of a bill to another, will extinguish the contractual rights of the shipper or of any intermediate holder of the bill. This result will follow even if the shipper retains the property in the goods after such indorsement and he will not regain title to sue even though he regains possession of the relevant documents unless they have been re-endorsed back to him. Thus in East West Corp v DKBS  bills of lading had been indorsed to bankers in connection with documentary credits and, on the buyer failing to pay the price for the goods, the bills were returned to the shipper without further indorsement. In these circumstances the shipper had no title to sue.

The operation of this provision also raises a practical problem which is specifically dealt with by the Act. The problem relates to the situation where, under a contract of sale, goods are shipped by a seller and eventually delivered to an overseas buyer on presentation of the relevant bill of lading. On transfer of the bill to the buyer, the seller will lose his right to sue on the contract of carriage while, on delivery of the goods to the buyer, the bill of lading will cease to be a document of title. What, then, is the position if the goods have been damaged in transit and are subsequently rejected by the buyer? The seller is the only person with an interest in suing the carrier, but has apparently lost his right of suit on transfer of the bill. In these circumstances the Act specifically confers on him title to sue when he regains lawful possession of the bill.

4. Title to sue is divorced from property in the goods, a person with rights of suit under s 2(1) may not have suffered personal loss or damage resulting from the carrier’s breach of contract. In such an event he is entitled to exercise rights of suit for the benefit of the party who has actually suffered the loss, and will then hold any damages recovered from the carrier for the account of such person. Unfortunately, while the Act empowers the holder of the bill to sue on another’s behalf, it apparently does not place him under any obligation to do so. Parties such as banks or other financial institutions, who are looking to the bill for purposes of security, may therefore prefer to be named as consignees, with a consequent right to sue, rather than to rely on the goodwill of future holders of the bill.

5. Liabilities under the contract of carriage are no longer transferred simultaneously with title to sue. Under s 3 of the new Act they will only attach to persons in whom rights of suit are vested when they either:
a- take or demand delivery of the goods
b- make a claim under the contract of carriage
c- took or demanded delivery of the goods before rights of suit vested in them under s 2(1) of the Act.

The final provision covers the situation where the receivers took delivery of the goods against a bank indemnity before they became ‘lawful holders’ of the relevant bills within the meaning of the Act.

The clear division of rights from liabilities will effectively protect a bank which is holding the bill as security for a credit from incurring liabilities under the contract of carriage until it seeks to enforce its security by claiming delivery of the goods or instituting proceedings against the carrier.

Lastly, the Act provides that such transfer of liabilities is without prejudice to the existing liabilities of the original party to the contract. Intermediate holders of the bill will presumably no longer incur liability under the contract of carriage once they have transferred title to sue to a subsequent holder of the bill.

6. The provisions outlined above apply equally, so far as appropriate, to the consignee identified in a sea waybill or the person entitled to delivery under a ship’s delivery order. The former is entitled to sue on the contract evidenced by the sea waybill, and the latter to enforce the terms of the undertaking contained in the delivery order, but only in relation to the goods covered by that order. Both will incur liability only when they seek to enforce the respective contractual undertakings.

Sea waybills are by definition non-negotiable, but they often contain provision for an alternative consignee to be nominated by the shipper. In such a case, title to sue will be transferred on the shipper instructing the carrier to deliver to a person other than the consignee named in the sea waybill.

B- The Implied Contract Approach

While most of the problems associated with title to sue have been resolved by the Carriage of Goods by Sea Act 1992, the well-established common law device of the implied contract remains available should the remedies provided by the Act prove deficient or inappropriate in any particular case.

In adopting this approach the courts have been prepared, in appropriate circumstances, to imply a contract between a consignee or endorsee of a bill of lading and the carrier, which is separate and independent of the original contract of carriage between shipper and carrier. This new contract was implied from delivery of the goods against presentation of the bill of lading, the consideration being provided by the payment by the receiver of the goods of any outstanding freight or other charges due under the original contract of carriage. It was then a short step for the courts to presume that the terms of the implied contract were those of the bill against which delivery had been obtained.

An example of the application of this principle is provided by Cremer v General Carriers where a cargo of tapioca chips had been shipped in bulk under two bills of lading which were issued to the consignee. Both bills were clean despite the fact that the mate’s receipts recorded that the tapioca was damp on shipment. The consignee then indorsed one of the bills to the claimant and handed it over together with a ship’s delivery order for part of the remainder of the cargo. After the claimant had taken delivery of his share of the cargo against production of these documents, he subsequently sued the carrier for cargo damage caused by moisture, seeking to rely on the estoppel created by the clean bills. Even though he had no rights under the original contract of carriage, since property in the goods had not been transferred by indorsement of the bill, the trial judge held that he could recover. In his view, ‘A contract incorporating the terms of the bill of lading was to be implied between the plaintiffs [claimants] and the defendants by reason of the payment of the freight by the plaintiffs [claimants] and the delivery of the goods by the defendants against the bill of lading.’

Furthermore, it was held that where the claimant had taken delivery against a ship’s delivery order (as opposed to a delivery order issued by the seller), he was entitled to the same rights as if he had taken delivery under a bill of lading. In both cases, however, it was essential that delivery was taken against payment of freight or other outstanding charges, since the latter provided the consideration necessary to make the implied contract enforceable.

Presumably in cases where the freight was prepaid and there were no other charges outstanding, the endorsee would be unable to invoke this principle. The limits of this doctrine have not been clearly defined, although it has been established that the decision as to whether or not a contract is to be implied in any particular case is one of fact and not of law. While some judges have urged restraint, others have been prepared to extend its application as a general panacea. Thus in The Elli 2 the Court of Appeal held that, where cargo had reached the port of discharge in advance of the documentation, a guarantee to present the bill when it arrived was as effective as actual presentation in raising the inference of a contract. Again, where, in the circumstances of a particular case, there has been a degree of mutual co-operation between carrier and receiver of the cargo which is only explicable on the existence of some form of contractual relationship between them, the courts have been prepared to imply a contract to give ‘business reality’ to the transaction. Thus in The Captain Gregos (No 2) a consignment of oil, which had been the subject of a series of chain sales, was delivered to the ultimate purchaser in Rotterdam. The appropriate documentation not being available, the shipowner made delivery against a letter of indemnity. The available evidence suggested to the court that the cargo could not have been discharged into the purchaser’s refinery complex in Rotterdam without the active co-operation of the purchaser and the crew of the vessel.

In these circumstances the Court of Appeal found ‘very powerful grounds for concluding that it is necessary to imply a contract between BP and the shipowners to give business reality to the transaction between them and create the obligations which, as we think, both parties believed to exist’. The same court was, however, less accommodating in the subsequent case of The Gudermes where a quantity of oil sold to the claimants was shipped on a vessel which was subsequently discovered to have no operative heating coils. The oil having cooled in transit, the claimant’s sub-purchasers refused delivery in Ravenna, fearing the oil might clog their underwater sea-line. The claimants accordingly arranged for the oil to be transshipped into another vessel off Malta, had it reheated on board and thereafter delivered at Ravenna. In an attempt to recover the cost of transshipment, the claimants argued that, as a result of the dealings between themselves and the carrier in respect of the transshipment, there was to be implied a Brandt v Liverpool contract on the terms of the bill of lading which expressly incorporated the Hague/ Visby Rules. The Court of Appeal rejected this contention and stressed that, before any contract could be implied, the conduct of the parties must be explicable only on the basis of the contract sought to be implied. In its opinion, the final decision must be one of fact and, in the circumstances of this particular case, the facts did not support the contention that any new contract between the parties should be implied. There are clearly limits to the extent to which the fiction can be taken. No contract was implied in The Aramis where there was a complete failure by the carrier to deliver any cargo. In this case a quantity of goods covered by several bills of lading had been shipped in bulk but, by the time the final bill was presented at the port of discharge, the supply of cargo had been exhausted.

The Court of Appeal refused to imply a contract from the mere act of presentation of a bill of lading in the absence of any corresponding response from the carrier which could be interpreted as an ‘acceptance’ of the claimant’s ‘offer’. This decision effectively denied any remedy for non-delivery. Again, mere presentation of a bill of lading followed by part delivery will not constitute sufficient evidence to found an implied contract in circumstances where the conduct of the parties is equally explicable as constituting performance of obligations and rights under the original contract.

The absence of any consideration provided by the party presenting the bill of lading may be an important factor in reaching such a conclusion, but it does not appear to be decisive. Lastly, there are two practical problems resulting from the implied contract concept. The first raises doubts as to whether the device will provide a remedy for the consignee under a waybill. As waybills were designed to avoid the problems arising from the late arrival of shipping documents, and consequently are not normally presented to obtain delivery of the cargo, the implied contract device fails to provide a practical solution to the problem of the consignee’s title to sue under such a document. The second query relates to the proper law of the implied contract. In the absence of any choice of law clause in the bill of lading, the proper law of a contract implied from the conduct of the parties at the port of discharge might differ from that appropriate to the original contract of carriage.