Third party reliance on bill of lading terms

Any unfettered right of action available to a cargo owner as against an actual tortfeasor creates its own problems. A shipper of goods, when negotiating a contract of carriage, will be aware that the obligations arising from that contract will rarely be performed personally by the contractual carrier but will be delegated to employees of the carrier or to independent contractors engaged to carry out a particular function, such as stevedores engaged to load or discharge the cargo. A brief glance at the printed terms of the bill of lading will also alert the shipper to the fact that, in many cases, the carrier will reserve the right to delegate performance of the carriage itself to a sub-contractor, although the contractual carrier will normally retain primary responsibility for due performance of the contractual obligations involved. In these circumstances it would seem reasonable to expect that the carriage would be undertaken on the agreed terms, including exceptions and limitation of liability provisions, irrespective of the identity of the party who actually performed the contract, or of the party who sought to claim for loss or damage to the cargo: provided, of course, that there was an identity of interest between the respective parties, and that any party seeking the protection of the contractual terms was providing the identical services stipulated in the contract. Unfortunately, this desirable result is often defeated by the intervention of the doctrine of privity of contract with the consequence that, where performance of obligations under a contract of carriage is delegated to an employee or a sub-contractor, the shipper can ignore the provisions of that contract and sue the employee or sub-contractor directly in tort where the loss or damage to cargo resulted from their negligence. The latter cannot rely on the protection afforded by the terms of that contract since they were not parties to it. Such results are undesirable for a number of reasons. On the one hand, they do not correspond with commercial reality. Once the parties have agreed on the terms on which a contract of carriage is to be performed and the overall risk and insurance liability has been allocated, it does not make commercial sense for the resultant balance of interest to be disturbed. Again, there are policy reasons rendering it undesirable for a party to invoke the privity doctrine in an attempt to circumvent the terms of an agreement to which he has freely and expressly consented. Thirdly, while it may be possible to avoid some of the more objec- tionable results of the privity rule by the introduction of a variety of indemnity and cross- indemnity clauses into the respective carriage contracts, such devices are not always successful and, in any event, result in unnecessary complications in the relevant law. When faced with this dilemma, the courts have used considerable ingenuity in devising a variety of strategies to extend the protection afforded by the terms of the contract of carriage to litigants who were clearly not parties to it. (I) Bailment on terms
One method of achieving this objective was advanced by the Privy Council in the recent case of The Pioneer Container. A variety of claimants had contracted with freight carriers for the carriage of their goods from Taiwan to Hong Kong either as a complete voyage or as part of a through transport to other ports. In each case the bill of lading issued to the shipper included a clause entitling the carrier to sub-contract ‘on any terms the whole, or any part, of the carriage, loading, unloading, storing, warehousing or handling’ of the goods. The carriage was in fact sub-contracted to the defendant shipowners, who issued feeder bills acknowledging receipt of the goods and including an exclusive Taiwan jurisdiction clause. On the voyage to Hong Kong the defendants’ vessel was involved in a collision and sank with the loss of the claimants’ cargo. The latter then sought to recover their loss by the issue of a writ in rem in Hong Kong against a sister ship of the defendants’ vessel. In reply, the defendants sought a stay of proceedings based on the exclusive Taiwanese jurisdiction clause in the feeder bills. On these facts the weak link in the defendants’ argument was that the jurisdiction clause appeared in their sub-contract with the freight carrier, whereas it was acknowledged that there was no contractual relationship between the defendants and the claimants. The Privy Council sought to bridge this gap by invoking the doctrine of bailment on terms, the possibilities of which had been explored in earlier cases, though largely in obiter dicta. There could be no doubt that the original contract of carriage concluded between the claimants and the freight carriers created a relationship of bailor and bailee, while Pollock and Wright in the late nineteenth century had taken the view that, if in such a situation the bailor had authorised the bailee to enter into a sub-bailment of the goods, while there would be no privity of contract between the original bailor and the sub-bailee, ‘it would seem that both the owner and the first bailee have concurrently the rights of a bailor against the [sub-bailee] according to the nature of the sub-bailment’. To what extent, therefore, could the head bailor be bound by the terms of the sub-bailment? In the view of the Privy Council, ‘if the effect of the sub-bailment is that the sub-bailee voluntarily receives into his custody the goods of the owner and so assumes towards the owner the responsibility of a bailee, then to the extent that the terms of the sub-bailment are consented to by the owner, it can properly be said that the owner has authorised the bailee so to regulate the duties of the sub-bailee in respect of the goods entrusted to him, not only towards the bailee but also towards the owner’. On the facts of The Pioneer Container there could be no doubt that the claimants had consented to the sub-bailment and, by authorising the carrier to sub-contract ‘on any terms’, such consent would encompass all contractual provisions other than those which were unreasonable or unexpected in their context. Moreover, in the view of the Privy Council,156 the inclusion of a jurisdiction clause, of the type in question, in the sub-bailment ‘would be in accordance with the reasonable commercial expectations of those who engage in this type of trade and that such incorporation will generally lead to a conclusion which is eminently sensible in the context of the carriage of goods by sea, especially in a container ship, in so far as it is productive of an ordered and sensible resolution of disputes in a single jurisdiction, so avoiding wasted expenditure in legal costs and an undesirable disharmony of consequences where claims are resolved in different jurisdictions’. Accordingly, the Privy Council granted the stay, holding that the claimants were bound by the jurisdiction clause, even though no contractual relationship existed between them and the sub-bailees. What then are the characteristics and effects of such a bailment on terms and what poten- tial does it have for use in other carriage situations? It is clear that the relationship between owner of the goods and sub-bailee is independent of contract and is created by the voluntary taking possession of goods with knowledge that they are the property of persons other than the immediate bailor. The result is that such sub-bailees owe the duty of a bailee not only towards their immediate bailor but also towards the owner of the goods. In fulfilling such duties, to what extent can the sub-bailee call in aid the exceptions, limitation of liability pro- visions and time bars contained in his sub-contract with the intermediate bailor, as reinforced by the Hague or Hague/ Visby Rules?
The key requirement would appear to be the consent of the owner of the goods to the sub-bailment on the terms in question. In the words of Lord Denning MR, in the earlier case of Morris v CW Martin & Sons Ltd, ‘ The answer to the problem lies, I think, in this: the owner is bound by the conditions if he has expressly or impliedly consented to the bailee making a sub-bailment containing those conditions, but not otherwise.’ Although this opinion was expressed obiter, it was adopted by the Privy Council as the basis of its judgment in The Pioneer Container. On the facts of that case there could be little doubt as to the owner’s consent. The bill of lading provided that the carrier should be entitled to sub-contract ‘on any terms’ the whole or any part of the carriage. ‘ Where, as here, the consent is very wide in its terms only terms which are so unusual that they could not reasonably be understood to fall within such consent, are likely to be held to be excluded.’ In the opinion of the Privy Council, there was nothing unusual or unreasonable in an exclusive jurisdiction clause which would commonly be found in the container trade. Once one accepts the premise of a sub-bailment on terms, then the facts of The Pioneer Container are reasonably clear cut. To what extent, however, will this principle be applicable in other carriage situations? Bills of lading for sea carriage frequently incorporate clauses entitling the carrier to sub-contract the carriage of the goods, while for bills covering com- bined transport, sub-contracting is virtually a necessity. Some bills follow The Pioneer Container pattern and allow sub-contracting ‘on any terms’ or ‘on any terms whatsoever’, others ‘on any terms which are reasonable in the circumstances’. More difficulty may be caused by bills which include a general authority to sub-contract, though without reference to the terms. Here again, it could be argued that the shipper has consented to the bailment on terms subject only to the aforementioned test of reasonableness. What, however, is the position where the bill of lading makes no reference to the possibility of sub-contracting? Lord Denning MR indicated in Morris v Martin that implied consent by the shipper of the goods to a sub-bailment on terms might be sufficient and this view was adopted by the Privy Council in The Pioneer Container: ‘Such consent may, as Lord Denning pointed out, be express or implied; and in this context the sub-bailee may also be able to invoke, where appropriate, the principle of ostensible authority.’168 A typical example of implied consent might arise when the shipper of goods contracts for their carriage with a freight forwarder or other person known to him to operate as a non-vessel owning carrier. In such a case the shipper must be presumed to be aware that performance of the contract is to be sub-contracted. Even though consent to a sub-bailment may be implied, it does not automatically follow that there is therefore consent to all the terms of that sub-bailment. Here again the test of reasonableness may be an appropriate guide, particularly if the terms involved are standard conditions in the particular trade. Thus, it has been suggested that the terms of a sub-bailment might satisfy the reasonableness test where the exclusions and limitations of liability were no wider than their counterparts in the contract of carriage concluded between the shipper of the goods and the contractual carrier. Certainly it is arguable that, where carriage by sea is envisaged, a sub-bailee should be entitled to rely on the defences provided by the Hague or Hague/Visby Rules where such rules were mandatorily incorporated into the contract of sub-bailment. Different conditions might apply where the effect of such rules was dependent on contractual incorporation. What is, however, clear is that the sub-bailee cannot rely on the terms of a sub-bailment to which the owner of the goods did not consent. Any argument to the contrary was rejected by the Privy Council in The Pioneer Container as being inconsistent with the reasoning of Lord Denning MR in Morris v Martin. ‘As [their Lordships] see it, once it is recognised that the sub-bailee, by voluntarily taking the owner’s goods into his custody, ipso facto becomes the bailee of those goods vis-à-vis the owner, it must follow that the owner’s rights against the sub-bailee will only be subject to terms of the sub-bailment if he has consented to them, i.e. if he has authorised the bailee to entrust the goods to the sub-bailee on those terms.’ (II) The vicarious immunity approach The Pioneer Container establishes that, in appropriate circumstances, a sub-bailee may invoke the terms of the sub-bailment as a defence to a claim brought by the owner of the goods. The courts have, however, been more reluctant to allow him to rely on defences contained in the head contract between the shipper of the goods and the head bailee, to which he is obviously not a party. There are two main reasons why the sub-bailee might prefer to adopt this approach rather than to seek the protection of the terms of the sub-bailment. On the one hand, the court might find it impossible to infer any consent by the owner of the goods to the terms of the sub-bailment. On the other, the sub-bailment may take the form of a charterparty, the terms of which might offer protection to the sub-bailee inferior to that avail- able under the bill of lading. The first sub-bailee to adopt this approach was, however, successful. In Elder Dempster & Co v Paterson Zochonis Co, cargo shipped on board the defendant’s vessel was damaged as the result of bad stowage which was covered by an exception in the bill of lading. The bills had, however, been issued by charterers of the vessel, who were held to be the contractual carriers. When sued for negligence by the owners of the cargo, the defendant shipowners sought to rely on the stowage exception in the bill of lading, despite the fact that they were not parties to that contract. A majority of the House of Lords, supporting the dissenting opinion of Scrutton LJ in the Court of Appeal, held that the shipowners were entitled to do so, though the reasons for this decision are far from clear. Only Lord Summer hinted at a solution based on a bailment on terms similar to that subsequently advanced by the Privy Council in The Pioneer Container. The majority of the court, together with Scrutton LJ in the Court of Appeal, preferred to base their decision on a principle of vicarious immunity, pointing to the fact that the bill of lading was signed by the master of the ship, a servant of the shipowner, and that the exception in question specifically stipulated that the ‘shipowners’ should not be liable for damage resulting from bad stowage. This decision has met with far from universal approval and has not been followed in subsequent cases. When the case eventually came to be considered by the House of Lords in Scruttons Ltd v Midland Silicones Ltd,176 only Lord Denning, a noted opponent of the doctrine of privity, was prepared to support the arguments advanced by Scrutton LJ. The appellants in this case were stevedores who had damaged a drum of chemicals during the unloading operation. When sued by the owners in negligence they unsuccessfully sought to rely on the limitation of liability provision in the Hague Rules, which had been incorporated into the bill of lading. The House of Lords strictly applied the privity rule. As the stevedores were not parties to the bill of lading contract, they could not rely on its provisions for their protection. In this case stevedores engaged as independent contractors to discharge the cargo were clearly not bailees of the goods since there was no intention that they should acquire legal posses- sion of them. Would the result have been different if, as in Elder Dempster, there had been a sub-bailment of the goods? Such a situation might, for example, arise where independent contractors are engaged not only to discharge cargo but also to store it awaiting collection by a consignee.177
Unfortunately the combination of facts encountered in the Elder Dempster case has not come up for reconsideration by an English court, although it has been the subject of judicial decision in the Australian case of Gadsden v Australia Coastal Commission.178 Cargo shipped under a charterer’s bill of lading was damaged while in the course of transit on board the defendant’s vessel. When sued by the cargo owner for negligence, the shipowner sought to rely on the Hague Rules time limitation, which had been expressly incorporated into the rele- vant bill of lading. The New South Wales Court of Appeal had little hesitation in applying the privity rule and holding that, as the shipowner was not party to the bill of lading contract, he could not rely on its terms for protection