The Tai Prize decision is unsurprising in result in that it reaffirms the Master’s obligations under the Hague-Visby regime. It is, however, a demonstration of a failed attempt by a time charterer to pass liability to the voyage charterer for damage to soya beans due to pre-shipment conditions. Following their breakdown of the case, our authors discussed the options in such cases for Owners, Time Charterers and their P&I Clubs with Solicitor Darryl Kennard of Penningtons Manches Cooper LLC.
The Court of Appeal in PRIMINDS SHIPPING (HK) CO LTD V NOBLE CHARTERING INC (“The Tai Prize”) confirmed the commercial court’s decision which held that the shipper’s statement in a draft Bill of Lading presented to the Master does not amount to a warranty by the Shipper/Charterers of the cargo’s apparent order and condition. This is because the carrier has the free-standing and independent obligation under the Hague Rules to accurately record the apparent order and condition of the cargo on the Bill of Lading when shipped on board.
Background
The Tai Prize loaded a cargo of
63,366.150MT soyabeans in Brazil bound for China. Shippers presented Shipowners
a Bill of Lading which contained the statements “clean on board” under
“Shipper’s description of Goods” and “shipped … in apparent good order and
condition.” At discharge, receivers raised a claim for burnt, discolored and moldy
cargo. Receivers succeeded in their claim in Chinese court against the Head
Owners as carriers under the Bills of Lading. Shipowners recovered a 50%
contribution from Disponent Owners under the Inter-Club Agreement as
incorporated in the Head Time Charterparty. In turn, Disponent Owners claimed
100% recovery from Charterers under an amended North American Grain
Charterparty 1973. They succeeded in arbitration on the basis (as held by the
Tribunal) that
(i)
it would, on a reasonable pre-shipment
inspection, have been apparent to the shippers/charterers that the cargo was
not in apparent good order and condition,
(ii)
in consequence of this,
the draft bill of lading presented for signature was inaccurate
because it stated that the cargo was shipped in apparent good order and
condition and
(iii) Owners
were entitled to be indemnified for any liability they incurred by reason of
signing inaccurate draft bills because the defective condition of the cargo was
not apparent to the Master on a reasonable inspection during loading.
The Commercial Court
The Charterers appealed the arbitrator’s
decision to the High Court, which considered the following questions:
1.
Did the pre-filled statements, “clean on
board” and “apparent good order and condition” on the draft Bills of
Lading, constitute a representation or warranty by shippers as to their
knowledge of the apparent condition of the cargo as presented, or were the
draft Bills of Lading merely an invitation to the Master to make his own
assessment of the apparent order and condition of the cargo after reasonable
inspection?
2.
Were the Bills of Lading, as issued,
inaccurate as a matter of law?
3.
Would Charterers be liable to Owners
either by way of warranty or implied indemnity if the Bills were inaccurate?
The High Court reversed the arbitrator’s
decision, finding that a pre-filled statement on a draft Bill of Lading is
neither a warranty nor a representation as it is the Master’s obligation
independently to assess and record the apparent order and condition of the
cargo. Furthermore, the Bills of Lading were not inaccurate as a matter of law,
given that as far as the Master or crew could see during a reasonable inspection
during loading, there was no damage to the cargo and thus no reason to remark
the Bills of Lading. The last question then was moot as the Bills of Lading
were not inaccurate.
The Court of Appeal Decision
The Court of Appeal considered the same
three questions and confirmed the Commercial Court judgment.
First, they considered what the term
“apparent good order and condition” means on a Bill of Lading. The arbitrator
had accepted that the Master was unable to see any damage to the cargo at
loading, but held that the damage would have been discoverable by shippers
before loading, and thus the cargo was not in apparent good order and
condition. The Court, citing The Nogar Marin, found that the arbitrator
applied the wrong test; the words on a Bill of Lading are understood to be a
representation by the Master, not the shippers. The authority of the David
Agmashenebeli [2003] case was reconfirmed where it was held that the
remark “in apparent good order and condition” is a statement made by the Master
regarding the cargo’s external condition at the time of shipment arising from a
reasonable examination by a competent Master based on the prevailing
circumstances during loading. A reasonable examination does not entail that the
Master is an expert in the cargo and cannot perform a granular inspection nor
interrupt regular cargo operations for inspection.
The principle that remarks about cargo
condition are from the Master’s point of view is consistent with the Hague
Rules incorporated in the Bills of Lading. Article III Rule 3 obliges the
carrier to issue, upon the shipper’s demand, a bill of lading setting out
certain information such as number of packages, leading marks, quantity,
weight, and apparent order and condition of the goods. Further, Article III
Rule 5 contains a guarantee (and associated indemnity) by the shipper to the
carrier for accuracy of all this information save, importantly, for the
apparent good order and condition of the goods.
If the above establishes that it is the
Master who is obliged to record the apparent order and condition of the cargo,
what is the effect of the wording on the draft Bills of Lading, “shipped in
apparent good order and condition” and “clean on board,” as presented by the
shippers? Owners argued that this was a statement of shippers’ knowledge of the
cargo condition, which gave rise to a right of indemnity where it was
inaccurate. The court found that this was not the case, as it was contrary to
the obligation of the Master to issue a Bill of Lading based on his own assessment
of the apparent order and condition of the cargo. The presentation of
the draft Bill of Lading by the Shippers is merely an invitation to
the Master who must examine the external condition of the shipment at the time
of loading and under normal loading procedures to confirm the cargo’s apparent
good order and condition. If the shipper’s “clean” draft cannot be confirmed,
the Master has a right, and a duty, to refer to cargo’s apparent condition at
the time of shipment with a suitable remark. This principle leads back to the
basic functions of a Bill of Lading, as a receipt from the Carrier for the
goods as shipped on board, and as a contract of carriage (or evidence of a
contract) between the holder of the Bill of Lading and the Carrier.
In summary, on the questions of law, the
Court found:
1.
The statements on
the draft Bill of Lading provided by shippers do not amount to a
representation or a warranty. They are an invitation to the Master to make an
independent representation of the condition of the cargo as it is apparent to
the Master.
2.
The Bills of Lading as issued were not
inaccurate.
On the question of implied indemnity,
there could be no implied indemnity for shippers tendering a draft Bill of
Lading; it would be contrary to the Carrier’s Hague Rules obligation to issue a
Bill of Lading stating the apparent condition of cargo when shipped on board.
We took the opportunity to discuss the Tai Prize decision in the wider context
of soya bean claims in China arising from inherent vice of the cargo with
Darryl Kennard, Solicitor and Partner with Penningtons Manches Cooper LLC.
The Court of Appeal expressed some
sympathy with the Owners in a theoretical case where the Shippers have actual
knowledge of poor cargo condition, which the Master could have no reasonable
means of discovering, suggesting in such a case there could be implied
representation. What would be the applicable test to prove knowledge? And
moreover, would gross negligence also pass the test?
The applicable test would be one of
actual knowledge of the cargo being defective at the time of shipment. In any
case, the question is only theoretical since there is neither an implied nor an
express representation made by the Shippers who only provide a draft Bill of
Lading to the Master. The Master has no obligation to follow what the
pre-printed words mention if, according to his judgment, the cargo is not in
apparent good order and condition. Another issue would be whether the party
having suffered the loss (be the Head Owner or the Disponent Owner) would
pursue its claim under the charterparty chain or under the bill of lading.
The latter may present better prospects
of success. The party having suffered a loss, might possibly find an economic
tort if it could be established that the Shippers knowingly and deliberately
provided damaged cargo and tendered a draft “clean” bill of lading in order to
obtain payment for defective cargo, and thereby benefited to the detriment of
the Owners.
Is there any danger that Shippers/Voyage
Charterer are “encouraged” to be careless or negligent as argued by Owners?
A clean Bill of Lading is simply a Bill
of Lading without clausing, it is the Master who provides any information about
the apparent order and condition. This case just makes clear that the Bill of
Lading in draft form does not constitute a representation of the apparent order
and condition of the cargo. How can the shippers be encouraged to do something
they are not doing in the first place? If the defective condition is not
apparent, then the Owners are not deprived of defenses, although they have to
be careful to keep good records and overcome the burden of proof to show they
have cared for the cargo and any defect was either not apparent at loading or
not caused by the ship. It does not assist to conflate the cause of the claim
with the remark on the bill of lading. The Owners did not succeed in China to
convince the court that they had no liability for the damaged cargo condition.
The cause of the liability was not the statements as to the apparent condition
of the cargo as contained in Bills of Lading, which were accurate as far as the
Master could determine.
The Hague Visby Rules, which are the
benchmark of P&I cover, are clear with respect to Carrier’s obligations
when signing a Bill of Lading. Does the “Tai Prize” bring Owners in a more
onerous position or does it reiterate what is already known? (The David
Agmashenebeli [2003] / Nogar Marin [1988])
This case aligns the risks with the
provisions of the Hague Visby Rules. It was always the Master’s obligation to
ensure the accuracy of the facts on the Bill of Lading insofar as concerns the
apparent order and condition of the cargo, not of the Shippers. The obligation
cannot be put on the Shippers who are only presenting the cargo for loading.
The bill of lading is a receipt of goods being brought for loading, and it is
the Master’s obligation to report the apparent condition of the cargo at the
time of shipment under normal loading procedures, it always has been. The
Master was never entitled to rely at what Shippers presented as being the
condition of the cargo.
Is it an even balance of risk that
Owners, or the Charterers in the middle, are left with a loss which was not
their fault? For example, soya bean “inherent vice” claims represent
significant exposure to P&I Clubs and Shipowners and this case makes it
difficult to pass liability to voyage charterers, who would presumably have
more information about the cargo condition. How can Owners protect
themselves? Are express indemnity clauses the only solution? Could there
be recourse against shippers under the Bill of Lading?
It is important to remember that although
Charterers may be the agents of the shippers in a charterparty context, it
cannot necessarily be said that it is the Charterers who would have more
information about the cargo. The Master’s role in recording the condition of
cargo at the time of shipment on a Bill of Lading has been the same for
hundreds of years for a good reason, which is that the Master may be the only party
that can give an independent assessment of the cargo. In FOB sales
contracts the buyer may be entirely reliant on the Master’s remarks that the
cargo as provided by the seller is in good order and condition, and it is on
this basis that they agree to pay for the cargo.
Express indemnity clauses may sound like
a solution, but they are not getting to the root of the problem, and they will
inevitably create more. For P&I insurance, any charterer agreeing to such
an indemnity clause would likely have trouble with their Club. The market is
unlikely to accept such clauses if they lead to uninsured losses. The trouble,
really, is that by addressing these claims through the charterparty chain,
there is going to be nothing but more narrow legal arguments until the
liability rests with one or another party until the next case comes up. The
cause meanwhile is going unaddressed, which is that the Owners have defences
under the Bill of Lading when they can prove that any damage was pre-existing
but not apparent to the Master. There was no inaccuracy in the Bills as issued,
from the eye of the Master, and implying there is another test, that of the
shipper’s representation, changes the meaning of the representation on the Bill
of Lading as it has been understood through hundreds of years in international
trade.
Is there any market-based approach to
rectifying this imbalance?
It is important for the P&I Market to
stem the tide of soya bean cases in China, and this is perhaps best done by a
coordinated and concerted effort to push back against the main protagonists,
the Chinese receivers and insurers.
In this regard, the recent English court
decision in The Frio Dolphin has (subject to appeal) given P&I insurers a
powerful weapon in their fight against the injustice of being saddled wrongly
with the cargo losses arising from inherent vice. In this case, the court held
that a shipowner may bring arbitration proceedings against a subrogated cargo
underwriter and claim “equitable compensation” (i.e. damages) in cases where
the subrogated underwriters has obtained judgment in a foreign court in breach
of the arbitration clause incorporated in the Bill of Lading contract. As the
law currently stand, such damages would be equal to the amount the shipowner
has had to pay pursuant to the foreign judgment, plus any associated costs. Of
course, the challenges of enforcement remain but insurers are much more
susceptible to enforcement proceedings than local receivers are.
Further, in The Eternal Bliss (another
recent English High Court decision, which again is subject to appeal), it was
held that demurrage does not liquidate damages for all losses incurred by
reason of the detention of the Vessel. In consequence, an indemnity can
potentially be sought from voyage charterers (and potentially by voyage
charterers, if they are sellers in any underlying sale contract) for loss and
damage incurred because of cargo deterioration sustained during the period
spent waiting at the discharge port. That said, this potential remedy may not
improve the position of a head owner (whose rights are recovery are governed by
the ICA). The result does, however, assist intermediary time charterers
who have been held liable under the ICA pass that liability down to their
voyage charterer.
Finally, anti-suit injunctions remain a
potent weapon and it should not be assumed that they will simply be ignored by
Chinese receivers. In a recent soya bean case in which damages of US$10 million
were claimed, we obtained an anti-suit injunction against a government owned
Chinese receiver, and this stopped the claim dead in its tracks; the ASI was
complied with and the security posted in China returned.
