Charterparties and the Clause Paramount

At the close of the nineteenth century, the United States Congress enacted the Harter Act, 46 U.S.C. §190, et seq. (1893), to protect American shippers from comprehensive limitation of liability clauses found in bills of lading issued, primarily, by British liner companies carrying American goods to England. Among other things, the Act makes it unlawful to insert in bills of lading any clause (1) relieving the carrier from liability for loss or damage arising from negligence, fault or failure in the proper loading, stowage, custody, care, and delivery of cargo, or (2) lessening or weakening the obligation to exercise due diligence to make the vessel seaworthy, or to carefully handle, stow, care for, and deliver the cargo. 46 U.S.C. §§ 190, 191. Clauses placed in bills of lading in contravention of §190, "shall be null and void and of no effect." 46 U.S.C. §190.

Provided the carrier exercises due diligence to make the vessel in all respects seaworthy, the carrier is exonerated for damage or loss resulting from errors in navigation and management of the vessel, and from a variety of other causes unrelated to fault, e.g., "dangers of the sea or other navigable waters." 46 U.S.C. §192.

The Harter Act is compulsorily applicable to carriage of goods "from or between ports of the United States and foreign ports." 46 U.S.C. §190.

In an attempt to ensure Harter Act protection was afforded by the courts of the country of destination for American exports, shippers insisted bills of lading issued in the United States include a provision expressly stating the bill of lading "is subject to all terms and provisions of, and exceptions from, liability contained in [the Harter Act]." See Selvig, The Clause Paramount, 10 Am.J.Comp.L. 205, 206-07 (1961) (explaining the historical background of Harter Act incorporation into bills of lading).

When called upon to construe a bill of lading covering goods damaged on a voyage from Baltimore to Liverpool, terms of which incorporated the Harter Act, Lord Esher set the standard by which courts would also treat mandatory legislation designed to govern bills of lading, where such legislation is incorporated into charter parties:

[W]hat we have to do is to construe the bill of lading, reading into it as if they were written into it the words of the Act of Congress. If this is done, it will have this effect: that some provisions will appear twice over, because they have put words extremely like those of the Act into the bill of lading, and then introduced the whole of the Act. That would, of course, do no harm, but it is clumsy to the last degree. [Dobell & Co. v. The S.S. Rossmore Co., Ltd., [1895] 2 Q.B. 408, 412 (C.A. 1895)]

On the international level, the Hague Convention signed at Brussels in 1924 sets out a series of rules (the "Hague Rules") to govern the rights and obligations of shippers and carriers under ocean bills of lading, or similar documents of title. On the one hand, the Convention requires the carrier to "properly and carefully" load, handle, stow, keep, care for, and discharge the goods carried. Article III(2). On the other hand, the carrier is relieved from the implied warranty of seaworthiness in favor of the lesser obligation, "before and at the beginning of the voyage to exercise due diligence to make the ship seaworthy," and, it is excused from liability for a series of named events, including negligence in the navigation and management of the vessel. Articles III(1), IV(1) and (2).

If Articles III(1) and (2), and IV(1) and (2) are "the heart" of the Convention, its teeth are in Article III (8):

Any clause, covenant or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to or in connection with goods arising from negligence, fault or failure in the duties and obligations provided in this Article or lessening of such liability otherwise as provided in this convention, shall be null and void and of no effect.

Article III(6) provides:

"In any event, the carrier and the ship shall be discharged from any liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered."

In 1936, the United States implemented the Convention by enactment of the United States Carriage of Goods by Sea Act ("COGSA"), now found at 46 U.S.C. App. §§1300-1315. Generally speaking, the American version of the Hague Rules kept to the original text, but there were some departures. Among other things, §1300 subjects to COGSA's provisions both inbound and outbound bills of lading; §1305 expressly states COGSA "shall not be applicable to charter parties; but if bills of lading are issued in the case of a ship under a charter party, they shall comply with the terms of this chapter;" and, §1312 requires "every bill of lading or similar document of title which is evidence of a contract for the carriage of goods from ports of the United States, in foreign trade, shall contain a statement that it shall have effect subject to the provisions of [COGSA]."

The application of the COGSA to inbound, as well as to outbound, bills of lading represented a significant geographic expansion of the Hague Rules. The limitation of COGSA's application to bills of lading and similar documents of title to the exclusion of charter parties made explicit what, in any event, was the case under the Hague Rules, the application of which was limited to bills of lading. Unless domestic legislation provided otherwise, bills were not required to contain a statement the carriage was governed by legislation implementing the Rules, but it was common practice to include such a statement in bills of lading, even when the carriage itself would not otherwise be subject to the Rules.

It is the Statement, required by §1312 to be placed in outbound bills of lading that has come to be known as the "USA Clause Paramount." COGSA does not expressly provide a remedy for failure to include a Clause Paramount in outbound bills, but one authority is of the view that where an outbound bill of lading subject to COGSA fails to contain the required Clause Paramount, "it may not seem too drastic to hold the carrier estopped from claiming the benefit of the statute, or of the exceptions in his illegal bill, while permitting the cargo to claim whatever benefit the statute gives." Gilmore, The Law of Admiralty, 186 (2d ed. 1975). Where a charter requires inclusion of a Clause Paramount in bills of lading, and Charterers fail to do so, they will be responsible for any prejudice to Owners on claims by cargo interests brought under the bill. See, e.g., Lux Challenger v. Blue Anchor Line, 1992 A.M.C. 841 (Arbitration at New York, 1991) (J. Berg, sole arbitrator).

The practice of conjoining legislation governing bills of lading and charter parties followed enactment of the Harter Act. See The Agwimoon, 24 F.2d 864 (D.Md. 1928), The Westmoreland, 86 F.2d 96 (2d Cir. 1936); The Tregenna, 121 F.2d 940 (2d Cir. 1941). It has been suggested the Clause Paramount found its way into charters as a consequence of brokers adopting the practice of adding to the charter by attachment, or by verbatim transcription, the same Clause Paramount required to be included in bills of lading. See Shoenbaum, Admiralty and Maritime Law, 361-62 (1987). "No matter what the reason: 'The parties to a charter party frequently have no specific idea why it contains or should contain a paramount clause.'" Selvig, The Paramount Clause, 10 Am. J. Comp. L. 205, 209-10 (1961).

The simple form of "USA Clause Paramount" reads:

This bill of lading shall have effect subject to the provisions of the Carriage of Goods by Sea Act of the United States, approved April 16, 1936, which shall be deemed to be incorporated herein, and nothing herein contained shall be deemed a surrender by the carrier of any of its rights and immunities or an increase of its responsibilities or liabilities under said Act. If any term of this bill of lading be repugnant to said Act to any extent, such term shall be void to that extent, but no further.

In 1958, the House of Lords addressed the question whether the U.S.A. Clause Paramount, drafted for inclusion in a bill of lading, but nonetheless physically attached to a consecutive voyage charter on a "Tank Vessel Voyage Charter-Party" form, affected rights and liabilities of parties to the charter. In what is recognized as the leading case on the subject, a unanimous court in Anglo-Saxon Petroleum Co., Ltd. v. Adamastos Shipping Co., Ltd. (The Saxon Star), [1958] 1 Lloyd's L.Rep. 73 (H.L.), held that it did: "If the Paramount Clause is to have any meaning or effect at all 'This bill of lading' must be held to be a misnomer for 'This charter party'." [1958] 1 Lloyd's L. Rep. at 90 (Reid, L.). However, when it came to the consequences of incorporation for the claim involved, i.e., economic loss sustained as a result of a series of delays attributable to unseaworthiness, some of which occurred in trading without the United States, and some of which occurred on ballast voyages, the Lords divided (3-2). The majority found (1) COGSA as incorporated into a charter for worldwide trading applied to all voyages, loaded and unloaded, without regard to §1300's geographical limitation to voyages to and from ports in the United States; and, (2) when incorporated into a charter, the reference in §1304(1) and (2) to "loss or damage," is not limited to physical loss or damage to goods - it includes other classes of damage, such as economic loss suffered as a consequence of delays which forced a reduction in the number of voyages capable of being performed within the charter period. The practical consequence for Owners was that their obligation to provide a seaworthy vessel was not governed by an absolute warranty of seaworthiness, but rather, by the lesser "due diligence" standard of §1304(1) brought into the charter by the Clause Paramount.

American courts have also reformed the "U.S.A. Clause Paramount" so that its introductory phrase "This bill of lading" is read as "This charter-party." See Sun Company, Inc. v. S.S. Overseas Arctic, 27 F.3d 1104 (5th Cir. 1994); Shell Oil Co. v. M.T. Gilda, 790 F.2d 1209 (5th Cir. 1986); United States v. Wessel, Duval & Co., 115 F. Supp. 678 (S.D.N.Y. 1953).

Despite the willingness of courts to reform language of the standard "USA Clause Paramount" to facilitate incorporation into a charter party, an intention to incorporate must nonetheless be clearly stated. A charter provision requiring "Bills of lading are to include" a Clause Paramount, the terms of which are quoted, but which makes no reference to incorporation into the charter, is insufficient to bring COGSA terms into the charter. Associated Metals & Minerals Corp. v. S.S. J. Jasmine, 983 F.2d 410 (2d Cir. 1993). Previously, the Second Circuit in The Stolt Lion, 617 F.2d 907, 913 n.7 (2d Cir. 1980) had avoided addressing the question of proper incorporation where the charter provision required "All bills of lading issued hereunder shall have effect subject to the provisions of COGSA.," but it took note of Standard Oil Co. of Calif. v. United States, 59 F.Supp. 100, 102-03 (S.D. Calif. 1945), aff'd, 156 F.2d 312 (9th Cir. 1946), where such a clause was deemed an effective incorporation of COGSA terms into the charter. In the writer's view, The S.S. J. Jasmine represents the better view. A charter provision containing a clause requiring "All bills of lading" issued thereunder to contain a Clause Paramount, is an attempt to ensure Charterer's compliance with §1312, and to ensure that on any suit by endorsees of negotiable bills, Owners and their vessel, inter alia, have the protection afforded by §§1303 and 1304. There is no basis for rewriting this clause under guise of a Saxon Star style reformation for the purpose of drawing COGSA terms into the charter itself.

A charter provision incorporating only a portion of COGSA, will be deemed an intention to exclude unmentioned portions. See Ralston Purina Co. v. Barge Juneau, 619 F.2d 374 (5th Cir. 1980); In re Sulphur Queen, 460 F.2d 89, 102-03 (2d Cir. 1972) (incorporation of only select sections of COGSA did not require application of burden of proof rules which would govern had COGSA been fully incorporated). A simple statement that: "Paramount Clause [is] deemed to be incorporated in this charter party" has been enforced as a reference to the Hague Rules: "It seems to me that when the 'Paramount Clause' is incorporated, without any words of qualification, it means that the Hague Rules are incorporated. I mean, of course, the accepted Hague Rules, not the Hague-Visby Rules, which are of later date." The Agios Lazaros, [1976] 2 Lloyd's L. Rep. 47, 50 (C.A.) (Denning, M.R.). More recently, the court in The Bukhta Russkaya, [1997] 2 Lloyd's L.Rep. 744 (Q.B.) found charter party incorporation of "the general clause paramount" referred to a clause published by BUIMCO in 1994, which provided for incorporation of the Hague Rules as enacted in the country of shipment, but, if none, of the Rules as enacted in the country of destination, but, if none, of the 1924 Convention; but, if the Hague-Visby Rules are made compulsorily applicable by the legislation either of the country of shipment, or of the country of destination, of the 1924 Convention as amended by the Hague-Visby Rules. On a voyage from Japan to Mauritania, where Hague-Visby was not in force, the unamended Hague Rules governed, despite the fact the charter contained English choice of law and London arbitration provisions, and Hague-Visby had been in force in the U.K. since 1977.

Where a U.S.A. Clause Paramount is properly incorporated into the charter, COGSA terms do not have "statutory rank," but the incorporated text "is converted into a binding consensual obligation." United States v. M.V. Marilena P, 433 F.2d 164, 170 (4th Cir. 1969). The same standard that had been adopted by the court in Dobell & Co. v. The S.S. Rossmore Co., Ltd., [1895] 2 Q.B. 408 (C.A. 1895) with respect to incorporation of the Harter Act into American export bills of lading.

The consequence of incorporation is simply stated:

[T]he terms of the specific contract and the Hague Rules are fused together. The combined terms interact between themselves. There is no line of demarcation or difference in quality or effect save that if the incorporated clause is also a paramount one the Hague Rules will not merely supplement the specific contract but will operate also to modify any incompatible clauses in it. [The Agios Lazaros, [1976] 2 Lloyd's L. Rep. 47, 59 (C.A.) (Shaw, L.J.)]

The interplay between COGSA (or the Hague Rules) and the provisions of the charter to which it is appended, is not so easily resolved:

The courts have not found it easy to make sense of the Hague Rules in the context of a charter-party since clearly those rules were not designed to be incorporated in such a contract. [The Standard Ardour, [1988] 2 Lloyd's L. Rep. 159 at 163 (Q.B. 1987) (Saville, J.)]

From Charterers' perspective, the Clause Paramount is of benefit since charter provisions attempting to exonerate Owners from liability as a COGSA carrier, are incompatible with incorporation of COGSA terms, rendering the exoneration provisions "null and void." Bunge Corp. v. Republic of Brazil, 353 F.Supp. 64 (E.D.La 1972); but see The Granville, 1961 A.M.C. 2229 (Arbitration at Oslo, 1961) (Clause Paramount did not deprive Owners of benefit of exoneration provisions of Baltime 1939 standard printed Clauses 9 and 13).

Therefore, the presence of a Clause Paramount has rendered a charter party Refrigeration Clause purporting to exonerate Owners from liability for negligent operation of refrigeration equipment, "null and void." Horn v. Cia de Navigacion Fruco, S.A., 404 F.2d 422 (5th Cir. 1968), cert. denied, 394 U.S. 943 (1964). It has overriden a "trade custom" of granting Owners a .05% allowance on shortage claims. Sun oil Co. of Pa. V. M.T. Carisle, 771 F.2d 805 (3d Cir. 1985). It has displaced charter clauses purporting to relieve the vessel from liability "for any consequences arising out of shipping more than one grade of cargo." Standard Oil Co. of California v. United States, 59 F.Supp, 100 (S.D. Calif. 1945), aff'd, 156 F.2d 312 (9th Cir. 1946). It has even been found to defeat an obligation to arbitrate in a foreign forum where the country whose version of the Rules are incorporated, deems foreign jurisdictional clauses contained in bills covering goods loaded at, or carried to, ports within its jurisdiction, void. Wilson v. Compagnie des Messageris Maritimes, [1954] 2 Lloyd's L. Rep. 544 (Austl.) (applying §9 of the Australian Sea Carriage of Goods Act, 1924); see also, The Amazonia, [1990] 1 Lloyd's L. Rep. 236 (C.A. 1989); contra, Associated Metals & Minerals Corp. v. S.S. Michaelis Angelos, 234 F.Supp. 236 (S.D.N.Y. 1964).

There are limits to the Clause's paramountcy. Where the presence of a Clause Paramount creates a conflict with specially negotiated charter party provisions, especially where they apply to a limited and clearly defined circumstance, it is the Clause Paramount, "a clause taken off the peg, or as is so often said about these clauses, picked out of a drawer and applied to the charter-party," which must yield. The Mariasmi, [1970] 1 Lloyd's L. Rep. 247 (Q.B.) (typed provision added to Gencon form placing responsibility on Owners for expenses resulting from lack of readiness to load was unaffected by Article 4(2) exception for negligent navigation brought into charter by Clause Paramount); see also The Westmoreland, 86 F.2d 96 (2d Cir. 1936) (charter party incorporation of Harter Act did not impose upon an unconditional typed provision stating: "Cargo to be loaded on skin of vessel at charterer's risk," a condition that Owners must exercise "due diligence" to make "the skin" seaworthy for stowage of cargo); The Tregenna, 121 F.2d 940 (2d Cir. 1941) (specific printed charter party provision unconditionally exempting carrier from liability for negligent stranding was not qualified by incorporation of Harter Act, which by §3 conditioned exception to liability for negligent navigation upon exercise of "due diligence" to make vessel seaworthy.).

When The Saxon Star was before the Court of Appeal, one of the justices observed: "It is a strange thing to find a shipowner relying on a paramount clause to exempt himself from liability. Historically, its purpose was to make him liable." [1957] 1 Lloyd's L. Rep. 271, 277 (C.A.) (Denning, L.J.). Actually, Owners have put the Clause Paramount to good use. As occurred in The Saxon Star, where the presence of a U.S.A. Clause Paramount was successfully employed to cut down the implied warranty of seaworthiness to an obligation to exercise due diligence to make the vessel seaworthy, Owners have enlisted the aid of the Clause Paramount to take advantage of COGSA (or Hague Rule) exceptions to avoid charter party liabilities ranging far beyond physical loss or damage to cargo.

In The Satya Kailash, [1984] 1 Lloyd's L. Rep. 588 (C.A. 1983), OCEANIC AMITY was chartered under an NYPE form to lighten SATYA KAILASH. Owners of SATYA KAILASH were Charterers of OCEANIC AMITY. During lightening damage was sustained by SATYA KAILASH as a consequence of contact with OCEANIC AMITY attributed to negligent navigation of the Master. In defense, Owners of OCEANIC AMITY asserted the Negligence in Navigation exception of COGSA's §1304(2), incorporated into the NYPE by Clause 24, the "Clause Paramount." Guided by Adamastos Shipping Co., Ltd. v. Anglo-Savon Petroleum Co., Ltd., [1958] 1 Lloyd's L. Rep. 73 (H.L. 1958), and by Australian Oil Refining Pty. Ltd. v. R.W. Miller & Co. Pty., Ltd., [1968] 1 Lloyd's L. Rep. 448 (Austl. 1967), the court upheld the defense. The immunities set out in §1304(2) were applicable to the full range of performance contemplated by the charter - "Under the charter-party Oceanic Amity was chartered to lighten grain from a mother ship. It follows that loading grain from the mother ship was a contractual activity to be performed by Oceanic Amity under the charter; and we can see no reason why, in principle, the benefit of the immunities contained in [§1304(2)] should not be available to [Owners of OCEANIC AMITY] in respect of damage caused to the appellants [Owners of SATYA KAILASH/Charterers of OCEANIC AMITY] in performance of this activity" [1984] 1 Lloyd's L. Rep. 596. See also, The Marivic, S.M.A. #1732 (Arbitration at New York, 1982) (U.S.A. Clause Paramount bars Charterers' claims for consequential damages resulting from negligent navigation); The Aliakmon Progress, [1978] 2 Lloyd's L. Rep. 499 (C.A.).

In the United States, application of §1303(6)'s one-year limitation period to claims asserted under a charter containing both an arbitration provision, and a Clause Paramount, is for arbitrators to determine. Son Shipping Co. v. DeFosse & Tanghe, 199 F.2d 687 (2d Cir. 1952). New York arbitrators have barred cargo claims where the arbitration demand comes subsequent to expiration of the one-year limitation period. The Uranus, 1977 A.M.C. 586 (Arbitration at New York, 1976) (2-1 award); The Prairie Grove, 1976 A.M.C. 2589 (Arbitration at New York, 1976). Quite properly, the one-year limitation period has not been applied to bar indemnity claims. The Lacerta, S.M.A. #3515 (Arbitration at New York, 1999). To fall within the purview of the time bar provision, the claim need not relate only to physical loss or damage, e.g., claims for financial loss caused by late delivery of the goods, or by slow discharge, have been deemed claims "in connection with the goods," subject to COGSA's one-year limitation period. See The Stolt Sydness, [1997] 1 Lloyd's L. Rep. 273 (Q.B. 1996); The Stena Pacific, [1990] 2 Lloyd's L. Rep. 234 (Q.B. 1989). Despite application of COGSA exceptions to aspects of charter party performance beyond physical loss or damage to cargo, courts have tended to restrict the one-year time bar to claims for loss or damage to, or in connection with, the goods: "It seems to me, therefore, that as a matter of construction, that is to say as a matter of trying to ascertain the intentions of the parties from the words they have chosen to use, they can only have intended the time limit to apply to claims for loss or damage relating to the goods carried or perhaps to be carried." The Standard Ardour, [1988] 2 Lloyd's L. Rep. 159 (Q.B. 1987) (claim for loss arising out of delay in issue or release of bill of lading was not subject to COGSA's one-year limitation period).

In a more general sense, perhaps the best guide to proper construction was stated by Judge Learned Hand over sixty years ago when considering a charter incorporating the Harter Act:

[I]t is idle to invoke the canon against redundancy in the interpretation of such a maritime document such as this. Courts have again and again observed the curious, often fantastic incongruities in charter-parties, bills of lading and insurance policies, composed as they so often are, of a motley patchwork of verbiage thrown together apparently at random, often in an unfamiliar diction three hundred years old. Particularly in such a document meant to do service in varying situations each word of such a discordant medley need not be made to count as we seek to make all words count of carefully prepared contracts drawn for a particular occasion. [I]nterpretation is always a question of the ensemble." [The Tregenna, 121 F.2d 940, 945 (2d Cir. 1941)]

In New York, determination whether COGSA, or Hague Rule, terms brought into the charter by the Clause Paramount supplement, or override, more conventional charter party provisions, or, as the courts in the United Kingdom put it, are "insensible" to resolution of the dispute at hand, is a call to be made by commercial arbitrators, especially members of the Society of Maritime Arbitrators. The ingenuity of attorneys, and the myriad fact patterns of charter party disputes may not bode well for ease of resolution, but it should ensure the interest of arbitrators charged with the responsibility of making sense out of "the ensemble" created by joinder of the charter party, and the Clause Paramount.

Mr. Connell is a Member of the New York Law Firm McMahon & Connell, P.C.

Staff Author