Bills of Lading and Club Cover

The bill of lading: What it is?

A bill of lading is a document that has developed in maritime trade over several hundred years. It now has three main functions:

  • It is evidence of the Contract of Carriage,
  • It is a receipt for the goods, and
  • It is a document of title to the goods.

The courts generally consider that these functions make a bill of lading a document of value and of dignity.

(a) Evidence of the Contract of Carriage

In its simplest form a contract of carriage is a legally binding agreement between two parties whereby one carries goods at the request of the other from A to B in return for payment of freight. A bill of lading is evidence of such a Contract of Carriage but it is not necessarily the Contract of Carriage itself: an agreement to carry goods is usually reached before a bill of lading is issued, say in a charter party or booking note. The bill may well contain the terms of the Contract of Carriage on one side but as an alternative, say where the contract of carriage is a charter party, the bill of lading may simply contain a reference to the charter party terms and conditions.

In accordance with English law a simple "incorporation clause" referring to a charter is acceptable, but in some other jurisdictions the full charter must be attached to the bill, to be validly incorporated. However, a simple incorporation clause in a bill of lading will not import some important clauses, such as an arbitration clause or a law and jurisdiction clause, unless these are specifically referred to in the incorporation clause.

It is important to recognise that, unless the bill of lading holder is also the charterer, a bill of lading will create a direct contractual relationship between the carrier and the holder of the bill of lading, which exists independently of any relationship between an owner and any charterer: The obligations that are created under the bill of lading may be completely different to those arising out of the charter party. A Charterer may, for his own purposes, ask an owner to perform acts that directly conflict with the owner's legal obligations to the holder of the bill of lading. Many large claims can arise if owners agree to charterer's requests, which may conflict with owner's bill of lading obligations.

From an English law point of view, in circumstances where the bill of lading incorporates a reference to a charter, if a claim is brought under the bill of lading a carrier might be able to rely upon the terms of a charter party to avoid or reduce his liability: If the claimant is the charterer then the carrier can rely exclusively upon the terms of the charter party: the bill is only a receipt for the goods and the contract is said to reside in the charter. If, however, the claimant is a third party holder of the bill of lading then the carrier's rights to avoid liability will be restricted by applicable carriage Act legislation, such as the Hague and/or Hague Visby Rules and/or Hamburg Rules.

For a ship under time charter, The carrier might be either the owner or a charterer: this will very much depend on exactly who signs the bill of lading and in what legal capacity, and exactly what the terms of the bill of lading are, but in many cases the bills represent evidence of a contract with the owner. This may even be true even if a charterer or his agent signs the bill, as they may be signing on the basis of an authority delegated to them by the owner and/or master. In legal terms they may be the agent of the master or owner, for signing the bills, however recent English case law suggests that if an agent signs a bill of lading on the front as agents to the charterer as carrier, then the bill will be held to be a contract with owners even if it contains a demise clause or identity of carrier clause on the back, suggesting it is contract with owners.

(b) A receipt for the goods

As a receipt for the goods the bill of lading is evidence of what the carrier receives from the shipper, including details of the nature of the cargo, its quantity, condition etc, and the date of shipment (date of completion of loading). Traditionally carriers were able to avoid liability for misrepresentation in the bills of lading by suitable terms in the Contract of Carriage but, as a result of legislation in various parts of the world, the rights of the carrier to avoid problems arising out of misrepresentations in the bills of lading have generally been legally restricted. The early legislation included the English bills of lading Act, 1855 and the American Harter Act, 1893. The principle of restricting the carrier's rights was later given international recognition in The Hague, Hague/Visby and Hamburg Rules.

Articles 3(3) and 3 (4) of the Hague Rules clearly specify the minimum amount of information that must be incorporated in the bills of lading, and they likewise state that any such statements are prima facie evidence of their accuracy. A modification was applied by the Brussels protocol of 1968 (the Visby Rules) whereby if the bill of lading has been endorsed in favour of a third party, acting in good faith, the bill of lading is conclusive evidence of the accuracy of the statements. This gave effect to the legal doctrine of "estoppel", whereby the carrier cannot deny the goods were in good condition when he received them, if the bill was "clean".

The carriage act legislation generally provides that a carrier is not obliged to insert any false statements in a bill, or any statements that cannot be reasonably checked.

(c) The bill of lading as a Document of Title

Arising out of the way maritime trade developed, the bill of lading came to represent the goods themselves. On shipment, the shipper took the bill of lading from the carrier, and it would be transferred to the receiver of the goods in return for payment for the goods. As evidence of his right to collect the goods from the carrier the receiver would, on delivery at the destination, hand the bill of lading to the carrier for cancellation. With the development of the banking trade, rather than a shipper directly handing a bill of lading to a receiver, in exchange for money, a letter of credit is set up and the bill is handed to a bank, and in due course it is handed on through the banking system, possibly passing through several banks, until it reaches the receiver who pays the final bank, before they are handed the bill of lading and, with it, the right to collect the goods. Unless a receiver presents the bill to the carrier, he should not be entitled to collect the goods.

In this context, the price that the receiver is obliged to pay for the goods represents a debt to the bank, and the bill of lading represents the bank's security for that debt.

Other documents may perform one or more of these functions, but only in a bill of lading are they combined. The functions of the bill of lading as a document of title and receipt for the goods go hand in hand with it being evidence of the condition of the goods and the terms on which they are carried.

The General effect of committing a breach of contract

It is not the purpose of this article to deal with claims involving accidental cargo damage where the carrier has otherwise complied with his normal contractual obligations, but the problems that can arise in where the owners may have stepped outside what is permissible in a contract.

It is important to note that a bill of lading imposes legal obligations on the carrier to care for the goods. This is specified in The Hague and Hague-Visby Rules and similar carriage act legislation. If the carrier fails to perform the contract in accordance with the terms of the bill, i.e. does not deliver at the place named in the bill or against surrender of the bill, and in the condition as described in the bill of lading, he is liable to be sued by the lawful holder of a bill of lading / owner of the goods for compensation for any losses they may suffer. Most such claims involve loss or damage to a part of the cargo, but they can include delay. If such loss, damage or delay occurs due to simple acts of carelessness, then the carrier can rely on the exception clauses in the Hague and/Hague-Visby to avoid or minimise his liability, but, subject to the rules and terms of entry, the carrier will generally be able to recover any such liability from his P&I club.

If the carrier deliberately commits any act not envisaged in the original contract, and which may expose the goods to a greater risk of loss, damage or delay, the effect of this may place the carrier outside of the contract. This is often described as a fundamental breach of contract (though the term is no longer recognised by the English courts) or as a deviation (in a legal as opposed to a geographical extent) from the contract. In such a case the carrier may sometimes be denied the right to any of the benefits of any exemption clauses in the contract, even if such legal deviation did not directly lead to the damage.

The carrier may also be precluded from being entitled to a recovery from his P&I Club.

Set out below are some of the commonest problems that can arise, which may prejudice owner's cover:

  • Knowingly issuing bills of lading containing incorrect information;
  • Delivery of the cargo without production of the bills of lading,
  • Sailing by a longer route and/or calling at intermediate ports for the carrier's own purposes, etc.
  • Delivering the cargo at a port or place other than that specified in the bill of lading, including arranging transhipment;
  • Carrying the cargo on deck without an appropriate remark on the front of the bill of lading, or moving it from under-deck to on deck part way through a voyage.

This list is not exclusive, and more details are contained in Rule 2 section 17 and Rule 5 of claims that are excluded or are at the directors' discretion.

One of the problems with deviating is that it may affect the validity of cargo insurance. In some jurisdictions, such as the USA, where this may be a consequence of a deviation the carrier may then be deemed to become the insurer of the goods, and be obliged to compensate the cargo owners for losses suffered that the cargo owner cannot recover from his cargo insurer, because of the deviation, even if the deviation was not contributory to the loss.

The nature of cover provided by P&I clubs is that it is designed to protect the owners in respect of accidental mishaps which occur due to their fault and, in the case of goods, while in the custody of the insured carrier, not their deliberate acts which may bring a claim upon them. Committing one of these deliberate acts as listed above can potentially prejudice an owners right of recovery from the club.

In most cases the claim becomes payable only at the discretion of the Directors of the club: While we cannot in any way prejudge how the Directors would decide an individual case, they certainly normally require a full and complete explanation of the circumstances, but the directors certainly do not always exercise their discretion in the member's favour.

While there is no automatic right to security for any claim: security is a privilege not a right, security will certainly not be available if there is any indication that the claim is discretionary.

Liberty clauses

Some bills of lading may contain so called "Liberty Clauses" which may purport to give a carrier a right to do certain acts, however it is important to recognise that the courts will very narrowly construe Liberty clauses in the carrier's favour and may under some circumstance strike them down if, they are deemed to be too vague and the carrier's conduct is considered as completely unreasonable.

Right of indemnity from Charterers:

In general terms many charters contain an indemnity clause that should allow the owner to recover from the charterer if the owner suffers a loss from a mistake on the part of the charterers. There is, in any event an implied right of indemnity if the owner is faced with a claim as a result of following the lawful instructions of the charterer. It is upon these indemnities that the owners may have to rely.

Letters of Indemnity

Where a letter of indemnity exists, one must very much hope that the issuer will honour it as if, the carrier can be seen to have participated actively in the wrongful act, say by accepting a letter of indemnity, he may deprive himself of the benefit of any indemnity contained or implied in any charter.

Common problems of breach of obligation to holders of bills of lading

(a) Mis-description in the bill

Some of the commonest problems occur when the bills do not accurately reflect the condition of the goods or the date or place of shipment: Any such false statement in the bill affects its dignity and value.

The shipper's interest versus the bank's and carrier's interests:

It is naturally in the interests of the shipper of a cargo to get the best price that he can for the goods and, when the goods are being sold by virtue of transfer of the bill of lading, the best way to do this is to ensure that the goods are described as favourably as possible in the bill of lading.

If the goods are clearly damaged before they come into the carrier's custody, then, in theory, the carrier is not obliged to issue a clean bill nor should he be liable for the damage to the cargo, but if however he has directly or indirectly allowed the issue of a bill of lading incorrectly representing facts, in circumstances where a third party has purchased the goods on the basis of the representations contained in the bill of lading, the carrier is "estopped" (legally denied the right) from pleading that the damage did not occur in his custody and he will be held liable for it by the courts, likewise for any other error fact contained in a bill of lading.

Though there is an argument that with modern means of communication a receiver can easily check the condition of his goods at the time of shipment, as a bill of lading effectively can be freely bought and sold at any stage between loading and delivery, a subsequent purchaser of the bill of lading may not have had the opportunity to do such checking. They therefore can rely upon the bill of lading as being an accurate representation of the condition of the goods and of the terms on which the goods are carried.

Apart from mis-describing the condition or quantity of cargo, other areas where there may be a mis-description may also include the date of shipment. In some cases the price obtained for the goods will depend on them being shipped before a certain time and the shipper may suffer a financial loss if they are not shipped by then: he may even loose the sale. The price payable may be dependant on a market price ruling at the date of shipment, and in times of rising market prices it may be to a shipper's advantage to show a later date of shipment. In these case the shipper will want the bill to evidence that the goods were shipped on a particular day but it is important that the bill of lading accurately reflects the date of shipment on board.

The banks will, in many circumstances, refuse to deal with bills of lading if they show the goods were not in apparent good order and condition when shipped, or if the date or place of shipment does not comply with the contract of sale of the goods and letter of credit requirements, as in the event of the receiver refusing to take up the bills of lading because of defects and inaccuracies in them, they may be obliged to recoup their losses by taking delivery and selling the goods themselves. They will look to recoup their losses from elsewhere, and because of the legal status of a bill of lading and the estoppel argument, the carrier is a natural target.

Shippers will therefore attempt to get bills saying what they want, to avoid problems with their bankers and receivers. The only person who benefits from mis-description in the bills of lading is a shipper. The problem of the correctly issued bill of lading is therefore a problem between a shipper and his bank and should not involve the carrier, but in many cases the carriers are persuaded to go along with a shipper's request to issue incorrect bills, sometimes in return for a letter of indemnity, sometimes against commercial pressures or to maintain a long term relationship with a regular customer.

Letters of Indemnity:

Many courts in the world have considered cases where carriers may have issued clean or otherwise factually inaccurate bills of lading in return for a Letter of Indemnity. In many cases they have formed the view that this agreement between the carrier and the shipper represents a deliberate attempt to deceive an innocent third party into accepting a bill of lading that they would otherwise have rejected, and that this is an illegal and fraudulent act. The courts will not condone any crime and they will not generally therefore enforce Letters of Indemnity.

Right of indemnity from Charterers:

Many charters contain an indemnity clause that should allow the owner to recover from the charterer, if the charterer causes the bills to be issued incorrectly, without the knowledge of the owner, and if there is no such clause, there is an implied right of indemnity. It is upon this indemnity that the owners may have to rely.

It is important to ensure that the master/owner ensures the charterers are given proper notification of the condition of the cargo and the time of shipment by making sure the mates receipts or similar are properly issued: If the charterer or his agents issues the bill on the basis of evidence contained in a mates receipt an owner cannot recover if the appropriate documentation has not been properly issued, as it breaks the chain of causation. Likewise an owner cannot recover if he or the master actually issued the bill, as it then becomes directly their fault that the bill is inaccurate.

Where a letter of indemnity exists, one must very much hope that the issuer will honour it. If, however, the owner can be seen to have participated actively in the wrongful issue of a clean bill, say by accepting a letter of indemnity, he may not be entitled to benefit from any indemnity contained or implied in the charter. There is also a prospect that by having committed an illegal act, the carrier could be denied the right to the defences and limits of liability contained within the contract of carriage, due to the taint of illegality.

The effect on club cover

Bearing in mind that Club cover is only designed to protect carriers from the consequences of the accidental negligent acts that they do, and as pre-shipment damage to the cargo is not a negligent act upon the part of the carrier, and claims may arise from the deliberate issue of incorrect documentation, then one of the conditions upon which the claim would be recoverable from the Club as of right has not been met. In accordance with the UK Club Rules, such a claim would only be recoverable at the discretion of the Directors.

Without prejudging the outcome of any individual case, we are aware from previous cases that the directors take a very firm line and have rejected claims where the bill had been incorrectly issued by a charterer, even without the actual knowledge of the owners. This was because the charterer, as the owner's agent, issued the bill and the owners were, in accordance with the doctrine of vicarious liability, legally responsible for the acts of their agent.

(b) Delivery without production of the bill of lading:

This too can prejudice club cover: as the bill is a document of title, a person presenting it to the carrier is ostensibly entitled to collect the goods and the carrier cannot refuse to deliver the goods to him. If someone claiming to be the receiver cannot produce the bill, what evidence is there that they are entitled to the goods? It may well be that a sale contract has collapsed and the seller may want to sell to someone else: in extreme circumstances the supposed receiver may want to take the goods and sell them on, with-out paying from them so stealing the goods and the sale proceeds, while the seller or the bank still retains the bill.

As the bill represents surety for the purchase price, if the carrier hands the goods over to an unauthorised party who does not hold the bill of lading, he is denying the legitimate holder of the bill the security the bill represents, by virtue of preventing the holder of the bill of lading from recovering their losses by themselves surrendering the bill and collecting the goods from the carrier.

Charterers Interests against cargo owner's interests

In some cases the charterer may want cargo to be discharged before the bill of lading is available, as the cargo may otherwise have to be held on the ship, and the charterer may have to pay extra hire or demurrage for any delay. In some cases the owners may agree in the Charter party to follow the charterers' instruction to discharge cargo without production of the bill of lading. This is one of the areas where the charterer's interests and requests may be in direct conflict with the obligations owed by the owner to the holder of the bill of lading, particularly, where it is simply being done to save money.

Letters of indemnity:

Again, letters of indemnity are sometimes offered, some times by cargo interests, sometimes by a time charterer, in return for delivery of cargo without production of the bills: in most cases there is a legitimate reason for the fact that the bill is not available, as it may not have had time to work its way through the banking system, and no claims arise. However, in some instances the carrier and shipper are the victims of a fraudulent attempt to steal the cargo, and because of the responsibilities placed on him by the bill, it is the carrier who will have to compensate the legitimate owner of the goods and get his money back from whoever gave him the Letter of Indemnity, if he can.

As the carrier has stepped completely outside of his obligations under the bill, again he may not be entitled to certain rights and defences, such as limitation of liability.

Effect on club cover:

Again, it is as this involves a deliberate act on the part of the carrier that club cover is potentially prejudiced. Any letter of indemnity issued, even if recommended by the club, stands in place of club cover, it does not reinstate it.

(c) Geographical deviations, including delivery at a port or place other than that specified in the bill of lading and unauthorised transhipments:

In most bills of lading, the place where the carrier's obligations start and where they finish are specified in the bill of lading as the place of shipment and the place of delivery. At common law the carrier has an obligation to the bill of lading holder to go by the shortest safe route in the quickest practical time, between these two places and a receiver is entitled to collect his goods at the place specified in the bill as the place of delivery.

If a carrier chooses for his own purposes and in a manner not agreed to go by another route, this may not only be a geographical deviation but it may also be a legal deviation. A common deviation is to call at a port simply to perform a crew change, or take on supplies, because these things may be cheaper to do at such an intermediate port than at the scheduled loading or discharging port. As these acts are done purely for the carrier's benefit then they constitute a deviation.

The goods may be perishable and, through taking a longer passage, or delaying, they may deteriorate: in some circumstances; taking an alternative route may expose the ship to extra hazards such as icebergs or reefs.

If the carrier has chosen solely for his own purposes to take that route then he may be obliged to bear the consequences of his decision.

As an example of where the charterers' interests may be at odds with the obligations to the holders of bills of lading, a time charterer may want the ship to make an unscheduled call at an intermediate port to take cheap bunkers, or he may want the ship to discharge the cargo and tranship it, to save time and money involved in going to the correct port. However, discharging the goods at another port and transhipping them may expose them to extra risk of damage due to extra handling that transhipment involves.

It is important to note that once a ship has committed a geographical deviation and may have lost the benefit of the protective clauses in the contract, she cannot regain those benefits after getting back on the correct route, even if making up the time lost. The rule is once deviated, always deviated.

Effect on club cover:

Again, it is as this involves a deliberate act on the part of the carrier that club cover is potentially prejudiced.

Not all geographical deviations are deviations from the contract of carriage: this depends on the precise wording of the contact which may allow certain variations in route, and on the exact reasons for this change of plan, to ensure it falls with in the scope of the permitted variations in the contract. However, In one case, a carrier had a part load on board: he did not go straight from the load port to the discharge port for that cargo, but called at other ports not even close to the geographical route between the original two places, to load and discharge other cargoes, before discharging the first cargo. It was some months late. Even though the cargo itself was not damaged, and the contract contained the usual wide liberty clauses to call at other ports and places to load other cargoes, the Courts decided the carrier's conduct was unreasonable and held him liable for costs incurred by the receivers, as a result of the extended voyage time

In some circumstances the cargo owner may ask for discharge of the cargo at a different port: he may even offer a letter of indemnity. If this is done with the joint agreement of the parties to the contract, it represents a variation of the contract and provided the bill of lading is surrendered, should not be a breach of contract.

(d) Carriage on deck with an under deck bill of lading

This is a special case of mis-description of the cargo, in respect of how it is to be carried in accordance with the contract of carriage. Where the carrier stows the goods on his ship is within his control: in normal circumstances it is generally accepted that unless a bill states otherwise, goods are stowed under deck, where they should be substantially better protected against risks of damage by the sea and weather, e.g. against risk of being washed overboard. Many insurance policies require shipment under deck.

Again the courts have decided that if, without the consent of the owner of the goods they are shipped on deck there is a deviation (in the legal sense) and the carrier may be denied the right to limit liability, etc. so a carrier may be liable to compensate up to the full value of any item lost overboard or damaged. One recent English case suggested that the carrier might be able to claim the benefit of the limitation of liability, however this case arose under the original Hague Rules and may be of limited benefit in cases covered by the Hague-Visby Rules,

Effect on club cover:

Again, it is as this involves a deliberate act on the part of the carrier, which potentially prejudices the carrier's rights to the exceptions clauses in the contract of carriage, that club cover is potentially prejudiced.

The above is a summary of the position: at the end of the day each case must be looked at on its merits, but we hope it provides some guidance on this topic.

Staff Author