The dangers of “clean” bills

Clean bills of lading are usually a prerequisite for the shipper of a cargo to be paid under the sale contract with his buyer. Shippers are accordingly keen to avoid bills being claused, and will often put owners under pressure to issue clean bills. If owners have doubts about the condition of the cargo, a common tactic is for the shipper to offer a LOI in return for clean bills.

In the recent case of The Saga Explorer (Breffka & Hehnke GmbH & Co KG and Others v Navire Shipping Co Ltd and Others [ 2012 ] EWHC 3124 (Comm)), the High Court considered the effect of a so-called “Retla Clause” in a bill of lading.

The facts
Nexteel sold a consignment of steel pipes to KOP. The sale contract provided for payment by way of a letter of credit, but the practice which had developed between the parties was that KOP would pay in cash against clean bills of lading.

The loadport survey contained 16 pages of what were described as “damage/exception” in which the pipes were described as “partly rust stained” and variations of that phrase. The survey noted that the “damage/exception” had been acknowledged by the Master and recommended that the Mate’s Receipt and bills of lading should be claused accordingly.

The Mate’s Receipt included a Retla Clause and also stated “condition of cargo as per survey report“. However, the bills contained no such reservation and clean bills were issued by owners stating that the pipes were shipped “in apparent good order and condition” against a LOI from Nexteel. The bills incorporated US COGSA 1936 and included the following Retla Clause:

“RETLA Clause: If the Goods as described by the Merchant are iron, steel, metal or timber products, the phrase ‘apparent good order and condition’ set out in the preceding paragraph does not mean the Goods were received in the case of iron, steel or metal products, free from visible rust or moisture or in the case of timber products free from warpage, breakage, chipping, moisture, split or broken ends, stains, decay or discoloration. Nor does the Carrier warrant the accuracy of any piece count provided by the Merchant or the adequacy of any banding or securing. If the Merchant so requests, a substitute Bill of Lading will be issued omitting this definition and setting forth any notations which may appear on the mate’s or tally clerk’s receipt.”

The pipes were found to be rusted on discharge, and KOP claimed damages from owners.

The judgment
Owners argued that English law should follow the US case of Tokio Marine & Fire v Retla Steamship in holding that the effect of the Retla Clause was that all surface rust of whatever degree was excluded from the representation of good order and condition. However, this argument was rejected by the Judge, who held that:

“I reject the Owner’s argument, based on the facts of the decision in the Tokio Marine case … that the Retla clause applies to all rust of whatever severity … Such a construction would rob the representation as to the good order and condition of the steel cargo on shipment of all effect“.

However, the Judge did accept that Retla Clauses do have a role to play, stating that:

“The Retla clause can and should be construed as a legitimate clarification of what was to be understood by the representation as to the appearance of the steel cargo upon shipment. It should not be construed as a contradiction of the representation as to the cargo’s good order and condition, but as a qualification that there was an appearance of rust and moisture of a type which may be expected to appear on any cargo of steel: superficial oxidisation caused by atmospheric conditions. The exclusion of ‘visible rust or moisture’ from the representation as to the good order and condition is thus directed to superficial appearance of a cargo which is difficult, if not impossible, to avoid. It is likely to form the basis of a determination as to whether there has been further deterioration due to inherent quality of the goods on shipment under S.4(2)(m) of US COGSA, or Article 4(2)(m) of the Hague-Visby Rules.”

Accordingly, the Judge held that the condition of the cargo was not reasonably and honestly represented by the bills of lading as signed, and that the decision to issue and sign clean bills involved false representations by owners which were untrue and intended to be relied on by KOP. He held that what occurred was not an honest and reasonable non-expert view of the cargo as it appeared, but a deceitful calculation made on behalf of owners at the request of Nexteel and to the prejudice of those who would rely on the contents of the bills. Owners were therefore held liable to KOP in damages.

Comment
As a matter of English law, the effect of Retla Clauses is therefore limited to superficial rust which will be present on any steel cargo – i.e. the law recognises the practical realities of the trade and the need to avoid the unnecessary and/or inappropriate clausing of bills.

However, the case also highlights the importance of the duty of the Master (or his agent) to form an honest and reasonable non-expert view of the cargo as he sees it and, in particular, as to the cargo’s apparent order and condition, in the interests of protecting those who will subsequently become the lawful holders of the bills who were not present on shipment but will rely on the representations made in them.

The Judge was also critical of the fact that owners’ decision to issue clean bills was apparently influenced in large part by the provision of a LOI by the shippers. Owners should be aware that, as a matter of English law, a LOI provided by shippers in return for clean bills being issued will not be enforceable if owners know that the cargo is not in good order and condition – owners will not be able to seek to be indemnified for taking action which they knew at the time was wrongful.

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