The Master, the charterparty and the Bill of Lading

28 Фев

Learning the hard way in bulk shipping

Simon Daniels MNI

There will be cases in which there is a conflict of interest between the owners and the charterers. The headline principle is that the Master must comply with the terms of the charterparty, assisting the charterer in completing the task and obeying the charterer’s orders. Sometimes this is a simple matter of risk assessment: tolerate, treat, terminate or transfer, but all too often it is much more complicated than that. It is therefore essential that the Master has access to the charterparty and can discuss it with the shore office, in order to identify any problems that may arise from time to time and figure out some options. The observations of the judge in the 25 year old case The Houda [1994] still hold good and apply to the Master, as employee, representative and agent for the owners:

It is obvious that lawful orders have to be obeyed, unless to do so would imperil the safety of ship, crew or cargo. It is not obvious that they have to be obeyed unthinkingly… In my judgment when a Master receives an order relating to the cargo his duty… is to act reasonably. Orders ordinarily require immediate compliance. But the circumstances in which an order is received or the nature of it may make it unreasonable for the Master to comply without further consideration or enquiry. When an order is reasonably regarded as ambiguous, it must be clarified. When the lawfulness of an order is reasonably called into question, it must be established. When the authenticity of an order is reasonably doubted, it must be verified. The delay introduced by any of these processes will usually be brief.

The occupational hazards of navigation notwithstanding, the Master must always have in mind that they have a contractual obligation to maximise the commercial return for the shipowner, while at the same time mitigating risks to the owner inherent in the operation from loading to discharge and everything in between.

The Master and the Bill of Lading

While the charterparty is an essential contractual document, it is not actually demanded by the Carriage of Goods by Sea Act 1992. Without doubt, the statutory document which can give rise to the greatest concern is the Bill of Lading, but that does not become effective until it has been signed, after the cargo has been loaded, and long after the charterparty has been agreed. The terms in both documents had better be consistent, or the Master will have endless problems to resolve.

The Bill of Lading has four very valuable functions:

  • It is prima facie evidence of the truth of the statements which it contains;
  • Although it does not transfer ownership in the goods – that is effected by the contract of sale – it gives the person in possession of it the right to immediate possession of the cargo upon discharge;
  • It is documentary evidence of the contract for the carriage of goods by sea;
  • It has statutory authority evidencing the transfer of rights and obligations to the ultimate buyer of the cargo in accordance with the Carriage of Goods by Sea Act 1992.

It is the first of these functions which gives the worst headache to the Master. The Master will always have the absolute discretion to disobey an order which is unlawful in itself, such as proceeding to sea in a dangerously unsafe ship (s98 Merchant Shipping Act 1995). The worrying scenario where the Bill of Lading is concerned arises when the Master is under pressure to sign a clean Bill, but the Mate’s receipt shows that there is some conflict between the description of the cargo on the Bill with that which has been loaded. Naturally, it will alarm the charterer if a claused Bill results in the failure of the buyer’s letter of credit, but failure to clause a Bill for damaged cargo will inevitably have a cost consequence upon the owner. Sometimes this ends up in a judgment call. Any risk assessment must result in a decision which a prudent Master would take.

CASE STUDY: The David Agmashenebeli (2002)

35,000 metric tonnes of urea were sold to traders Agrosin, under a contract which specified that the goods must be ‘white colour, free flowing, free from contamination, prilled form, treated against caking, free from harmful substances…’ Agrosin sold the urea to a third party and arranged to sub-charter the David Agmashenebeli which had been time-chartered by her owners, Georgian Shipping Company. This may sound complicated, but charters often are – and the facts in this case have been simplified.

The time charter required the charterers to load, stow and trim and discharge the cargo at their expense under the supervision and responsibility of the Captain, who is to sign, if required to do so by charterers, bills of lading for cargo as presented, in conformity with Mates’ or Tally Clarks’ receipts. The charterparty also provided that if damaged cargo was observed during loading, the Master had the right to stop loading and the charterers and shippers to be immediately informed.

Three hours after loading began, the Master notified all parties that the cargo contained contaminants and was of a dirty colour. Despite protests by Agrosin’s surveyor, the Mate’s receipt was signed with the following wording: Cargo discoloured also foreign materials e.g. plastic, rust, rubber, stone, black particles found in cargo. The Master refused to sign Bills of Lading without the same wording. Naturally, a claused Bill would result in the failure of the letter of credit guaranteeing payment for the cargo. The Master found himself under close crossexamination in the High Court, never an amusing experience at the best of times. After hearing all the evidence, the Judge found that there had been some contamination of the cargo, but this was so slight that no reasonably observant Master would have described it in the way that he had. The judge also found that there had been some discolouration, but that the Master’s description of the cargo as discoloured was misleading, as there was no indication that this referred to only about 1% of the whole. A reasonable Master would have added some qualification to avoid creating a false impression that a substantial part of the cargo was discoloured. Consequently, the defendant shipowners must accept vicarious liability for the Master’s negligent misstatement as to the apparent order and condition of the cargo.

Lessons learned

The Master can be in a very lonely position when confronted with the contractual obligation to protect the owners’ interests while meeting the priorities of the charterers. They must therefore rely on their best judgment when exercising their absolute discretion, and decide whether, in all the circumstances, the cargo appears to satisfy the description of its apparent order and condition in the Bill of Lading. The safe solution is to instruct cargo survey before clausing the Bill, but this costs money, and takes time, while the clock is ticking away on laytime. In a time charter, the vessel may even be off-hire. The Master otherwise must use terms in the clause that reflect reasonably closely the actual apparent order and condition of the cargo and the extent of any defect which he considers it to have. The elephant in the room, of course – the ‘solution’ which everyone know exists but nobody wants to mention – is the offer of an indemnity. This solution may be a very short term one indeed; if the charterer declines to honour the indemnity they have promised, the one thing that the owner cannot do is to sue them for recovery. The Court could not possibly uphold the letter, which in realistic terms is a fraud on the buyer.

Invitation, not compulsion

The Master’s absolute discretion is as steadfast in the commercial management of the ship as it is in her navigation. If the shipper presents a Bill of Lading for the Master’s signature, it puts no compulsion on the Master to sign. The shipper is merely inviting the Master to make their own assessment of the apparent order and condition of the cargo on loading.

CASE STUDY: the Tai Prize (2020)

The cargo had been loaded even though it failed to meet the specifications agreed between the seller and the buyer as defined on the Bill of Lading. Notwithstanding that, the shipper promptly presented the Bill of Lading stating that the cargo was clean on board and shipped in apparent good order and condition. As is so often the case, the shipowners’ agents signed the clean Bill of Lading on behalf of the Master, effectively endorsing as his agent. Expert evidence was accepted that the cargo had been loaded with pre-existing heat damage, which later led to the development of mould. The damage was not reasonably visible to the Master, but the shipper would have been able to discover the damage by reasonable means. This meant that the Bill falsely represented that the cargo was loaded in apparent good order and condition. The question arose, therefore, whether the condition of the cargo contained in the Bill amounted to a representation or warranty by the shipper, or if they were merely inviting the Master to make his own assessment of the apparent condition of the cargo, following which he would make a representation of fact by signing it. The Court held, that when a charterer or shipper on a charterer’s behalf tenders to the Master for signature a bill of lading that contains a statement as to the apparent order and condition of the cargo, this amounts to an invitation to the Master as agent for the owner to make a representation of fact as to the apparent condition of the goods on shipment. As such, the shipper could not be held to account for any representation of facts as to the actual condition of the cargo. It is the Master’s task to verify the condition of the goods before they sign the Bill of Lading.

Lessons learned

By presenting a Bill of Lading for signature by or on behalf of the Master, the shipper was merely inviting the Master to make a representation of fact in accordance with his own assessment of the apparent condition of the cargo. The adjective ‘apparent’ is all-important, and still as relevant as it was in the defining case of Churchill (1906) 114 years ago. The prudence of getting a cargo survey cannot be understated, if the owners are willing to risk the burden of time and cost. Otherwise, it is a matter of commercial judgment.