Legal Business. Claims Arising From Mis-Delivery Of Cargo Without Production Of Bills Of Lading

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1 Memoranda on legal and business issues and concerns for multiple and business communities Claims Arising From Mis-Delivery Of Cargo Without Production Of Bills Of Lading 1 Rajah & Tann 4 Battery Road #26-01 Bank of China Building Singapore Tel: Fax: eoasis@sg.rajahandtann.com Website:

2 Claims Arising From Mis-Delivery Of Cargo Without Production Of Bills Of Lading Bill Of Lading As A Document Of Title Key To Warehouse A bill of lading is often referred to as a document of title, which gi ves the holder of the Bill of Lading the right to possession of cargo carried under it. That is why the bill of lading has been likened to a key, which, in the hands of a rightful owner, is intended to unlock the door to the floating or fixed warehouse in which the goods are stored. Cargo at sea is necessarily incapable of physical delivery while it is in the hands of the carrier and during this period of transit and voyage, the bill of lading is universally recognised as its symbol. The indorsement and delivery of the bill of lading transfers to the indorsee right of possession of the goods. Duty To Deliver Against Bills Of Lading The obligation of a carrier in delivering cargo is explained in the Privy Council decision on appeal from Singapore of Sze Hai Tong v Rambler Cycle [1959] AC 576 in the following terms: It is perfectly clear law that a shipowner who delivers without production of the bills of lading does so at his peril. The contract is to deliver, on production of the bill of lading, to the person entitled under the bill of lading. In Sze Hai Tong Bank s case, a cargo of bicycles and bicycle parts was shipped from London to Singapore. The bills of lading for the goods were not forwarded to the consignees as they had not paid for the goods. After the goods were discharged from the vessel, they were placed in godowns of the Singapore Harbour Board. The consignees took delivery of the goods after producing a letter of indemnity from the bank. It was held by the Privy Council that the carriers were liable to the shippers for the loss and that the bank, which furnished the indemnity, was liable to indemnify the carriers. The shipowner must, as a general rule, allow the bill of lading holder to claim the goods, which are in his possession. A shipow ner who delivers goods to a holder of a properly endorsed bill of lading is not answerable to the true owner of the goods where such delivery was made in good faith and without notice of the true position. However, delivery of goods without requiring the claimant to produce the bill of lading for the goods involves a breach of the contract of carriage and a conversion of the true owner's goods. Page 1

3 This well established principle was recently affirmed in the Singapore Court of Appeal decision of The Salina. Delivery of the goods without the production of the bill of lading is a breach of contract and a conversion of the goods of the true owner even in a case where the person the goods have been delivered to is named as the consignee in the bill of lading: The Stettin (1889) 14 P.D Distinction Between Ownership Of Goods And Right To Possession It is not the case that the owner of the goods is entitled to take delivery of the cargo without the presentation of the bill of lading. Carriers should be concerned with who has the right of possession to the cargo. A buyer of the cargo could have title in the cargo transferred to it but because he has not paid for the cargo, the seller does not release the bills of lading. This is the typical situation of the bill of lading not reaching a party who has title to the goods. If cargo is delivered to this party, the carrier is in breach of contract and is liable for conversion of the goods. What If It Is A Straight Consigned Bill Of Lading? A straight consigned bill of lading is one that makes goods deliverable to a named consignee and either contains no words importing transferability or contains words negativing transferability (such as not transferable or somewhat inaccurately not negotiable ). One view advocated by the learned authors of Benjamin on Sales (5 th Edition) is that such a bill is not a document of title in the common law sense. The transfer of such a bill does not operate to transfer constructive possession of the goods. It is not a symbol of the goods as the carrier is entitled and bound to deliver the goods to a named consignee without production of the bill. An alternative view is advanced by Schmitthoff s Export Trade (9 th Edition). The learned authors are of the view that logically, the function of the bill of lading as a document of title is distinct from its quality as a negotiable instrument. Accordingly, even a bill of lading that is not made negotiable operates as a document of title because the consignee can only claim delivery of the goods from the shipowner if he is able to produce the bill of lading. Goh Joon Seng J, in the Singapore High Court decision of Olivine Electronics Pte Ltd v Seabridge Transport Pte Ltd [1995] 3 SLR 143, in the face of these conflicting views, was of the view that the law on the duty of the carrier to deliver only against production of the original bill of lading in a straight consigned bill of lading is still unsettled. His Honour did, however, state that he was more inclined to the view that delivery should be made against bills of lading. Given the uncertainty at law, as a matter of prudence, carriers should where possible insist on presentation of straight consigned bills of lading if possible. As an alternative, this uncertainty can be resolved by a provision in the bill of lading stipulating that presentation of the straight bill of lading is necessary before delivery is given. Page 2

4 House / Freight Forwarder Bill Of Lading A recent tendency has been for forwarding agents to undertake liability of carrier for part or even the whole of the carriage of the goods to their destination. They act as NVOCs i.e. non-vessel owning carriers. In such cases, the usual practice of freight forwarders has been to issue their own house bills of lading. A 'house bill of lading' issued by a forwarding agent acting solely in the capacity of an agent to arrange carriage is not a document of title. It is at most a receipt for the goods coupled with an authority to enter into a contract of carriage on behalf of the shipper. Therefore, carriers, especially those engaged in the contained trade, should not deliver against a house Bill of Lading. Forged Bills Of Lading In the recent English case of Motis Exports v Dampskibsselskabet AF 1912 Aktieselskab [1999] 1 Lloyd s Rep 837, it was held that it was not a defence to a claim for misdelivery for the shipowner to plead that he was innocently deceived into releasing the cargo by the production of a forged bill of lading. Rix J explained that if a shipowner was entitled to deliver goods against a forged bill of lading, then the integrity of the bill as the key to a floating warehouse would be lost. Moreover, his Lordship added, as between the shipowner and the true owner of the goods, it was the shipowner who controlled the form, signature and issue of his bills. Therefore, if one of two innocent parties had to suffer for the fraud of a third, it was better that the loss fell on the shipowner. This is because, it was his responsibility to care for the cargo in his possession and to deliver it, rather than the true owner of the goods, who held a valid bill and expected to receive his goods in return for it. The law in Singapore is also similar. In this respect: see The Arktis Sky [2000] 1 SLR 57 where the carrier was held liable for delivery against a forged Bill of Lading. What Can Or Cannot Delivery Without Production Of Bills Of Lading? Delivery In Accordance With The Law Of The Place Of Discharge / Established Custom Of Port If there is a rule of law under the laws of the port of discharge which allowed delivery of the cargo without the production of the bills of lading, that the carrier would not be in breach of contract if delivery of cargo was made in accordance with such law. However, any such laws of the port of discharge must be strictly proved. In The Salina (supra), the shipowners argued that the laws of Thailand required them to discharge the cargo even though the bills of lading were not presented. This argument was rejected as the shipowners could not prove that that was in fact the law of Thailand. Similarly, if there is a custom of port of the discharge port which is reasonable, certain, consistent with the contract, universally acquiesced in and not contrary to law, allowing for delivery without production of bill of lading, that would excuse the shipowners. A mere practice of the port of discharge to deliver without production of bill of lading is not sufficient: The Sormovskiy 3068 [1994] 2 Lloyd s Rep 266. Custom of port is not easy to establish. Page 3

5 Right To Demand Delivery Against Provision Of Letter Of Indemnity Does Not Excuse Shipowners If a person claims the goods as entitled to them, but is unable to produce the bill of lading, the consignee or indorsee might offer to provide a letter of indemnity and persuade the shipowner to release the goods. The purpose of such a letter of indemnity, is to protect the carrier from any potential claim made against him subsequently as a result of the carrier releasing the goods without requiring the production of the relevant bill of lading. Notwithstanding the provision of the letter of indemnity, the carrier is still in breach of contract and liable for conversion in releasing the goods without requiring the production of the bills of lading. Rix J in Motis Exports v Dampskibsselskabet AF 1912 Aktieselskab [1999] 1 Lloyd s Rep 837, had this to say regarding this point: In my judgement a true owner cannot in the absence of some special arrangement oblige a shipowner to deliver his goods to him without presenting his bill of lading: either he must have agreed in his contract with the shipowner that an indemnity will suffice, or he must persuade the shipowner to deliver against an indemnity, or he must seek the assistance of the Court. In practice a suitable indemnity will be likely to satisfy the shipowner, all the more so when the goods owner has a reasonable explanation for the absence of his bill of lading. In the local case of The Salina [1998] 3 SLR; [1999] 1 SLR 486 (on appeal), the Singapore Courts similarly held that the provision of an indemnity did not exempt the carrier from liability where goods were released by the carrier without the production of a bill of lading. Therefore, unless it is provided in the bill of lading that an indemnity would suffice in the absence of a bill of lading, a shipowner will still be liable for misdelivery. Therefore, shipowners must understand that release of the cargo without requiring the production of the bill of lading renders them liable for breach of contract, notwithstanding the provision of a letter of indemnity. Effectively Drafted Exclusion Clause Although the attitude of the English and Singapore Courts with respect to carrier s reliance on exemption clauses in misdelivery claims has been very strict, there is nothing in principle to prevent a carrier from including a very clearly worded exemption clause in the bill of lading to cover claims for delivery without presentation of bills of lading. The wording of such a clause must be very clear for it to have a chance of being accepted by the court. Delay In Taking Delivery: Arguably Lesser Duty Of Care While the master is not, as a general rule, bound to deliver except on production of the bill of lading, he is not bound to keep goods on board his ship indefinitely if no bill of lading is produced. If the consignee or holder of the bill of lading does not claim delivery within a reasonable time, the master may by the merchant shipping legislation of Singapore and the United Kingdom land and Page 4

6 warehouse the cargo in a warehouse at the expense of the owners and at the same time preserve his lien on the cargo. In such a case, the warehouseman holds the goods as the common agent of the shipowner and of the consignee or indorsee of the bill of lading. He is agent of the shipowner to retain the goods and his lien for freight and agent for the consignee or indorsee to hold or deliver goods to him on his producing the bill of lading and paying the freight. Where there is pronounced delay in taking delivery, it may be argued that the shipowner is holding onto the goods as an involuntary bailee on behalf of the true owner of the goods (rather than a carrier). As such a bailee, his duty is to due care of the cargo. This is arguably a lower standard than that of a carrier. In certai n situations, where there are extraneous events which require delivery of the cargo to third parties, it is arguable that the shipowner as bailee may not be liable. One such situation would be execution levied against the cargo as a result of court orders. This was the situation which came up in a recent decision of the Singapore High Court of The Timur Queen. The court verbally accepted the argument that a lesser duty is imposed on a carrier if there has been a pronounced delay by the consignees or bill of lading holder in taking delivery and in the meantime, the cargo is subject to execution. In such circumstances, the carrier cannot be held to its strict duty to deliver against production of the bills of lading. Period Of Responsibility Clauses Effectiveness Of These Clauses In Excluding Carrier s Liability The purpose of such clause is to define the period for which the carrier is responsible for the goods he carried. Often such a clause would specify that the liability of the carrier would end the moment the goods are free of the ship s tackle or are discharged from the vessel. The argument that follows is that since delivery or misdelivery of the goods takes place sometime after discharge that such a clause would have the effect of excusing the carrier from liability in cases of misdelivery. In the case of Sze Hai Tong Bank v Rambler Cycle [1959] AC 576, the Privy Council had to consider such a clause. Lord Denning delivering the judgement of the Board explained that the extreme width of such a clause must be cut down by an implied limitation. It must be limited and modified to the extent necessary to enable effect to be given to the main object and intent of the contract, and at least so as not to permit the carrier deliberately to disregard its obligation as to delivery. This obligation is to deliver against production of the bill of lading. This case was followed in the recent Singapore Court of Appeal decision of The Jian He [2000] SLR 8. The Court of Appeal there held that a clause which provi des that the period of responsibility of the carrier was up to delivery by the carrier at the port of discharge, that it was ineffective to protect the carrier from liability. This was because, explained the Chao JA, delivery must mean delivery to the rightful person entitled thereto. Page 5

7 The Singapore High Court, faced with a similar clause in the case of The Arktis Sky [2000] 1 SLR 57, held that this clause would only be effective to exonerate the carrier from liability for loss or damage to cargo after their proper discharge from the vessel and does not cover misdelivery of the goods to a party who did not present the bill of lading. Therefore, it seems that the approach of the Singapore Courts like that of the English courts has been to hold that such Period of Responsibility clauses are not effective to excuse the carrier from liability for misdelivery. Practical Ways To Minimise Losses From Misdelivery Claims Letter Of Indemnity From Reputable Financial Institutions Although a letter of indemnity does not excuse a carrier from his obligation to deliver the cargo against bills of lading, nevertheless, they provide the carrier with an avenue to recover his losses from the party granting the letter of indemnity. In this regard, letters of indemnity should be obtained from reputable financial institutions. It is quite risky to obtain a letter of indemnity from a party whose financial strength is unknown to the carrier. The wording of the letter of indemnity is important: it should be as widely couched as possible to cover all situations of misdelivery without production of bills of lading. Statutory Right Of Warehousing Pending Taking Of Delivery As aforesaid, there is a statutory right under Singapore and English merchant shipping legislation for the carrier to warehouse the goods. This reduces the needs for master to discharge and deliver the cargo hastily without insisting on bills of lading in order to achieve a quick turn around time. Under this legislation, the warehouseman is not to release the cargo without production of bills of lading. Control Over Discharge Port Agents Very often, misdelivery problems arise because of the misconduct of discharge port agents. These agents are the parties usually responsible for handling the cargo after it has been discharged from the vessel. There is therefore a need to be selective in the appointment of discharge port agents as well as to educate them on the fundamental importance of insisting on bills of lading when giving delivery of cargo. Discharge port agents should also be warned about the risk of accepting letters of indemnity issued by party whose financial strength is not established. Not Delivering To A Party Claiming To Be The Owners Of The Cargo This is another common reason for delivery without production of bills of lading. Sometimes, carriers discharge port agents are tricked into delivering cargo to a party who is able to prove that he is the owner of the cargo but who does not present bills of lading. As discussed above, such a Page 6

8 delivery is wrongful and exposes the carriers to claims. Masters, chief officers as well as discharge port agents should therefore be alerted to this fact. Establishing A System For Post Discharge Treatment Of Cargo Ideally, every carrier should have a prescribed procedure for its masters, chief officers and discharge port agents as to what is to be done with the cargo during and after discharge from the vessel. This may minimise the possibility of persons not taking the proper precautions when faced with a demand for delivery of cargo. Misdelivery And Time-Bar Under Hague -Visby Rules A question arises as to whether the time-bar provision of 1 year from time of delivery in the Hague-Visby Rules (i.e. Article III rule 6) can apply to a claim for misdelivery. In Peninsular & Oriental Steam Navigation v Rambler Cycle (1964) 30 MLJ 443, a decision of the Malaysian Federal Court, Thomson LP explained that the Hague Rules only applied from the time the goods were loaded onto the ship till the time the goods were discharged. In this case, since the misdelivery only took place after the goods were discharged from the vessel, the Hague Rules did not apply. Thus, the limitation, which was relevant, was the ordinary period of limitation applicable to cases of breach of contract, ie 6 years instead of 1 year. However, this is a decision under the Hague as opposed to Hague-Visby Rules. Art III Rule 6 of the Hague-Visby Rules is different from Art III Rule 6 of the Hague Rules in that it provides for the extinguishing of all liability whatsoever. It is at least arguable that the addition of the word whatsoever may have the effect of making the time bar under the Hague-Visby Rules applicable to cases of misdelivery of cargo. There is no judicial affirmation in Singapore that the Rambler Cycle decision extends to the Hague-Visby Rules. The position may therefore be considered open in Singapore. In The Captain Gregos [1990] 1 Lloyd s Rep 310, short delivery was regarded as a breach of the carrier s obligation under Art III Rule 2 to properly and carefully carry, keep, care for and discharge the goods carried. Such a breach is within the ambit of the timebar in Art III Rule 6. The alleged breaches thus fell within the time-bar in Art III Rule 6 and, accordingly, the claim was time-barred. It is arguable that if misdelivery of cargo is viewed as a breach of the carrier s obligation under Article III rule 2 that such a claim might similarly fall within the time bar provision of Article II rule 6. However, it is pertinent to note that this case involved the cargo being pilfered and used as bunkers before the vessel reached the discharge port and not the usual situation of misdelivery at discharge port. In The Zhi Jiang Kou [1991] 1 Lloyd s Rep 493, the Court of Appeal of New South Wales had to consider the implications of a clause defining the carrier s period of responsibility on the issue of time-bar under the Hague Rules. Kirby P expressed the view that the Hague Rules should be given a sensible operation which should not Page 7

9 terminate artificially at the ship s rail. He then held that the time bar obligation in Article III rule 6 of the Hague Rules would apply in that case to bar the Respondent s claim. Since this case involves a claim in which goods were released without presentation of the relevant bills of lading after discharge from the vessel, there is some authority for the position that the time bar in the Hague-Visby would apply to a claim for misdelivery. Misdelivery Claims And Stay Of Proceedings In the recent decision of The Jian He [2000] SLR 8, the Court of Appeal of Singapore refused to grant a stay of proceedings in Singapore in favour of China despite a Chinese jurisdiction clause. The Court found that there was no dispute on the facts of the case as the Defendant carriers had not put forward any serious arguments for dispute. The court was of the view that there was really no defence to the claim since the defendants had released goods against a forged bill of lading. This shows that the Courts of Singapore will, in the future, scrutinise the facts of a particular matter before a stay of proceedings is ordered in favour of an agreed forum. The opposite result was reached in The Timur Queen where, inter alia, there were real disputes as to the holder s rights to take delivery of the cargo under circumstances where Chinese customs and import laws might have been infringed. Rajah & Tann is one of the largest law firms in Singapore. It is a full service firm and given its alliances, including US premier firm Weil, Gotshal & Manges, is able to tap into a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this newsletter is correct to the best of our knowledge and belief at the time of writing. Specific professional advice should be sought before any action is taken. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or the Knowledge Management team at eoasis@sg.rajahandtann.com Rajah & Tann Knowledge Management. All rights reserved. Page 8