The Polar - UK Supreme Court Guidance on incorporating a Charter Party clause into Bills of Lading
Published: February 22, 2024
In the recent decision of Herculito Maritime Ltd v. Gunvor International BV [2024] UKSC 2 (“The Polar"), the Supreme Court considered and provided useful guidance, inter alia, on implying an insurance code or fund into a charterparty, on the application of war risks clauses and on incorporating a clause other than an arbitration or jurisdiction clause from a charterparty into a bill of lading by general words of incorporation, the latter being the focus of this article.
Key Facts:
In late October 2010, the MT Polar was seized by Somali pirates whilst transiting the Gulf of Aden and only released some 10 months later after a ransom of US$7.7 million was paid by, or on behalf of, the vessel owner. The owner declared general average but the cargo interests refused to pay their proportion arguing that:
The war risk clauses and the additional Gulf of Aden clause of the voyage charterparty precluded the vessel owner from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained pursuant to those clauses (the “insurance code or fund” point); and
Those clauses were incorporated into the bills of lading; and
The owner was, therefore, precluded from claiming for general average contributions from the bill of lading holders.
The vessel owner’s claim to recover cargo interests’ proportion of general average was arbitrated in London. The tribunal concluded that the charterparty clauses were incorporated into the bills of lading and that this precluded the owner from claiming general average contributions against the charterers and the bill of lading holders.
The case was appealed before the Commercial Court, the Court of Appeal and the Supreme Court and the latter concluded that the cargo interests did have to contribute to general average on the ground that there was no insurance code or fund as between the owner and charterer.
Incorporation and Manipulation:
Whilst not changing the law on incorporation or manipulation, the Supreme Court judgement provides a useful guidance when considering the incorporation of charterparty terms into bills of lading.
The Supreme Court commented that there is an abundance of authorities dealing with the incorporation of charterparty terms into bills of lading and the foundational principles are succinctly summarised in Scrutton on Charterparties in the form of a three-stage test:
Is the incorporating clause in the Bill of Lading wide enough to bring a prima facie incorporation of the relevant term?
If so, does the term, which is sought to be incorporated, make sense in the context of the Bill of Lading
If there is an incorporation which is prima facie effective, is the term in question consistent with the express terms of the Bill of Lading?
Both the Court of Appeal and the Supreme Court referred to these stages and the convenience in following these but also that they should not be too rigidly applied as the construction of contracts is a single “iterative” process, which means that the conclusion reached at each stage should be tested against the terms of the contract and business common sense. As such, Scrutton’s reference to “prima facie incorporation” indicates that the conclusion reached can be no more than provisional and, other considerations, such as the features of a bill of lading contract should be taken into account.
The features of a bill of lading that are relevant to issues of incorporation were identified by the Court of Appeal and are included in points (1) – (3) below, whereas Lord Hamblen (with whom Lord Hodge, Lord Leggatt, Lady Rose and Lord Richards agreed) in the Supreme Court made a number of additional general observations which are included in points (4) – (10) below:
Bills of lading are negotiable instruments, and the contractual rights and obligations thereunder may be transferred down a chain of contracts to the ultimate receiver.
Bills of lading on a single voyage may be for different cargoes and may be negotiated to a variety of receivers whose identity or, the intended discharge ports, are not known at the time the bill of lading contract is concluded. Even if they are, plans may change by the time the vessel arrives at its destination.
Cargo interests may have no knowledge of the charterparty terms and no ready means of finding out those terms when accepting documents under their purchase contracts.
The incorporating words in the bill of lading are of importance, not provisions relating to incorporation which may be found in the charter. If the incorporating clause in the bill of lading is not sufficient to incorporate the provision in question, then that is the end of the inquiry.
Many cases state that general words of incorporation only incorporate provisions of the charter which are “germane” to the shipment, carriage and delivery of the goods, or the payment of freight. The Supreme Court commented that this is not archaic language -as contended- rather it remains an apt term but if any tribunal would prefer to use a synonym, then they could refer to provisions which “directly relate” to shipment, carriage and delivery of the cargo, or the payment of freight on the premises that it is understood that no change in meaning is intended thereby. In Lord Hamblen’s words “what matters is the function and significance of this established rule rather than the precise verbal formula used to describe it”.
The principal significance of this established rule is that it excludes ancillary agreements such as an arbitration clause or a jurisdiction clause which is justified by the negotiable nature of a bill of lading.
Other than ancillary agreements, the incorporation only of terms which are directly relevant to shipment, carriage and delivery of the cargo, or the payment of freight, will exclude provisions which are inapplicable or make no sense in the bill of lading context.
Where specific words of incorporation are used, a degree of manipulation of the relevant clause in the charterparty will be appropriate to give effect to the parties’ expressed intention.
Where, on the other hand, general words of incorporation are used some degree of manipulation may be permissible of terms which directly relate to shipment, carriage and delivery of the cargo, or the payment of freight, to make the wording fit the bill of lading. Notably, there is no rule of construction to this effect.
The case law on the incorporation of charterparty terms into bills of lading is not “dated”, rather the law involves an appropriately iterative approach and even if a different approach might be adopted in the absence of any authority “it is preferable that the law should be clear, certain and well understood than that it should be perfect”1
Accordingly, when it comes to incorporating charterparty terms into bills of lading the initial question to be addressed is whether the clause directly relates to shipment, carriage and delivery, or the payment of freight.
The Polar approach:
The owners argued that the obligations for payment of insurance premia included in the war clauses were not directly relevant to the loading, carriage and discharge of the cargo and were, thus, not incorporated into the bills of lading. The Supreme Court (agreeing with the approach of the Commercial Court and the Court of Appeal) disagreed noting that:
the clauses related to the route to be taken by the vessel and, consequently, were directly relevant to the carriage of the cargo;
the liberties given to the owner by the clauses i.e., not to proceed, provided the owner with protection in relation to war risks which were clearly relevant to carriage; and
in order to give effect in the bills of lading to the agreed allocation of risk in relation to transiting the Gulf of Aden, the entirety of the Gulf of Aden clause and the War Risk clause were incorporated in the bills of lading.
In considering whether when those clauses were incorporated into the bills of lading it was necessary to substitute the words “the Charterers” with “the holders of the bill of lading”, the Supreme Court commented there was no need to do so. In the Court’s view, the Gulf of Aden and the War Risk clause made perfect sense in the context of the bills of lading as a record of the terms upon which the owner had agreed to transit the Gulf of Aden. In addition, to do so would risk making the bills of lading holders liable to pay the insurance premia with the added unnecessary complication of deciding how that premia should be apportioned between the holders of different bills of lading, if at all.
1 As per Lord Bingham in Federal Bulk Carriers Inc v C Itoh & Co Ltd (The Federal Bulker) [1989] 1 Lloyd’s Rep 103;
