Bills of Lading – Liability After Endorsement

July 2001

In a recent case the English House of Lords has considered the issue of whether a party who has endorsed a bill of lading in favour of a third party can, nonetheless, remain liable to the carrier for any breach of its terms.

In the "Berge Sisar"* the issue involved the carriage of a cargo of liquid propane from Yanbu, Saudi Arabia to Stenungsund, Sweden.

The relevant parties were:

Bergesen – owner of the Berge Sisar

The Owner

The Saudi Arabian Oil Company ("Saudi Aramco")

The Seller

Stargas - Bought the cargo, directly and indirectly, from the Seller (and chartered the Berge Sisar on ASBATANKVOY form)

Buyer 1

Borealis – Bought the cargo from Stargas

Buyer 2

Dow Europe – Bought the cargo from Borealis after contamination discovered

Buyer 3

When the vessel arrived at Stenungsund, Buyer 2 directed the master to the import jetty and routine samples were taken. The samples revealed that the cargo was contaminated and Buyer 2 sold it to Buyer 3. The master was directed to deliver the cargo to Buyer 3 based in Terneuzen in Holland. The cargo was discharged there.

The vessels tanks, pumps and lines has to be cleaned to avoid contamination of subsequent cargo.

The issues in the case were summarised by Lord Hobhouse as follows:

"…

The financial consequences were substantial. There were the wasted costs at Stenungsund, the costs of diverting back to Terneusen and discharging there, the delay to the vessel, the reduced value of the contaminated cargo in comparison with a sound cargo and the cost of the clean-up. These events led to the making of claims and cross-claims by and against the various parties involved in the venture and has given rise to disputes between them. Factually, the disputes primarily relate to the time at which and the reason why the propane became contaminated. Legally, the disputes relate to the division of responsibility and risk between those parties. The relevant contracts governing the various relationships were of two different types. Firstly there were the contracts covering the sales and purchases of the propane. Secondly, there were the contracts covering the employment of the vessel and the carriage of the cargo.

…"

The bills of lading provided for English law and jurisdiction. The claims were as follows:

1. Buyer 2 against Buyer 1

Damages for loss arising from the cargo being out of contractual specification prior to loading

2. Buyer 1 against the Owner (as third party)

Indemnity for post shipment contamination

3. Owner counterclaim (in the third party proceedings) against Buyer 1

The cost of cleaning the tanks, pumps and lines because the cargo was contaminated prior to shipment, representing a breach of charterparty warranty that the cargo was fit for carriage.

4. Owner’s claim (in the same proceedings) against Buyer 2 as holder of the bill of lading.

A claim under the Carriage of Goods by Sea Act 1992 (COGSA 1992) - breach of the shipper’s obligation not to ship dangerous cargo pursuant to Article IV Rule 6 of the Hague/Hague Visby Rules

5. Owner’s claim direct against the Seller

Same cause of action as against Buyer 2

 

Buyer 2 denied that it was a party under the bill of lading. Alternatively, in the event that it was held liable on this ground, its additional claims were as follows:

6. Buyer 2 against the Owner

Breach of contract/breach of duty as carrier

7. Buyer 2 against the Seller

For indemnity/contribution in respect of the Owner’s claim against Buyer 2 (see 4 above)

8. Buyer 2 against Buyer 1

Add to the claim for damages (see 1 above) any amount for which Buyer 2 may be found liable to the Owner.

 

In order to incorporate its claim against the Seller (claim 7) into the proceedings, Buyer 2 amended its writ and obtained leave to serve the amended writ on the Seller out of the jurisdiction. The Seller applied to have service set aside. That application failed at first instance. The Seller appealed to the Court of Appeal arguing, additionally, that the Owner’s claim against Buyer 2 could not succeed and, therefore, that there was no proper basis for the claim of Buyer 2 against the Seller in this context.

The Owner was invited to address the Court of Appeal, as well as Buyer 2 and the Seller. The issue to be decided developed into one of assessing whether the Owner had a good arguable case against Buyer 2. If it did , then it was appropriate that Buyer 2 should be allowed to join the Seller in respect of this claim. If it did not, then that claim should be struck out. The Court of Appeal allowed the appeal**. The point upon which the Seller succeeded was that the Owner’s claim against Buyer 2 was bad in law. It followed from this that the justification for joining the Seller also failed.

The Owner appealed to the House of Lords. The response to the appeal was argued in the name of Buyer 2, it being agreed that the Seller should abide by the outcome of the appeal.

The issues for consideration by the House of Lords were:

1. Was Buyer 2 ever liable to the Owner under s.3 COGSA 1992?

2. If so, did Buyer 2 cease to be liable when it endorsed the bills of lading to the Ultimate Receiver?

The Owner was seeking to rely on s3(1)(c) COGSA 1992 which provides as follows:

…"

Sub-section (c) was relevant because (as is often the case) Buyer 2 had not received the bills of lading when the vessel arrived at Stenungsund. (Had Buyer 2 accepted the cargo delivery would have been made by the Owner without bills of lading on the basis of an indemnity from Buyer 1 for any liabilities arising as a result.) The bills of lading did not reach Buyer 2 until almost 2 months later at which point they were forwarded to Buyer 3. Therefore, this was a case where the goods arrived before the rights under the bill of lading had vested in Buyer 2 which meant that in order to establish liability the Owner was arguing that Buyer 2 had taken or demanded delivery of the cargo, thereby rendering Buyer 3 liable under s3(1)(c).

Held:

1. The circumstances of the case in which Buyer 2 directed the master to the import jetty and took routine samples fell short of Buyer 2 making a demand for delivery (for the purposes of s3(1)(c) of COGSA 1992. Buyer 2 did not even get as far as expressing a willingness to receive the cargo. Buyer 2’s acts were merely co-operative acts and did no amount to a demand for delivery. Without such a demand for delivery there can be no liability under s3(1)(c) COGSA 1992.

This decision was enough to exonerate Buyer 2 but the House of Lords still went on to consider the second question.

2. In the words of Lord Hobhouse:

"…

When an endorsee of a bill of lading who has both had transferred to and vested in him all the rights of suit under the contract of carriage pursuant to s.2(1) and become subject to the liabilities under that contract pursuant to s.3(1), does he cease to be so liable when he endorses over the bill of lading to another so as to transfer his rights of suit to that other?

…"

This issue is not expressly dealt with under COGSA 1992 but by referring to the report*** which lead to the introduction of that Act the court found guidance: For a person to be "caught" by s 3(1) he must be the person in whom rights of suit under the contract of carriage vest pursuant to s2(1) . Liability is dependant on possession of those rights. In the absence of a provision to the contrary, if the rights cease to vest then there can also be no further liability. "The mutuality which is the rationale for imposing the liability has gone. There is no longer the link between benefits and burdens."

The Owner’s claim against Buyer 2 was struck out and leave to join the Seller was set aside.

* Borealis Ab (Formerly Borealis Petrokemi Ab and Statoil Petrokemi Ab) V Stargas Limited and Others and Bergesen D.Y. A/S "Berge Sisar" [2001] UKHL 17. To view the full judgement in this case click here for link to the House of Lords website.

**[1999] QB 763

*** Joint report by the Law Commission and Scottish Law Commission on "The Rights of Suit in Respect of Carriage of Goods by Sea", March 1991.