Clausing bills of lading correctly - Standard of reasonable care affirmed

Introduction
Gard Services regularly receives questions and approaches from members about clausing bills of lading. Often, decisions have to be made quickly. The vessel is about to load the cargo, or has already loaded part cargo. The owners are often under pressure from the shippers or charterers, or both, to issue or agree to the issue of clean bills, although the master is not satisfied that the cargo is indeed in "apparent good order and condition".

Full and detailed advice on this problem is contained in the Gard Guidance on Bills of Lading. Nevertheless, Gard Services is always happy to deal with individual enquiries.

A recent case which was heard by the English Admiralty Court shows how difficult it can be for the master to clause the bill of lading in circumstances where he is under pressure from all sides and explains the test with which a master must comply when considering when and how to clause a bill. The vessel in question was the DAVID AGMASHENEBELI. Judgment was given in July this year.¹

The facts
The vessel, a 1987-built bulk carrier, was chartered by her owners under the well-known New York Produce Exchange (NYPE) form of time charter. Clause 8 said that the charterers were 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 Mate's or Tally Clerk's receipts."

In April 1995, a Singapore-based company bought a quantity of urea in bulk at Kotka, Finland. The supplier was named as a Russian company, so it is perhaps logical to assume that the urea originated in Russia. The specification of the cargo described it as "white colour, free flowing, free from contamination, prilled form, treated against caking, free from harmful substances".

A few days later, the Singapore company re-sold the cargo to a Hong Kong company. Under the terms of the re-sale, the cargo was to be delivered to a port in Southern China. The letter of credit required that, amongst other documents, a full set of "clean on board" bills of lading were to be presented.

The Singapore company also arranged for the vessel to be sub-chartered, on a voyage charter basis, to a company in Riga. Interestingly, the voyage charter contained the following clause, which was not in the head (time) charter:
"Under supervision of independent surveyor together with Master/Officers' assistance no damaged cargo to be loaded into the holds. If such fact will take place Master has the right to stop loading but Charterers and Shippers to be immediately informed to arrange removing of any contaminations for Charterers' expenses/time."

Finally and later that month, the Hong Kong company re-sold the cargo to a Chinese company.

The dispute
The vessel was instructed to load the urea at Kotka, where she arrived towards the end of April 1995. Before loading started, there was a dispute as to whether the holds were clean enough to receive the cargo after the previous cargo of coal. This was resolved by the owners agreeing that the master would issue clean mate's receipts and bills of lading, plus a letter of indemnity to the Singapore company in relation to loss or damage which they might sustain as a result of the cargo being loaded into "unclean" holds. In fact, the master did not issue such a letter. Nevertheless, loading started.

However, the problems had only just begun. Within a few hours of the start of loading, the master informed all parties that the cargo contained rust, plastic and other contaminants and was "of a dirty colour". A letter of protest was issued and sent to the time charterers and the Singapore company. Some two weeks later, the shipowners' local agents issued a mate's receipt claused as follows: "cargo discoloured also foreign materials eg plastic, rust, rubber, stone, black particles found in cargo".

The day after, the Singapore company, to whose order the cargo was consigned in the mate's receipt, informed the shipowners, time charterers and voyage charterers that no freight would be paid unless a clean mate's receipt was issued. Nevertheless, in mid-June, the bills of lading were signed by the shipowners on behalf of the master. They were claused in the same terms as the mate's receipt.

Needless to say, the claused bills presented problems to those involved in the sale and purchase of the cargo, but all concerned managed to agree a solution whereby the cargo was discharged at the end of June. The market price of urea had fallen during the voyage and the Chinese receivers were prepared to accept the cargo only if a reduced price was agreed. It was.

Although discharge had started towards the end of June, it was not completed for another two months. A few days before the completion of discharge, the receivers alleged that the cargo was water-damaged and contaminated by coal dust and rust. In contrast, an inspection report prepared a few days after discharge indicated that the cargo was in normal condition, free-flowing and white in colour and suggested that the contamination and discolouration had been caused by the unclean condition of the vessel's holds. Some 280 MT, or about 8 per cent of the total cargo, was considered to be damaged. This report said that the inspector found "no evidence of foreign materials such as plastic, rubber and stone as mentioned in the master's remarks in the bill of lading".

The arguments
The Singapore company brought a claim against the shipowners for their losses. At the heart of the dispute was the question of the duty in law resting on a master when clausing a bill of lading. The claimants argued that, pursuant to Article III Rule 3 of the Hague-Visby Rules (which both sides agreed applied), the duty stipulated in that Rule on the master to show the apparent order and condition of the cargo was unqualified or absolute. In other words, the master had to take more than "reasonable care" in clausing the bill. They further argued that there was an implied contractual term, or a duty of care in tort, to exercise reasonable care that the bills of lading accurately reflected the apparent order and condition of the cargo.

The shipowners disagreed. In their view, the master's responsibility was to honestly and reasonably state the apparent order and condition of the cargo as it seemed to him, based on a reasonable inspection and bearing in mind that the master is not an expert in that particular cargo.

The judge seems to have favoured the shipowners' point of view on this question. He decided that, although there was a contractual duty of care on the master to issue or approve of the issue of a bill of lading showing the apparent order and condition of the cargo, based on his reasonable opinion of such apparent order and condition, the contract did not guarantee the absolute accuracy of the master's statement. The judge further decided that no separate duty of care in tort existed, although he also observed that, if the master was in doubt as to the apparent order and condition, he could call in outside help, usually in the form of a surveyor.

The judge then looked at the facts as he saw them. The shippers had appointed a surveyor, who said that, at the time of loading, the cargo was discoloured, but only to a very minor extent. His figure was 0.2 per cent. He considered that this did not affect the otherwise apparent good condition of the cargo. The master had died some years before the trial, but had given a statement, which was submitted by the shipowners. The statement said that about 30 per cent of the cargo was discoloured.

The judge's findings
Faced with such conflicting evidence, the judge decided that the level of pre-shipment contaminants was around 0.01 per cent and that the level of discolouration at the time of loading was about 1 per cent. It is unclear how the judge reached this figure, but his decision may have been influenced by the fact that he had not had the chance to hear the master give his evidence before the court. Nevertheless, it might be said that, although the shipper's surveyor may have wished to ensure that his clients obtain a clean bill of lading, the master is unlikely to have had any such consideration in his mind in reaching his decision to clause the bill.

Whatever the true position, the judge found that the master was wrong to have claused the bill in relation to pre-shipment contamination. So far as discolouration of the cargo was concerned, he decided that the master was right to take the view that the bill should be claused so as to show that a very small part of the cargo was affected, but that his (the master's) figure of 30 per cent was excessive. In the judge's view, the master did not act reasonably in clausing the bill in the way that he did.

Therefore, he decided that the shipowners had breached their contractual duty under Article III, Rule 3 of the Hague-Visby Rules to issue a bill of lading showing the reasonably apparent order and condition of the cargo. But this was not the end of the story.

Were the shipowners liable?
Based on the above, most people would probably answer "yes". In fact, the answer was "no". Why?

The reason was that the judge decided that the master was entitled to clause the bill of lading in relation to the very small amount of discolouration which he (the judge) considered was in evidence at the time of loading (the judge's figure of 1 per cent mentioned above). Following on from this, the judge decided that, because the master would have been entitled to clause the bill in relation to this small amount of discolouration and would in fact have done so, the same result would have been obtained. Because the bill would, in any event, have been claused, the claimants would have been unable to present a clean bill of lading in exchange for payment by the receivers. Thus the claimants did not suffer any loss as a result of the master's failure to properly and accurately clause the bill. The claim therefore failed.

Comment
The judge declined to accept the claimant's argument that the master's duty to issue and/or sign a bill of lading showing the apparent order and condition of the cargo was "unqualified" or "absolute". Instead, he reaffirmed that the master had to reasonably assess the condition of the cargo, using the skill and ability expected of someone in his position. It was emphasised that the master was not expected to be an expert in the particular cargo. Equally, however, it was emphasised that the master could (and perhaps should) have called in outside assistance when the dispute over the clausing of the bill of lading first arose. In our experience, a surveyor is often called in when such a dispute arises. It is unclear why the master did not do so and unfortunately, he was not able to explain his reasoning.

Masters in such situation are under considerable and often conflicting pressure. However, there appears to be no reason to think that, in clausing the bill in the way he did, the master was doing anything other than acting in the way he thought best to protect the interests of both the shipowners and the third party cargo buyers. Unfortunately, the master was unable to explain his actions in court. This may be why the judge, looking at the matter in hindsight, seems to have preferred the shippers' surveyor's opinion, although as mentioned, the surveyor is unlikely to have forgotten that a clean bill of lading was vital for his clients.

The good news for shipowners and masters is that the judge underlined the fact that, in deciding how and when to clause a bill, the master is required to use reasonable care. The standard is not absolute or unqualified. The master is not expected to be an expert in the particular cargo in question - although it is always possible that a master who has, say, 20 years experience of carrying forest products would be regarded as more expert in that type of cargo than a master who had no such experience. What the master must do is to clause reasonably and accurately, using his best judgment and experience.

Last but not least, the shipowners achieved the right result, despite the judge's criticism of the master, because the judge found that the bills of lading would have been claused in any event.

However, the case is likely to be appealed to the Court of Appeal, so there may be more news to report in due course. Gard News will keep readers informed.