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The perils of misdelivering cargo

News / / The perils of misdelivering cargo

Original Bills of Lading (“OBL”) frequently end up in cargo owners’ hands long after a vessel is ready to discharge her cargo. This is due to the fact that OBLs, which are often negotiable documents of title, are passed through the payment chain in a series of sale and financing arrangements.

OBLs act as proof of title over cargo and entitle the consignee named on the OBL to delivery of cargo upon presentation of the OBL. Delays in discharging cargo caused by the unavailability of OBLs at a port of discharge may give rise to substantial claims for hire under a time charter, or demurrage under a voyage charter. 

As such, it has become common for traders to instruct carriers to deliver cargo against a Letter of Indemnity (“LOI”) without first being presented with OBLs. Consequently, carriers need to be aware of the liabilities they are potentially exposed to when delivering cargo in such a manner.

Under English law, carriers have been held liable for cargo that was delivered without presentation of OBLs, even when a consignee of the cargo produced convincing proof of his identity.

When presented with a misdelivery claim, the English courts are also unlikely to allow a carrier to rely on a standard exception clause found in bills of lading which states that the carrier is not responsible for “any loss or damage to the goods… howsoever caused”. The rationale for this is that the cargo was not lost or damaged, but misdelivered due to the carrier’s actions.

Liability under a misdelivery claim can have a significant impact on a carrier. This is especially so if the carrier is expected to account for the value of a cargo that rises rapidly in a volatile market and which may well be worth considerably more than the vessel.

Letter of Indemnity 

To protect themselves against the risk of being subject to a misdelivery claim by cargo owners, carriers often accept a LOI. Under the LOI, the trader is expected to hold the carrier and his agents harmless in respect of any liability, loss, damage or expense arising from the carrier’s performance of the trader’s request for cargo to be delivered without presentation of OBLs.

While most LOIs are now issued in the standard format recommended by P&I Clubs, the P&I Clubs have also repeatedly emphasised that P&I cover for misdelivery claims is discretionary.

In the circumstances, carriers need to be sure that the LOI is issued by a party of strong financial standing. Given the substantial delay that occurs before an OBL may emerge in the hands of the cargo owner, a LOI will provide little comfort if the party issuing the LOI is in poor financial health and subsequently collapses.

Scrutinise the terms of the charterparty

Carriers often enter into charterparties which contain a right for charterers to instruct the master of the vessel to discharge cargo without presentation of OBLs. Such charterparties will also generally include a clause where owners are given the right to an indemnity, often specifying the required LOI wording.

Even if there is no express indemnity, owners are likely to be entitled to an implied indemnity subject to certain conditions.

However, owners should take note that the right to an indemnity does not necessarily oblige owners to deliver cargo without production of OBLs. This distinction is crucial, given that P&I cover is likely to be lost when owners deliver cargo without presentation of OBLs.

For owners to be contractually obliged to discharge cargo without presentation of OBLs, the terms of a charterparty must express a positive obligation on owners to do so. The threshold for the wording required for such an obligation to be placed on owners can be high.

For example, the courts have rejected arguments that the following clauses, when read together, constitute a positive obligation on owners to discharge cargo without presentation of OBLs:

      i.  “master… shall be under the orders and directions of Charterers as regards employment of the vessel… and shall sign Bills of Lading as Charterers or their agents may direct”; and

     ii.  “Charterers hereby indemnify Owners against all consequences or liabilities that may arise from the master… otherwise complying with Charterers’ or their agents’ orders, (including delivery of cargo without presentation of Bills of Lading…”

By contrast, the courts have accepted that a positive obligation on owners to discharge cargo without presentation of OBLs exists in a charterparty which expressly provides that “Owners agree to release the entire cargo without presentation of the original Bills of Lading”. Such is the courts’ inclination only to accept clauses that are unambiguous and free of the “catch all” provisions draftsmen tend to favour.

It seems obvious, but it is worth repeating, that the LOI is only valuable if the party providing it has the necessary financial standing to honour the LOI. Clauses similar to that accepted by the English courts above are usually found in charterparty forms used by oil majors because of their substantial financial backing when indemnifying owners against misdelivery claims. Owners should, therefore, be careful about using the same forms in their dealings with other charterers whose financial standing may be uncertain.

Unreasonable delay in discharging cargo

In light of the risks carriers take in delivering cargo without presentation of OBLs, it would not come as a surprise that carriers often insist on a surrender of OBLs before releasing cargo.

While refusal to deliver cargo without presentation of OBLs is usually not a breach of the charterparty as explained above, carriers should be alive to the fact that an unreasonable delay in releasing cargo may undermine any consequent claims carriers may have for hire or demurrage due to that delay.

As such, if carriers are able to use other remedies available to discharge cargo without giving delivery of the said cargo, it is advisable that they do so. For example, carriers have a statutory right to discharge and warehouse imports into the United Kingdom after the expiration of 72 hours under the English Merchant Shipping Act 1894. Other jurisdictions have similar provisions or permit port (or customs) authorities to take temporary custody of the cargo.

Other pitfalls

Even in cases where carriers believe that cargo has been delivered against an OBL, they have been held liable for delivery against forged OBLs which would not have been detected by the master of the vessel.

There are also persistent problems created by the much criticised practice of having three OBLs in circulation at any one time. Carriers are expected to be aware of the possibility of fraud and may also be held liable for failing to make more enquiries as to the true owner of the cargo.

As such, where carriers notice suspicious circumstances relating to delivery of cargo (e.g. when cargo is diverted en route, far away from its original destination), it is recommended that carriers make enquiries as to the location of the other OBLs. In practice, banks that have paid for the cargo under a letter of credit may sometimes be prepared to send confirmation that OBLs are in their possession.

Finally, when one OBL is surrendered, the master should mark it clearly as “Accomplished” and notify the bank or other parties holding the remaining two OBLs that this has been done. Any subsequent endorsement of the remaining OBLs would thus be made with knowledge of this fact.

If owners are for any reason unsure as to the party entitled to receive delivery of cargoes in the owners’ possession, they would be well advised to seek the immediate input of their P&I Club and, where appropriate, seek external legal assistance. 

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