The Carriers` Responsibility Over The Proper Description Of Apparent Condition Of Bulk Grain Cargoes In Bills Of Lading
Conditions For The Issuance Of Bills Of Lading For Contaminated Cargoes
Grains are not shipped perfectly clean. It is customary to contain a small percent of non-damaging foreign materials, usually no more than 1%, resulting either from harvest or thereafter that had not been eliminated through the cleaning process. The ratio of such foreign materials in grain cargoes must be within the permissible ratio stated in sales contract specifications, otherwise the cargo would either be sold at a discount or rejected.
The responsibility to ascertain whether the quality of grain cargoes is in conformity with the sales contract specifications is upon the independent surveyors appointed by sellers and buyers1.
The grain charter parties frequently include loading survey clauses which provide that the Master has the right, in conjunction with the charterers` surveyor, that is, subject to surveyor`s consent, to reject any cargo that contains foreign materials or alternatively, clause the Bills of Lading issued for such cargo. However, whilst the surveyor`s responsibility is to determine whether the cargo is in conformity with the quality specifications of sales contract, the Master`s responsibility under Article III Rule 3 of the Hague-Visby Rules is to properly describe in Bill of Lading the apparent order and condition of cargo. Whether the cargo is in accordance with the quality specifications of sales contract it is irrelevant to the Master2. The Master is not concerned with the quality specifications for the cargo but with its apparent condition and the way this is described in Bill of Lading3.
Due to the different responsibilities of surveyors and Master, disputes occurred in the past over the interpretation of loading survey clauses and the way cargo was described by the shippers in Bill of Lading, the surveyors arguing that cargo is within the quality specifications of the sale contract, the carriers and Masters arguing that the cargo description in the Bills of Lading had to mention about the presence of foreign materials and their nature.
If the sale contract stipulates that the grain cargo may contain a small percent of foreign materials such as 1 or 2% and the surveyors certify that the content of foreign materials does not exceed the maximum limit stipulated in the sale contract, then the shipper`s description of cargo in the Mate`s Receipt and Bills of Lading should mention about that. Otherwise, the Master should add a remark to shipper`s description specifying the nature and estimated quantity of foreign materials.
In a dispute reported in 20064, the LMAA Tribunal held that if the surveyor says that cargo is within the quality specifications of the sales contract, the Master cannot reject the cargo but he can qualify the shipper`s description of cargo to mention about the foreign materials.
In case of clausing the Mate`s Receipt and Bills of Lading, the Master`s statement should indicate the estimated proportion of foreign materials in the cargo, presumably based on the samples` analysis made by vessel`s P&I Club surveyors, e.g. "cargo contains ...% foreign materials", and not just mention about contamination, to avoid creating a false impression about the extent of contamination. In The "David Agmashenebeli"5 case, the English High Court held that words which indicate that only a small proportion of the cargo is likely to be affected would be essential.
The failure to properly describe the cargo in Bill of Lading would expose the carrier to claims from the buyers of cargo.
In the Australian law case Hunter Grain Pty Ltd. v. Hyundai Merchant Marine Co. Ltd. and Malaysian International Shipping Corporation BHD6, a cargo of soyabean meal in bulk had been contaminated at the commencement of loading with a residue of soda ash left in the conveyor loading equipment from a previous shipment due to stevedore`s failure to properly clean the loading equipment. When the belt conveyor set in motion, the vessel`s officer supervising the loading noticed that an unidentified material was loaded in one of the vessel`s holds before the soyabean meal. The Master asked the stevedores to stop the loading, but the stevedores refused insisting that the quantity of contaminant which had entered into the vessel`s hold was not substantial. The stevedores were backed by the cargo surveyor which estimated that the quantity of contaminant was less than 50 pounds or 22.7 kilograms.
After the completion of loading, the vessel`s Chief Officer issued the Mate`s Receipt with the following clause:
"EXCEPTION. Above cargo of soy bean meal has been noted to have been contaminated with soda ash cargo residues from the loading facility/conveyor system during start of loading operation."
After the vessel sailed away, the shipper gave the time charterer a letter of indemnity for issuing the Bill of Lading without the clause inserted in the Mate`s Receipt by the vessel`s Chief Officer.
The clean Bill of Lading enabled the shipper to obtain the payment under letter of credit on 24 August 1990. On 5 September 1990, the shipper informed the buyer that:
"a quantity of soda ash was loaded on board the vessel prior to the loading of the consignment and that some contamination had occurred [but the surveyor estimated that] the quantity was only 20 or 30 kilograms."
After discharge of cargo at destination, it was found that about 23 tonnes of the total quantity of 3,352 tonnes of cargo had been badly affected. Also affected, although less seriously than the 23 tonnes, were a further 772 tonnes, i.e. over 20 percent of the entirety of the cargo. Based on out-turn results, it was estimated that "almost a tonne of soda ash was in the conveyor system".
The buyer of cargo, Hunter Grain, sought to recover the financial loss incurred from the time charterer, Hyundai Merchant Marine and the shipowner, Malaysian International Shipping Corporation through a claim for misrepresentation of the condition of soyabean meal cargo in the Bill of Lading.
The Federal Court of Australia held that the issuance of Bills of Lading by charterer`s agents without the Chief Officer`s remark in the Mate`s Receipt about contamination constituted a misrepresentation intended to deceive the paying bank and ultimately, the buyer as consignee of the cargo. The Court held that the shipowners had no involvement in the issuance of Bills of Lading without the Mate`s Receipt clause about contamination and that time charterers and their agents, Sunrise were responsible for the misrepresentation. The relevant passage of the judgment is quoted below:
"My analysis of the evidence has shown that Malaysian did not engage in any misleading or deceptive conduct.
Its employees, particularly the Master and Chief Officer of the vessel, brought the contamination to the notice of Hyundai`s agents and provided them with a qualified receipt in respect of the cargo. [...]
There is a strong case for saying that Hyundai did engage in such conduct. …
Hyundai and its agent, Sunrise, lent themselves to a situation in which they well knew that the Hunter Grain as consignee of the cargo and its Bank were to be deceived by the sending to Australia of a false document, namely, a bill of lading containing a clean receipt for the cargo when a qualified receipt was required. ...
Hyundai cannot therefore be heard to deny that the goods were received on board in apparent good order and condition. The fact that they were not due to no fault of Hyundai is not to the point …
The estoppel prevents it from relying on this evidence."
Thus, if the carrier issues a clean Bill of Lading for a cargo in a damaged condition in exchange for a letter of indemnity from the shipper and then a third party purchases the cargo in reliance on the clean Bill of Lading, the carrier is estopped from offering other evidence of the cargo`s pre-shipment condition. The damage will be presumed to have occurred after loading and the carrier will therefore be liable for it.
Conditions For The Issuance Of Bills Of Lading For Infested Cargoes
Should the cargo description in the Bills of Lading mention about the insect infestation when the cargo is fumigated after being loaded on board the vessel?
This question was raised in the 1999 US law case Ventura Maritime Co. Ltd. v. ADM Export Co.7, where a cargo of soyabean meal was noticed at the time of shipment to be infested with live insects. After loading, the shipper had fumigated the cargo.
The dispute broke out when the Master put in the Mate`s Receipt the remark "cargo fumigated due to live infestation". After finding about this, the original buyer was not interested anymore to buy the cargo. The shipper found another buyer in Ireland which agreed to accept the Bills of Lading with the remark "cargo fumigated due to live infestation". When the cargo was discharged in the port of Dublin, it was free of infestation, dead or alive.
The shipper claimed damages for delay in the issuance of Bill of Lading. The US District Court of Louisiana ordered the shippers to submit their claim to arbitration in London pursuant to the arbitration clause incorporated in the Bill of Lading.
The LMAA Tribunal held in similar disputes that if the grain cargo is infested with insects, the carrier is not only entitled to demand that the Bills of Lading issued for the cargo be properly claused, but they have a duty vis-à-vis third party holders of Bills of Lading to ensure that the Bill of Lading reflect accurately the condition of cargo at the time of shipment8. This is so even in cases where the vessel is chartered based on "SYNACOMEX 2000" grain charter party which includes the following provisions:
"When fumigation has been effected at loading port and has been certified by proper survey or by a competent authority, Bills of Lading shall not be claused by Master for reason of insects having been detected in the cargo prior to such fumigation."
The fact that the Master is aware that the cargo will be fumigated after the completion of loading it is irrelevant to the Master9. Although there is a practice to fumigate the grain cargoes after the completion of loading, this does not mean that all grain cargoes can contain live insects to the extent that they are readily noticeable during loading. Furthermore, there have been cases where the fumigation was not properly done at loading port and the cargo was found infested at the port of discharge.
The Master`s responsibility under Article III Rule 3 of the Hague-Visby Rules is to properly describe in Bill of Lading the apparent order and condition of cargo. If the clause 11 "SYNACOMEX 2000" grain charter party is interpreted as requiring the Master to mis-state the condition of cargo in the Bills of Lading in order to deceive the buyers of cargo, then it is unenforceable. The clause was also considered to be contrary to the Article III Rule 8 of the Hague-Visby Rules.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 1.
Endnotes:
1. The only major exporting countries were quality inspections are performed by state agencies are United States and Canada.
2. See London Arbitration No. 12/07 (2007) 719 LMLN 3
3. See London Arbitration No. 12/07 (2007) 719 LMLN 3
4. London Arbitration No. 19/06 (2006) 705 LMLN 1(2)
5. [2002] EWHC 104; [2003] 1 Lloyd`s Rep. 92
6. (1993) 117 ALR 507
7. 44 F. Supp. 2d 804 - Dist. Court, ED Louisiana 1999
8. See London Arbitration No. 12/07 (2007) 719 LMLN 3
9. See London Arbitration No. 12/07 (2007) 719 LMLN 3