The Bills Of Lading Provisions As To The Obligation To Nominate A Safe Port Of Discharge

In the modern tanker voyage charterparties, the safe port warranty has been replaced by due diligence clauses whereby the charterers undertake solely to exercise due diligence when nominating the ports of discharge and accept liability only in case of loss or damage caused by their failure to exercise due diligence. The oil trading companies introduced the due diligence clauses because they charter vessels to carry cargoes sold afloat during the carriage to other companies usually along a chain of sellers and buyers, the port of discharge being actually nominated by the final buyers rather than the charterers. The last sale in the chain often made by the charterers is either a CFR sale or a CIF sale or a DAP sale.
In the Ex Ship sales (DAP in INCOTERMS 2010), the Bills of Lading are not required for payment because the sellers do not have to provide the evidence of shipment of goods, but in CFR and CIF deliveries the Bills of Lading are required for payment and when the Bills of Lading are transferred to CFR and CIF buyers, it will become the contract of carriage between the shipowners as carrier and CFR and CIF buyers as third party holders. Given that the terms of the Bills of Lading will govern the rights and obligations of the contracting parties and that the charterers want to pass responsibility for the nomination of the port of discharge to the final buyers and holders of the Bills of Lading, it has become customary for the charterers to ask the shipowners to state the destination in the Bills of Lading as one or two safe ports or as one or more safe ports within a geographical area or within a range of ports, thereby giving the final buyers of cargo and holders of the Bills of Lading the right to nominate the port or ports of discharge within the specified geographical area or the range of ports with the obligation to nominate a safe port1 or safe ports, in line with their corresponding right and obligation under the sale contracts.
This practice is common in CFR and CIF sales of bulk commodities such as crude oil, LPG and coal which are traded afloat during the carriage, the ultimate destination of cargo being unknown at the time of shipment and issuance of Bills of Lading.
Since the CFR and CIF sales are subject to the buyers` obligation to nominate a safe port and a safe berth, the CFR and CIF prices of cargoes of crude oil, LPG and coal are commonly quoted with the "safe port" or "safe port/berth" terms in the sale contracts and invoices and thereby all other documents required for payment, including the Bills of Lading, must show the destination with the same terms. Most of the commodity trading companies accept the Bills of Lading with the "safe port" or "safe port/berth" terms unaware of their meaning and the potential liabilities they may incur.

The Effect Of "Safe Port" Terms When Used In The Description Of The Port Of Discharge

The effect of the words "safe port" was explained in the English law case AIC Ltd. v. Marine Pilot Ltd. (The "Archimidis")2, a case which involved a claim for breach of a safe port warranty in a voyage charter party. The English Commercial Court held that where the terms "safe port" are expressly stated in the contract of carriage with reference to the port of discharge, they constitute a safe port warranty regardless of whether the port of discharge is named as a single port or is stated as one of a range of ports. Mrs. Justice Gloster said that:

"if the word "safe" is used in a charterparty to describe a port, whether named or unnamed, it does indeed result in the charterer warranting the safety of the port named, or subsequently nominated by him."

Therefore, if the charterer has the obligation to nominate one or two safe ports out of a range of ports or a geographical area, the safe port warranty applies to the port or ports to be nominated.
As charterers in charterparties, the shippers and final holders of the Bills of Lading stating the destination as "one or two safe ports" or "one or more safe ports" within a geographical area or a range of ports warrant the safety of the port or ports to be nominated, the shipowners agreeing to comply with their instructions on condition that the port nominated will be safe at the time of the vessel`s arrival, stay and departure. In case of a cargo sold along a chain of sellers and buyers, the shippers will have no interest and involvement in the nomination of the port of discharge. Once the final buyers obtain the Bills of Lading and thereby the right to nominate the port of discharge, they must comply with the safe port warranty and nominate a prospectively safe port3 where the vessel can safely reach, stay as far as necessary for the discharge of cargo and depart from at the relevant time4. The express warranty that the port nominated is prospectively safe is considered to be given at the time of port nomination5.

What Does The Safe Port Warranty Cover

The safe port warranty covers both the physical and political risks.
The physical risks are the risks resulting from the deficiencies in the set-up of the port.
In Kodros Shipping Corporation v. Empresa Cubana de Fletes (The "Evia No.2")6, Lord Denning said that in order to be considered physically safe, the port "must be safe in its set-up as a port".

"There must be buoys to mark the [access] channel, lights to point the way, pilots available to steer, a system to forecast the weather, good places to drop anchor, sufficient room to manoeuvre, sound berths, and so forth. In so far as any of these precautions are necessary - and the set-up of the port is deficient in them - then it is not a "safe port"."

In the English case law, the following deficiencies in the set-up of the port have been held a breach of safe port warranty:
- the tendency to sudden storms, in The "Stork", [1955] 1 Lloyd`s Rep. 349; [1955] 2 Q.B. 68;
- the absence of navigational aids, in Independent Petroleum Group Ltd. v. Seacarriers Count Pte Ltd. (The "Count"), [2006] EWHC 3222; [2008] 1 Lloyd`s Rep. 72;
- the unsound berths, in The "Houston City", [1956] 1 Lloyd`s Rep 1; [1956] AC 266;
- the lack of reliable holding ground in the anchorage area, in The "Eastern City", [1958] 2 Lloyd`s Rep. 127;
- the absence of an adequate weather forecasting system, in The "Dagmar", [1968] 2 Lloyd`s Rep. 563;
- insufficient sea-room to manoeuvre in port in bad weather, in The "Khian Sea", [1979] 1 Lloyd`s Rep. 545;
- seabed vulnerability to silting, in The "Pendrecht", [1980] 2 Lloyd`s Rep. 56; Transoceanic Petroleum Carriers v. Cook Industries Inc. (The "Mary Lou"), [1981] 2 Lloyd`s Rep. 272;
- insufficient depth of water caused by the seabed vulnerability to silting, in AIC Ltd. v. Marine Pilot Ltd. (The "Archimidis"), [2007] EWHC 1182 (Comm); [2007] 2 Lloyd`s Rep. 101;
- the lack of a proper system for monitoring the safety of the access channel and for warning the ships about the hazards, in Independent Petroleum Group Ltd. v. Seacarriers Count Pte Ltd. (The "Count"), [2006] EWHC 3222; [2008] 1 Lloyd`s Rep 72; Maintop Shipping Company Ltd. v. Bulkindo Lines Pte Ltd. (The "Marinicki"), [2003] EWHC 1894 (Admlty.); [2003] 2 Lloyd`s Rep. 655.
The political risks are the risks arising from the political unsafety, including the hostilities of war, blockades, acts of terrorists, acts of piracy, revolution, rebellion, civil commotion, which may expose the ship to dangers such as the risk of an attack on the ship or the risk that the ship will be blockaded and trapped at the port of discharge.
Not every risk will render a port unsafe but only the risks considered to be characteristics of the port. When the final buyers of cargo nominate the port of discharge, they warrant the prospective safety (physical safety and political safety) of the port nominated, guaranteeing the safety of the vessel, crew and cargo carried on board against the risks considered to be characteristics of the port7. The final buyers may become liable as Bill of Lading holders for breach of the safe port warranty only if the danger to which the vessel was exposed is considered a characteristic of the port.
The shippers and final holders of the Bills of Lading cannot be held liable for breach of the safe port warranty if the carrier`s loss is caused by an unexpected event or by the negligence of the Master in navigating the ship.
The safe port warranty does not cover the dangers resulting from an unexpected, abnormal occurrence which cannot be avoided by good navigation and seamanship. If notwithstanding that the characteristics of the port make the port prospectively safe, some unexpected and abnormal event suddenly occurs which creates conditions of unsafety and as a result the ship is delayed, damaged or destroyed, those risks will fall upon the hull underwriters8.
If the Master`s negligence in the navigation of the ship is considered to be the cause of the casualty at the port of discharge, the Master shall be the one responsible for the resulting damage or loss9.
In case of a claim for breach of the safe port warranty, the question whether the port of discharge was safe or not will be whether the danger to which the ship was exposed is a characteristic of the port or was an unexpected, abnormal event or the casualty was caused by the Master`s negligence.
The carriers can recover the loss incurred at the port of discharge only if the event that caused the casualty or delay to the ship had occurred sufficiently frequently to be considered a characteristic of the port10. If the danger to the vessel was foreseeable at the time of the port nomination, it will be considered a characteristic of the port11.
In Pearl Carriers Inc. v. Japan Line Ltd. (The "Chemical Venture")12, the fact that three ships had been attacked in the preceding eleven days by the Iranian Air Force, all in the same channel through which the ship "Chemical Venture" was expected to proceed, it was considered sufficient to become a characteristic of the approach voyage of any ship bound for the port of Mina Al Ahmadi.
In K/S Penta Shipping A/S v. Ethiopian Shipping Lines Corp. (The "Saga Cob")13, the English Court of Appeal held that if the port is declared a high-risk zone by the Joint War Committee in London and the war risk underwriters charge an additional premium to cover the ships operating at or off the nominated port, it means that the war risks are foreseeable.

The Potential Liabilities For Breach Of The Safe Port Warranty

If the Bills of Lading contain a safe port warranty in respect of the port to be nominated by the final holders of Bills of Lading, then the final holders must comply with the safe port warranty and nominate a port that is physically and politically safe. The nomination of an unsafe port under a Bill of Lading containing a safe port warranty will constitute a breach of contract of carriage for which the carriers shall be entitled to recover damages in respect of any resulting loss.

Potential Liabilities For Losses Caused By The Port`s Physical Unsafety

The Liability For The Extra Expenses Incurred To Avoid Physical Dangers

An example of such extra expenses is the cost of lightering in case of insufficient depth of water at the port of discharge. The carrier`s entitlement to recover the extra expenses for lightering has been upheld in the English case law in two cases.
In Hall Bross. Etc. S.S. Co. v. R.&W. Paul14, the voyage charter party required the ship "to call at Teneriffe for orders to discharge at a safe port in the United Kingdom or so near thereto as she can safely get". At Teneriffe the Master received orders to discharge the cargo at King`s Lynn, in Norfolk. Upon the vessel`s arrival at King`s Lynn, the Master found that the depth of water was insufficient for the vessel to proceed to berth with the full cargo on board and had to discharge part of the cargo in lighter vessels before proceeding to berth. The shipowners claimed the extra expenses for lightering on the basis that the port of discharge nominated by the charterer was not a safe port and the charterer committed a breach of contract by ordering the vessel to proceed there. The shipowners` claim was upheld by the Court.
In AIC Ltd. v. Marine Pilot Ltd. (The "Archimidis")15, the LMAA Tribunal held that "a port can be unsafe because of a need for lightering to get into or out of it". The word "safely" in the safe port warranty of the charter party meant "safely as a laden ship". If the vessel, laden with the contractual cargo, cannot undertake the discharging operations in safety, there is an obvious danger due to the risk of grounding and thereby a breach of the safe port warranty. In such case, the safe port warranty will entitle the shipowners to recover the extra expenses for lightering. The English Commercial Court and English Court of Appeal upheld the conclusion of the LMAA Tribunal16.

The Liability For Damages In Case Of Detention Of Vessel At The Port Of Discharge Following The Completion Of Discharging Operations

In Independent Petroleum Group Ltd. v. Seacarriers Count Pte Ltd. (The "Count")17, the charter party stated the destination as "1, 2 or 3 safe ports East Africa Mombassa / Beira range". The charterers nominated the port of Beira for discharge of part of the cargo.
Upon arrival in port, the vessel "Count" could not proceed to berth because another inbound vessel went aground in the channel linking the port to the sea. The vessel "Count" had to wait five days for the other vessel to be re-floated and complete the discharge operations to proceed to berth. The vessel "Count" reached safely to berth and discharged the cargo, but upon the completion of discharging operations, she was prevented to sail from the port for a period of four days because another vessel run aground in the channel.
The shipowners claimed the payment of demurrage charge for the five days lost between the time of arrival and time when the vessel proceeded to berth and damages for detention of vessel during the four days after the completion of discharge. The dispute concerned the shipowners` right to claim damages for detention of vessel during the four days after the completion of discharge.
The shipowners claimed damages for detention of vessel on the ground that the financial loss incurred due to the detention of vessel resulted from the breach by charterers of the safe port warranty.
The LMAA Tribunal and later the English Commercial Court upheld the shipowners` claim and held that the port of Beira was prospectively unsafe at the time of nomination because the fact that the buoys marking the access channel were not correctly positioned at the time of the vessel`s arrival in port meant that the channel had not been adequately monitored or there was no adequate system in operation for monitoring the access channel and therefore, it was unlikely that at the date of nomination the buoys were properly positioned.

The Liability For The Cost Of Repairs, If The Vessel Is Damaged

In Maintop Shipping Company Ltd. v. Bulkindo Lines Pte Ltd. (The "Marinicki")18, the vessel was damaged by an underwater obstruction in the access channel to the port. The shipowners sought to recover the cost of repairs by making a claim for breach of the safe port warranty. The English High Court held that the port was unsafe because there was no proper system in place for monitoring the safety of the access channel to the port and for warning the vessels through buoys that there was an obstacle in the channel.

The Liability For The Value Of The Vessel, If The Vessel Is Lost

In Gard Marine & Energy Ltd. v. China National Chartering Co. Ltd. (Rev 1)19, the bulk carrier "Ocean Victory" had to interrupt discharging a cargo of iron ore and move out in the open sea following a warning of high sea waves and possible effect on the ship safety at berth. When the vessel entered in the open sea, the Master lost control of the vessel which was driven back onto the breakwater wall where the vessel grounded and became a total loss. Following the casualty, the hull underwriters paid the value of the vessel to shipowners and then sought to recover from the time charterers the amount of US$ 137.7 million as damages for breach of the safe port warranty. Of the amount of US$ 137.7 million, US$ 88.5 million was the market value of the vessel, US$ 12 million was the cost of salvage services, US$ 35 million was the cost of wreck removal.
At first instance, the English Commercial Court held that the charterers were liable for breach of the safe port warranty and thereby, the hull underwriters were entitled to recover the market value of the vessel, cost of the salvage services and cost of the wreck removal, but in appeal the English Court of Appeal held that the simultaneous occurrence of two weather conditions on the casualty date (namely the phenomenon of swell from "long waves" which have forced the vessel to leave the berth and a very severe northerly gale which meant that the vessel could not safely leave the port) was an abnormal occurrence and there was no breach of the safe port warranty.
Although the cases mentioned above were claims under charterparties, the commodity traders can be confronted too with such claims if they nominate the port of discharge as Bill of Lading holders.

Potential Liabilities For Losses Caused By The Port`s Political Unsafety

The Liability For The Extra Expenses Incurred To Avoid The War Risks

If a port which is prospectively safe for the ship at the time of nomination subsequently becomes unsafe while the ship carrying the cargo is en route to that port, a safe port warranty provided in the Bill of Lading in respect of the port of discharge will entitle the carriers to reject the nomination and ask the cargo owners to nominate an alternative safe port20.
The Bills of Lading War Risks Clauses provide further that if the Master and/or shipowners consider that the vessel, crew and cargo carried on board may be exposed to war risks at the originally nominated port, they shall be entitled to refuse to continue the voyage to that port and to require the cargo owners to nominate an alternative safe port within 48 hours from the shipowners` request and if the cargo owners fail to nominate an alternative safe port within 48 hours from the shipowners` request, the Master and shipowners shall have the liberty to deviate from the original route and proceed to an alternative safe port (nearest safe port) and discharge the cargo there, regardless of whether the respective port is within the range of ports stated in the Bill of Lading or not. In such case, the shipowners shall be entitled to recover from the cargo owners the extra expenses involved in reaching and discharging the cargo at the alternative safe port as well as the extra expenses arising from the Master`s compliance with the orders and directions given by the war risk underwriters or the Government of the flag state.
The extra expenses may include:
- the cost of the time lost by the vessel for waiting the cargo owners` (i.e. Bill of Lading holders) nomination of an alternative safe port, to be recovered as damages for detention21 unless the charter party provides that the time lost thereby shall be considered as part of the time spent by the vessel on the voyage;
- the demurrage charge, if the time spent by the vessel on the voyage and time used for discharging exceed the time which would have been used by the vessel had the vessel proceeded to the originally nominated port of discharge;
- the cost of extra bunkers consumed by the vessel if they are greater than those which would have been consumed on the voyage to the port originally nominated by the cargo owners;
- the extra port charges incurred at the actual port of discharge if they are greater than those which would have been incurred at the originally nominated port22.
In order to be able to recover these extra expenses, the Bills of Lading issued for the cargo in question must contain both a War Risks Clause providing the cargo owners` obligation to pay the extra expenses and a safe port warranty in respect of the port of discharge because the only way the carriers can justify the deviation from the original route in case the vessel is exposed to war risks at the originally nominated port is by reference to an express safe port warranty in the Bill of Lading.
BPVOY4 and SHELLVOY 6 tanker voyage charterparties provide expressly the charterers` obligation to include in the Bills of Lading War Risks Clauses similar to the relevant charter party clauses but amended to address the rights and obligations of cargo owners as Bill of Lading holders, by replacing the provisions referring to the charterers` rights and obligations with provisions stipulating the rights and obligations of the cargo owners23.
The War Risks Clauses can be either stated verbatim in the Bills of Lading as in the Clause 4 of the SHELL Bill of Lading form or incorporated by express reference as in the Charter Party Bill of Lading forms published by BIMCO24. As regards the effect of incorporation of the charter party clauses by express reference, the English Courts held in The "Rena K"25 and Miramar Maritime Corp. v. Holborn Oil Trading (The "Miramar")26 that if the Bill of Lading incorporates specifically a charter party clause, it is permissible to manipulate the wording of the incorporated clause to fit into the Bill of Lading contract of carriage. Even so, it is questionable whether the extra expenses can be imposed upon the Bill of Lading holders given that the BIMCO War Risks Clause – VOYWAR 2013 provides that the alternative safe port must be nominated by the charterers and that the charterers shall be liable for the extra expenses. Therefore, for the shipowners the effective incorporation of the War Risks Clause into the Bills of Lading with provisions stipulating the rights and obligations of the cargo owners as Bill of Lading holders is safer than the incorporation by reference of the war risks clause of the charter party because it avoids disputes as to the liability for payment of extra expenses.
Given the potential liability of CFR and CIF buyers for extra expenses arising from the detention and/or deviation of the vessel from the original route, the CFR and CIF sale contracts should mention the buyers` consent to accept Bills of Lading containing a War Risks Clause and buyers` liability for extra expenses, to avoid the involvement of sellers in disputes between the carriers and buyers in case it is necessary for the vessel to deviate from the original route to avoid the war risks.
The Clause 14 of FOSFA Contract No. 81 used for the CIF sales of palm and palm kernel oil products provides an example of such provisions:

"WAR DEVIATION: Buyers agree to accept Bill of Lading containing the Chamber of Shipping War Deviation Clause and/or any other recognised official War Deviation Clause.
Any extra charges, duties and taxes incurred by reason of such deviation or detention are for Buyers` account and cost."


The Liability For Damages In Case Of Detention Of Vessel At The Port Of Discharge Following The Completion Of Discharging Operations

In Uni-Ocean Lines Pte Ltd. v. C-Trade S.A. (The "Lucille")27, the vessel "Lucille" was ordered to enter into the port of discharge, Basrah, at a time when the outbreak of war between Iraq and Iran was imminent. Upon the completion of discharge of cargo, the vessel was trapped in the port due to the war between Iraq and Iran.
The LMAA Tribunal held that the war like situation on the date when the vessel was ordered to enter into the port was sufficient to render the port unsafe. The fact that within two days the Shatt Al Arab waterway was closed, it was not something unexpected. The risk of outbreak of war could have been anticipated at the time when the order was given to enter into the port of Basrah. By that time, it became a characteristic of the port.
By ordering the vessel to enter into an unsafe port, the charterers were acting in breach of the safe port warranty and were thereby responsible for the entrapment of the vessel.

The Liability For The Cost Of Repairs, If The Vessel Is Damaged Or For The Value Of The Vessel, If The Vessel Is Destroyed At The Port Of Discharge

Once the final buyers obtain the Bills of Lading and thereby the right to nominate the port of discharge, they must comply with the safe port warranty and nominate a port that is prospectively safe for the vessel to approach, stay as far as necessary for the discharge of cargo and depart from at the relevant time28. The express warranty that the port nominated is prospectively safe is considered to be given at the time of port nomination29.
If the port originally nominated subsequently becomes unsafe while the vessel carrying the cargo is en route to that port, the carrier will be entitled to reject the nomination and ask the cargo owners to nominate an alternative safe port30.
But if the carriers, notwithstanding their right to reject the nomination of an unsafe port, comply with the nomination and thereby their ship is damaged or destroyed or is trapped at the nominated port, the carriers would still be entitled to recover damages for breach of the safe port warranty, because by complying with the nomination the carriers waive the right to reject the nomination but not the right to claim damages31.
The liability for damage or loss of the vessel will depend on whether the event that caused the casualty, for instance, a missile attack or seaborne attack on the vessel, was sufficiently foreseeable to be considered a characteristic of the port32.
If such attacks are considered a characteristic of a port, the port will be excluded from the standard Hull & Machinery insurance cover. If nonetheless, the carriers decide to proceed to and enter into such a port, they can request a war risk insurance cover for the period of time the vessel will need to stay in the port. The war risks clauses of the voyage charter parties provide expressly the charterers` obligation to reimburse the additional war risks insurance premium and crew war bonus to shipowners. In turn, the CFR and CIF sellers of bulk commodities chartering vessels for the carriage of cargoes will recover from the final buyers under the terms of the sale contract.
If the vessel is damaged or destroyed at the port of discharge, the hull underwriters cannot claim the financial loss from the charterers who paid the additional war risks insurance premium. In Kodros Shipping Corporation of Monrovia v. Empresa Cubana de Fletes (The "Evia No.2")33, the House of Lords held that if the charterer is required to pay under the charter party the additional cost of insuring the ship against the war risks, the shipowners cannot thereafter claim damages for breach of the safe port warranty. But the shipowners could try to recover from the cargo owners through a claim for breach of the safe port warranty under the Bill of Lading terms, since there is no direct contractual obligation on the part of cargo owners as Bill of Lading holders to pay the additional war risks insurance premium to the shipowners under the War Risks Clauses of the Bills of Lading.

In What Conditions The Carriers May Impose Liability For Breach Of The Safe Port Warranty Upon The Bill Of Lading Holders

In the FOB sales, the shippers have the right to exercise control over the goods shipped on board the vessel until the delivery of the Bills of Lading duly endorsed to the FOB buyers in exchange for payment. After the transfer of contractual rights by endorsement and delivery of the Bills of Lading to the FOB buyers and then further on by the FOB buyers along a chain of commodity traders, the shippers will lose the right to exercise control over the goods.
If the final buyers procure the goods on CFR or CIF terms and obtain the Bills of Lading in exchange for payment, in due time after the shipment34, they will be able to exercise control over the goods by presenting the Bills of Lading duly endorsed to the carrier either directly or through its agents35.
If the CFR or CIF buyers present the Bills of Lading duly endorsed to the carriers and give instructions to the carriers to proceed to a port within the range of ports or geographical area stated in the Bills of Lading and deliver the goods there, the Article 58 of the Rotterdam Rules provides that they will assume thereby any liabilities imposed on them under the contract of carriage "to the extent that such liabilities are incorporated in or ascertainable from the negotiable transport document or the negotiable electronic transport record". This means that if the Bills of Lading contain an express safe port warranty in respect of the port of discharge to be nominated by the final holders, the carriers may impose any liability for breach of the safe port warranty in case the port nominated proves to be unsafe for the vessel, crew and cargo on board. At least this will be the position in jurisdictions where the Rotterdam Rules apply and in the US Courts which adopted the rule that if the Bill of Lading holders exercise acts of control over the goods carried on board the vessel, such as the nomination of the port of discharge during the carriage, they will become liable under the contract of carriage for any liabilities arising therefrom36.
It remains the question whether the instructions given to the carriers, following the presentation of Bill of Lading (electronic Bill of Lading) to the Master, to proceed and discharge the cargo to a port within the range of ports stated in the Bill of Lading would be considered a formal demand for delivery of the cargo carried on board, in case of a claim brought in English Courts or in jurisdictions which apply the English law, particularly Singapore and Australia.
When the final holders present the Bill of Lading (electronic Bill of Lading) to the Master, they become irrevocably liable under the contract of carriage because they cannot thereafter endorse the Bill of Lading to someone else37. The final holder is the only person entitled to demand delivery of the goods from the carrier38.
The conditions for the imposition of liability for breach of the safe port warranty under the Bill of Lading contract of carriage were discussed by Thomas J., judge of the English Commercial Court in the English law case Aegean Sea Traders Corporation v. Repsol Petroleo S.A. (The "Aegean Sea")39.
In that case a cargo of approximately 80,000 metric tonnes of crude oil shipped on board the vessel "Aegean Sea" at Sullom Voe Terminal was sold along a chain of sellers and buyers down to the Spanish oil company Repsol Petroleo S.A.. The vessel "Aegean Sea" was chartered by Repsol Oil International Ltd., the offshore trading company of Repsol Petroleo S.A.. Repsol Oil International Ltd. procured the cargo on FOB terms and sold it further on Ex Ship La Coruna terms to Repsol Petroleo S.A..
Given that the vessel was expected to complete the voyage from the Sullom Voe Terminal to the port of La Coruna (in the northwest of Spain) before the Bills of Lading reach into the possession of charterers as the last FOB buyers in the chain, the charterers asked the shipowners to discharge the cargo against a letter of indemnity. Because the charterers did not have substantial assets, the shipowners asked Repsol Petroleo S.A., as the parent company of the charterers, to provide the letter of indemnity.
When it provided the letter of indemnity to shipowners, Repsol Petroleo S.A. gave them also instructions to discharge the cargo at the port of La Coruna. Upon the vessel`s arrival at the port of La Coruna, the weather deteriorated quickly and when the vessel proceeded to berth, she grounded on the sea bed rocks, broke in two and exploded. The vessel became a total loss and the cargo dispersed in the sea caused a large scale pollution of the environment and damage to private property.
Following the casualty, the shipowners sought to recover from the voyage charterer a total of US $ 65 million as damages for breach of the express safe port warranty provided in the charter party. Of the amount of US $ 65 million: US$ 12 million was the market value of the vessel, US$ 215,709.50 was the value of bunkers lost on board the vessel at the time of casualty, US$ 354,066.05 was the value of freight lost, the balance representing the amounts paid for the salvage services and oil pollution damage.
The shipowners brought also a claim against Repsol Petroleo S.A. on the grounds that the company Repsol Petroleo S.A. was the lawful holder of the Bills of Lading and by demanding delivery of the cargo with the letter of indemnity, it became subject to liabilities under the Bills of Lading pursuant to the provisions of section 3(1)(c) of COGSA 1992.
The Bills of Lading issued for the crude oil cargo stated the destination as "port of Spain".
The shipowners contended that the Bills of Lading contained an implied term entitling the lawful holder to nominate the port of discharge and an implied warranty that the port so nominated by the lawful holder would be safe. Because the port of La Coruna was nominated by Repsol Petroleo S.A. and was unsafe, Repsol Petroleo S.A. became liable for breach of the implied safe port warranty in the Bills of Lading for the losses incurred by the shipowners due to the nomination of an unsafe port.
The English Commercial Court rejected the shipowners` claim under the Bill of Lading contract of carriage holding that Repsol Petroleo S.A. never became the lawful holder of the Bills of Lading40 and had no rights under the Bills of Lading when it nominated the port of discharge and even if they had such rights, the Bills of Lading did not contain a safe port warranty. The Court held that the question whether the Bills of Lading gave the endorsee in that case the right to nominate the port of discharge turned on the "facts relating to the trade in question and the issue of bill".
The Court took into consideration the following factors:
- The Bills of Lading were issued in paper form for a short haul voyage. The Bills of Lading issued in paper form are passed down the chain without the knowledge of or communication to the shipowners until they reach into the possession of the final buyers who can then present the Bills of Lading to the shipowners` agents at the port of discharge.
- In short haul voyages like that of the vessel "Aegean Sea", the vessel will often complete the voyage before the buyers even obtain the Bills of Lading. The Judge said that:

"In the short haul trade in which these bills of lading were issued, the shipowner would never be likely in practice to have the opportunity of seeing the bill of lading at the time of nomination or otherwise verifying the entitlement of the person seeking to make the nomination."


Hence, the practice of discharging the oil cargoes against the charterers` Letter of Indemnity.
- Since the final buyers did not obtain the Bills of Lading, they could not have any rights, including the right to nominate the port of discharge at the time the port nomination was required.
The English Commercial Court held that in the circumstances of that case only the charterers would have been entitled to nominate the port of discharge under the charter party terms which gave the charterers an express right to nominate a port within the European Mediterranean range with the obligation to nominate a safe port41. The Court held that in such circumstances it was not necessary to imply a term that the lawful holders had the right to nominate the port of discharge.
Even if there was an implied term giving the holders of Bills of Lading the right to nominate the port of discharge, given the large liabilities involved in The "Aegean Sea" case, the implication of a term as to safety of the port nominated would have created a very onerous liability on those who became subjected to the liabilities under the Bill of Lading. The Judge said that the situation of Bill of Lading holders is different from that of charterers under the voyage charter party. The charterers who are in direct contractual relationship with the shipowners can insure their potential liabilities under the charter party. The oil trading companies did not have the possibility at that time to insure their potential liabilities under the Bill of Lading contracts of carriage. Hence, it was necessary to make a distinction between a charter party and a Bill of Lading.
The fact that in a voyage charter party that gives the charterers the right to nominate a port of discharge from a range of ports it can be implied a term as to safety of the port to be nominated, it does not follow that such a term should also be implied into a Bill of Lading, even if the destination is stated in the Bill of Lading as a range of possible discharge ports. The Court held that the safe port warranty must be stated expressly in the Bills of Lading for the carriers to be able to impose a liability for breach of the safe port warranty. The comments of the judge are quoted below:

"Although it would be necessary to imply a term that the port nominated be one at which it was possible for the vessel to discharge the cargo she had loaded, the implication of a term as to safety of that port would create a very onerous liability on those who became subjected to the liabilities under the bill of lading. The bill of lading does not specify that the port is to be safe and given the potentially onerous liabilities, it is difficult to see how an officious bystander would say “of course” if the term were proposed. The position of the charterer is very different as he is in direct contractual relationship with the shipowner and will often insure his liabilities under a charterer`s liability policy. In the case of a bill of lading that liability as to safety will be passed to the lawful holder who takes or demands delivery at the end of the chain; it would not necessarily be certain that in the case of this bill of lading that would be Repsol and it would be unlikely that they would ever contemplate insurance against such liabilities as the holders of a bill of lading, assuming such insurance was available. In my view if it had been intended that the onerous obligations as to safety were imposed under the bill of lading, the bill of lading would have made this express."

In The "Aegean Sea" the question whether the Bill of Lading gave the holders the right to nominate the port of discharge involved Bills of Lading issued in paper form for a short haul voyage under a voyage charter party that incorporated the ASBATANKVOY charter party terms including the express safe port warranty. The situation would be different in case of shipments made under charterparties that do not contain an express safe port warranty, if the Bills of Lading state the destination as a range of ports or as a geographical area and contain an express safe port warranty in respect of the port to be nominated, particularly in case of electronic Bills of Lading which give the final buyers the possibility to present them to the Master in due time after the shipment for the nomination of the port of discharge.
The safe port warranty in the Bills of Lading issued for bulk commodity cargoes is not qualified by the so-called "due diligence clauses" as in BPVOY4 and SHELLVOY 6 tanker voyage charterparties. Therefore, if the vessel is damaged or lost and the Courts will consider that the casualty was caused by the unsafety of the port nominated by the final buyers as holders of Bills of Lading, their liability shall be absolute. Given the potential liabilities resulting from the breach of the safe port warranty, the commodity traders should take into consideration the necessity of an insurance cover against such liabilities, including the potential pollution liabilities.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Oil Trade Review Edition No. 3.

Endnotes:

1. The right to send the vessel to a port within a geographical area or a range of ports gives rise to the obligation to nominate a safe port. See Reardon Smith Line Ltd. v. Australian Wheat Board (The "Houston City"), [1954] 2 Lloyd`s Rep. 148; [1956] 1 Lloyd`s Rep. 1; [1956] A.C. 266.
2. [2007] EWHC 1182 (Comm); [2007] 2 Lloyd`s Rep. 101.
3. The safe port warranty is a warranty of prospective safety.
4. See Leeds Shipping Co. Ltd. v. Société Francaise Bunge (The "Eastern City"), [1958] 2 Loyd`s Rep. 127
5. See Kodros Shipping Corporation v. Empresa Cubana de Fletes (The "Evia No.2"), [1982] 2 Lloyd`s Rep. 307; and Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corp of India (The "Kanchenjunga"), [1990] 1 Lloyd`s Rep. 391
6. [1982] 2 Lloyd`s Rep. 307.
7. See Kodros Shipping Corporation v. Empresa Cubana de Fletes (The "Evia No.2"), [1982] 2 Lloyd`s Rep. 307
8. See Leeds Shipping Co. Ltd. v. Société Francaise Bunge (The "Eastern City"), [1958] 2 Lloyd`s Rep. 127
9. See Aegean Sea Traders Corporation v. Repsol Petroleo S.A. (The "Aegean Sea"), [1998] 2 Lloyd`s Rep. 39.
10. See Transoceanic Petroleum Carriers v. Cook Industries Inc. (The "Mary Lou"), [1981] 2 Lloyd`s Rep. 272
11. See K/S Penta Shipping A/S v. Ethiopian Shipping Lines Corporation (The "Saga Cob"), [1991] 2 Lloyd`s Rep. 398.
12. [1993] 1 Lloyd`s Rep. 508
13. [1992] 2 Lloyd`s Rep. 545.
14. 1914 111 L.T. 811: 30 T.L.R. 598
15. [2007] EWHC 1182 (Comm); [2007] 2 Lloyd`s Rep. 101
16. See AIC Ltd. v. Marine Pilot Ltd., [2008] EWCA Civ. 175; [2008] 1 Lloyd`s Rep. 597.
17. [2006] EWHC 3222; [2008] 1 Lloyd`s Rep. 72.
18. [2003] EWHC 1894 (Admlty.); [2003] 2 Lloyd`s Rep. 655.
19. [2015] EWCA Civ 16
20. See Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corp of India (The "Kanchenjunga"), [1990] 1 Lloyd`s Rep. 391
21. See Ogden v. Graham, (1861) 1 Best & Smith, 739; 121 E.R. 901
22. In Evans v. Bullock, 1877 38 L.T. 34, the charterer nominated a port where upon arrival the Master found that the ship could not safely unload the cargo there. The Master proceeded to another port and upon discharging the cargo there, the shipowners claimed successfully the excess port dues at the actual port of discharge.
23. See the Sub-Clause 30.2 of BPVOY4 and the Sub-Clause 33.3 of SHELLVOY 6.
24. See GRAINCONBILL – the Bill of Lading form to be used for grain shipments; COAL-OREVOYBILL – the Bill of Lading form to be used for coal and iron ore shipments; OREVOYBILL – the Bill of Lading form to be used for iron ore shipments; POLCOALBILL – the Bill of Lading form to be used for coal shipments; CHEMTANKVOYBILL – the Bill of Lading form to be used for the liquid chemical shipments.
25. [1978] 1 Lloyd`s Rep. 545
26. [1984] A.C. 676; [1984] 2 Lloyd`s Rep. 129.
27. [1984] 1 Lloyd`s Rep. 244
28. See Leeds Shipping Co. Ltd. v. Société Francaise Bunge (The "Eastern City"), [1958] 2 Loyd`s Rep. 127
29. See Kodros Shipping Corporation v. Empresa Cubana de Fletes (The "Evia No.2"), [1982] 2 Lloyd`s Rep. 307; and Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corp of India (The "Kanchenjunga"), [1990] 1 Lloyd`s Rep. 391
30. See Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corp of India (The "Kanchenjunga"), [1990] 1 Lloyd`s Rep. 391
31. See Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corp of India (The "Kanchenjunga"), [1990] 1 Lloyd`s Rep. 391
32. See Pearl Carriers Inc. v. Japan Line Ltd. (The "Chemical Venture"), [1993] 1 Lloyd`s Rep. 508
33. [1983] 1 AC 736; [1982] 2 Lloyd`s Rep. 307.
34. The electronic Bills of Lading can be transferred and produced back to the vessel`s Master in a couple of hours after the shipment.
35. The Article 51 paragraph 3 (c) of the Rotterdam Rules provides that: "In order to exercise the right of control, the holder shall produce the negotiable transport document to the carrier … If more than one original of the document was issued, all originals shall be produced, failing which the right of control cannot be exercised."
36. See A/S Dampskibsselskabet Torm v. Beaumont Oil Ltd. and Banque Paribas (Suisse) S.A., 927 F.2d 713 (2nd Cir. 1991)
37. See Borealis AB v. Stargas Ltd. & Anor, [2002] EWCA Civ. 757
38. See Borealis AB v. Stargas Ltd. & Anor, [2002] EWCA Civ. 757
39. [1998] 2 Lloyd`s Rep. 39
40. The Judge said that had the vessel completed the voyage to berth and delivered the cargo, it would have been Repsol Oil International Ltd. and not Repsol Petroleo S.A. who would have taken delivery under the Bills of Lading from the carrier. Repsol Petroleo S.A. would not have needed the Bills of Lading because it purchased the cargo on Ex Ship basis (DAP in INCOTERMS 2010). DES or DAP sellers do not have to provide evidence of shipment of goods as in case of FOB, CFR and CIF deliveries. The evidence of delivery of goods in DES or DAP sales are the certificates of quantity and quality issued by the independent inspectors based on the measurement, sampling and testing carried out at the time of discharge from the vessel.
41. The charter party stated the destination as "… one or two safe port(s) EUROPEAN MEDITERRANEAN ..." and provided that "Charterers to have the right to order the vessel to any port within the terms of the Charter Party".