Shippers` And Buyers` Potential Liabilities In The Sea Carriage Of Containerised Commodities
Liability For Destination Terminal Handling Charges
The freight rates for containerised shipments are quoted in two ways: as an all-inclusive rate that incorporates all charges or as a basic rate plus ancillary charges.
In case of all-inclusive rates, the payment of freight charges and surcharges under a single Bill of Lading would all have to be on either a prepaid or collect basis and no part of an all-inclusive rate may be split between a prepaid portion and a collect portion.
In case the ancillary charges such as Terminal Handling Charges are charged separately from the basic sea freight rate, the Bills of Lading may show a portion of total freight and charges prepaid and the balance of the freight and charges collect. Such Bills of Lading are sometimes issued for containerised shipments sold on CFR or CIF terms, when the sellers do not wish to pay for the destination terminal handling charges. In such cases the Bills of Lading stipulate expressly that the Destination Terminal Handling Charges must be paid by the consignee prior to the release of containers.
For this purpose some NVOCCs and container shipping lines included in their Bill of Lading terms and conditions the following clause:
"Notice To Endorsee And/Or Holder And/Or Transferee
By taking up this Bill of Lading, whether by endorsement and/or becoming a holder and/or by transfer hereof and/or by presenting this Bill of Lading to obtain delivery of the Goods herein and/or otherwise, the endorsee/holder/transferee and the Carrier agree that the endorsee/ holder/transferee thereupon become a party to a contract of carriage with the carrier on the basis herein."
The banks paying under letters of credit accept the Bills of Lading containing references to costs which may be incurred after the containers with the goods are discharged. In this regard the ISBP1 paragraph E27 has the following provisions:
"a. When a credit states that costs additional to freight are not acceptable, a bill of lading is not to indicate that costs additional to the freight have been or will be incurred.
…..
c. Reference in a bill of lading to costs which may be levied […] after the goods have been unloaded (demurrage costs) or costs covering the late return of containers (detention costs) is not an indication of costs additional to freight."
Liability For Container Demurrage And Detention Charges
The container demurrage charge is levied by the container liner operators in case of consignees` failure to arrange the Customs clearance or to take delivery of the laden containers from the destination port terminal within the allowable "free time".
The "free time" is the period of time during which the carrier holds in custody the laden containers at the destination port terminal following the date of discharging from the vessel, free of charge.
The container detention charge is levied by the container liner operators in case of consignees` failure to unpack the goods and return the containers to the carrier within the allowable "free time".
In this case, the "free time" is the period of time allowed for unpacking the goods and return of the empty containers to the carrier.
The demurrage rate, detention rate and free time periods for collection of the laden containers, unpacking the goods and return of the empty containers are stipulated in the carrier`s tariff which is incorporated in the Bill of Lading through express reference in the Bill of Lading`s terms and conditions. An example of such Bill of Lading`s terms and conditions are the MSC`s Bill of Lading terms and conditions which include the following provisions:
"3. Carrier`s Tariff
The terms and conditions of the Carrier`s applicable Tariff are incorporated into this Bill of Lading. Particular attention is drawn to terms and conditions concerning additional charges including demurrage, per diem, storage expenses and legal fees etc. A copy of the applicable Tariff can be obtained from the Carrier or its agent upon request and the Merchant is deemed to know and accept such Tariff. In the case of any conflict or inconsistency between this Bill of Lading and the applicable Tariff, it is agreed that this Bill of Lading shall prevail.
[….]
14.8 The Carrier allows a period of free time for the use of the Containers and other equipment in accordance with the Tariff and as advised by the local MSC agent at the Ports of Loading and Discharge. Free time commences from the day the Container and other equipment is collected by the Merchant or is discharged from the Vessel or is delivered to the Place of Delivery, as the case may be. The Merchant is required and has the responsibility to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery. Demurrage, per diem and detention charges will be levied and payable by the Merchant thereafter in accordance with the Tariff."
Some carriers stipulate the free time period also on the face of the Bills of Lading.
One of the risks related to the containerised transport of commodities is that in case of a downfall of the market price below the contract price the buyers will seek to avoid the payment and collection of containers with the goods at any cost. In such case, the shippers will be left to bear the container demurrage charges. The shippers remain liable as the original party to the contracts of carriage notwithstanding the transfer of the Bills of Lading to a bank.
The buyers would become liable only after the presentation of the Bills of Lading and making a formal demand for delivery of the goods. If the buyers do not make a formal demand for delivery of the goods, they cannot be held liable under the Bills of Lading2.
An example of such case was the English case Fortis Bank S.A./N.V. and Stemcor UK Ltd. v. Indian Overseas Bank3. The case involved a shipment of 15,500 MT of steel scrap packed in containers sold basis CFR CY Haldia to an Indian company.
The letters of credit issued for the payment of cargo required the presentation of Bills of Lading made out to order of the issuing bank and showing 10 days free time for the storage of containers at the discharge port.
The Bills of Lading issued for the cargo showed between 10 and 14 days free time for the storage of containers at the discharge port. However, by the time of shipment the market price for steel scrap had fallen below the contract price and the buyer was no longer interested to buy the cargo.
On instruction of the buyers, the issuing bank rejected the shipping documents on the ground of alleged discrepancies but failed to return the shipping documents with reasonable promptness to the negotiating bank.
The shippers were unable to take control over the goods at the destination container terminal in due time because the issuing bank returned the Bills of Lading only after three months after the date of presentation by the negotiating bank.
The carrier claimed the reimbursement of container demurrage charges from the shippers. The shippers had to pay container demurrage charges in the amount of $869,048.
A more recent example is the English case MSC Mediterranean Shipping Company SA v. Cottonex Anstalt4.
The case involved a shipment of raw cotton packed in 35 containers sold to a company in Bangladesh. After the conclusion of the sale contract, the market price of raw cotton collapsed. The buyer sought to cancel the contract but the seller refused the cancellation of contract.
The next move of the buyer was to obtain an injunction order from a local Court to restrain the issuing bank from paying under the letter of credit. However, the letter of credit was confirmed by a bank in the seller`s country so that after the shipment of goods, the shipper obtained the payment under the letter of credit from the confirming bank.
The containers with the goods were discharged at the port of discharge on various dates between 13th May and 27th June 2011.
The Bills of Lading stipulated a free time period of 14 days starting from the dates when the containers were discharged from the vessel at the port of discharge.
The consignee refused to collect the goods. The Bills of Lading terms and conditions stipulated that if the consignee failed to collect the goods within the 14 days` free time period, the carrier was entitled to unpack the goods from containers and thereby free up the containers for use elsewhere. However, the customs authorities did not allow the removal of cotton from containers without a Court order and the containers remained at the port of discharge.
The carrier sent notices to both shipper and consignee.
On 27th September 2011, the shipper informed the carrier that it no longer had any legal title to the goods following the payment made by the confirming bank and it could do nothing about the containers. But in an email dated 2nd February 2012, the carrier offered to sell the containers to the shipper as a solution for the settlement of dispute provided also that the shippers would have settled up-to-date demurrage charges due. The shipper declined the offer because the carrier wanted for the 35 containers US$200,000 which would have meant approximately US$5,714 per container.
In June 2013 the dispute reached to the English Commercial Court.
The carrier sought to recover the sum of US$577,184 for the container demurrage charges incurred following the date of expiry of the 14 days` free time period until 30th April 2013. The carrier contended that demurrage started to accrue after the expiry of the 14 days` free time period and would have continued to accrue at the daily rate until the containers were redelivered.
The shipper contended that the notice sent on 27th September 2011 about his inability to return the containers within the foreseeable future amounted to a repudiation of the contracts of carriage which the carrier was obliged to accept, thereby bringing to an end any obligation to pay demurrage.
The English Commercial Court held that demurrage will accrue after the expiry of the free time period irrespective of whether the shipper or consignee collects the containers or not. The Court also held that the shipper remained liable as the original party to the Bills of Lading (contracts of carriage).
The English Commercial Court held that from 27th September 2011 when the shipper informed the carrier that there was no realistic prospect of being able to redeliver the containers, "the delay in collecting the goods had become so prolonged as to frustrate the commercial purpose of the adventure" and therefore, the shipper was in repudiatory breach of all the contracts of carriage. Therefore, the carrier was entitled to recover the demurrage charges for the period between the date of expiry of the 14 days` free time period and 27th September 2011 when it received the shipper`s notice that it no longer had legal title to the goods.
In appeal, the English Court of Appeal held that the shipper was in repudiation of the contracts of carriage from 2nd February 2012 when the carrier offered to sell the containers to the shipper.
The Court held that the carrier`s offer to sell the containers was the clearest indication that the "commercial purpose of the adventure" had become frustrated by 2nd February 2012.
The fact that the "commercial purpose of the adventure" had become frustrated meant that in commercial terms the containers had been lost. Due to the breach of contract, the shipper had become liable in damages for their loss. The loss to the carrier resulting from the shipper`s failure to return the containers was represented by the value of containers on 2nd February 2012. The carrier had the right to recover damages for the loss of containers calculated by reference to their value on 2nd February 2012 (US$3,262 per container) and demurrage for detention of containers up to and including 1st February 2012. After 1st February 2012, demurrage was not recoverable.
The English Commercial Court held that the container demurrage charges will continue to accrue after the expiry of the free time period until:
- the shipper or consignee takes delivery of the containers and returns them to the carrier; or
- the goods are unpacked by the carrier based on the Bills of Lading terms and conditions entitling the carrier to do so; or
- the contract of carriage is terminated (by shipper`s repudiation).
Therefore, if the shippers of containerised commodities are trapped in a dispute with the buyers or their banks due to the buyer`s refusal to perform his contractual obligations and will not be able to redeliver the containers in a foreseeable future, they should try to reach a settlement with the carrier in due time for the cost of containers. The demurrage charges will be payable until the date of such settlement. The carrier cannot ignore the shipper`s repudiation of the contract of carriage and claim demurrage indefinitely.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Metals & Minerals Legal Brief Edition No. 1.
Endnotes:
1. International Standard Banking Practice for the Examination of Documents under UCP 600 (ICC Publication No. 745E)
2. See Evergreen Marine Corporation v. Aldgate Warehouse (Wholesale) Ltd., [2003] EWHC 667 (Comm), [2003] 2 Lloyd`s Rep. 597.
3. [2011] EWHC 538 (Comm); [2011] 2 Lloyd`s Rep. 190.
4. [2016] EWCA Civ 789, [2015] EWHC 283 (Comm).