The Meaning Of Statement "Apparent Good Order And Condition" In Charter Party Bills Of Lading Issued For Hot-Rolled Steel Coils
For the unwrapped hot-rolled steel coils it is customary to be stored in the open area and to have the surface covered by a layer of rust1. This layer of rust is caused by contact with fresh water and is usually of no consequence for further processing since any remaining rust or other extraneous matter is to be removed by a "pickling" process before cold rolling2. Hence, the presence of a light film of rust on the surface of hot-rolled steel does not affect its quality3.
This does not, however, mean that the Charter Party Bills of Lading should not mention about it. Nor does it mean that if the Charter Party Bills of Lading mention about the presence of rust on the surface of the steel this is necessarily an indication of a defective condition of cargo.
This matter was explained by the London Maritime Arbitrators and the English High Court in the case Sea Success Maritime Inc. v. African Maritime Carriers Limited4. In that case the question was not whether to mention or not in the Charter Party Bills of Lading about the presence of rust on the surface of steel, but whether a cargo in such condition should be loaded or not. The case was a dispute over the interpretation of a loading survey clause of a time charter party which stated that:
"Master has the right and must reject any cargo that are subject to clausing of the Bills of Lading."
The cargo was described in the Charter Party Bills of Lading based on the findings of pre-loading survey made by vessel`s P&I Club surveyors. The P&I Club`s surveyors report stated that the hot-rolled steel coils had been stored before shipment in open space subject to adverse weather conditions and that the cargo was rusty, with a percentage of it suffering from dents and buckles.
The charterer`s statements in the draft Bills of Lading as to condition of cargo were not disputed by the Master, but, in reliance of loading survey clause of charter party, the Master refused to load the cargo. The shipowners` interpretation of charter party clause was that only "good" cargo could be loaded and that any cargo that would be "subject to remarks" in the Bill of Lading must be rejected.
On their part, the charterers claimed that provided the description of cargo made in the Bills of Lading was accurate, there was no need for Master to clause the Bills of Lading as they already contained the surveyors` remarks. Accordingly, the Master had no good reason to refuse the loading of cargo on board the vessel.
The dispute was first submitted to arbitration in London and then went to English High Court.
The arbitrators had to decide over two questions:
- In what circumstances, on the true construction of charter party clause above, is the Master entitled and obliged to reject the cargo presented for shipment/tendered for loading?
- Did those circumstances exist at the time of loading the steel cargo?
The arbitrators` interpretation of charter party clause was that this was intended to avoid disputes between the Shipper and the Master as to the appropriate description of the cargo being loaded or about to be loaded to be inserted in the Charter Party Bills of Lading. It was not intended "to operate in circumstances where there is no disagreement between the Master and the Shipper as to the proposed description of the cargo in the Bills of Lading". Accordingly, the Master did not have the right to reject the cargo tendered for loading.
The arbitrators found that in the context of the charter party clause submitted for interpretation the term "clausing" means "a notation on the Bill of Lading by the Master or his agent, which qualifies existing statements in the Bill of Lading as to the description and apparent condition of the goods". It does not refer to terms used by charterer to describe the cargo in Bill of Lading even if such terms indicate a defective condition of cargo at time of loading. The question of whether the goods are "in apparent good order and condition" depends primarily on the nature of goods and the way in which they are described in the Bills of Lading that are tendered by charterer to Master for signature. A cargo that is properly described in the Bills of Lading as damaged or imperfect in some way can still be stated to be in "good order and condition". Thus, a cargo described in a Bill of Lading as "hot-rolled steel coils with pitting and gouging" can be stated to be in "good order and condition".
Similar conclusions can be found in US case law. One example is the case Thyssen, Inc. v. S/S Eurounity5, where the Bills of Lading included notations indicating that the cargo of hot-rolled steel was "RUST STAINED", "PARTLY RUST STAINED" and "WET BEFORE SHIPMENT". The shipowners argued that these notations indicated a defective condition of cargo at time of loading. The Court disagreed on the basis of the evidence provided by a freight forwarder and loading port surveyor. The freight forwarder testified that these notations referred to "non-damaging, atmospheric rust that does not affect the value of steel". The loading port surveyor testified that the "steel is considered to be in "prime" condition when the bills of lading include these standardized notations6".
In addition the pre-shipment survey report had a statement which confirmed that the presence of rust was not an indication of a defective condition of cargo. The statement was: "Amount of depreciation caused by any rust condition observed: none." Accordingly, both the District Court and the Court of Appeal concluded that the hot-rolled steel products so described were in good condition.
Another example is the case Steel Coils Inc. v. M/V Lake Marion7 where the Charter Party Bills of Lading included similar notations indicating that the hot-rolled steel coils were rust stained and wet before shipment. The shipowners argued that these notations indicated a defective condition of cargo at time of loading.
Both the US District Court and the Court of Appeal found from the evidence presented that the notations in the Bills of Lading indicating rust staining and moisture on the hot-rolled steel coils did not affect their good condition prior to loading.
Captain Arthur Sparks, Steel Coils` expert on sea carriage of steel cargoes explained that the notations regarding rust in the Bills of Lading were "non-restrictive clauses indicating that the goods were undamaged but affected by a form of atmospheric rust normal on all mild steel surfaces which are untreated against oxidation". This atmospheric rust, which he also termed "fresh water rust", is caused by the storage of hot-rolled steel coils in open air prior to loading onto the vessel. Mr. Arthur Sparks stated that this type of rust does not result in harmful deterioration of the material and only if the hot rolled coils come into contact with "an electrolyte more aggressive than fresh water, e.g. saltwater," does permanent damage to the plating occur. He also said that "it is not unusual for such goods to be shipped in an apparent rusty condition and wet" and despite the notations on the bills of lading, all of the bills of lading were signed clean and therefore "all cargo when shipped was in apparent good order and condition".
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Metals & Minerals Legal Brief Edition No. 1.
Endnotes:
1. See the Information about "Steel sheet in coils" in the Cargo Information section of Transport Information Service from the German Insurance Association at www.tis-gdv.de
2. See "Hot rolled steel sheeting" report in the Carefully to Carry section in the Loss Prevention area of UK P&I Club website www.ukpandi.com and the Information about "Steel sheet in coils" in the Cargo Information section of Transport Information Service from the German Insurance Association at www.tis-gdv.de.
3. See the Information about "Steel sheet in coils" in the Cargo Information section of Transport Information Service from the German Insurance Association at www.tis-gdv.de
4. [2005] EWHC 1542 (Comm); [2005] 2 Lloyd`s Rep.692
5. 21 F.3d 533 (2nd Cir.1994)
6. These standardized notations are part of a list of standard clauses published by The International Group of P&I Clubs to be used in Bills of Lading to describe the condition of steel cargoes.
7. 331 F.3d 422 (5th Cir. 2003)