Buyer & Third Parties

Transfer of Rights to Buyer at Common Law

Under both the common CIF and FOB type contracts for the sale and carriage of goods, the contract of carriage is usually entered by the seller.   However, the property in the goods usually passes to the buyer at or before delivery, so that the buyer is the party who will suffer loss and damage in the event that the goods are lost, damaged or delayed.

It is a fundamental principle of common law that a person who is not a party to the contract does not have the right to enforce it. This has been alleviated in the context of the carriage of goods, by certain common law doctrines and principles and by statute.

At common law, it is presumed that the seller contracts as the undisclosed principal of the buyer, where the ownership of the goods has already passed at the relevant time. This applies commonly in road transport. This position does not apply generally to contracts for carriage of goods by sea. The property does not usually pass until payment against the documents.

Customary merchant law in relation to shipping developed mechanisms by which the buyer of goods could be given title to them so as to make a claim for delay in delivery; damage and loss in the course of carriage, notwithstanding that the contract of carriage was made between the seller (the shipper / consignor) and the carrier (the shipowner or charterer).

Transfer of Benefit Bill of Lading

There is generally no direct contractual relationship between the carrier and the consignee.  The buyer may become liable under certain types of contract or by statute.  If the goods are lost or damaged due to the negligence of the carrier or others, are if goods are taken are interfered with, the person entitled to them, usually the buyer may have a claim in negligence or a property claim to the good.  These claims may circumvent the limitations in the contract or which might arise where the contract is negated.

The bill of lading will usually contain the terms of the contract of carriage.  The Bill of Lading Act provides an exception to the general principle that only parties to a contract may sue on it.  The Act allows the contract to be transferred from sellers to banks and buyers so that the rights under the contract rest with the person entitled to possession of the goods.

The Bill of Lading Acts provides that the consignee or endorsee of a bill of lading succeeds to the rights of the shipper under the contract of carriage.  This is provided that the ownership of goods is passed by assignment or endorsement. The legislation applies to bills of lading only, and not to other transport documents, by which property in the goods passes. The rules have been expanded in some jurisdictions.

Statutory Assignment of Contract

The Bill of Lading Act provides for an assignment of the contract contained in the bill of lading to the consignee named or to the endorsee. The buyer obtains rights under the initial contract between the seller (shipper) and the carrier, evidenced by the bill of lading, upon endorsement which takes effect by statute.

The property in the goods must have passed under the contract or by reason of assignment or endorsement. The Bill is the title to the goods, and the parties will usually intend that the title to the goods passes on assignment.

Where a claim is made by the third party (buyer) who holds the bill of lading, his rights derive from the statutory assignment of the bill of lading contract. The bill of lading will usually comprise all or the principal parts of the contract. In some cases, the terms of the bill of lading may be varied or displaced by clear evidence to the contrary regarding the actual terms of the contract agreed with the carrier.

Security may be granted by endorsement by way of pledge. Financers obtain special property in the goods, rather than general property, i.e. a security interest. If goods are part of an unascertained bulk, the property cannot pass until they are ascertained under the basic sale of goods provisions.

Further Common Law Assignment and Extension

Various mechanisms have been developed by the courts over time to plug gaps in the bill of lading legislation, such as the deployment of trusts, assignment and agency principles.

The shipper may contract as agent for the third-party consignee. Where available on the facts. a finding of agency gives the most comprehensive substitution of the buyer as a party to the contract. The buyer as the third-party principal is the party from the outset and has a clear right to enforce the contract.

In theory, a seller may act as trustee for the buyer on the basis that the buyer is the true owner of the goods.  However, a trust will not usually exist in the context of a sale, and the concept is less likely to be employed.

Contractual rights may be transferred by assignment. However, duties may not be transferred. This is a significant weakness for the prospective employment of the concept of assignment in this context.

Bill of Lading Charterer and Ship Owner

If the bill of lading is signed by the charterer or its agents; it is a charterer’s bill. The contract is between the charterer and the holder on the terms of the bill.  Where a charterer’s bill is issued, the ship-owner may be responsible for the delivery of the cargo against the charterer’s bill of lading in accordance with the bailment to the charterer. In other cases, it may be interpreted that the ship-owner is sub-bailee of the charterer in respect of the goods.

Where a demise clause is provided in the bill of lading, it has effect or purports to have effect, as a contract between the shipper and the shipowner. Where the shipper contracts with the charterer and the bill of lading is signed by it as the ship owner’s agent, it constitutes a ship owner’s bill of lading. This allows the arrest of the vessel to enforce a claim.

Demise clauses state that if the “carrier” is not the owner of the vessel or the demise charterer, it merely acts as an agent for the vessel owner and has no liability at all as a carrier albeit that it may have issued the only bill of lading in relation to the goods. Identity of carrier clauses have a similar effect, providing that the contract is made with the shipowner and not the person the shipper regarded as the carrier.

Most liner container operators have discontinued the practice of including a demise clause or identity of carrier clause in their bill of lading. The clause may make it much harder to bring a successful claim for loss or damage to goods. The shipowner may be a one vessel operator under a flag of convenience in a faraway place and prove difficult to pursue for any claim. The clauses are arguably inconsistent with the carrier’s obligations under The Hague Visby rules.

Bailment and Negligence

Bailment concepts are employed by the courts in this context. A bailee may pass goods onto a sub-bailee. A bailee owes a duty of care to the bailor in respect of the goods. A successor to the original bailor may sue on the bailment. The bailee or sub-bailee may attorn to it by recognising it as bailor.

Attornment appears to operate retrospectively. The requirement for attornment does not apply if the bailment is on the terms of the bill of lading and its benefit is assigned to the successor. Equally, an attornment is not required if the apparent third-party is, in fact, the original bailor.

The buyer/consignee may have an action for negligence against the carrier. However, fault must be proved. If there is a bailment, it reverses the burden of proof as the person in possession of goods is obliged to show that he has taken care of them. A claim in negligence does not cover pure economic loss. It requires a breach of the duty of care whereas a contractual duty is strict.

Where there is a contractual duty between that plaintiff and defendant, recovery for negligence may be limited by exceptions and limitations in the contract. Where there is no contract, there is potentially no limit to liability.

Extending Limitation of Liability to Third Party Contractors I

The limitations in The Hague Visby Rules covers employees and agents of the carrier. However, if actions are taken against independent contractors and other third-parties, such as those handling the goods, they may not enjoy the benefit of the limitations. The Hague Visby Rules do not directly apply, but the courts have sought where possible to limit recovery in accordance with the financial limits in the rules. In some cases, the courts have denied a duty of care on the part of the third-party. In other cases, it has been argued unsuccessfully that there was a voluntary assumption of risk.

In other cases, the courts have sought to find a contract between the owner of the goods and the third party, which is subject to The Hague and Hague Visby Rules. They have sought to graft a contract with limiting terms on to the duty of care in tort. In a famous case in the 1960s, the House of Lords rejected the argument of so-called vicarious immunity, where a stevedore sought to rely on exceptions in the bill of lading in favour of the carrier.

Extending Limitation of Liability to Third Party Contractors II

In response, so-called Himalaya clauses emerged. They were upheld by the Privy Council in the mid-1970s. The principle of agency could be used to assist third-party defendants such as stevedores, provided that

  • the bill of lading made it clear that they were intended to be protected by the clause;
  • the carriers purported to contract as their agent;
  • the agent had the authority of the stevedores to make the contract; and
  • consideration must have been given.

Himalaya clauses sought to satisfy the above conditions. The position is not without difficulty and involves the stretching of existing legal concepts.

Another mechanism employed to protect third parties is the incorporation of an indemnity / undertaking in the bill of lading, not to sue the carrier’s employees, subcontractors, at least not on terms more favourable than applying against the carrier. These clauses have been upheld. However, they give a remedy to the carrier but not a direct remedy to the independent contractor. The clauses are weak as there are certain procedural complications. The carrier must be joined to determine to what extent it is required to give the subcontractor the indemnity.

References and Sources

Consumer Law  Long      2004

The Law of Transport and Road Haulage (1999) Canny

Consumer Law Rights & Regulation          Donnelly & White 2014

Commercial Law White  2nd ed    2012

Commercial & Economic Law in Ireland  White    2011

Commercial Law Forde  3rd ed    2005

UK Texts

Schmitthoff: The Law and Practice of International Trade 13th ed Carole Murray, David Holloway, Daren Timson-Hunt, Schmitthoffs 2018

Bills of Lading in Export Trade 4th ed Charles Debattista 2018

Arnould’s Law of Marine Insurance and Average 19th ed  Jonathan Gilman, Robert Merkin, Claire Blanchard, Mark Templeman 2018

O’May on Marine Insurance 2nd Ed Julian Hill 2018

Shipping Law 3rd ed  Sweet & Maxwell Ltd 2018

The UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea 2nd ed Michael Sturley, Tomotaka Fujita, Gertjan van der Ziel 2018

Commercial Maritime Law Edited by: Melis Ozdel 2018

Springer-VerlagScrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement

Scrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement (Book & eBook Pack) Scrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement (Book & eBook Pack)

Bernard Eder, Howard Bennett, Steven Berry, David Foxton, Christopher Smith 2017

The Bill of Lading: Holder Rights and Liabilities The Bill of Lading: Holder Rights and Liabilities

Frank Stevens 2017

Charterparties: Law, Practice and Emerging Legal Issues Edited by: Baris Soyer, Andrew Tettenborn 2017

Shipping and Trade Law 2017

Multimodal Transport Law Michiel Spanjaart 2017

Maritime Law 4th ed Edited by: Yvonne Baatz 2017