London Arbitration: Indemnity Claims

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Date31st January 2019
CategoryNewsletter articles

LONDON ARBITRATION: Charterers P&I Club Assured successfully Claims Indemnity from Voyage Charterer who Misdescribed Cargo in Bill of Lading

By Chris Ward, London Office

In this article, Chris Ward, a claims executive in our London office, reports on a recent London arbitration where one of our Assureds acting as disponent owner was successful in passing down to the voyage charterer the 50% contribution paid up the contractual line to the head owners pursuant to the Inter Club Agreement. Though arbitration awards do not set a legal precedent, it is interesting to see how in this case a London tribunal was prepared to accept an implied indemnity by virtue of the charterer issuing a bill of lading which failed to describe accurately the condition of the cargo. It remains to be seen if the Courts will follow a similar approach.

One of our assureds has successfully passed a USD 500,000 cargo liability on to their voyage charterer in a ground breaking London arbitration decision.

The vessel loaded soya beans at Santos, Brazil in July 2012 for carriage to Guangzhou, China. There were some damaged and blackened beans in the cargo due to silo burn at Santos. The cargo was loaded via a chute and the loading operation caused a dust cloud which prevented the master or crew from identifying the damaged beans. The charter party required the master to sign bills of lading as presented by the charterer. The bill presented for signature and signed on behalf of the master stated that the cargo was in apparent good order and condition. The bill failed to state the date of the charter terms incorporated into the bill.

On arrival at Guangzhou, the receivers arrested the vessel, which was released only after the head owners issued LOU security agreeing to submit the cargo claim to Chinese law and jurisdiction. Relying on the clean bill as evidence that the cargo was loaded in good condition, the Chinese Court gave judgment in favour of the receivers equivalent to USD 1m.

Having paid the claim, the head owners commenced arbitration against our assured for a 50% contribution under the Interclub Agreement incorporated into the head charter. The assured settled the claim and commenced London arbitration against their sub voyage charterer to recoup the USD 500,000 paid to the head owner, along with the costs of the head arbitration.

The arbitrator held that our assured was entitled to an indemnity. The decision is an unusual one, not least because it is rare for a cargo indemnity to be awarded under a voyage charter.

Where a party in the shoes of a shipowner suffers liability for a cargo claim, it is generally simpler to claim an indemnity from their charterer if the relevant charter is a time rather than a voyage charter.

NYPE time charters often contain an express term giving effect to the Interclub Agreement, which sets out a rough and ready apportionment of liability for cargo claims as between owner and charterer. An owner who suffers a cargo liability might routinely recover 50% or 100% of that liability from their charterer under the Interclub Agreement, depending on the nature of the claim.

English law will also imply a potentially far-reaching term obliging a time charterer to indemnify their owner for the consequences of following the charterer’s orders for the employment of the vessel.

A voyage charter however contains no such implied indemnity, as the vessel is engaged on a fixed transit and is not under the charterer’s general control. Voyage charters also do not normally incorporate the Interclub Agreement or contain an express term roundly apportioning cargo liability. Some voyage charters incorporate provisions of the Hague or Hague-Visby Rules but such Rules only enable a charterer to claim against an owner for cargo liabilities and not the other way around.

If the cargo shortage or damage is caused by stevedores, the charter stevedoring provisions might enable the owner to recover from their voyage charterer. However, where there is no express clause which might support a cargo indemnity claim, the owner will be unable to claim from their voyage charterer unless they can demonstrate an implied right to an indemnity. This requires the owners to prove that the liability arose from a discrepancy with the bill of lading for which the charterer is responsible.

In such cases, the bill of lading will have been signed on behalf of the owner. In order for the voyage charterer to be potentially responsible for how the cargo is described in the bill, the charter must contain a term stating that the master is to sign bills of lading as presented. English law will then imply an obligation to indemnify from the request to sign the bill of lading and a warranty that the statements contained in the bill are accurate.

Consequently, where shippers understate the cargo weight in the bill of lading but the voyage charter requires the master to sign bills as presented, the charterers must indemnify the owners for their resulting losses (Dawson v Adler [1932] 1 KB 433)

The position is more complicated where the bill misstates the cargo condition because the master is responsible for assessing the apparent order and condition of the cargo. In The Nogar Marin [1988] 1 Lloyd’s Rep 412, a steel coil cargo was loaded in a rusted and damaged state but a bill describing the cargo as “loaded in apparent good order and condition” was presented for signature. It was held that the master was negligent in allowing a clean bill to be signed when he ought to have been aware of the damage. This negligence broke the chain of causation between the presentation of the inaccurate bill for signature and the ensuing claim. Consequently, there was no right to an indemnity. Although the charter required bills to be signed as presented, the master should have rejected the bill and insisted on one which accurately described the cargo.

We are aware of no reported English Court decision in which a shipowner has obtained an implied indemnity from their voyage charterer for losses arising out of a bill presented for signature which inaccurately describes the condition of the cargo.

However, this is precisely the basis for the USD 500,000 indemnity awarded to our assured. The London arbitrator held that the master and crew were deprived of any opportunity to inspect the condition of the cargo. Accordingly, there was no break in the chain of causation between the inaccurate bill being presented for signature and the liability which ensued. Our assured was entitled to recover both the USD 500,000 indemnity and their costs.

The arbitrator also held that the head owners’ concession to Chinese law and jurisdiction did not break the chain of causation. As the charterers had failed to specify the date of the charter terms incorporated into the bill of lading, they were not in a position to criticise the owners for failing to ensure that the cargo proceedings were heard in London arbitration.

Assureds should be mindful of the cargo indemnity terms applying to their charter parties and the fact that an obligation to sign bills of lading as presented does not obviate the need for the master to properly inspect the cargo where reasonably possible.