Both Operators involved in voyage charters and Liner Operators provide services in return for payment of freight. Issues do commonly arise, particularly, when cargo interests refuse to pay freight or pay a reduced freight due to either damage to cargo or delays in the voyage. This article touches on the various issues related to freight from a practitioner’s perspective.
- While there are many definitions, we prefer to define it as the payment of a sum of money to the Carrier for the carriage of goods. To enforce a simple agreement, at least in common law countries, there must be consideration i.e., benefit/detriment that the parties derive from the agreement. In the case of shipping contracts, this is the payment of a sum of money to the Carrier, commonly called “Freight” from the cargo interests.
- Under common law, freight is only earned on right and true deliveryi. Absent any other contractual provisions, a Carrier would be at risk till such time they deliver all, or at the very least a substantial portion, of the cargo they had been contracted to carry. A Carrier may insure their risksii and should there be any loss or damage to the cargo being carried, submit their claim to their Insurers. The other alternative is for Carriers to contractually provide for the freight to be earned either on receipt of cargo or on loading and in this way transfer the risk to the cargo interests. In this case, freight is no longer at risk of the Carrier. Instead, the element of freight is merged with the value of the cargo and for which cargo interests may take cargo insurance for both the value of cargo and freight, to protect their interests. Should the cargo be lost or damaged, Carriers would be entitled to still seek payment of full freightiii even if the payment is yet to be received.
- Set-off: If there is a dispute, cargo interests may wish to hold payment of freight and/or set off any potential claims they may have against the Carriers. Absent any contractual provisions, the rule in common lawiv is that the Carrier are entitled to payment of freight without any set-off. However, this is a narrow rulev and does not extend to hire contracts. Additionally, Liner Bs/Lvi and Freight Forwarding Standard Trading Conditionsvii contractually provide for “no set-off” such that cargo interests are contractually bound to make payment of the complete freight without any set-off.
- Lien: If the freight remains outstanding, a Carrier has under common law, an entitlement to hold lien over the cargo till such time they have received the freight due. This common law lien only extends to the freight for the cargo being carriedviii and not to earlier or other outstanding freight payments. As this lien is restrictive, Service Providers/Freight Forwardersix may contractually provide for this lien not only for the specific cargo being carried but also for earlier shipments.
- Nonpayment of freight:
- If the cargo interests do not make payment of freight, does it mean that there is failure of consideration such that there is no contract? Absent any specific contractual provisions on the time of payment of freight, delay or non-payment of freight does not result in the failure of consideration. Instead, it results in a debt to the Carrier, at least, when the cargo is ready for delivery and for which the Carrier can hold the cargo on lien and/or pursue the Cargo interests for payment. If there are contractual provisions for the payment of freight, absent payment, the Carrier is entitled to payment from the date when it becomes due and can pursue the same for recovery.
- While holding lien for payment may be one of the options available to a Carrier, prior to doing this, the Carrier must consider whether they are entitled to also recover the charges incurred for holding lien on the cargo. In this regard, a Liner Bs/Lx would generally incorporate a clause providing for recovery of these charges.
- Whether an overlying Carrier can hold lien on cargo due to non-payment of freight of the underlying carrier would depend on the terms and conditions of the Bs/L issued to the cargo interestsxi.
- Advance freight is basically moneys advanced to the Carrier and which will be deducted from the freight which is to be paid. If there is no freight due or that the freight due does not exceed the advance freight paid, the Carrier would have to refund the advance or the balance of the advance freight to the cargo interests.
- If the freight has been paid, the Bs/L issued will state Freight as “Prepaid”. The Bs/L is a negotiable document and therefore when it is transferred to a third party, they will become aware that the freight has been paid and that they have no further exposure for this.
- Sometimes, Carriers issue Freight Prepaid Bs/L, even though they may not have received the freight. This would be considered a credit arrangement between the Carrier and the Shipper such that subsequent holders would not be liable for the outstanding freight.
- Collect or Freight to be Paid: If the Bs/L are marked as Freight Collect or Freight to be Paid, successive holders of the Bs/L are aware that freight needs to be paid to the Carrier to take delivery of the cargo. Once the freight has been paid, say by a party in the chain, the Carrier could be requested to mark the Bs/L either as Freight Prepaid or Paid so that successive downward parties are aware of the same.
- Dead freight: If the Shipper fails to load the contractually agreed cargo resulting in non-utilization of space/slots, Carriers may contractually provide for the payment of the agreed freight as Dead freight. Alternatively, Carriers can pursue the cargo interests for recovery but would have to prove their loss.
- Short payment: Short payment of freight does not result in the complete payment of freight. This being the case, the Carrier is entitled to hold lien of the cargoes and/or pursue for recovery for the amounts unpaid.
- Interception of freight:
- This will depend on whether the Bs/L issued is an Owners Bs/L or allows for Owners/Overlying Carriers a right to intercept freight should they remain unpaidxii. In the case of Liner Industry, the Bs/L issued would generally be of the Operator and therefore it would be difficult to intercept freight.
- If the Operator ceases trading, the overlying Carrier would hold lien on the cargo for their unpaid freight. If the freight has already been paid, the cargo interests must provide evidence of the same and in which case, they would be entitled to deny any further payments. However, if the freight is yet to be paid, cargo interests may be forced to consider practical solutions to deal with the issues such as making payment to the Overlying Carrier in return for a release from their lien.
- Zero or negative freight:
- The Shipping Market is generally considered as a perfect market due to which the freight movements depend upon the demand and supply of cargo and vessels. When the demand for containers is way lesser than the supply, Shippers, in some sectors, are able to ship their cargo for Zero Freight (NIL Freight), and in some instances, get payment from the Carrier (negative freight). The question is whether there a contract when Zero / Negative freight is involved?
- Mr Joseph Tanxiii had earlier given a talk at the Singapore Branch of the Institute of Chartered Shipbrokers where he argued:
- Even though freight is Zero or negative, there is consideration given that Carriers received a benefit by moving the containers from a location of weak to a location of higher demand. Additionally, this movement may result in reduction in costs to the Carrier vis-à-vis if the containers were moved as empties, they would have to incur additional costs such as land haulage, terminal handling and other associated costs. This being the case, even though there is Zero or Negative freight, this is sufficient consideration for the purposes of enforcing the contract.
- It is also beneficial for Carriers to argue that there is sufficient consideration. Otherwise, in the absence of any contract, Common lawxiv would apply and which would result in Carriers being liable for the full value of the cargo in the case of any loss or damage to the cargo.
- One of the terms of the cover provided by Liability Insurersxv is that their Member/Insured (Carriers) contract on terms no wider than the Hague Visby Rules. As stated above, if there is no contract, the Hague/Hague Visby Rules would not apply such that the Member/Insured (Carriers) would be in breach of the Rules/policy conditions resulting in there cover being prejudiced.
- English Law has moved on from the strict requirements of consideration and instead accept practical benefit as considerationxvi. This being the case, if there can be a practical benefit shown arising from the agreement, the element of consideration would be fulfilled.
- Quantum Meruit freight: Carriers may, due to reasons beyond their control, be unable to complete the voyage contracted for. While the Carriers may be excused from performance based on either frustration or force majeurexvii, the question would be whether Carriers are entitled to freight, and if so, the amount if freight is at risk. The argument for the payment of say pro-rata freight is that the Carrier has suffered time and trouble. Absent any contractual provisions providing for quantum meruit, at least under English Law, a Carrier would not be entitled to any freight if the cargo is not delivered to the location contractually provided for.
- Risk Management: Freight is the lifeline for any Carrier. This being the case, delay in receipt of payment may result in extreme stress and sometimes lead to questions of their existence. Accordingly, Carriers must periodically consider
- their counterparties (cargo interests) to ascertain whether they are good for the risks and will make payment of freight when due
- Freight Insurance if freight is at risk
- Trade Credit Riskxviii if they provide credit to their clients, but this is more of a credit risk than a freight risk.
i. See Dakin v Oxley and which can be viewed at https://vlex.co.uk/vid/dakin-v-oxley-805714173
ii. Insurances can include Freight Insurances such as Institute Voyage Clauses, Freight 1/8/89 & Institute Time Clauses, Freight 1/8/89 and Trade Credit Insurance but this Insurance is strictly not for freight but the credit which may have been provided to the cargo interests. All of these Insurances are on named peril basis and therefore will be triggered if loss occurred due to one of the perils/risks insured for.
iii. See The Dominique. See also article, Getting Freight Straight, by Nick Froude.
iv. See The Aries.
v. See an article, The no-set off rule in freight contracts, where are we?
vi. See Clause 16.5 of the Maersk Bs/LTerms & Conditions.
vii. See Clause 19 (a) of the Singapore Logistics Association Standard Trading Conditions.
viii. See Article in TT Talk, Lien – Make sure it is “right” before exercising your right.
ix. See Clause 25(a) of the Singapore Logistics Association Standard Trading Conditions.
x. See Clause 17 of the Maersk Bs/L Terms and Conditions.
xi. See NAU’s earlier article, Cargo Liens for unpaid Hire / Freight.
xii. See article by Swedish Club, Remedies for non-payment of hire, liens, interceptions of freights and other forms of security.
xiii. Joseph Tan is the Managing Director of JLex LLC.
xiv.The Hague/Hague Visby Rules only apply to a contract of carriage. Accordingly, if there is no contract in the first instance, the Hague/Hague Visby Rules would not apply to deal with the carriage.
xv. Owners / Charterers P&I and Transport Liability Insurers.
xvi. See William v Roffey Bros & Nicholls (Contractors) Ltd.
xvii. See NAU’s article on Frustration and Force Majeure in Liner Contracts and Force Majeure revisited.
xviii. See NAU’s article on Trade Credit Risk.