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Arbitration Clause – Liner Bills of Lading


Jagan - January 31, 2018 - 0 comments

  1. We have been propounding arbitration to deal with disputes in the Liner Industry. The majority of the Bills of Lading issued in the Liner industry still incorporate a Law and Jurisdiction Clause (providing for the courts of a particular jurisdiction to deal with a dispute), however, we do note that some Liner Operators / Carriers / NVOCC’s are now incorporating or considering incorporating an arbitration clause to deal with disputes. This article considers issues which may arise by the use of such arbitration clauses in the Bills of Lading contract together with suggestions to deal with them.
  2. Bills of Lading:
    1. The Bill of Lading is an unique contract in that :
      1. The contract is invariably formed prior to issue of the Bills of Lading.
      2. While the initial parties to the contract is between the Carrier and the Shipper, the Bills of Lading are endorsed to a subsequent party and this may continue till such time the final endorsee submits the Bill of Lading to the Carrier to take delivery of the cargo. The doctrine of privity of contract, a common law principle, provides that a contract cannot confer rights or impose obligations on any third party who is not a party to the contract. As the endorsee / consignee is a third party to the original contract, they will have difficulties in enforcing the contract against the Carrier (English legislation stepped in to try and resolve this  issue – The English Bills of Lading Act 1855 and which has since been repealed by The Carriage of Goods by Sea Act 1992. The main purpose of these acts were to regulate the acquisition of rights together with the imposition of liabilities on the consignee or the endorsee/transferee who comes forth for delivery).
    2. The Bills of Lading contract may also be considered as an unilateral contract given that the Shippers generally do not  have sufficient bargaining power to negotiate terms (which are always boilerplate terms) and which means that use of  arbitration is not individually negotiated with the Shippers.  While the Shipper may be aware of the Arbitration Clause (if it is properly brought to his notice), the Consignee / endorsee only becomes aware when he comes in possession of the Bills of Lading.
    3. Frequently, bookings with the Carrier are made through intermediaries, such as freight forwarders acting as agents for the Shipper. The Bills of Lading are only provided once the shipment has been effected, and therefore the Shippers listed in the Bills of Lading may be unaware of the same.
  3. Types of possible claims: Liner contracts, by definition, have regular advertised sailings such that cargo interests could ship their cargo on smaller parcels, as and when ready. Accordingly, the claims are generally not very substantial, with the majority of claims generally below USD 100,000. However, claims arising from improper packing / stowage of cargo may sometimes be for substantial sums given that these losses may be for contamination of 3rd party cargo / fire /etc (we have seen multi-million dollar claims for such losess).  The common claims which may arise are as follows:
    1. Detention and Demurrage due to the delay by the Shippers in turning the laden containers within the time allowed at the port of loading or delay in taking delivery at destination by the consignee within the free time allowed at the port of destination.
    2. Damage to other cargo / vessel / third party by improper packing / stowage, mis-declaration of the cargo being carried.
    3. Damage to cargo during transit.
    4. Delay in delivery.
  4. Why arbitrate?
    There are obvious benefits such as reduced costs, quicker resolution together with possibility of engaging arbitrators having requisite knowledge of the Liner Industry (see Para 3 of our earlier article – Arbitration for Liner Contracts). In addition, Small Claims (say below USD 100,000) which are generally not pursued, or if pursued, compromised to consider the costs of pursuit, can be pursued for recovery given that the costs of pursuit would be much lesser (say by use of the Small Claims Procedure which provides for fixed costs). Examples of claims which Carriers and Cargo Interests could consider pursuit would include:

    1. Recovery for uncleared cargoes, unpaid charges including demurrage / detentioin as the case may be by Carriers.
    2. Cargo damage claims by Cargo interests including subrogated cargo insurers.
  5. Issues for enforcement:
    1. Some jurisdictions allow cargo interests (Shippers, Consignee and their insurers) to deny the enforceability of the arbitration clause due to:
      1. Imbalance in bargaining powers between the parties
      2. Consignee not being an original party to the Bill of Lading Contract.
      3. A separate independent right which may be available under the local legislation (such as Consumer Protection Act in India, etc).
    2. Some jurisdictions will not give effect to arbitration clauses as these oust the jurisdictions of the local courts (see clause 4 c of Arbitration for Liner Contracts). A variation of this is that the courts may not give effect to the arbitration clauses unless the arbitration is conducted within the jurisdiction (see clause 2 a of Arbitration for Liner Contracts -2).
  6. Possible solutions:
    1. The Bills of Lading must list the Arbitration Clause prominently in its face so that it is easily noticed by the Shipper and other parties (consignee or endorsee) who may come into possession (so as to avoid any challenge to the incorporation of the arbitration clause).
    2. The Carrier must notify the Shippers of their Bills of Lading terms including their arbitration clause at the time they are negotiating the contract of carriage. This would allow the Shipper to consider whether they wish to proceed with the carriage contract.
    3. If the negotiation of the contract is through an intermediary (freight forwarders), the Carrier must ensure to impose terms requiring the intermediaries to have the authority to contract on behalf of their clients and at the same time being liable jointly and severally for any and all claims out of the contract (see BIFA STC Clause 3, SLA STC Clause 5).
    4. It would be good practice to advise the Shipper that they (Shipper) as original party to the contract remain liable under the contract irrespective of the Bill of Lading having been endorsed and transferred to a third party (This is provided both under common law and The English Carriage of Goods by Sea Act 1992).
    5. The arbitration clause must list a seat which is pro arbitration. The seat of the arbitration is the legal jurisdiction to which the arbitration is tied and therefore this will determine the law of the procedure which the arbitration adopts together with intervention the courts will have over the arbitration.
    6. Some Liner Operators operate on a world wide basis and therefore the use of a “one size fits all” arbitration clause may not be appropriate. In this regard, we submit that the Liner Industry should work together with the Cargo Interests / Intermediaries / Cargo Insurers to draw suitable rules to deal specifically with liner disputes (the prevailing arbitration clauses list various rules including LMAA, SCMA, KLRCA with amendments). The advantage of having specific Rules to deal with Liner dispute would be that it would not only be neutral but also work towards the expeditious resolution of claims with minimum costs. Such Rules can also consider the requirement of the arbitration being local, (so as to ensure that it does not fall foul of the relevant legislation (see 4 b above wherein we make reference to the requirement in Australia), possibility of the initiating party considering the seat of the Arbitration, etc.
  7. Conclusion:
    1. While the progress in the use of Arbitration is slow in the Liner Industry, when parties become aware of the inherent advantages of Arbitration, the take up should increase.
    2. The Rotterdam Rules, which is yet to be in force, provide for the use of Arbitration (which is not mandatory for normal contracts) and therefore it would be preferable to have proper rules in place prior to it (Rotterdam Rules) coming into effect.

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