Back to Back Contracts

1. International Shipping has become increasingly specialized, and which has led to many parties including Owners of vessel being involved in the trading for freight. The other parties include Charterers, Operators, NVOCC’s, etc. In the Bulk trades, the Bills of Lading (“Bs/L””) issued are primarily the Owners Billsⁱ such that cargo interests have a direct contractual right to pursue Owners for recovery for any damage to cargo whilst under the care and custody of the Owners. This is however not the case for container shipping as the contractual documents invariably issued to the cargo interests are by operators or NVOCC’s and who may not be Owners. This being the case, the downward carriers are expected to contract on similar terms (commonly known in business parlance as “Back-to-Back”) so that if they (downward carriers) should become liable, they could look up for recovery up the chain. This article will argue that there are truly no Back to Back contracts and therefore parties must always consider their counterparty risks.
2. TT Club recently published a risk byte on Contractual Risk Management and suggested that Transport operators (“TO”) should contract on “Back-to-back” terms i.e. contracting with your subcontractor on the same terms as you have contracted with your customer … to avoid a gap in liability between what is legally owed to their customer and what is recoverable from their subcontractor (see case studies)”. This is indeed sound advice but may not be achievable in some circumstances.
   1. Freight Forwarder (“FF”):
      1. Contractual provisions: A FF contracts may contract with a Container Carrier (“CC”) on behalf of his clients and who (CC) issue their Bs/L listing the FF’s clients. If the CC were to incorporate terms in their booking with the FF providing for the  FF to be jointly and severally liable to them (CC) for any claims, then the FF may be contractually liable for the non-performance of their client. Should a liability arise against the FF, the issue would be whether the FF has a similar right to pursue the Cargo interests. Absent any contractual provisions providing for a right of indemnity, we submit that it would be difficult for a FF to seek any recovery from their clients, particularly, when the claim is due to no fault of their client e.g say the cargo being uncleared due to the consignee and not to any fault of the shipper who is the FF’s client.
      2. Jurisdictional issues: Some jurisdictions have specific legislation imposing liability on the FF’s for the planning of the transportationⁱⁱⁱ. Accordingly, cargo interests can pursue the FF even if they are not involved in the actual transportation. Whether the FF has a similar right to pursue for indemnity would depend on the jurisdiction where the CC is based and whether the FF has a right to pursue.
   2. Non-Vessel Owning/Operating Common Carrier^iv (“NVOCC”):
      1. FF as Principal: While some FF’s act purely as agents and do not issue their own Bs/L, others may do so. If a FF issue their own Bs/L, then they become a NVOCC such that they have contractual liability. If the FF contracts for the whole carriage with an overlying carrier (“OC”), it may be possible to contract on similar terms given that the BL wordings would provide for the compulsory application of the Hague or Hague Visby Rules either by force of law or by contractual incorporation. However, some clauses in the FF and the OC Bs/L^v may vary and which include the Law of the Contract^vi, Jurisdiction^vii and Dispute Resolution Clause^viii.
      2. Container Owning NVOCC’s: A Container Owning NVOCC’s has the option of contracting with OC for the complete carriage or with separate OC’s for the voyage, say from the load port to transhipment hub and from the transhipment hub to final destination. The issue would be that while the NVOCC will be contracting on “Through Bs/L”^ix basis, if they contract with OC on “Port to Port” basis and arrange for Transshipment by themselves, there would be potential gap whilst the containers are being transhipped. This is because contracts with Terminals are more restrictive and may provide for a lower limitation of liability and time bar period. Hence, the NVOCC generally has a higher exposure, at least, when the cargo is being transhipped^x.
3. Other challenges: Even if a TO is able to contract on completely back-to-back terms^xi, there would still be a difference in risks given that the counter party may be seated in a difficult jurisdiction (which may frustrate the enforcement of any award or judgement) or be impecunious^xii resulting in the TO’s inability to recover from their sub-contractor. We submit that this would also be the case when there is a charter party chain involving multiple charterers^xiii,Owner, Charterer, Sub-Charterer and so on.
4. Insurance policy conditions: A review of the common TO policy wordings suggest that the general precondition for cover is that the TO to contract on terms no wider than the National Freight Forwarding Association Standard Terms and Conditions and/or the compulsory applicable cargo conventions. However, should there be any requirement that the TO contract on “back to back” terms, then at least when the TO contracts with multiple sub-contractors (say when a NVOCC arranges transshipment by themselves and engages various Carriers for Port-to-Port carriage), they may face difficulty in fulfilling the policy conditions such that they may be unable to receive the benefit of the cover in certain circumstances.
5. In conclusion,
   1. A perfect back-to-back contract is rarely, if ever, possible.
   2. If NVOCC contracts with multiple OC’s and arranges transshipment by themselves, they must be aware of the additional risks together with the liability coverage issues, if any.
   3. It is best to conduct independent review of one’s counterparty (both the OC and the sub-contractor) to ensure that they are good for their risks.
   4. It may be worthwhile to standardize Bs/L wordings used in the Container Trade and which may provide for document bypass (as provided in some commodity contracts), to allow the cargo interests to pursue the actual carrier directly should the loss be due to the fault or negligence of the actual carrier.

^i. The Charterparty may entitle the Charterers or the Charterers nominated agents to sign Owners Bills of Lading such that it would be considered as Owners Bills.
^ii. See Clause 5 of the SLA STC 07th May 2004.
^iii. See NUS Law Working Paper –  Freight Forwarders’ House Bills of Lading – Myth, Facts and Hope by Dr Simone Lamont-Black.
^iv. There are two definitions of NVOCC as has been stated in our earlier article, International Maritime Bureau NVO Register.
^v. There is a tendency in the trade to generally calls this as a “Master B/L” with the BL issued by a NVOCC as a House B/L. Given that there may be many overlying and underlying BL’s for the same shipment, we would submit that it would be best to view through the contractual prism and instead call it Overlying and Underlying BL’s. Additionally, our understanding that the term House came into prominence when Carriers wished to promote their House / Logo and which would mean that at least in the container trade, all the BL’s issued by the Operator, Time Charterer, NVOCC’s are all HBL’s.
^vi. Also known as the Governing law of the contract – see a write up which can be viewed at What are governing law and jurisdiction clauses? – Lexology.
^vii. See write up in Pinsent Mason’s guide on Jurisdiction Clause and which can be viewed at Jurisdiction and choice of law clauses in international contracts (pinsentmasons.com)
^viii. See a write up on Dispute Resolution Clauses at Blake and Morgan and which can be viewed at Dispute Resolution Clauses: What are they and what do I need to think about? – BM Insights – Blake Morgan
^ix. See definition of Through Bills of Lading in Maersk’s website – What are the two types of bill of lading | Support | Maersk
^x. See Mayhew v OOCL [1984] 1 Lloyd’s Rep 317 where the English Court held OOCL liable on the basis of HV Rules during the transshipment period.
^xi As you generally find in a commodity contract – for instance see Clause 16 of the PORAM Contract No 7.
^xii. Having very little money.
^xiii. We have not viewed any document by-pass provision such that while it may be possible to have concurrent arbitrations as provided under the Arbitral Rules of various associations/institutions, it would be necessary for all of the parties to participate.