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Cargo Owners Liability

Jagan - May 31, 2014 - 0 comments

  1. In our course of work, we have been involved in many claims for which the cause of the loss appeared to be due to the fault / negligence of the cargo owners (generally the Shipper under the contract). However, recovery is sometimes difficult as the cargo owners are either in a difficult jurisdiction to pursue or are impecuniousness for the amounts claimed. The purpose of this article is to discuss on how a cargo owner may be liable, the cover available (although our understanding is that cover is only available as an extension to a charterers liability policy) and our suggestion to transport operators.
  2. Liability could arise to cargo owners due to various reasons including the following:
    1. Inherent properties of the cargo which are undeclared to the carrier and due to which proper precautions have not been taken during carriage. 
    2.  Improper stowage / lashing of the cargo inside the container / packing material and which cause the cargo to damage not only the container / outer packing but also other cargoes/containers. 
    3. Improper packing material due to which say leakage of the cargo occurs (eg. use of second hand drums to carry Ferric Oxide, etc) resulting in pollution/contamination claims, damage to vessel, etc. 
    4. Detention and Demurrage for failure to take delivery of the cargo promptly at the port of discharge / port of delivery. We could go on with other causes but to us these appear to be the common causes.
  3. Under common law, even if the cargo is not inherently dangerous but becomes dangerous due to the circumstances, it would be considered as dangerous cargo.
    1. A case in point is The “Giannis NK” [1998] 1 Lloyd’s Rep.337 which was decided by the English House of Lords. The facts of this case were that a cargo of wheat and ground–nut pellets were being transported in a vessel under a Bill of Lading incorporating the Hague Rules. At the port of discharge, an infestation of Khapra Beetles was discovered in the cargo of ground–nut pellets and following unsuccessful fumigation, the entire cargo (infested cargo of ground–nut pellets and the un-infested cargo of wheat) was dumped in to the sea. The vessel subsequently had to undergo extensive fumigation which caused delay of about 2 1⁄2 months and for which the carrier claimed damages for the loss caused by delay together with the fumigation expenses. Article IV, r.6 of the Hague Rules state that the shipper must bear all damages and expenses that arise directly out of the shipment of undeclared dangerous cargo. The House of Lords in this case held that the term ‘dangerous’ is not restricted to goods which are liable to cause direct physical damage to the vessel or to other goods.
    2. Goods which are liable to cause physical damage in an indirect manner could also be considered as ‘dangerous’ and this being the case, they could give rise to the loss of other cargo loaded in the same vessel, namely the wheat cargo, by dumping at sea. The fact that the Shippers were ignorant of the infestation did not absolve them from liability. As you will note from the above case, Shippers could become liable for any loss or damaged caused by their cargo even if they are not aware of the particular characteristics causing the loss / damage.
    3. On the basis of the principles derived, it could be argued that Shippers would be liable for any loss or damaged caused to the vessel or other cargoes due to improper packaging / stowage / leakage etc, even though the damage may not be physical in nature.
  4. Liability could also arise to the cargo owners if after completion of the voyage; the person entitled to take delivery does not come forth.
    1. After loading of cargo, shippers would generally receive a Bill of Lading from the Carrier which they, in turn, would endorse to the buyer/consignee under the relevant sale contract. If there is delay in taking delivery by the consignee, the carrier would generally charge detention or demurrage, as the case may be, and on being paid, effect delivery. The issue comes when the accrued detention or demurrage blossoms to a significant amount such that it may be more than the value of the cargo. In this case, the consignee may simply abandon the cargo to avoid these costs.
    2. One of the functions of the Bill of Lading is to act as a document of title. Transfer of ownership of the cargo is done by indorsement of an ‘order’ bill. In turn, if the buyer so wishes, he can resell the goods and transfer ownership of the cargo by making an indorsement to a new buyer and this can continue innumerable times. Under s 2(1) of the English Carriage of Goods by Sea Act 1992 (similar act in Singapore known as The Bills of Lading Act Cap 384), a lawful holder of the bill of lading has title to sue under the contract of carriage as if he had been an original party to it. He however becomes subject to liabilities under the contract only when he takes or demands delivery of the goods from the carrier, or makes a claim for loss or damage to the cargo (as provided in s 3(1) of the COGSA 1992). This being the case, if the buyer does not take or demand delivery or initiate a claim for loss or damage to the cargo, the carrier may be unable to pursue the buyer/consignee for the accrued detention and / or demurrage. However, the carrier would be able pursue the shipper (who may be the cargo owners) as they were the original party to the bill of lading contract.
  5. CargoInsurance:
    1. Shippers, may, under the relevant sale contract, be required to insure the cargo. In this regard, we have considered the Incoterms Rules 2010 (the latest edition). For shipments by Sea, the relevant Incoterms Rules 2010 to be used are FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).Only one of the Incoterms Rules 2010 i.e. CIF makes it a requirement for the Shipper to insure the cargo. The obligation under the Incoterms Rules 2010 is for the seller to obtain at their expense, cargo insurance at least with the minimum cover provided by Clauses (C) of the Institute Cargo Clause (LMA/IUA) or any similar clauses.
    2. The latest edition of the Institute Cargo Clause (C) is of 2009. Clause 1 deals with the cover provided and which is as follows:
      This insurance covers, except as excluded by the provisions of Clauses 4, 5, 6 and 7 below:
      1.1 loss of or damage to the subject-matter insured reasonably attributable to
      1.1.1  fire or explosion
      1.1.2  vessel or craft being stranded grounded sunk or capsized
      1.1.3  overturning or derailment of land conveyance
      1.1.4  collision or contact of vessel craft or conveyance with any externalobject other than water
      1.1.5  discharge of cargo at a port of distress,
      1.2 loss of or damage to the subject-matter insured caused by

      1.2.1  general average sacrifice
      1.2.2  jettison.
      The cover provided is only for the loss or damage to the cargo. It does not provide cover for any liabilities arising from the cargo. This being the case, if any liability arises, then the ICC C or the other clauses, B & A, would not provide any cover for these losses.
    3. As the coverage in ICC C does not engage for liabilities, Shippers may wish to consider seeking cover under the Cargo Owners Liability Policy (irrespective of the fact that their sale contract does not require the shipper to take this insurance) which is designed to protect cargo owners for any legal liability and defence costs which arise due to the properties of the cargo whilst in the ordinary course of transit and in its customary packaging, or its incorrect handling by others. Examples are cargo taint and spillage. We understand that this cover is provided as an extension to the Charterers cover i.e. the Shipper must be a Charterer and which entitles them to seek cover for their role as cargo owners. However, we have not seen a similar policy for a shipper shipping small parcels i.e. break bulk or containerised cargo (we would be happy to hear from other readers if they have any knowledge of the same). We believe that considering the liabilities, a potential market exists for the creation and sale of such a policy.
  6. Transport operators must be aware of the potential gaps in the insurance coverage of their clients. Although (as it appears to us), no cargo owners liability policy is available for cargo interests shipping smaller parcels of cargo, Transport operators should consider conducting a risk audit prior to accepting cargo from any new shipper (so as to ascertain as to whether they are good for any liabilities which may arise and that they/Shipper are not impecuniousness for large claims) and / or for any new cargo (to ascertain the properties of the cargo including the packing, lashing, stowage, properties, etc). We are aware that our suggestion is a tall order considering that shipments in the containerised liner industry are generally taken on a FCL / FCL basis, but considering that the potential liabilities would first fall on the transport operator, we believe that would be better to be safe than sorry. If a cargo owners liability policy is indeed available for cargo interests shipping smaller parcels of cargo, Transport operators may wish to consider making it a requirement whilst accepting shipments from new shippers and / or new cargoes.
  7. To conclude, we would be happy to see the development of a “Cargo Owners Liability Policy” available to Shippers / Cargo interests involved in shipment of small parcels / containerised cargo. We believe that this product would not only protect the interests of the Transport Operator but also the Cargo interests in the event liability arises due to the cargo. We would also be happy to hear from our readers on any comments they may have and in particular as to whether any such a policy is available for smaller parcels of cargo.

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