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House Bills of Lading – are they a cause for concern?

Jagan - May 26, 2015 - 0 comments

We recently read an article which mentioned that there were additional risks associated with the issue of a House Bills of Lading (“HBL”) by a Freight Forwarder and / or NVOCC. The purpose of this article is to define what a HBL is and further argue that the risks associated with the issue of a Bill of Lading (“BL”) by a Freight Forwarder / NVOCC or a Main Line Operator is similar.

  1. This article is in response to the general suggestions made in various forums that it would be best to avoid using a HBL and instead seek B/L’s issued by Main Line Operators (“MLO” –someone who operates his own service and often in conjunction with other operators by way of a Vessel Sharing Agreement, Consortium, etc). It is our view that there are similar risks involved irrespective if the Bill of Lading is issued by a Freight Forwarder / NVOCC or a MLO.
  2. House Bill of Lading (“HBL”): Although various parties have defined this in various ways, we would define that whenever a BL promotes the organisation / House (House – Logo of the operator is generally shown in the top right hand side of the Bills of Lading issued), that BL is a HBL. By this definition, HBL’s are issued not only by Forwarders or NVOCC but also MLO’s if they promote their “house”. With respect to traditional BL’s, they are generally B/L forms issued pursuant to the relevant charter parties / contracts and by Vessel Owners (this is generally the case in Bulk Trades even if the vessel is on charter).
  3. Container Liner Shipping Industry has drastically changed over the years and presently Owners of vessels do not necessarily operate vessels in the trade but instead may prefer to time / voyage charter them down the line to other parties. In turn, a time charterer may operate the vessel by themselves or charter the vessel downwards (time charter, voyage charter). MLO’s may therefore operate either by owning, operating, slot chartering or buying space from other operators on an use basis. So if a MLO’s issue’s its B/L to the cargo interests for containers loaded on vessels which are not owned by the MLO’s, they would correspondingly receive a B/L or similar document from the overlying carrier (which would act as a receipt). Similarly, Freight Forwarders (If a Freight Forwarder issues a B/L as Carrier, they no longer act as Freight Forwarder but instead act as a NVOCC/Contractual Carrier) and / or NVOCC’s, receive a B/L from the overlying carrier, and, in turn issue their BL’s to the cargo interests. In some trades, both the MLO’s and NVOCC’s load with feeder operators on similar terms and in this case, both the Main Line Operator and NVOCC’s are technically NVOCC’s i.e. Non Vessel Owning Common Carriers for at least this leg!
  4. Insurance cover for Carriers:
    1. We understand that Freight Forwarders no longer issue B/L’s as Agents (in which case, they would be acting as a Freight Forwarder) and instead issue BL’s as Carriers (so as to comply with the relevant International Chamber of Commerce Uniform Customs and Practice for Documentary Credit – the latest being UCP 600). In this case, as mentioned in 3 above, the Freight Forwarders then act as NVOCC’s. Often, the Freight Forwarders are members of Freight Forwarding Associations such as British International Freight Association, Singapore Logistics Association, Hong Kong Association of Freight Forwarding and Logistics Ltd,etc. All of these and similar associations require their members to have cargo liability insurance as one of the pre-conditions for maintaining their membership. This being the case, if cargo interests contract with NVOCC’s who are members of an established Freight Forwarding Association, they have the benefit of this provision and which simply means that if an Association’s member is found to be liable for loss or damage to cargo whilst under their care or custody, the Freight Forwarder / NVOCC (who is the member of the Association) can invoke their liability cover to deal with the claim (Liability cover is not cargo cover – instead, it covers the NVOCC’s liability as provided under the carriage conventions, applicable law and / or the carriage contract).
    2. Vessel Owners would need to insure for their P&I risks to trade into various ports (generally ports would require confirmation that the Owners are covered for P&I risks and in particular, pollution and wreck removal, prior to allowing them entry). However, there appears to be no specific requirement for Container Operators to take any such liability cover unless it is one of the conditions required under their overlying contract with Owners / Charterers i.e. the operator must have relevant liability insurance. Having said that, almost all of the MLO’s have a comprehesive liability cover for their role as  Operators but  the terms of cover are rarely disclosed to the underlying market i.e. the cargo interests.
    3. It therefore seems to us that there may be advantages for cargo interests in contracting with NVOCC’s who are members of Freight Forwarding Associations in that they(cargo interests) would be aware that their counterparty (NVOCC’s) have a liability cover to deal with losses under their responsibility. However, as mentioned above, MLO’s rarely disclose their liability coverage, this would only be known post incident.
  5. The risks mentioned in the article we read is that the cargo interests did not get delivery of the cargo due to the NVOCC not having paid their overlying carrier and who (overlying carrier) held delivery. We believe that this risk could also happen with MLO’s when they are unable to pay their overlying carriers (Owners) or terminals, etc (this has happened in the past with leading MLO’s to the detriment of many cargo interests). The issue here is counterparty risks and which simply means that cargo interests (and for that matter any party) doing business with another party (carriers) should do  due diligence (Wikipedia defines due diligence “is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care”…) of their counterparty to avoid such issues. If the cargo interests have not conducted due diligence, then our submission is that the loss flows from the failure of conducting due diligence and not due to risks associated with doing business with NVOCC’s.
  6. The issue mentioned in above would generally occur in “Freight Prepaid” shipping contracts. International Trade is frequently conducted on the basis of Incoterms, the latest being of 2010 (Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are published by the International Chamber of Commerce (ICC) and are widely used in commercial transactions). The Incoterms which require the Exporter / Shipper to be responsible for the payment of freight are CPT, CIP, CFR and CIF. We are not touching on the duties and responsibilities provided under Incoterms as this itself is a vast and seperate topic except to state that aview exists that CPT and CIP are better terms to be used for container shipping. In addition to the Incoterms, the contract would also provide for law and jurisdiction (governing law of the contract and the jurisdiction where disputes would need to submitted).  In this regard, we have considered the possible recourse action available to the buyer under both Sale of Goods Act 1979 (“SOGA 79”) and Convention on Contracts for International Sale of Goods 1980 (“CISG”).
    1. SOGA 79: Cargo interests (buyers and sellers of cargo) generally contract on the basis of various trade forms. Often, these trade forms incorporate English Law and as a consequence, SOGA 79 would apply to the sale of the cargo. Depending on the contractual terms, the carriage contract may be the responsibility of either the seller or buyer. The issue mentioned in 5) above are more with respect to “freight prepaid” contracts and which is being considered . S 32(2) of SOGA 79 states “ Unless otherwise authorised by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case; and if the seller omits to do so, and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself or may hold the seller responsible in damages” (letter in bold and underline for emphasis by us). What is reasonable contract? SOGA does not provide any definition of a  reasonable contract. However, common law tends to suggest that in order for the carriage contract to be reasonable, it must provide the buyer with continuous documentary cover (see Hansson v Hamel & Horley [1922] 2 AC 46) i.e. it must offer the CIF buyer contractual protection against the carrier from the moment they are loaded on board until these are discharged at the port of destination. Hence, if the seller fails to provide a reasonable contract with the carrier, then the risk does not pass on or as from shipment but remains with the CIF seller throughout the entire voyage.
    2. CISG: This convention is currently adopted by 83 countries around the world (including Singapore) but not adopted by UK. Parties to the contract are however free to exclude the application of CISG either by expressly derogating from the application of the convention (Art 6) or by incorporating the law and practice of a state which is not a party to the convention (Art 1) – this is the often the case whereby the contract provides for say English Law to govern the contract.Art 32(2) of the CISG states “if the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation”. Art 45 of the CSIG provides that “ if the seller fails to perform any of his obligations under the contract or this Convention, the buyer may:
      (a)   Exercise the rights provided in articles 46 to 52;
      (b)   Claim damages as provided in articles 74 to77”
      The buyer can therefore avoid the contract and / or seek damages from the seller for their breaches.It therefore appears to us that the buyers should consider recovery from the sellers if the loss was due to the failure of the sellers to conduct due diligence prior to contracting with carriers.
  7. Due Diligence: We would suggest that parties to the contract should conduct a “due diligence” on their counterparties to ascertain that they have are persons / companies of good reputation and will honour the contract. If the focus in on getting the cheapest freight, the issues mentioned in 5) are bound to repeat again irrespective if the shipments are loaded with a NVOCC or a MLO. If however, prior to contracting with Carriers, if cargo interests conduct a due diligence, the risks mentioned in 5) would be reduced significantly.
  8. Conclusion:
    1. Default risk of MLO’s / Freight Forwarders / NVOCC’s are similar.
    2. Cargo interests must conduct a ‘due diligence’ of all counterparties including the party they are contracting for the carriage of goods.
    3. Finally, if the buyers do reach an uncomfortable situation (as mentioned in 5 above), they must also consider pursuing the sellers for their losses.

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