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BILLS OF LADING

AND THIRD PARTIES


BY- SARTHAK PATTNAIK
SRISHUBHAM RAY
SUBHANKAR DAS
BILLS OF LADING AND THIRD
PARTIES

 Though the Carriage of Goods By Sea 1992 Act has resolved most
of the difficulties associated with the doctrine of privity of contract
 But the relationship between the holder of a bill of lading and the
contractual carrier, a number of residual problems still remain. For
example, to what extent may the holder of a bill of lading sue
persons other than the contractual carrier for loss or damage to the
goods caused by their acts or omissions, and to what extent may
such individuals, when sued, rely for protection on the terms of a
contract of carriage to which they were not parties?
LIABILITY IN TORTS
 Where a claim for loss or damage is based on the negligence of the carrier or his servants, an
alternative to the contractual remedy might be to sue the party responsible for the loss in tort.
 There could be certain situations wherein suing the agent or servant of carrier or making him
tortuously liable for personal negligence on his part could be an effective remedy. The contract of
carriage in such cases should explicitly include such an express provisions entitling the contractual
carrier to sub-contract the whole or part of the carriage.
 When such performance delegated and goods are damaged in possession of third party or sub-
contractor, the bill of lading holder will prefer to sue the sub contractor under tort rather than under
the law of contract due to the application of the doctrine of privity under which third party cannot be
made liable for loss suffered.
 In the case of Margarine Union v. Cambay Prince, it was held that a tortious liability could only
arise when the claimant was the owner of the goods or was in possession of the same at the time of
commission of the tort.
 The facts of the case were that a cargo of copra, shipped in bulk, had been seriously damaged by
giant cockroaches as the result of the negligence of the shipowner in failing to have the holds of his
ship fumigated before the commencement of the voyage. The claimant was the holder of a delivery
order for part of the cargo issued by the seller under a ci.f. contract. As the claimant did not become
owner of the goods in question until they had been ascertained on discharge, Roskill J held that an
action in negligence would not lie. This decision was criticized for being unfair to the claimant.
 The case of The Aliakmon upheld principle laid down in the Margarine Union
case wherein cargo of steel had suffered damage in transit due to negligent stowage
at a time when the risk but not the property in the goods had passed to a cost
insurance. and freight. buyer. (Seller arranges everything)
 In denying the buyer any remedy in the tort of negligence on the ground that he
was not the owner of the steel at the time the damage was inflicted, Lord Brandon
asserted that the decision in the Margarine Union case ‘was good law at the time it
was decided and remains good law today’.
 In their Lordships’ view there was no lacuna in the law relating to carrier liability
which required to be filled by extending the range of duty of care in negligence. If
for some reason the indorsee of a bill of lading could not sue, because the property
in the goods remained with the indorser after indorsement of the bill, this merely
meant that the indorser rather than the indorsee retained the right to sue the carrier
for negligent damage to the goods.
 In such circumstances buyers under a c.i.f. or c. and f. sale could gain adequate
protection by ensuring that the contract of sale contained provision that ‘the sellers
should either exercise this right for their [the buyers’] account . . . or assign such
right to them to exercise for themselves’.
THIRD PARTY RELIANCE ON BILL OF
LADING TERMS

 A shipper of goods, will be aware that obligations under a contract of carriage,


will mostly be performed by independent contractors or stevedores, for
example, who are engaged in loading or discharge of cargo.
 The terms of bill of lading will give information to shipper that, the carrier is
entitled to delegate the performance to sub-contractor though the primary
responsibility of fulfilling the contractual obligations lies with the contractual
carrier. In these circumstances it would seem reasonable to expect that the
carriage would be undertaken on the agreed terms,
 including exceptions and limitation of liability provisions,
 irrespective of the identity of the party who actually performed the contract,
 or of the party who sought to claim for loss or damage to the cargo provided,
 of course, that there was an identity of interest between the respective parties,
 Any party seeking the protection of the contractual terms was providing the
identical services stipulated in the contract.
 The shipper can sue the sub-contractor directly under tort law for loss or
damage to the cargo, resulted from his negligence. The shipper cannot rely on
protection as per the contract of carriage due to the application of doctrine of
privity of contract.
 Once the parties have agreed on the terms on which a contract of carriage is to
be performed and the overall risk and insurance liability has been allocated.
 There are policy reasons rendering it undesirable for a party to invoke the
privity doctrine in an attempt to circumvent the terms of an agreement to which
he has freely and expressly consented.
 Thirdly, while it may be possible to avoid some of the more objectionable
results of the privity rule by the introduction of a variety of indemnity and
cross-indemnity clauses into the respective carriage contracts, such devices are
not always successful and, in any event, result in unnecessary complications in
the relevant law.
 When faced with this dilemma, the courts have used considerable ingenuity in
devising a variety of strategies to extend the protection afforded by the terms of
the contract of carriage to litigants who were clearly not parties to it.  
BAILMENT ON TERMS
 The Pioneer Container-[1994] 2 AC 324

• Claimant had contracted with a Carrier for the carriage of goods from Taiwan to
Hong Kong either as a complete voyage or as part of a through transport to other
ports.
• In each case, the bill of lading issued to the shipper included a clause entitling the
carrier to sub-contract ‘on any terms the whole, or any part, of the carriage, loading,
unloading, storing, warehousing or handling’ of the goods.
• The carriage was in fact sub-contracted to the defendant shipowners, who issued
feeder bills acknowledging receipt of the goods and including an exclusive Taiwan
jurisdiction clause.
• On the voyage to Hong Kong the defendants’ vessel was involved in a collision and
sank with the loss of the claimants’ cargo.
• In reply, the defendants sought a stay of proceedings based on the exclusive
Taiwanese jurisdiction clause in the feeder bills.
 On these facts, the weak link in the defendants’ argument was that the
jurisdiction clause appeared in their sub-contract with the freight carrier,
whereas it was acknowledged that there was no contractual relationship
between the defendants and the claimants.
 The Privy Council sought to bridge this gap by invoking the doctrine of
bailment on terms.
 In the view of the Privy Council, ‘if the effect of the sub-bailment is that
the sub-bailee voluntarily receives into his custody the goods of the
owner and so assumes towards the owner the responsibility of a bailee,
then to the extent that the terms of the sub-bailment are consented to by
the owner, it can properly be said that the owner has authorised the bailee
so to regulate the duties of the sub-bailee in respect of the goods
entrusted to him, not only towards the bailee but also towards the owner’.
 Moreover, in the view of the Privy Council, the inclusion of a
jurisdiction clause, of the type in question, in the sub-bailment
‘would be in accordance with the reasonable commercial
expectations of those who engage in this type of trade.
 Accordingly, the Privy Council granted the stay, holding that the
claimants were bound by the jurisdiction clause, even though no
contractual relationship existed between them and the sub-bailees.
Q. In fulfilling such duties, to what extent can the sub-bailee call in aid
the exceptions, limitation of liability provisions and time bars contained
in his sub-contract with the intermediate bailor, as reinforced by the
Hague or Hague/Visby Rules?

 The key requirement would be the consent of the owner of the goods
to the sub-bailment on the terms in question.
 In the words of Lord Denning MR, in the earlier case of Morris v
CW Martin & Sons Ltd, ‘The answer to the problem lies, I think, in
this: the owner is bound by the conditions if he has expressly or
impliedly consented to the bailee making a sub-bailment containing
those conditions, but not otherwise.’ Although this opinion was
expressed obiter, it was adopted by the Privy Council as the basis of
its judgment in The Pioneer Container.
Q. What is the position where the bill of lading makes no reference to the
possibility of sub-contracting?
 Lord Denning MR indicated in Morris v Martin [1966] 1 QB 716 that
implied consent by the shipper of the goods to a sub-bailment on terms
might be sufficient and this view was adopted by the Privy Council in
The Pioneer Container: ‘Such consent may, as Lord Denning pointed out,
be express or implied; and in this context the sub-bailee may also be able
to invoke, where appropriate, the principle of ostensible authority.’
 Even though consent to a sub-bailment may be implied, it does not
automatically follow that there is therefore consent to all the terms of that
sub-bailment. Here again the test of reasonableness is to be applied.
 What is, however, clear is that the sub-bailee cannot rely on the terms of a
sub-bailment to which the owner of the goods did not consent.
THE VICARIOUS
IMMUNITY APPROACH
 The Pioneer Container establishes that, in appropriate circumstances, a sub-bailee may
invoke the terms of the sub-bailment as a defence to a claim brought by the owner of the
goods.
 The courts have, however, been more reluctant to allow him to rely on defences contained in
the head contract between the shipper of the goods and the head bailee, to which he is
obviously not a party.
 There are two main reasons why the sub-bailee might prefer to adopt this approach rather
than to seek the protection of the terms of the sub-bailment. On the one hand, the court might
find it impossible to infer any consent by the owner of the goods to the terms of the sub-
bailment. On the other, the sub-bailment may take the form of a charterparty, the terms of
which might offer protection to the sub-bailee inferior to that available under the bill of
lading.
 The first sub-bailee to adopt this approach was, however, successful. In Elder Dempster &
Co v Paterson Zochonis Co [1924] AC 522, cargo shipped on board the defendant’s vessel
was damaged as the result of bad stowage which was covered by an exception in the bill of
lading. The bills had, however, been issued by charterers of the vessel, who were held to be
the contractual carriers. When sued for negligence by the owners of the cargo, the defendant
shipowners sought to rely on the stowage exception in the bill of lading, despite the fact that
they were not parties to that contract.
 A majority of the House of Lords, supporting the dissenting opinion of
Scrutton LJ in the Court of Appeal, held that the shipowners were entitled to
do so, though the reasons for this decision are far from clear.
 Only Lord Summer hinted at a solution based on a bailment on terms similar
to that subsequently advanced by the Privy Council in The Pioneer
Container. The majority of the court, together with Scrutton LJ in the Court
of Appeal, preferred to base their decision on a principle of vicarious
immunity, pointing to the fact that the bill of lading was signed by the master
of the ship, a servant of the shipowner, and that the exception in question
specifically stipulated that the ‘shipowners’ should not be liable for damage
resulting from bad stowage.
 In the words of Scrutton LJ in the Court of Appeal, ‘The real answer to the
claim is in my view that the shipowner is not in possession as a bailee, but as
the agent of a person, the charterer, with whom the owner of the goods has
made a contract defining his liability, and that the owner as servant or agent
of the charterer can claim the same protection as the charterer.’
 This decision has met with far from universal approval and has not been
followed in subsequent cases.
 When the case eventually came to be considered by the House of Lords in
Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, only Lord Denning, a
noted opponent of the doctrine of privity, was prepared to support the
arguments advanced by Scrutton LJ.
 The appellants in this case were stevedores who had damaged a drum of
chemicals during the unloading operation. When sued by the owners in
negligence they unsuccessfully sought to rely on the limitation of liability
provision in the Hague Rules, which had been incorporated into the bill of
lading.
 The House of Lords strictly applied the privity rule. As the stevedores were not
parties to the bill of lading contract, they could not rely on its provisions for
their protection. In this case stevedores engaged as independent contractors to
discharge the cargo were clearly not bailees of the goods since there was no
intention that they should acquire legal possession of them.
 Unfortunately the combination of facts encountered in the Elder
Dempster case has not come up for reconsideration by an
English court, although it has been the subject of judicial
decision in the Australian case of Gadsden v Australia Coastal
Commission [1977] 1 NSWLR 575.
 Cargo shipped under a charterer’s bill of lading was damaged
while in the course of transit on board the defendant’s vessel.
When sued by the cargo owner for negligence, the shipowner
sought to rely on the Hague Rules time limitation, which had
been expressly incorporated into the relevant bill of lading. The
New South Wales Court of Appeal had little hesitation in
applying the privity rule and holding that, as the shipowner was
not party to the bill of lading contract, he could not rely on its
terms for protection.
HIMALAYA CLAUSE
 Himalaya clause is a clause in bill of lading or transportation contract, purporting to extend
liability limitations benefiting the carrier, to others who act as agents for the carrier such as
stevedores or longshoremen. Such a provision is expressed to be for the benefit of a third party
who is not a party to the contract.
 The rule of privity was applied strictly in Scruttons v. Midland Silicones, wherein stevedores
engaged as independent contractors where not allowed to invoke protection of limitation
clause in contract of carriage. Lord Reid, suggested that for stevedores to take protection of the
limitation clause in the existence of agency relationship. For the creation of agency
relationship four requirements were to be established:
1. first, the bill of lading makes it clear that the stevedore is intended to be protected by
the provisions in it which limit liability
2. Secondly, bill of lading clearly lays down that the carrier is contracting as agent for
stevedore that these provisions should apply to the stevedore
3. Thirdly the carrier has authority from the stevedore to do that or perhaps later
ratification by the stevedore would suffice
4. Fourthly that any difficulties about consideration moving from the stevedore
were overcome.
 In the case of The Eurymedon, the four criterias laid down by Lord Reid were
applied and it was held that where the bill expressely had a clause that a servant or
agent of the carrier should be protected by any exemption, as the carrier was
contracting not only on his own behalf but as agent or trustee on behalf of the
contractors. In the instant case, the stevedore was entitled to protection for damage
caused to drilling machine, as the carrier in concluding the contract of carriage had
been acting as agent on his behalf.
 Pursuant to this further bills of lading, contained these express clauses which gave
protection to not only the employees of a contractual carrier but also to an actual
carrier where performance had been delegated to a sub-contractor.
 However, there were certain limitations to this clause as discussed in the case of
Starsin wherein it was held that a wider exemption granted to the independent
contractor in comparison to the contractual carrier under the Hague Rules, which
was to be rendered void under Art III, Rule 8 of Hague Rules.
EXCEPTION TO THE PRIVITY OF CARRIAGE
CONTRACT
 In the case of London Drugs Ltd v Kuehne & Nagel, the claimant had delivered a transformer
to a warehouseman for storage under a contract which specified that his liability was limited
to $40 per package unless the owner declared the true value of the goods and paid an
additional charge. The claimant elected not to exercise this option. Subsequently, employees
of the warehouseman damaged the transformer while, contrary to express instructions,
attempting to lift it with a fork-lift truck. When sued for damages in negligence, the employees
sought to invoke the limitation of liability clause in the contract between the claimant and
their employer, even though they were clearly not parties to that contract.
 The Supreme Court of Canada created an exception to the rule of privity, and observed that,
‘When an employer and a customer enter into a contract for services and include a clause
limiting the liability of the employer for damages arising from what will normally be
conduct contemplated by the contracting parties to be performed by the employer’s
employees, and in fact so performed, there is simply no valid reason for denying the benefit
of the clause to employees who perform the contractual obligations.’ In the view of the
majority of the court, it did not make commercial sense to allow a plaintiff to invoke the
doctrine of privity in such circumstances in order to circumvent a contractual exclusion or
limitation clause to which he had freely consented.
 The exception can operate in two cases, firstly, the limitation of liability clause must either
expressly or impliedly extend its benefit to the employees seeking to rely on it; and, secondly,
such employees ‘must have been performing the very services provided for in the contract
between their employer and the customer when the loss occurred.

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