UK Supreme Court refuses leave to appeal in Tai Prize case

The UK Supreme Court has refused permission to appeal in the case of Priminds Shipping (HK) Co Ltd v Noble Chartering Inc and has affirmed the decision of the Court of Appeal [2021] 2 Lloyd’s Rep 36.

The vessel had loaded a cargo of soyabeans in Brazil for discharge in China. The shippers had presented owners with a ‘clean on board’ and ‘apparent good order/condition’ bill of lading.

1: Initial case

A claim was lodged by receivers in China for damage to the cargo. Central to the arbitration and the legal issues arising was that the pre-existing damage was not reasonably visible to the master during loading operations.

Head owners, as carriers under the bills of lading, settled the receivers’ claim. The head owners then recovered 50% of their losses from the disponent owners (the time charterers) on the basis of the Inter-Club Agreement (ICA).

The disponent owners then sought an indemnity from their charterers under the voyage charterparty, (North American Grain Charterparty 1973 form) on the basis that the charterers were responsible for the shippers tendering of their draft bill of lading, including the term, ‘apparent good order/condition’.

The Tribunal held that the disponent owners were entitled to an indemnity from the charterers because the condition of the cargo (soyabeans) could not have been apparent to the master upon a reasonable inspection during loading. Therefore the draft bill of lading presented was inaccurate given that it recorded that the cargo was shipped in ‘apparent good order and condition’.

The charterers were found to be in breach of an implied warranty to provide an accurate draft bill of lading and the Tribunal agreed that charterers should be held liable to indemnify disponent owners for their losses.

2. Commercial Court Findings

Upon appeal by the voyage charterers to the High Court, it was found that, when the shippers presented the draft bill of lading to the master for signature, this simply constituted an invitation to the master to make a representation of fact in accordance with his own reasonable assessment of the apparent condition of the cargo.

The arbitrator had made a factual finding that cargo damage was not apparent at the time of loading. It followed therefore that the draft bill of lading, as a matter of law, was not inaccurate.

The statements on the draft bill of lading provided by the shippers did not amount to a warranty or representation. Implying a warranty or indemnity owed by shippers would also run contrary to the Hague Rules which were incorporated in the sub-charter.

The High Court therefore reversed the arbitrator’s decision, varying the arbitration award. The disponent owners’ claim was dismissed. The judge however allowed permission for disponent owners to appeal the decision to the Court of Appeal.

3. Court of Appeal Findings

The Court of Appeal confirmed the Commercial Court’s findings that the statement on the draft bill of lading provided by the shippers did not amount to a warranty or representation.

The Appeal Court noted that the statement by the shippers was an invitation to the master to make his own reasonable assessment of the apparent condition of the cargo at the time of shipment i.e. a representation of fact. The enquiry is therefore the master’s determination and not that of the shippers, even though they may have alternative means of examination at their disposal.

A statement in a draft bill of lading refers to the external condition of the cargo as would be determined by a reasonable examination at the time of the receipt of the cargo.

As for what would constitute a “reasonable examination”, this would be determined based on the actual circumstances at the load port and did not mean that the master had to be an expert in the cargo or required to interrupt cargo operations in order to make an assessment.

It was accepted that the master would have been unable to see the damaged cargo at the load port and the cargo was therefore shipped in ‘apparent good order and condition’.

The decision in arbitration that the bill of lading was inaccurate was therefore wrong in law, because the test is what is reasonably apparent to the master, not what might be apparent to the shippers.

It was the master’s responsibility to verify cargo condition at the time of loading and to establish whether or not to sign a draft bill of lading or not.

The master’s duty aligns with the Hague Rules which were incorporated in the bill of lading. To imply a warranty would be contrary to the Hague Rules. These rules oblige the carrier, after receiving goods into his charge, to issue a bill of lading upon demand by the shipper containing information which the shipper guarantees, which is distinguished in the rules from the apparent order and condition of the cargo following a reasonable examination by the master.

The decision by the Court of Appeal established that, notwithstanding the information contained in a draft bill of lading provided by shippers, the master still has a duty to undertake his own reasonable examination of the cargo.

However, the Appeal Court had sympathy for disponent owners’ position and left open the question as to whether or not the court would have come to the same conclusion had the shippers been shown to have actual knowledge of the cargoes poor condition.

4. Observations

The Supreme Court has refused permission to appeal and has therefore affirmed the decision of the Court of Appeal.

MECO observed in a comment on the ruling that the decision was a reminder that a master should exercise caution when signing a bill of lading, especially in a situation where there may be reasonable grounds to suspect that cargo may not be in ‘apparent good order and condition’. Despite information on the draft bill of lading, it is key for the master to carry out his own assessment and clause the bills of lading to reflect the apparent condition of the cargo loaded.

It was observed that the case demonstrated difficulties for time charterers attempting to pass down liability to voyage charterers where damage to cargo was found to be pre-shipment related and the master proceeds to sign a ‘clean on board’ bill of lading. The case was a reminder of the master’s obligation to carry out a reasonable examination of the cargo as it is his duty to make such an assessment and decide whether to sign bills of lading presented by shippers.

Whilst it was not possible for disponent owners to claim an indemnity in this case, there remained a curiosity that a voyage charterer or shipper would not be held liable for the inaccuracy of the words ‘apparent good order and condition’ in a draft bill of lading, unless it could be proven that the shippers were aware of the pre-shipment cargo damage.

As matters currently stand, in the absence of an express indemnity in a voyage charterparty, a voyage charterer or shipper is not responsible for the inaccuracy of including the words ‘apparent good order and condition’ in a draft bill of lading.

The commentary observed that a case on slightly different facts particularly if it could be shown that shippers had knowledge of the defective condition of the cargo, might well attract judicial consideration in the future.

IMN covered Clyde & Co’s observations of the initial court ruling on July 7th 2020. See also https://www.clydeco.com/en/insights/2020/07/m-v-tai-prize-tendering-a-clean-on-board-bill-of-l

Clyde’s report of the Court of Appeal judgment is at: https://www.clydeco.com/en/insights/2021/07/m-v-tai-prize-tendering-a-clean-on-board-bill-of-l

Clyde’s Ian Woods observed at the time that “the issues arising in this case stem from the head owners’ decision to issue a letter of undertaking subject to Chinese law and jurisdiction to the receivers as security for the cargo claim. The lead judgment in the Court of Appeal seems to suggest that the time charterers perhaps missed an opportunity to argue that issuing a letter of undertaking on these terms amounted to a new cause of loss so as to break the chain of causation. However, this point was not explored in any more detail and constitutes an argument that should perhaps be kept in mind for similar situations in the future.”

Details of the case also available from IMN on June 24th 2020, on an article on the Standard Club web site (May 6th 2020). https://www.standard-club.com/risk-management/knowledge-centre/news-and-commentary/2020/05/article-what-means-clean-on-board-and-what-should-a-master-be-aware-of-when-presented-with-a-bill-of-lading.aspx

Standard Club’s senior claims executive Elisabeth Birch and head of division Revecca Vasiliou observed of the lower court ruling that “this judgment reinforces that it is the master who has the sole responsibility for assessing the apparent order and condition of the goods shipped. This principle is one of the cornerstones of international trade, given the reliance placed by traders and bankers on the accuracy of statements of fact contained in the bill of lading”.