Breach of contract and bills of lading

Breach of contract and bills of lading. The bill of lading possesses three characteristics; one being that it is evidence of the contract of carriage, according to textbooks and older cases.

In more recent cases, for example, in The Jalamohan, 1988, and also in some commercial practice, the bill of lading is considered to be the document that is the contract of carriage between shippers, especially those in the liner trades, and shipowners. If a bill of lading is issued to a charterer/shipper under a charterparty, the charterparty is the contract and the bill of lading is only a receipt for cargo. The Hague-Visby Rules provide that a bill of lading “covers” a contract of carriage. Therefore, this “contractual” characteristic is perceived in a number of ways. The contract contained in a bill of lading or evidenced in a bill of lading or contained in a charterparty under which a bill of lading is issued can be breached by one of the parties to the contract of carriage.

For example, if a bill of lading is presented to a master for his signature under a charterparty and it contains “terms” which expose the shipowner to greater liabilities than he is under in the charterparty itself, this may be a breach of the charterparty contract. On the other hand, if the charterparty requires the master to sign bills of lading as presented and the master fails to sign certain “originals” this could be a breach of the charterparty contract by the owners.

Such a breach occurred in The Mobil Courage, 1987, where the master agreed to carry a set of bills of lading on board the vessel. The bills were to be delivered to the consignee at the port of discharge. He did not sign the bills of lading on departure from the loading port, agreeing to sign them on passage. He forgot to sign them. When the vessel arrived at the discharging port, there were no original bills of lading against which the cargo could be discharged and the shipowner prohibited the master from signing the bills carried on board. The vessel was delayed but the owner’s breach caused the delay to be for their own account.

The contract of carriage of goods by sea “contained” in or “covered” by or “evidenced” by a bill of lading can also be breached by the carrier who may be the shipowner. The other party to the contract may have to be compensated. This may be the shipper or, under section 1 of the Bills of Lading Act, the consignee or endorsee to whom the property passes by delivery and endorsement of the bill of lading. The compensation may be set by the courts or by some legislation or international agreement regulating the liability regime. If the contract of carriage of goods by sea covered by a bill of lading is subject to the Hague-Visby Rules, for example, the carrier has the responsibilities and liabilities but also the rights and immunities .set out in the Rules. In some circumstances the liability may be completely excepted (Art. IV, r. 2) or limited (Art. IV, r. 5). This is a “right” or “immunity”.

However, if the contract of carriage is breached by the carrier to a very serious extent, this party may lose the benefit of such rights and immunities. In England and other countries with a similar legal system, such a breach was called a “fundamental breach”. In English and similar legal systems, the doctrine of fundamental breach no longer represents the law. In The Antares, 1987, a case concerning bills of lading, the applicability of the Hague-Visby Rules and whether breach of contract displaced the Rules, it was said, in rather picturesque language, in the English Court of Appeal:

“The doctrine of fundamental breach . . . that is to say the doctrine that a breach of contract may be so fundamental as to displace the exceptions clause altogether, no longer exists. The death knell sounded in Suisse Atlantique… [1966]. The corpse was buried in Photo Production Ltd. v Securicor Transport Ltd. [1980]…”

The party committing the breach is moving away from the method of performance of the contract and such movement away from an agreed pathway is a “deviation”, hence, in the United States, such serious breaches of contract are called “deviations”. However, this word is generally used fox a departure from and return to a customary, geographical route during a sea passage, which is considered to be “geographical deviation” and the use of “deviation” in the context of a general breach of contract may be confusing. In the U.S, a serious breach of the contract may also be termed “quasideviation”. In Continental countries, a serious breach is called a “rupture of the contract”.

Shippers can also commit a serious breach if, for example, they knowingly mis-state the nature and value of the goods in the bill of lading, which is usually prepared by the shipper for the signature by the master or agents. In this situation, neither the carrier nor the shipowner is responsible for any loss or damage to or in connection with the goods. (Art. IV, r. 5 (h) of the Hague-Visby Rules.)

If contracts of the carriage of goods by sea are subject to the Hague Rules or Hague-Visby Rules, the nature of the breach by shipowners may cause the Rules to lose their application to the contract and the owners may lose any protection granted by the Rules, such as exclusion or limitation of liability. One example of breach would be where cargo is carried on deck and exposed to heavy-weather damage, when it is required to be carried under deck and somewhat protected from bad weather. The leading, though old case of Royal Exchange Shipping Co. v. I3ixon, 1886, confirms this result of such a breach.

A cargo of cotton was shipped on the deck of the vessel. Some bills of lading specified shipment was “under deck”. One hundred and twenty-five bales of cotton, carried under these bills, had to be jettisoned by the master when the vessel was aground. It was decided by the House of Lords that the bales were being carried in breach of contract as a result of which the exception, contained in the bills of lading, of liability for jettison could not favour the shipowner.

In The Chanda, 1989, the vessel carried a “control cabin”, which contained very sophisticated electronic and computerised equipment, of considerable value. The control cabin was stowed on No. 1 hatch top (that is, “on deck”) in the forepart of the vessel. In that position the cargo was exposed to very heavy weather on passage between the loading and discharging ports. On discharge, the control cabin was so badly damaged it had to be scrapped at a large monetary loss. The cabin was carried under a bill of lading, which was subject to the Hague Rules. The shipowners admitted that the carriage of the cabin on deck was unauthorised. They then attempted to limit their liability as provided by the Hague Rules. The limit was very low in comparison to the value of the damaged goods. The judge decided that:

“. . . clauses which are clearly intended to protect the Shipowner provided he honours his contractual obligations to stow goods under deck do not apply if he is in breach of that obligation . . .”

Accordingly, the shipowner was not permitted to use the package limitation in the Hague Rules and was liable for the entire loss to the cargo interests.


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