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Clausing Bills of Lading

Under the Hague / Hague-Visby Rules, Article III Rule 3, the Master of a vessel is required on the demand of the shipper to issue a bill of lading showing amongst other things “the apparent order and condition of the cargo.” 

If the cargo is not in apparent good order and condition upon loading, the Master can add wording to the bill of lading to record that the cargo appears unsound.

Charterers may oppose the Master “clausing” the bills in this way because claused bills can create commercial problems. Banks may refuse payment under letters of credit if claused bills do not comply with credit terms. Receivers may reject the documents and/or demand reductions in price.

To avoid these commercial issues, there can often be a clause in the charterparty requiring the Master to issue clean Bs/L or reject unsound cargo. This is designed to address the conflict between the Master’s legal duty to clause Bs/L where the cargo appears to be unsound and the commercial pressure to sign clean Bs/L.

One of the key authorities in this area of English law is The David Agmashenebeli [2003].

The David Agmashenebeli [2003]

Background

In The David Agmashenebeli, the Master observed minor contamination and discolouration in a cargo of 35,000 tonnes of bulk prilled urea. The Master refused to issue clean bills and instead issued claused bills. The buyers required clean bills of lading for payment under a letter of credit. The failure to provide clean bills led to rejection of the documents and renegotiation of the sale price.

The court held the Master’s clausing was excessive, inaccurate and in breach of the Hague-Visby Rules. The cargo had been in apparent substantially good order and condition. Discoloration affected only around 1% of the cargo and contamination affected only 0.01%. The Master should have made it clear that the discoloration only applied to a very small proportion of the cargo.

The David Agmashenebeli established the English law test for whether a Master is entitled to insist on clausing the bills of lading. Colman J held that if the Master “honestly takes the view that the cargo is not or not all in apparent good order and condition and that is a view that could properly be held by a reasonably observant master”, the master is entitled to insist on clausing.

This test can be broken down into the following elements:

• “Honestly” – the Master’s view must be a genuine independent belief.
• “Not or not all in apparent good order and condition” – the Master must regard the cargo or part of the cargo as unsound.
• “View could properly be held by a reasonably observant master” – the Master’s view must be based on reasonable observations.

The Master must not give the impression that the cargo is in worse condition than it actually is, in other words, any clausing must not exaggerate or mislead.

This does not mean that masters are required to be experts. Colman J stated, “the law does not cast upon the master the role of an expert surveyor”. Masters are simply required to exercise reasonable judgment based on the cargo’s visible condition. If a situation arises where a vessel cannot proceed due to a stand-off over whether the bills should be claused, it may be a good option to appoint a mutually agreed independent inspector or expert to assess the cargo if the parties can agree this.

If the parties still cannot agree, the issuance of a letter of indemnity (LOI) in exchange for clean bills may be considered. This option carries a risk as set out below.

Letters of Indemnity 

In Brown Jenkinson v Percy Dalton [1957], the cargo was clearly defective on loading. Barrels of concentrated orange juice were old, frail and leaking. Despite this, clean bills of lading were issued in exchange for an LOI provided by the shippers. A dispute arose as to whether the indemnity was enforceable. The court held that as the bill of lading contained a known false representation, the LOI amounted to a contract to commit fraud on the receivers, and the indemnity was unenforceable due to illegality.

However, obiter comments in Brown Jenkinson suggest that it is okay to issue an LOI in certain narrow circumstances.

Morris LJ stated:

• “There may perhaps be some circumstances in which indemnities can properly be given. Thus, if a shipowner thinks that he has detected some faulty condition in regard to goods to be taken on board he may be assured by the shipper that he is entirely mistaken: if he is so persuaded by the shipper it may be that he could honestly issue a clean bill of lading while taking an indemnity in case it was later shown that there had in fact been some faulty condition”

Pearson LJ stated:

• “In the last 20 years it has become customary, in the short-sea trade in particular for shipowners to give a clean bill of lading against an indemnity from the shippers in certain cases where there is a bona fide dispute as to the condition or packing of the goods … The evidence seemed to show that in general the practice is kept within reasonable limits. In trivial matters and in cases of bona fide dispute where the difficulty of ascertaining the correct state of affairs is out of proportion to its importance, no doubt the practice is useful.”

This suggests that an LOI could be enforceable where there is a bona fide dispute as to the condition of the cargo or where the defects are trivial.

Conclusion

Clausing bills of lading is an important safeguard for owners under the Hague and Hague-Visby Rules. However, excessive or misleading clausing can create issues for receivers and expose owners to liability.

As demonstrated by The David Agmashenebeli, any Master should exercise honest and reasonable judgment, supported by expert evidence if time permits and where necessary, and ensure any clausing is accurate and proportionate.

Where disputes arise, LOIs may offer a pragmatic solution, but their enforceability depends on the absence of fraud and the existence of a genuine dispute. Ultimately, the best practice is for all parties to communicate with a view to keeping the commercial adventure in tact using LOIs where appropriate.

Article prepared by Alastair Moir and Daniel Hornby.