Law Of The Carriage Of Goods By Sea (PART 6)

Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series, the basis and elements of the Law Of The Carriage Of Goods By Sea will be explored.

Freight

1. Delivery freight

   By the rule in Dakin v Oxley, freight is payable on the cargo delivered, even though it is not the whole of the cargo shipped, and even though the cargo is in a damaged condition. A claim for damage to the cargo cannot be asserted by way of set-off against the freight, but must be pursued in a separate counterclaim. Although this differs from the law in the US and from the English law of sale of goods, where damage claims may be set off against the price, the rule in Dakin v Oxley was confirmed by the House of Lords in Aries Tanker v Total, The Aries, where the counterclaim was time-barred.
   No freight is payable if the damage to the goods is of such a nature and extent that it is no longer the cargo (i.e. the cargo contracted to be carried). In Asfar v Blundell the cargo of dates was submerged for two days in the Thames after a collision and became ‘a mass of pulpy matter impregnated with sewage and in a state of fermentation’: no freight was payable as the goods had become an unmerchantable thing, for business purposes something else. The test is whether the goods delivered still fit the commercial description in the contract, though damaged (Montedison v Icroma, The Caspian Sea). It is a question of fact whether an honest merchant would be forced to qualify the description to such an extent as to destroy it because of the damage.

2. Lump-sum freight

   Instead of a freight calculated at an agreed rate on the quantity of cargo carried, the freight may be a single lump sum for the entire cargo. The problem then arises whether the whole sum is payable if only part of the cargo arrives at the destination. Thomas v Harrowing showed that the carrier was entitled to the whole freight where the vessel was stranded outside the port and part of the cargo was lost by perils of the sea.
   The same effect was given in Shell v Seabridge, The Metula to an agreement for freight to be paid on the intake quantity of oil: the loss of one-third of the cargo by perils of the sea did not relieve the charterers of liability to pay freight on the whole in taken quantity.

3. Advance freight

   The common law rules governing freight always yield to contrary agreement and many contracts provide for payment of some or all of the freight in advance. ‘Freight prepaid’ bills of lading are generally required in international sales. Even at common law, freight paid in advance is not recoverable by
   the cargo owner in the event of non-delivery. Advance freight clauses usually contain the phrase ‘freight non-returnable cargo and/or vessel lost or not lost’.
   The carrier’s position is reinforced by providing that the freight is deemed to be earned on loading (The Karin Vatis). The freight can then be retained (or recovered if it has not yet been paid) even though the vessel sinks on the voyage and the contract is frustrated.
   Even when the charter party provides that freight is deemed to be earned on loading, it is common to defer payment of at least part of the freight until after delivery.

   In The Dominique full freight was deemed to be earned on signing bills of lading, non-returnable, vessel and/or cargo lost or not lost, and was to be paid within five days of signing and surrender of the bills of lading. Before surrender of all the bills, the owners repudiated the charter, because of their financial difficulties, and the charterers accepted the repudiation. The House of Lords held that the owners’ right to the freight had accrued before the repudiation, under the ‘deemed earned’ provisions, and that the freight remained payable to the owners’ bank, their assignees, on ordinary contractual principles.

   The House rejected the charterers’ further argument of an equitable set-off to cover the costs arising from the repudiation by the owners.

4. Who is liable to pay the freight?

   Under a charter party, the answer is clear: the charterer is liable for the freight. Under a bill of lading, the owner will have a claim against the holder of the bill of lading who presents the bill to obtain delivery of the goods, unless the bill is marked ‘freight prepaid’. In favour of a party to whom the bill of lading has been transferred, the owner is estopped by this statement – that is, precluded from asserting that the freight has not in fact been paid.
   The party making the contract of carriage with the carrier undertakes that the freight will be paid and derives no assistance from a marking ‘freight prepaid’ where it has not been paid.
   Normally, the contracting party will be the shipper, but it may be another party who is not legally the agent of the shipper, as in Cho Yang v Coral: here the carrier was not able to recover from the shippers of the cargo when the party making the arrangements became insolvent without paying the freight (after the issue of freight prepaid bills).

   If the freight is unpaid, the shipowner has a common law right to exercise a lien over the cargo (Dakin v Oxley). Under English law, a common law right of lien covers freight, general average and the expenses of preserving goods. To secure the payment of other sums that may become due under a charter party, such as demurrage or dead freight, the shipowners must have a contractual lien clause in their respective charter parties, specifically giving the shipowners the right to exercise a lien over such unpaid sums.

   It is common for voyage charter parties to contain a cesser clause, which purports to end the charterer’s liability when the cargo is shipped on board. In consideration of the cessation of liability, cesser clauses also provide a right of lien for the benefit of the shipowners to secure the payment of the sums, such as dead freight, demurrage and damages for detention, due under the charter party. Unless the cesser clause clearly provides otherwise, these provisions are construed as being applicable only when the cessation of liability is conditional upon and co-extensive with an effective right of lien on the cargo ( Fidelitas Shipping Co v V/O Exportchleb).

   Against a charterer that has committed a repudiatory breach under the voyage charter party, the owner will be entitled to damages for loss of the profit that would have been obtained from the performance of the charter party repudiated. If the owner also claims a different kind of loss, such loss can be recovered pursuant to the rules of causation, mitigation and remoteness, see MTM Hong Kong.

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This article is written by our Principal Associate, Chakaravarthi