BP Oil International Ltd (BP) sold a cargo of oil to Gulf Petrochem FZC (Gulf) on delivery ex ship Fujairah or Singapore terms. BP voyage-chartered the Sienna from the respondent owners. The owners issued a bill of lading to BP on shipment. The appellant bank financed the purchase by Gulf on terms that conferred a security interest in the cargo. Before completion of the carriage, the bank paid BP the purchase price, and the charterparty was novated to Gulf. The oil was discharged on Gulf's instructions in Oman. It had been envisaged at the time of the novation that BP would indorse the bill of lading directly to the bank, but as result of COVID restrictions the indorsement had not taken place by the time of discharge. The owners discharged the cargo against Gulf's letter of indemnity (LOI). After discharge, the bill of lading was indorsed by BP to the bank. The bank brought a claim against the owners for the value of the cargo, alleging breach of the contract of carriage contained in or evidenced by the bill of lading in delivering the cargo without production of the bill.

In the High Court, Moulder J dismissed the bank's claim on the grounds that there was no contract of carriage contained in or evidenced by the bill of lading at the time of discharge, and therefore no breach; alternatively, that if there had been any such breach, it did not cause the bank's loss, because the bank was aware of the intended delivery without presentation of the bill, and would have authorised or permitted the owners to do so. The bank appealed on both grounds.

Held: Appeal dismissed.

In Scrutton on Charterparties and Bills of Lading (24th ed, para 6-015) the authors consider the principles that may underlie the proposition that a new contract springs up when a bill of lading is indorsed:

Possibly the difficulty may be resolved by a consideration of the wording of the Carriage of Goods by Sea Act 1992 [COGSA] itself. Section 2(1) transfers to the lawful holder of the bill of lading all rights of suit 'under the contract of carriage as if he had been a party to that contract'. The definition of 'contract of carriage' in s.5(1)(a) presupposes that the bill of lading does contain or evidence a contract: but if it is a mere receipt and the governing document is the charterparty it does not do so. As, however, the words of the statute must be given a sensible meaning, it is submitted that the true meaning is that the lawful holder has vested in him all rights of suit 'as if there had been a contract in the terms contained in the bill of lading and he had been a party to that contract'.

This is how s 2 must be interpreted. The new contract 'springs up' as a result of the operation of COGSA, and before it the Bills of Lading Act 1855, not as the result of the application of any common law principles of contract or estoppel. Nevertheless, the rationale underlying it is that it represents the presumed intention of both the carrier and the indorsee. If one asks why the carrier is prepared to issue a bill of lading so that it contains contractual terms vis-à-vis a non-charterer shipper, or any non-charterer indorsee, the answer is that the carrier will generally want its relationship with the person interested in the goods and the maritime adventure to be a contractual one.

By putting the document into circulation, the carrier can impose the contractual terms commonly found in bills, subject to the constraints of the Hague and Hague-Visby Rules where they mandatorily apply, which form an internationally negotiated and accepted set of rules balancing the interests of carriers and cargo interests (as to which see Effort Shipping Co Ltd v Linden Management SA (The Giannis NK) [1998] AC 605, 621 (CMI571); Deep Sea Maritime Ltd v Monjasa A/S (The Alhani) [2018] EWHC 1495 (Comm), [2018] 2 Lloyd’s Rep 563 [20] (CMI154)). Many aspects of the Hague or Hague-Visby Rules provide carriers with protections which would not exist absent a contract, such as the defences in art 4.2, and time and package limitations. Bills of lading often contain a clause paramount incorporating the Hague or Hague-Visby Rules, and it is often the carrier who is contending for the existence of a contract on the terms of the bill where its existence is disputed.

Equally, those interested in the cargo and its carriage will generally be best served if their relationship with the carrier is a contractual one. That brings the benefit of the mandatory obligations imposed on carriers by the Hague and Hague-Visby Rules where they apply, and avoids the vacuum which might otherwise exist if the only potential claim lay in tort or bailment.

Just as where the bill is issued to a charterer, both the mere receipt principle, and the springing up of a contract when indorsed by the charterer to a third party, depend upon the presumed intention of the parties, so the position governing a bill in the hands of a charter who ceases to be charterer should also be determined by the presumed intention of the parties, subject always to any contrary agreement or circumstances which demonstrate a contrary intention. Just as a carrier and indorsee would generally want their relationship to be contractual following indorsement, so too it is in the interests of both the carrier and the charterer that their relationship should be contractual for so long as the latter has an interest in the goods and the voyage. While the charterparty subsists, the charterparty usually performs that function to the exclusion of the bill of lading. But if the charterparty ceases to govern, both parties would presumptively expect the completion of the voyage to be carried out on the terms of a contract, not in a legal vacuum. The bill of lading provides that function.

A conclusion that after cessation of the charterparty for any reason there is no contract at all between the charterer/shipper and carrier governing their relationship would mean that if the shipowner loses or damages the cargo, the charterer/shipper, who may well still be the owner of the cargo, has no contractual rights or remedies against the shipowner. Further, the Hague/Hague-Visby Rule regime, which usually applies to the carriage of goods by sea under a bill of lading, would not apply. One of the primary functions of the bill of lading, to give contractual rights to the holder in respect of the carriage of the goods, would be negated. Conversely, it would mean that the carrier would have no contractual rights against the shipper, or anyone else (absent novation), in relation to the kinds of losses suffered during the continuation of the voyage in respect of which the commercial expectation would be that they were not for the carrier’s account. Further, once the shipper ceases to be charterer it could not transfer contractual rights against the carrier to a buyer or any other party after discharge, whereas a non-charterer shipper could do so whether before or after discharge, and a charterer shipper could do so before, but not after discharge. This would be anomalous and have no commercial justification. Indeed, it would deter sales of cargo in trades where the bill of lading might not be available at the time of discharge, because the charterer would not be able to ensure that it could pass on the important contractual rights in the bill of lading contract which a purchaser would expect to receive. Moreover, it would operate anomalously vis-à-vis an indorsement to a pledgee.

The mere receipt principle therefore applies in this case to render the bill of lading a contract of carriage between BP and the owners when the charterparty ceased to perform that function upon the novation. The first ground of appeal is therefore determined in favour of the appellant bank.

As to the second ground of appeal, the appellant bank submitted that Moulder J's conclusion on causation would have calamitous consequences for those involved in providing commodity trade financing, because it would be open to owners in almost every case in which discharge took place against an LOI without production of the bill of lading to assert a similar causation defence. If that is so, it is simply the result of the application of conventional principles to which the practical consequences for market practice must yield. There are other forms of security available to those in the business of providing trade finance, and until 1992 taking a pledge of the bill of lading did not confer the security now said to be critical. In any event, the decision in this case is the result of a particular finding of fact as to what instructions would have been given to these shipowners in the light of the fact that the bank thought that it was wholly or largely secured in other ways. It is by no means clear that similar findings of fact could be made in most other cases. The second ground of appeal is therefore dismissed.