Freight |

24 Jan, 2016 MARITIME LAW 0

Chapter 12

Freight

12.1 Without freight there would, of course, be no merchant shipping and no need for bills of lading. The carrier’s right to freight is a fundamental aspect of carriage of goods by sea. This chapter covers the subject of freight due under bills of lading, as opposed to charterparty freight or hire.1 However, the majority of disputes over “bill of lading” freight arise in cases where one or more charterparties are also in place. Thus, a consideration of this topic cannot ignore altogether the law relevant to charterparties.

12.2 Freight may be defined as “the consideration payable for the carriage of the goods to and their delivery at the destination”.2 The word freight may be used not only in respect of the money consideration itself, but the right to it.

12.3 The rights and obligations relating to freight are almost entirely common law. Freedom of contract has remained largely intact and unaffected by conventions such as the Hague Rules, which impact on the other rights and obligations of the parties to a contract of carriage for goods by sea.

The common law position in the absence of specific contractual provision

12.4 At its most basic level freight is contractually payable to one party to the contract of carriage (the carrier) by the other party, usually the shipper, named in the bill of lading. In Cho Yang Shipping Co. Ltd. v Coral (UK) Ltd.3 Hobhouse L.J. said:

In the absence of some other consideration, the shipper is contractually liable to the carrier for the freight (Scrutton, 20th edn, art. 172). This is because the carriage is for reward and the personal liability to pay the reward is a contractual liability (whether the carriage was as a common carrier or pursuant to a “special” contract). The personal liability is that of the person with whom the performing carrier has contracted to carry the goods. This person is normally the shipper (Domett v Beckford, (1883) 5 B. & Ad. 521). But the shipper may be shipping as the agent of the consignee in which case the contract will be with the consignee (e.g., Fragano v Long (1825) 4 B. & C. 219, Dickenson v Lano (1860) 2 F. & F. 188). A contract to pay the freight will not always be implied from the fact of shipment and the issue of a bill of lading (Smidt v Tiden (1874) L.R. 9 Q.B. 446). It is possible for there to be more complex contractual schemes; the performing carrier may be in contractual relations with others as well, as, for example, where there is a voyage or time charter; this can affect the position.

12.5 It is possible for the right to sums of money akin to freight to arise outside the confines of a contract, typically in one of two basic situations. First, it may arise on a quantum meruit basis where goods are carried at the request of another without any contract being in place.4 Secondly, a carrier may be under a duty as a bailee where the contract of carriage has come to an end; as well as having certain duties he may have a correlative right to remuneration.5 In neither case is the remuneration “freight” in the strict sense of sums contractually due to a carrier.

12.6 There may be an implied term in a contract of carriage that the shipowner will be given an opportunity to earn his freight, although the scope of this will depend on the express terms. In The Springbank,6 the charter provided for a range of discharge ports, including English and Danish ports. The vessel was ordered to a Danish port, where it would have been illegal to discharge, so the vessel proceeded to an English port and discharged the cargo. The shipowners were held to be entitled to damages equivalent to the freight that would have been payable at the English port, on the basis of an implied term that the charterers would nominate a port to which it was legally possible to proceed for discharge.7

Right to remuneration – substantial delivery

12.7 What must the carrier do to earn freight? At common law the test is “whether the service in respect of which the freight was contracted has been substantially performed”.8 This test is satisfied “by the carriage and arrival of the goods ready to be delivered to the merchant, though they may be in a damaged state when they arrive”.9

12.8 Thus, at common law, and unless the freight is payable on a lump sum basis:10

  1. (1) no freight will be payable on goods that are lost on the voyage, whether this occurs because of a breach of contract by the carrier or not; and
  2. (2) freight will be payable, pro rata, on goods delivered even though part of the cargo has been lost.11

As discussed below, the common law position may be modified by express terms in the bill of lading.

12.9 If cargo is very seriously damaged, to the extent that it has lost its identity, no freight will be payable in respect of it. In Dakin v Oxley12 the cargo of coal was damaged to such an extent that it was abandoned. Willes J. reviewed extensively the English and foreign authorities and concluded that no freight was payable where either no substantial part of it remains or the quantity is undiminished but it loses its identity. He said:

In both classes of cases, whether of loss of quantity or change in quality, the proper course seems to be the same, viz. to ascertain from the terms of the contract, construed by mercantile usage, if any, what was the thing for the carriage of which freight was to be paid, and by the aid of a jury to determine whether that thing, or any and how much of it, has substantially arrived.

12.10 Thus, no freight was payable on cement in casks which had turned into solid masses after the vessel was scuttled, on the basis that it had ceased to exist as cement.13 A commercial rather than a scientific approach14 was taken to this test in Asfar v Blundell,15 where dates immersed in water became a mass of pulpy matter impregnated with sewage and in a state of fermentation, although they did retain value for purposes of distillation into spirits. Thus, although they remained dates in a limited sense, no freight was payable because:

if the nature of the thing is altered, and it becomes for business purposes something else, so that it is not dealt with by business people as the thing which it originally was, the question for determination is whether the thing insured, the original article of commerce, has become a total loss. If it is so changed in its nature by the perils of the sea as to become an unmerchantable thing, which no buyer would buy and no honest seller would sell.16

12.11 In The Caspian Sea17 Bachaquero crude oil became contaminated by paraffin. In remitting the case to the arbitrators the court held that if (as was alleged) the description “Bachaquero crude” connoted a paraffin-free crude oil, then no freight would be due in respect of cargo so contaminated. Donaldson L.J. rejected the notion that the shipowners would be disentitled to freight merely because the cargo delivered was not commercially identical to that loaded. He identified the relevant question as “whether an honest merchant would be forced to qualify the description applicable to the goods on shipment to such an extent as to destroy it”. This decision illustrates the somewhat arbitrary operation of the rule. On the one hand, damage that affects the description of the goods, but that causes very little diminution in value may deprive the owner of freight. On the other hand, damage that renders the goods worth very much less may not have this effect, as in Dakin v Oxley.

Right to remuneration – carriage all the way to destination

12.12 At common law a contract of carriage is an “entire” contract in the sense that nothing is earned until the goods have been carried to their contractual destination.18 Carriage to a port that is 90 per cent of the way to the contractual destination will not entitle the carrier to any, let alone 90 per cent, of the freight.19 Similarly, where the carrier is compelled to discharge the cargo other than at the contractual destination, for example, by governmental order made on the outbreak of war, he may lose his right to freight.20 Where the shipper asks for and receives delivery short of the destination, the carrier will be entitled to freight, as such conduct gives rise to a variation to the contract.

12.13 Where no place for delivery is specified, under usual circumstances the vessel ought to proceed to the place in the port where cargo such as she carries is ordinarily discharged.21

Time at which right to freight accrues

12.14 Prima facie freight is not due until the arrival of the goods at the contractual destination.22 While it is sometimes said that delivery of the goods and payment of freight are concurrent, it is more accurate to say that freight is due once the carrier is ready to deliver. The shipowner’s lien for freight would be emasculated if he could not withhold the goods pending payment of freight, and he is not bound to deliver until he has received his freight.23 The receiver’s refusal to accept the goods, or the inability of the vessel to discharge due to port regulations, will not deprive the carrier of the right to freight. In those circumstances the carrier is entitled not only to freight but also to “back freight” and other expenses involved in taking the goods to a convenient place for discharge.24

Mutual exceptions

12.15 A contract of carriage sometimes provides that specified perils will be “mutually excepted”. If, under such a contract, cargo is loaded on board but is destroyed by an excepted peril before the voyage commences, then the shipper is under no liability to pay freight in respect of the cargo lost, nor is he obliged to ship replacement cargo.25 Furthermore, in those circumstances the carrier would be under no liability to cargo interests in respect of the loss.

Specific contractual provisions

12.16 The contract of carriage will generally make express provisions for concerning freight. In considering the effect of common forms of wording is it necessary to distinguish, among other things: (i) the time or stage of the voyage by reference to which the amount of freight is calculated; (ii) the time or stage when the freight is earned; and (iii) the time or stage when the freight is payable.

Calculation of amount

12.17 A contract may provide for freight to be calculated on a particular basis.26 A question may arise as to whether this governs just the calculation of the amount of freight or whether it also displaces the common law rule that freight is payable only on cargo delivered, making it similar in effect to a contract for “lump sum” freight, i.e. the payment of a certain sum, whatever the quantity of goods delivered.

12.18 In London Transport v Trechmann Bros27 the shipowner contracted to “deliver the cargo agreeably to bills of lading on being paid freight in full…at the rate of 10s. 6d. per ton of 20 cwt. gross weight shipped payable on right and true delivery of the cargo in cash…”.28 Part of the cargo of bagged sugar was lost on the voyage, and the principal issue was whether the shipowners were entitled to retain the freight paid on shipment on the basis of the entire quantity shipped. The court answered this question in the negative, on the basis that the reference to the weight shipped only provided for calculation of the amount of freight potentially payable, and did not displace the common law principle that freight was payable only at the time of delivery and on such quantities available for delivery.29

12.19 In contrast in The Metula30 Donaldson J. considered that the concept of freight payable on the shipped weight of such part of the cargo as was actually delivered made no sense in the context of a bulk cargo of petroleum products. He held that a clause providing that freight “shall be computed on intaken quantity…Payment of freight shall be made by Charterer without discount upon delivery of cargo at destination” entitled the shipowners to full freight calculated on the shipped quantity despite the loss of over 50,000 tons of cargo on the voyage.31

12.20 A separate question arises as to the effect of natural variations in weight or volume of a cargo during a voyage, due to evaporation, shrinkage, etc. The basic principle remains that it is the shipped weight or volume that is the relevant one for the basis of calculation, subject to any provision to the contrary. In Dakin v Oxley32 Willes J. said that:

Where the cargo, without loss or destruction of any part, has become accidentally swelled (Gibson v Sturge, 10 Exch. 622), or, perhaps, diminished, as, by drying (Jacobsen’s Sea Laws, book 3, Chap. 2, p. 220), freight (usage of trade apart) is payable upon the quantity shipped.33

12.21 A bill of lading or charter may provide that a statement as to weight or quantity of cargo shipped may be conclusive evidence of the truth of that statement. This may34 operate to fix freight on the basis of the quantity or weight so stated.35

Earned

12.22 As discussed above, at common law freight is not earned until the goods are ready to be delivered at the contractual destination. Bills of lading or charterparties may provide for freight to be earned36 at a different stage, such as on shipment. The significance of this is that once the relevant event has occurred that earns the shipowner his freight, he has an indefeasible right to such freight that is unaffected by subsequent events, including loss of the vessel or cargo37 or repudiatory breach of the contract of carriage by the carrier.38

12.23 Thus, in The Karin Vatis39 the relevant clause in the charter provided:

Freight deemed earned as cargo loaded…95% of freight to be paid within three (3) banking days after completion of loading and surrender of signed Bills of Lading…vessel and/or cargo lost or not lost. Balance of freight…to be settled within twenty (20) days after completion of discharge and Owners’ presentation of Laytime Statements from load/discharge ports.

The Court of Appeal differed from the arbitrators and the judge at first instance in their construction of this clause. The court held that the opening words gave the shipowners an accrued right to 100 per cent of the freight on completion of loading and this right was unaffected by the subsequent loss of the vessel and cargo, with the consequence that discharge never took place.40

12.24 Where freight is earned or payable on the happening of a specific event, and the shipper by breach of contract prevents this event occurring, then the carrier may recover damages equivalent to the unpaid freight. This principle is illustrated by SS Oriental v Tylor,41 where one-third of freight was payable on signing the bill of lading, based on the bill of lading weight and the master was to sign bills within 24 hours of completion of loading. After completion of loading the vessel sailed and very shortly thereafter sank. The shippers refused to present bills for signature by the master. That refusal was held to be a breach of the charter and the charterers were held liable for the one-third of the “advance” freight, that is, the freight due on signature of the bills of lading.

Payable

12.25 The Karin Vatis42 also illustrates the distinction between the point at which freight is earned and that when it is payable. The vessel loaded and the 95 per cent freight was paid but she sank on the voyage. The question was whether, on these facts, the owners could claim the balance of 5 per cent of freight. The court was faced with the difficulty that the event under the contract that was to be the trigger for payment of the balance of 5 per cent never occurred. The court concluded that the remaining 5 per cent of freight had been earned on shipment and that, in the circumstances, payment of this balance had to be made within a reasonable time.

12.26 A common provision is that freight is payable “after right and true delivery of the cargo”. This phrase on its own connotes delivery at the place specified, or at least a place where delivery is accepted pursuant to the contract of carriage. However, delivery at a different place will not defeat an accrued right to freight arising from a provision that the freight is earned at an earlier stage.43

12.27 The common provision that a balance of freight is payable only after settlement of demurrage may mean that such freight payment will be delayed, if demurrage is disputed, until the amount of demurrage due is “settled”. The meaning of “settlement” depends on the context, but is more likely to mean determined, if necessary in court or arbitration, rather than actually paid.44

Lump sum freight

12.28 The basic common law rule is that freight is recoverable only in respect of cargo delivered or tendered for delivery. Where, however, the contract provides for payment of lump sum freight, the full “lump sum” is payable even if some of the cargo is lost.45 This is because the essence of the contract in such cases is that the carrier is entitled to a fixed sum for freight for undertaking the voyage, displacing the rule that the consideration for freight is the delivery of the cargo.46 The contract may be for “lump sum” freight in this sense even if the contract provides, not for a specific figure, but for freight calculated by reference to the quantity of cargo loaded. The right to freight still accrues at the time of delivery, subject to contractual provision to the contrary, and will also be payable even if no cargo is shipped as a result of a default by the shipper. If none of the cargo shipped is delivered, then, subject to contractual provision to the contrary, there is no entitlement to freight, even if “lump sum”.47

Advance freight

12.29 This term is used to connote freight that is payable in advance of when it would be payable at common law (i.e., after carriage of the goods to the place of delivery).48 “It is advanced beyond the time of the ship’s arrival at the port of destination.”49 Subject to express provision to the contrary, such advance freight will not be repayable even if the cargo is, after the right to payment accrues, but before actual payment, lost by an excepted peril. In Allison v Bristol Marine50 Brett J., whose advice was accepted by the House of Lords, referred to “the uniform, though perhaps anomalous rule, that the money to be paid in advance of freight must be paid, though the goods are before payment lost by perils of the sea, and cannot be recovered back after, if paid before the goods are lost by perils of the sea”.51

12.30 As indicated above, freight may be earned and payable as different times. Thus, in The Lorna I, Lord Donaldson M.R. stated:

…a liability to pay advance freight does not per se affect the time when freight is earned. It is simply an obligation to make a payment on account of freight at a time when it has not yet been earned. However that obligation is subject to a customary incident, capable of being varied or confirmed by express stipulation, that advance freight paid pursuant to the contract is not returnable or recoverable should the contract be frustrated before the freight can be earned (see Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour (1942) 73 Ll. L. Rep. 45; [1943] A.C. 32).52

12.31 Thus, there are two questions that usually arise on the terms of bills of lading or charterparties that provide for freight to be paid in advance of the arrival of the ship at her destination. The first is when such “advance freight” is payable. If the contractual conditions for payment have been fulfilled, then the shipper must pay the freight, even if the freight has not been “earned”. However, if the ship and cargo are subsequently lost, by non-excepted perils, the freight may be recoverable by the cargo owner, as part of the damages for non-delivery of the goods, unless the freight had been deemed “earned” at the same time it was payable.53 The second question is when such “advance freight” is earned. Once the conditions for the “advance freight” being earned have been fulfilled, then it will become payable, even if the time for payment is at that stage in the future and something happens to the ship after the time the freight is earned but before the due date for payment. Thus, in The Lorna I54 the relevant clause provided for “freight non returnable cargo and/or ship lost or not lost to be paid…75% within 5…days after Master signed bills of lading”. The vessel was lost before five days after signing bills of lading. It was held that no freight was payable, because the time for payment (at the latest) was five days after signing the bills of lading. The words “cargo and/or vessel lost or not lost” were held to relate only to the words “non returnable”, and they did not mean that freight had to be paid whether or not the vessel had been lost before the expiry of the five-day period.

12.32 Where part of the freight is payable or earned at a time in advance of delivery, and part of the cargo is lost between such time and the time of delivery, the way in which the “advance” freight is to be apportioned will determine what further freight is payable. That will depend on the bill of lading wording. In Allison v Bristol Marine,55 freight was payable at 42s. per ton on the delivered quantity, with 50 per cent of the freight to be paid in London on signing of bills of lading.56 The 50 per cent of freight was paid as agreed. After signing the bills and before delivery of the cargo in Bombay, half of the cargo was lost when the vessel foundered on a reef outside Bombay. The master did not claim the balance of freight from the charterers at Bombay, thinking that the prepayment had satisfied the total freight for the cargo that was delivered. Subsequently, the shipowner sued the defendants, who were underwriters of policies on the 50 per cent of the freight that was to be paid on the total cargo that was due to be delivered at Bombay. The shipowner argued that he had suffered a total loss of the second half of the freight on the whole cargo as shipped. The insurers’ first argument was that the 50 per cent initial payment, made of the basis of the bill of lading quantity, was not freight at all, but a loan, so that the shipowner had received all the freight due on the 50 per cent of the cargo that had been delivered at Bombay and so had suffered no loss under the policy. Alternatively, the insurers argued that the 50 per cent freight paid was a non-returnable advance of half the freight that should be apportioned across each ton shipped, so that a further 25 per cent (i.e., the balance of 50 per cent on the 50 per cent of the cargo delivered) of the total freight was payable on delivery. Therefore, the shipowner had suffered only a partial loss of the freight due at Bombay if the whole cargo had been delivered. The House of Lords rejected both these arguments. It held that no further freight was payable by the charterers at Bombay, as the payment made in London was to be regarded as advance pre-payment of freight on the half of the total cargo that was actually delivered. Therefore the shipowner had lost all the freight that he should have been paid at Bombay, had the whole cargo been delivered. Therefore, he had suffered a total loss under the policies.

Deadfreight

12.33 Deadfreight is the sum payable in respect of cargo that should, under the contract of carriage, have been shipped but is not so shipped. Thus, if the shipper or charterer is obliged to load “a full cargo of wheat, at freight of £30 per tonne” and loads only 10,000 tonnes when the vessel has capacity for 12,000 tonnes, the shipper is liable not only for £300,000 freight, but for £60,000 deadfreight. The term is somewhat misleading, as the carrier is actually claiming unliquidated damages for loss of profit, and thus the carrier is under a duty to mitigate loss and to give credit for any savings made as a result from the short shipment.57

Back freight

12.34 Back freight is of little practical importance in modern times. It is the term used for the remuneration to which the shipowner may be entitled if there is a failure to take delivery of the goods, and it becomes necessary to carry the goods to some alternative place of discharge, which may be “back” to where the goods were shipped.58

Freight collect

12.35 This is the term used to denote an agreement that freight will be paid at the port of destination.59

Prepaid freight

12.36 This denotes freight paid at or in advance of shipment, as opposed to at the time of delivery. The effect of “freight pre-paid bills” is of some importance and is dealt with below.

The original contracting party

12.37 As discussed above, the right to freight is contractual and so primary liability to pay freight falls on the party contracting with a carrier under a charterparty or bill of lading contract. The question of the identity of parties to contracts of carriage is discussed in detail in Chapter 7. In most cases the identity of the contracting party will be clear, but in two categories of case careful analysis may be necessary to ascertain who is liable for freight.

12.38 First, it may be said that one party contracts as agent (e.g., in certain circumstances, particularly involving an f.o.b. contract, the shipper may contract as agent for the consignee).60 Secondly, the bill of lading may not reflect in full the contractual obligations of the parties concerned, for example, where there is more than one relevant contract of carriage and the party to the bill of lading contract has not undertaken any liability for freight under that contract.61 As discussed below in the context of charterparties, the right to freight under one contract does not preclude the existence of a parallel right against a different party under a separate contract.62 The right to freight may also be affected by agreements collateral to the bill of lading contract, such as the “special freight agreements” concluded for shipments involving the parties in Evergreen Marine Corporation v Aldgate Warehouse (Wholesale) Ltd.63

12.39 A bill of lading in the hands of a charterer operates as a receipt only, the contract being contained in the charterparty. Thus, a bill of lading in the hands of the charterer cannot, prior to any transfer of the bill, give rise to an obligation on the charterer to pay freight.

12.40 Subject to these points, and to the effect of a bill providing for freight to be payable as per charterparty (see below), the rights of a shipowner to freight under a bill of lading contract and a charter are independent. Accordingly, the fact that a shipper has paid freight under a sub-charter will not preclude him from being liable to the shipowner under the bill of lading contract where that contract of carriage is with the “head owner”. Thus, in certain circumstances a shipper may run the risk of having to pay freight twice.64

The subsequent holder or indorsee

12.41 As discussed in Chapter 8, at common law an implied contract may arise between a receiver or consignee who presents a bill of lading to the carrier in exchange for delivery of the cargo and, if so, this implied contract may render him liable for freight. However, it is often the act of payment of freight itself, coupled with the presentation of the bill, that allows the implication of a contract in the first place.65

12.42 The need for an implied contract is significantly reduced by the passing of COGSA 1992. The holder of a bill may come under the same liabilities as the original party, including a liability to pay freight, if the conditions in section 3 are fulfilled.66

Freight “as per charterparty”

12.43 Bills of lading frequently provide that the payment of freight is to be “as per charterparty”,67 or use some similar expression, and the effect of such provisions gives rise to questions of practical importance. This is particularly so when the bill is an “owner’s bill” and the shipowner has chartered the ship to a charterer who fails to pay the charterparty freight or time charter hire.

12.44 In Wehner v Dene,68 the general position in relation to freight on goods on a chartered ship was explained by Channell J. as follows:

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