By: Naraya Lamart, Joseph Nicholls and Emma Campbell

Issue 1 – Tallow Commodities and liability for charges under a contract of carriage

Our Marine + Transport team are launching a marine series to provide marine insurers and their insureds with short reviews of the key authorities on legal issues arising out of the marine insurance space.

Our first paper in the series revisits Australian Tallow & Agri-Commodities Pty Ltd v Malaysia International Shipping Corporation (2001) 50 NSWLR 576 (Australian Tallow). Australian Tallow is the authority for terms in bills of lading extending liabilities under the contract of carriage (which usually fall on the shipper/consignee) to freight forwarders and other non-parties. We consider its significance 23 years later.


At a glance

  • The terms and conditions of a carrier’s bill of lading may extend liability usually attributed to shippers/consignees to freight forwarders (and other agents or contractors).
  • Australian Tallow sets a precedent for freight forwarders to incur liability for fees and charges owing to carriers under bills of lading, such as freight rates, container demurrage and storage or terminal charges, despite not being parties to the contract.
  • Marine insurers may face exposure where the insured freight forwarder becomes liable for any outstanding charges owing under the contract of carriage.


Background

Wotton + Kearney has acted for a number of parties in relation to claims arising out of container detention, port and storage charges.

Freight forwarders are frequently caught by the definition of “Merchant” under the terms of the bill of lading, despite acting in their capacity as agent for the shipper and never intending for themselves be bound by those terms. Presumably, at least some freight forwarders are entirely unaware of their potential exposure for at least a portion of their customers’ liabilities.

We discuss below the definition of “Merchant” under a contract of carriage and the (potentially far-reaching) implications for freight forwarders and their insurers.

Back to basics

A shipper has a common law duty to pay freight. This liability will transfer to the holder of the bill of lading or named consignee under a sea waybill or delivery order.

Under a bill of lading, the shipper (or merchant) will also be liable for a range of other charges owing to a carrier, including:

  • fumigation
  • repair or replacement of damaged packaging in certain circumstances
  • duties, levies or taxes
  • fines or penalties associated with import or export regulations
  • general average
  • salvage fees, and
  • detention and demurrage.

So, where does the freight forwarder fit into this?

The starting point is that the common law rule of agency states that where an agent discloses the existence and name of the principal on whose behalf it is making the contract, the agent will “drop out” of the contract and not be a party. As such, the agent will not incur liability under the contract to any third party.1

This is because, under the doctrine of privity of contract, only those persons/entities which are formally parties to the contract can be bound by it.

However, an exception to the doctrine of privity of contract may arise where the express terms of the contract impose personal liability upon the agent2 (or freight forwarder). In assessing whether to depart from the doctrine, the courts will consider the agent’s intention3 as to their/its own personal liability and the terms, nature, and circumstances of the contract.4

Typical bill of lading terms

The definition of “Merchant” in the bill of lading terms will typically include, at a minimum, references to: “shipper, receiver, consignor, consignee, holder, owner of the cargo, and any person entitled to possession of the cargo”. This broad definition is designed to capture a wide range of parties within the carrier’s terms and conditions.

Carriers may, and often do, extend the definition to include anyone acting on behalf of those parties identified above. The Australian Tallow case illustrates the significance of this extension.

Where the common law position is modified by contract to extend to anyone acting on behalf of the named parties, a freight forwarder may be inadvertently captured within the definition of “Merchant” and the liability clauses under the bill of lading terms and, as a consequence, be at risk of liability to the carrier for rates and charges owing under the contract of carriage.

These charges can mount up and quickly exceed hundreds of thousands of dollars within a matter of months.

An extended definition of “Merchant” alone may not be enough. Other clauses under the bill of lading terms which expressly render all parties falling within the definition of “Merchant” jointly and severally liable for specific charges will be relevant to the extent of the freight forwarder’s (or agent’s) liability.

Revisiting the reasoning in Australian Tallow

The 2001 New South Wales Court of Appeal case, Australian Tallow, is authority for a situation where liabilities of a shipper/consignee under a contract of carriage can be extended to a freight forwarder, agent or contractor through operation of an extended definition of “Merchant” in the bill of lading terms.

In that case, the Court of Appeal held that a freight forwarder, Australian Tallow & Agri-Commodities Pty Ltd, was liable for freight charges incurred by the carrier.

We explore the Court’s reasoning behind the decision below.

The facts of the case involved a freight forwarder acting as agent for a shipper of goods. The freight forwarder arranged a contract of carriage on behalf of the shipper pursuant to the terms and conditions of a standard form bill of lading.

The bill of lading defined “Merchant” as including “the Shipper, Holder, Consignee, Receiver of the Goods, any person owing or entitled to possession of the Goods or of this Bill of Lading and anyone acting on behalf of such person” (emphasis added).

Crucially, other liability clauses in the bill of lading terms expressly extended the operation of those clauses to anyone falling within the definition of “Merchant”.

Clause 14(5) of the bill of lading terms provided:

“The persons falling within the definition of Merchant in Clause 1 shall be jointly and severally liable for the payment of Freight and liquidated damages as provided in this Clause.”

The shipper refused to pay freight fees owing to the carrier. The carrier then sought to recover the freight fees from the freight forwarder. The issue was whether the freight forwarder was bound by the bill of lading terms and therefore liable to the carrier in respect of the unpaid freight charges.

The Court found that in arranging the contract of carriage, the freight forwarder must be taken to have been aware of the terms of the bill of lading, including the extended definition of “Merchant” and the express imposition of joint and several liability under clause 14(5).

Accordingly, in arranging the contract, the freight forwarder expressly made itself jointly and severally liable for the payment of freight. The freight forwarder therefore became privy to the contract, carrying with it liability for payment of freight.

In coming to this decision, the Court considered relevant case law and authoritative texts on the issue of privity of contract in agency relationships.5 Citing these texts, the Court explained that the principles of agency can be an exception to the doctrine of privity of contract where the agent, in concluding the contract on behalf of its principal, can create privity of contract between the third party and principal while also becoming a party to the contract itself. Whether an agent incurs personal liability will be “determined by the construction of the contract, if written, and by its nature and the surrounding circumstances”.6

Significance of Australian Tallow today

Twenty-three years on, Australian Tallow continues to provide a strong legal basis for carriers to rely on extended definitions of “Merchant” to pursue freight forwarders for outstanding charges owing under the contract of carriage, where the terms of the contract of carriage impose liability on the merchant for these charges.

Some freight forwarders may accordingly carry more risk than accounted for. This may also, in turn, create higher than anticipated exposure for their insurers.

To assess and limit their exposure, freight forwarders can, where possible:

  • ensure that the shipper, not the freight forwarder or agent, is the named consignee on the ocean bill of lading
  • ensure that the carriage document is a non-negotiable or straight bill of lading
  • ensure that no consignment note or house bill of lading is issued by the freight forwarder to the shipper
  • include an indemnity in its standard terms and conditions with its customers so that the customer indemnifies the freight forwarder for any liabilities incurred as a result of performing the freight forwarding services, and
  • ensure that its customers sign the freight forwarder’s terms and conditions containing the above indemnity.

With many freight forwarders operating a relatively lean business model, it will be interesting to see how the amendments to the unfair contract terms regime under the Australian Consumer Law might have an impact on a future challenge to Australian Tallow.

Our Marine + Transport team will be watching this space closely.

If you would like to discuss any of the topics raised in this article, please don’t hesitate to contact marine specialist Naraya Lamart.

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[1] New South Wales v Orton (1922) 30 CLR 422, 425.

[2] Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1 QB 370.

[3] Gorman v Norton (1887) 8 LR (NSW) L 479.

[4] Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460.

[5] Donald W Greig and J L R Davis, The Law of Contract (Law Book Co Ltd, 1987) 999; Australian Trade Commission v Goodman Fielder Industries Ltd (1992) 36 FCR 517, 521-522.

[6] Australian Tallow & Agri-Commodities Pty Ltd v Malaysia International Shipping Corp (2001) 50 NSWLR 576, 583 (Meagher JA, Sheller JA and Powell JA), quoting Francis M B Reynolds in Chitty on Contracts, 25th (ed), (Sweet & Maxwell, 1983) vol 2, ch, par 2274 at 51.