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THE "BERGE SISAR"¹

The Transfer of Liabilities under Bills of Lading: Section 3 of the Carriage of Goods by Sea Act 1992

In what circumstances can a holder of a bill of lading attract liabilities under the Carriage of Goods by Sea Act 1992 and in what circumstances can potential liabilities be divested? The "BERGE SISAR" may answer the immediate question but leaves problems unresolved.

The facts of the case are complex but, distilled to their simplest, Borealis (for whom Waltons & Morse act) purchased about 42,000 metric tonnes of liquid propane from Stargas. They in turn had purchased it in five separate parcels either directly or indirectly from Saudi Aramco ("Aramco"). The gas was shipped from Yanbu by Aramco on board the "BERGE SISAR", which had been chartered in by Stargas, for delivery at Borealis's terminal in Stenungsund. Five separate bills of lading were issued to Aramco, all of which were eventually negotiated to Borealis. On arrival at Stenungsund, Borealis took samples of the gas and found it to be off-specification due to an excess of corrosive sulphur compounds. Being unable to accept delivery of the gas, Borealis on-sold the contaminated gas as a distressed cargo to Dow on terms CIF Terneuzen. Thereafter, the vessel proceeded to Terneuzen and there delivered up the off-specification gas to Dow.

Borealis brought proceedings in the Commercial Court against Stargas under the contract of sale. Thereafter, the shipowners (Bergesen) were joined to the action and various claims and cross-claims were pursued as between these three parties. Of particular significance, Bergesen brought a claim against Borealis under the bills of lading alleging that, as intermediate holder of the bills of lading, Borealis was liable to them under Section 3 of the Carriage of Goods by Sea Act 1992 for shipping an injurious cargo. In particular, they sought recovery of the cost of cleaning the ship's tanks which had become impregnated with the sulphur compounds. Borealis denied that it was so liable to Bergesen but nevertheless sought an indemnity from Aramco under the Civil Liability (Contribution) Act 1978 on the basis that Aramco was liable in respect of the same damage.

The Commercial Court granted Borealis permission to join Aramco but Aramco appealed to the Court of Appeal. That appeal was successful, but only by a majority. The dissenting judge (Sir Brian Neill) preferred the view that Borealis remained liable to Bergesen notwithstanding the onward endorsement of the bills to Dow. The majority however held that no liability could attach to Borealis under the bills of lading after endorsement, such that the question of an indemnity from Aramco did not arise. The decision was appealed to the House of Lords.

The House of Lords has now dismissed the appeal, holding that where a bill of lading holder transfers rights under it to a third party (by endorsement and delivery), on so doing they also cease to become subject to any liabilities.

The scheme of COGSA 1992 is essentially to transfer rights under bills of lading to the "lawful holder" (Section 2), but only to fix them with liabilities if they take or demand delivery of any part of the goods or if they make a claim under the contract of carriage. The House of Lords held that in taking samples at Terneuzen, Borealis had not demanded delivery of any of the goods (or made a claim) as the taking of samples was an act preliminary to demanding delivery. Consequently, they had done none of the acts which trigger liabilities under Section 3. Although that was decisive of the appeal, the Court nevertheless went on to state that even if a bill of lading holder does take or demand delivery or make a claim but thereafter transfers the bill to a third party, it in so doing divests itself of any liabilities.

Whilst the decision has clarified the law in many respects, it raises a number of potentially interesting questions which are stood over for future debate. For example:

1. Can a "lawful holder", knowing that the bill carries with it substantial liabilities, defeat the owners' claim against it by transferring the bill to "a man of straw"²?
2. What of the bill of lading holder who, knowing that the bill carries with it liabilities, cannot himself accept delivery because it is unsafe to discharge (as in the "BERGE SISAR" case), yet cannot find a buyer for the cargo, perhaps because the potential liabilities would exceed its value and this fact is well known in the market?
3. Under what circumstances might a bill of lading holder become liable on the basis that it demanded delivery (as distinct from doing the subsequent act of taking delivery)? In other words, what was the draftsman's purpose in including the making of a demand for delivery as one of the acts triggering liability under Section 3?

The principle underlying the decision would appear to be one of fairness. A bill of lading holder will only be liable under Section 3 in circumstances where it seeks to enforce rights under the contract of carriage (by demanding/taking delivery or making a claim). Likewise, where a party ceases to have rights under the contract of carriage, so too does it cease to have liabilities.

Should you require any further information or have any queries in relation to these issues, please contact Andrew Purssell.

May 2001

¹ Borealis AB v Stargas and Ors, House of Lords, 22^nd March 2001. [1998] 2 Lloyd's Rep 475 (CA) and [1997] 1 Lloyd's Rep 642 (Com Ct)

² The answer, in part, is that it can only do this if the bill is transferred in good faith (i.e. honestly)

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