Thursday, January 29, 2009

Ship's Rail Liabilities Under FOB Clause

From Countryman & McDaniels Peerless "Cargo Law Website"

Ship's Rail Liabilities Under FOB Clause

The seller, Mr. White, sued a ship owner, Liberian Lines Inc., for damage caused to the goods by the negligence of the ship owner’s employees: The question of damages is not the issue. They were clearly damaged goods. The question relates to which party is responsible seller, carrier or buyer (or their insurances) for payment of the damages and whether negligence can be found on the part of the ship owner's employees. INCOTERMS exist for this reason to determine title and risk transfer liabilities.

As the goods were being loaded onto the ship, but before passing over the ship’s rail, they were dropped and damaged. The sale contract specified “FOB London”: Under the terms "FOB London" the seller is responsible for warehousing at point of origin, warehouse labour charges, export packing, loading costs, inland freight charges, loading cargo on the ocean carrier, but not ocean insurance charges. Therefore as the damage occurred prior to passing over the ship's rail it would be illogical to sue the shipowner, Liberian Lines Inc. as the shipowner's responsibility for the goods has not taken place prior to damages. In what ways could the shipowners be found liable of negligence if the damages occur prior to passing over the rail?

In this type of contract, the buyer engages a freight forwarder to book space and to procure a B/L; the seller discharges his duty by putting the goods on board, getting the mate’s receipt and handing the receipt to the buyer’s freight forwarder to enable him to obtain a B/L: Seeing as the goods were damaged prior to crossing the ship's rail one must examine the terms of liability and risk assigned to the freight-forwarder, the dock stevedores and loading company who under the buyer's instructions have taken responsibility for the goods especially if the exporter has transferred title and risk at the point of loading cargo on the ocean carrier. Insurance coverage should also be investigated to determine who is liable for damages; the freight forwarder, the dock stevedores or port loading company. This would require complete review of all documents from the shipper or exporter to the dock receipt, to the bill of lading, insurance coverage and certificates with review of the mate's receipt which should detail nature of damages as "claused" or "unclean." The freight forwarder handling all of these details of proper documentation and insurance should clearly demonstrate coverage for damages and liability clauses.

In, "Is The Ship's Rail Really Significant?" by Dr. Bruno Zeller, the INCOTERMS of FOB are expressed as often misused where FCA would more clearly determine liabilities in the cases of loading damages. Zeller asks, "who bears the responsibility if the goods sway back over the ‘ship’s rail’ and fall on the wharf?" He states that FOB generally holds the seller/exporter liable for delivering clean and cleared goods to a specific port and loading onto a ship. He also states that the seller bears the loss if the goods fall on the wharf or in the water as they are being loaded while conversely the buyer must cover the loss if the goods fall upon the deck or upon any point over the "ship’s rails."

The ship owner, Liberian Lines Inc., tried to rely on the B/L which incorporated the Hamburg Rules and thus limited liability: This would be correct especially if the evidence proves that the damages resulted in cargo falling to the wharf/dock or water. Evidence suggests that the seller should have better selected FCA as an INCOTERM to clearly delineate transfer of liability and risk at the point of the ship's rail. Zeller confirms," the seller in the FOB transaction remains liable until this point, which means that if the parties incorrectly use FOB instead of FCA the seller remains at risk even after the goods have been handed over to the first carrier. " In addition, prior to crossing the rail the goods are not considered in the carrier's possession under terms of FOB.

The seller, Mr. White, claimed that since it was not a party to the B/L, the ship owner could not rely on the limitation: Mr. White agreed to the FOB clause and the selection of freight forwarder by the buyer therefore he apparently remains liable for damages even after the point of crossing the rail according to Dr. Zeller.

Who won?: It would appear Mr. White cannot win as he has signed an FOB clause, "instead of FCA – the seller remains liable until the goods cross the ‘ship’s rail’." (Zeller, 2005)


Roy Becker said...

FOB as defined in Incoterms 2000 does not requre the goods to be loaded - only that they pass the ship's rail. In the case of swaying back over the rail to the dock side, wouldn't there be a good argument that it is the buyer's loss? Of course, there would have to be indisputable evidence that this in fact happened.

Daniel Costello said...

This ships rail swaying issue is the point of Zeller's reference to FCA as a safer option.

I am sure Countryman & McDaniels spend a lot of time and litigants' legal budgets on such difficult swaying cases.