A recent case before the High Court in Kuala Lumpur concerned the loss of cargo delivered from the Port of Tanjong Priok (Indonesia) to the Port of Dammam (Saudi Arabia). The plaintiff, shipper P T Karya Sumiden Indonesia (KSI), brought the claim against the non-vessel owning common carrier, which comprised Oceanmasters Marine Services Sdn Bhd and its agent Sapphire Line Private Limited.(1)

Facts

The contract of carriage by sea between KSI as shipper and Sapphire Line as carrier was evidenced by three house bills of lading issued by Sapphire Line. Oceanmasters was the undisclosed principal.

KSI brought its claim against Oceanmasters and Sapphire Line as principal and agent respectively, for acting in breach of contract as carrier or duty of care as bailee under the terms of the bill of lading, in that they released KSI's cargo without due production of Sapphire Line's original house bills of lading.

Had the delivery taken place as planned, the cargo would have been released only against production of the original bills of lading and on receipt of the purchase price by consignee Jawad and Malik Metal LLC (JMM), thereby ensuring that KSI was paid the purchase price. However, the goods were released against switch bills of lading issued at the behest of JMM.

Oceanmasters maintained that it could not be held responsible for JMM effecting the issuance of switch bills of lading and pointed to the fact that it was appointed by JMM as its agent to arrange for the shipment and carriage of the cargo it purchased from KSI. Oceanmasters claimed that it had no knowledge that JMM had failed to procure the original bills of lading before issuance of the switch bills of lading. Sapphire Line claimed that it had been unaware that switch bills of lading were used in the transaction and maintained that KSI never advised Sapphire Line that it had not been paid by JMM. Both Oceanmasters and Sapphire Line further contended that the fault and responsibility for the unlawful release of the cargo lay solely with JMM.

The following primary issues arose for the court's consideration:

  • whether KSI had the necessary locus standi to bring this action;
  • whether KSI's action was time barred under Article III Rule 6 of the Hague Rules, as it applied to the terms of the Sapphire Line's house bill of lading; and
  • whether Oceanmasters or Sapphire Line was in breach of contract as carrier or in breach of duty as bailee, in releasing or allowing the release of cargo without due production of Sapphire Line's house bills of lading.

Locus standi

Oceanmasters contended that KSI did not have the locus standi to bring the action, on the grounds that the primary sales contract between KSI and JMM was on free on board (FOB) terms, meaning that title to the cargo passed together with the risk to JMM at the moment the cargo crossed the ship's rail at the port of loading. However, KSI argued that its cause of action against the defendants was founded on a breach of the contract of carriage of the cargo and bailment. The court held that issue of title to or property in the cargo was not pivotal in determining whether there was a breach of contract of carriage or bailment in releasing the cargo. After considering the factual matrix, the court held that the intention of the parties regarding the point in time at which they mutually intended property in the cargo to pass was significant.

The court considered the FOB terms agreed by the parties in the master agreement (Incoterms 2000) and, relying on Samsung Corp v Devon Industries,(2) held that these terms must be construed within the factual matrix and circumstances of the case, with a view to ascertaining the true intentions of the parties regarding when they mutually intended property to pass.

The court further considered the application of Section 19 of the Sale of Goods Act 1957, which provides for property to pass as intended by the parties, having regard to:

  • the conduct of the parties;
  • the circumstances of the case; and
  • Section 25(3) of the Sale of Goods Act.

The court also considered the application of Section 2 of the Bills of Lading Act 1855, which preserves the right of the carrier to claim freight against the original shipper or owner, notwithstanding an endorsement on the bill of lading. The court held that preservation of such burden also preserved the shipper's right to sue the ship owner for breach. It held that the property in the goods did not pass to JMM, as the purchase price for the cargo was never paid to KSI.

Time bar

The court stated that the Hague Rules govern only the period between the loading of goods over the ship's rail and their unloading over the ship's rail and onto the quay. The court followed an earlier Federal Court decision in Peninsular & Oriental Steam Navigation Co Ltd v Rambler Cycle Co Ltd regarding the application of Article III, Rule 6 of the Hague Rules,(3) which held that it encompasses the contract of carriage from the point of loading until the point of discharge and does not extend to delivery. The court held that KSI's claim was not time barred.

Breach of contract/breach of duty

The court observed that KSI as shipper could rely on Sapphire Line's house bill of lading as evidence of the contract of carriage. The court held that as the cargo was shipped under a house bill of lading (ie, a bill of lading issued by a non-vessel owning common carrier) which was issued by a freight forwarder on such terms that it undertook the carriage of the goods, the terms of the contract did not in any way detract from the nature of a bill of lading, which is a contract of carriage between the freight forwarder and the shipper. Therefore, Oceanmasters and Sapphire Line owed obligations to KSI as the carrier under Sapphire Line's house bills of lading to deliver goods only against the production of the original bill of lading. To deliver otherwise (ie, either without the original bill of lading or against a switch bill of lading), would amount prima facie to a breach of the contract of carriage or conversion.

The court held that it was negligent – if not wrongful – for a carrier to issue a second set of bills of lading in respect of the same cargo without the consent of the holder of the first set. Issuing a second set of bills of lading to a different shipper to cover the same shipment of goods as under a set of bills of lading issued earlier to the original shipper is a breach of the contract of carriage.

Oceanmasters' liability to KSI arose through its role as the undisclosed principal under Sapphire Line's house bills of lading. The court applied Section 179 of the Contracts Act 1950 and allowed KSI to seek recourse against Oceanmasters under Sapphire Line's house bills of lading. Similarly, the court applied Section 184 of the Contracts Act, which conferred on KSI the right to proceed against Oceanmasters (as the undisclosed principal) for breach of its contractual obligations under the contract of carriage and in bailment.

Sapphire Line's liability to KSI arose through its role as the agent under Section 186 of the Contracts Act and enabled KSI to proceed against both Oceanmasters and Sapphire Line as principal and agent concurrently. The court held that Sapphire Line had at all times, as agent, acted solely on the instructions of Oceanmasters and could not therefore be said to have knowingly acquiesced or consented to the release of the cargo without production of the original house bills of lading. As such, the fact that Sapphire Line's house bills of lading were issued to KSI representing the contract of carriage – as well as securing the cargo from release – was sufficient to warrant the imposition of liability on Sapphire Line. The court was not persuaded by Sapphire Line's claim of not knowing that a switch bill transaction took place at the behest of JMM and held that the claim did not detract from the representation made to KSI.

For further information on this topic please contact Rajasingam Gothandapani at Shearn Delamore & Co by telephone (+60 3 2070 0644) or email (rajasingam@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

Endnotes

(1) P T Karya Sumiden Indonesia v Oceanmasters Marine Services Sdn Bhd (High Court of Malaysia, Kuala Lumpur (Commercial Division) 27-35-08/2013).

(2) 1996 1 SLR 469.

(3) 1964 30 Mil 443.

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