Sellers often face difficulties when attempting to bring a claim against a carrier for loss of or damage to goods in transit after the bills of lading have been transferred to buyers.
The issue often arises under sale contracts where quantity and/or quality are to be assessed on an “outturn” basis, i.e. on discharge.
On indorsement of the bills of lading and delivery of the bills to the buyer, the rights of suit under the bills are transferred to the buyer (s. 2(1) of COGSA 1992). The seller does not retain any rights to bring a claim against the carrier for loss of or damage to goods. In these circumstances, the seller is left in the unfortunate position of (a) facing a potential quantity and/or quality claim from a buyer under the contract of sale and (b) having no right to recover its losses from the carrier.
In contrast, the buyer as the holder of the bills of lading has title to sue the carrier but has a more straightforward claim against the seller under the sale contract for the seller’s failure to deliver goods of contractual quantity/quality.
We set out below a suggested approach by which sellers may overcome this problem when selling on an “outturn” basis.
Assignment of the Buyer’s rights under the bills of lading to the Seller
To address this problem, sellers should consider including an express contractual right in the sale contract requiring buyers to assign rights of suit acquired under the bill of lading back to the seller.
Whilst the assignment of the rights could be brought about through the indorsement of the bill of lading back to the seller, this approach only really works where the cargo in question has not already been delivered. Where goods have been delivered by the carrier to the holder of the bills of lading, the bills are said to be “spent”. Generally, rights under the “spent” bills may not be transferred by indorsing the bills to a third party.
Although there are exceptions to this rule (see Section 2(2) COGSA), for completeness’ sake a seller would be advised to include in the contract of sale a right to have the rights under the bills reassigned to it by legal assignment.
Compelling the Buyer to exercise rights under the bills of lading for the benefit of the Seller
Pursuant to Section 2(4) COGSA, a person who has acquired rights of suit under a bill of lading is entitled to exercise these rights for the benefit of another person who has sustained loss or damage. A seller should therefore also consider including in the contract of sale an express provision compelling the buyer to exercise rights under the bills of lading for the benefit of the seller.
Suggested Contractual Provision
An example of an express provision to address this issue (in relation to quantity claims) is set out below. The draft clause also includes a provision for the reassignment of the benefit of an insurance policy where the contract is on CIF terms or where the seller has provided the buyer with an insurance policy/certificate.
“If the quantity discharged and determined in accordance with the Agreement is less than the quantity loaded in accordance with the bill of lading or otherwise, the Buyer shall, upon written request from the Seller, forthwith:
(a) assign to the Seller by way of legal assignment all rights of action it may have against the carrier under the bills of lading in respect of the goods and shall give notice of that assignment to the carrier; and
(a) assign to the Seller its rights under the relevant insurance policy or certificate (if any) including the rights of action thereunder.
The Buyer further agrees to exercise such rights against the carrier under the bills of lading for the benefit of the Seller as the Seller may direct. The Buyer consents to the use by the Seller, in any action brought by the Seller against the carrier, of the Buyer’s name as claimant and will furnish all such information and execute all such further documents as are necessary for the conduct by the Seller of any action against the carrier.”