Tianjin Maritime Court of PRC recently released one Typical Case held in 2018, which was dispute arising from the Letter of Guarantee issued by B/Ls Shipper for exchange of clean bills of lading from carrier/owners.

HiHonor Law Firm, acting on behalf of Charterer, CL Company (as plaintiff) filed lawsuit against Shipper TG Company (as defendant ), requesting for Shipper/Guarantor to reimburse all of Charterer’s losses suffered for issuance of clean B/Ls. PRC court upheld that the LOG was valid, shipper should bear 50% liability for all losses within the scope of LOG suffered by Charterer, including cargo damage claims paid by charterer/owner to the receiver in disport Egypt, legal costs incurred by owner/charterer in London Arbitration and legal costs incurred by charterer in the recourse claims in China.

【Case Brief】

By TCT Charter Party dated March 6, 2015 (“CP”), CL Company, as Charterer, chartered MV. ILIANA (“the vessel”) from Conor Shipping Co., Ltd. (“Conor Shipping”), as Owner of the vessel.

On March 14, 2015, TG Company, as the shipper, exported some deformed steel bars (“the cargo”), which were shipped on board the vessel from Xingang, Tianjin to Damietta Port in Egypt. During the loading of the cargo, it was found some slight rusts/scratch/oil stain/bent etc. on them. In order to exchange clean B/Ls, TG Company issued a Letter of Guarantee (“LOG”) addressed “To: CL Company & owner of MV. ILIANA, and the ship agent at loading port issued a clean bill of lading on behalf of Master of the vessel.

On 4^th May 2015, when the cargo arrived at the port of discharge, the consignee found damage in different degrees on cargo, which were not caused by sea water according to the test report. The owner Conor Shipping and the consignee reached a compromise on damage compensation. In order to recover their loss, Conor Shipping initiated arbitration in London (LMAA) against CL Company according to CP between those two parties. The Arbitral tribunal made two awards respectively on the cause of the damage and on the amount of the loss. According to the awards, CL Company should bear 100% liabilities for the cargo damage and shall compensate about USD477,569.37 plus interest to Conor Shipping for the cargo damage, off-hire of the vessel, the legal costs and any other expenses or costs etc. arising from the arbitration. CL Company finally perform their payment obligation to Conor Shipping under the awards.

On 16^th May 2016, CL Company, based on the LOG issued by TG Company, filed a lawsuit to Tianjin Maritime Court against TG Company for recovery of all of their losses and expenses incurred in London arbitration.

【Court Decision】

1. Nature of legal relationship between CL Company and TG Company:

CL Company opined that it was the offer made by TG Company with clear and true intention by providing the LOG which contains clear information of B/Ls, reason to provide LOG and their obligation under LOG in exchange for clean B/Ls; and it shall be regarded as acceptance of the offer by CL Company with clear and true intention when CL Company accepted the LOG and agreed to issue clean B/Ls. Therefore, the contract of guarantee was agreed between those two parties based on the effective offer and acceptance.

TG Company alleged that there’s no contractual relationship between TG Company and CL Company, and the LOG was merely a normal document in exchange for B/Ls.

The court finally accepted the legal opinion of CL Company and decided that there’s effective contractual relationship between CL Company and TG Company with the offer and acceptance made by them for the issuance of LOG.

2. Contribution to the cargo damage

Charterer CL claimed that TG Company as shipper on B/Ls, shall bear 100% for cargo damage claims, for it was concluded by London arbitration that the cause of cargo damage was attributable to simply natural aggravation of the rust found on the cargo at loading port, after some forty days’ sea voyage.

TG Company argued that cargo damage was resulting from relative humidity of the cargo holds because of wet dunnage found in some cargo holds, stowage of plywood normally with 14% water content and bad weather suffered in the 4^th loading port.

The court opined that -

slight rusts of cargo at the time of loading was naturally aggravated during the sea voyage, while CL Company also failed to perform due diligence in keeping and care of the cargo, which was one of the causes of the serious rusts on the cargo found at port of discharge. Thus, the court decided that Shipper TG Company should bear 50% liability of compensation to the Charterer.

3. Decision on the items and amount of loss reasonably incurred by Charterer

Charterer claimed against Shipper for below items: A.cargo damage paid to receiver, B. off-hire of the vessel when receiver refused to discharge cargo; C. expenses and costs for London arbitration including tribunal fee, lawyer fee, expert fee, survey fee etc. incurred by Charterer and the head Owner Conor Shipping; expenses and costs incurred in PRC court proceedings including court fee, Chinese lawyer fee, expert fee etc. Charterer’s total claims amount is about USD 760,000.00

The court upheld the majority of item A and C of Charterer’s claims as reasonable, which was within the compensation scope of LOG, and held that Shipper shall compensate about RMB 2.36million to the Charterer..

【Influential Meaning of the Case】

In shipping practice, it’s common to see steel cargo with some slight rust/scratch/oil stain/bent in appearance. Even if this may not affect commercial use of cargo, once remarks on cargo were made in Bs/L in accordance with Mate’s Receipt, this will definitely prejudice shipper to get payment under sale contract, since clean Bs/L are indispensable when the payment is made by the Letter of Credit. Thus, Shipper of steel cargo, in order to exchange clean Bs/L, prefers to issue Letter of Guarantee to ship owner and/or charterer, guarantee to be responsible and to reimburse the owners’ interests in respect of any liability, loss, damage or expenses of whatsoever nature which may be sustained by reason of the issuance of clean B/Ls.

The above case, being selected and released as one of Five Typical Cases of Tianjin Maritime Court in 2018, has some guiding meaning for handling similar cases arising from above-mentioned issuance of LOG by shipper in exchange of clean Bs/L

1. The court recognized the LOG as lawful and valid contract between Charterer and Shipper.

On one aspect, the court opined that it was the offer of Shipper by providing LOG to the Charterer in exchange for clean B/Ls, and such offer was accepted by Charterer who instructed loading port ship agent to issue clean Bs/L, thus, the contract of guarantee was agreed between those two parties.  On the other hand, the court did not consider the LOG issued in exchange of clean B/Ls as deceitful /fraudulent conduct to holder of B/Ls, did not consider such LOG to be null and void since slight rust or other imperfection in appearance did not affect the value and commercial use of the cargo.

2. The court recognized the vast majority of claim items of Charterer as reasonable losses under LOG.

In this case, cargo damage based on A. compromise amount between head owner Conor Shipping and Consignee; B. off-hire of the vessel when receiver refused to discharge cargo; C. expenses and costs incurred in London arbitration including tribunal fees, lawyer fees, expert fees, survey fee etc. incurred by Charterer and head owner; expenses and costs incurred in PRC proceedings in Tianjin including court fee, PRC lawyers’ fee and expert fee etc. Items A & C were held within the scope of LOG, namely “any liability, loss, damage or expenses of whatsoever nature which may be sustained by reason of the issuance of clean B/Ls” as described by Shipper in the LOG in this case.

3. Charterer successfully applied to the court only for the Recognition of foreign arbitration award without Execution of award in China.

Article 3 of Provisions of the PRC Supreme People's Court on Several Questions Concerning Judicial Examination of Arbitration Cases, which was effective as of 1^st January 2018, provides that, “if a foreign arbitration award is related to a case heard by the people's court, and neither the domicile of the respondent nor the location of the respondent's property is within the territory of mainland of China, if the applicant applies for Recognition of the foreign arbitration award, the people’s court hearing the case shall have jurisdiction to Recognize the related foreign arbitration award.”

In this case, although Charterer was not winning party in London arbitration, they were entitled to apply to the court for the Recognition of London arbitration award before Tianjin Maritime Court as per the above pretty new “Judicial Note”. Hihonor lawyers acting for Charterer CL, made timely application for recognition of the London LMAA awards.  Finally, Tianjin Maritime Court approved the application and recognized the validity of two LMAA Awards in China.

4. With the recognized foreign arbitration awards as evidence, the court still can examine the facts ascertained by the arbitration award.

London arbitration award clarified the responsibility for cargo damage between head owner and Charterer under C/P. In the first arbitration award, the tribunal opined that cargo damage was simply natural aggravation during sea voyage, thus excluded responsibility of head owner as Bs/L carrier for cargo damage.

However, the PRC court views that, the London arbitration award just excluded the possibility that there was any seawater entering into the cargo holds during the voyage, and this finding was enough for the arbitral tribunal to clarify the parties’ liability for the cargo damage under the CP.  The award did not and was not necessary to make any comment on whether the natural aggravation of the rust found on the cargo at loading port was the sole cause of the cargo damage or whether the Charterer CL Company had any wrongful conduct during loading and stowing operation of the cargo, i.e. whether the wet dunnage, stowage of plywood with normally 14% water content and bad weather suffered in the 4^th loading port Lianyungang, which were under the obligation of Charterer to stow cargo, may have contributed to or have increased the aggravation of cargo damage or not.

Court decision, in this case, was to clarify the liability between Charterer and the Shipper based on LOG, while both parties had different rights and obligation compared with those between Head Owner and Charterer under the C/P.  The court adopted partial opinion of the arbitration award, i.e. there’s no seawater leakage causing to the cargo damage. In addition to the damage at port of loading was naturally aggravated during the sea voyage, the Charterer did not perform its due diligence obligations in cargo loading, stowage and dunnage as their way of keeping and taking care of cargo.  Finally, the court concluded that both Charterer and the Shipper shall bear 50% for occurrence of cargo damage.

5.  Exclusive Jurisdiction and Applicable Law Clause

In the captioned Letter of Guarantee, it was agreed on high court of justice of England as exclusive jurisdiction, and English law as applicable law.

Even though Shipper did not challenge on the jurisdiction of Tianjin Maritime Court, the exclusive jurisdiction clause in the LOG shall be regarded null and void by PRC Courts. Article 34 of Civil Procedure Law of PRC provides that “Parties to a dispute over a contract or any other right or interest in property may, by a written agreement, choose the people's court at the place of domicile of the defendant, at the place where the contract is performed or signed, at the place of domicile of the plaintiff, at the place where the subject matter is located or at any other place actually connected to the dispute to have jurisdiction over the dispute, but the provisions of this Law regarding hierarchical jurisdiction and exclusive jurisdiction shall not be violated.”  In this case, England had no any connection, nor triggered any factor as mentioned in the above article, thus this jurisdiction clause shall be null and void. As per Article 23 of Civil Procedure Law of PRC, Tianjin, as the place of domicile of defendant, making Tianjin Maritime Court definitely have jurisdiction over this case.

Turning to clause of applicable law, the Shipper as defendant, did not allege to apply English law while agreed to apply Chinese law. Article 41 of The Law of the Application of Law for Foreign-related Civil Relations of the PRC provided that “The Parties concerned may choose the laws applicable to contracts by agreement.” and Article 10 “If any party chooses the applicable foreign laws, he shall provide the laws of the country. If foreign laws cannot be ascertained or there were no provisions in the laws of this country, the laws of PRC shall apply”.  Accordingly, this applicable clause is legal and valid. But party concerned did NOT argue to apply English law, nor did party incur costs or expert fee to prove to the PRC court on contents of the English law, instead, both parties agreed to apply Chinese law. Hence, Chinese law was confirmed as applicable law in this case, instead of English law.

The above case summary and comments are for good reference only.  If you are interested in this case, or have any query, please welcome to contact the below lawyers of HiHonor Shipping Team:

Ms. Xinwei ZHAO

E-mail:  xinwei.zhao@hihonorlaw.com

Mobile:  +86 137 0642 0263

Ms. Wenjuan LI

E-mail: wenjuan.li@hihonorlaw.com

Mobile:  + 86 152 7532 6809

Mr. Huanying LIU

E-mail:  huanying.liu@hihonorlaw.com

Mobile:  +86 185 6151 7061

Ms. Vicky WEI

E-mail:  vicky.wei@hihonorlaw.com

Mobile:  +86 188 5322 5857