Extensions of liability to non-contractual parties

There has been concerns raised among FIATA membership worldwide regarding vessel operating common carrier (VOCC) attempts to extend freight forwarders’ liability through use of widely worded ‘Merchant’ clauses. In some instances, these clauses even request freight forwarders to sign a Letter of Undertaking explicitly agreeing to take on such liability. FIATA has been working closely on this topic to ensure that freight forwarders are made aware of the consequences of such practices, in the interest of encouraging a level playing field within the supply chain.

Beware of the 'Merchant' clause

In November 2020, FIATA submitted comments to the US Federal Maritime Commission’s Notice of Inquiry on VOCCs’ definition and application of the term ‘Merchant’ in bills of lading. This was done through the collaborative efforts of FIATA’s Working Group Sea Transport and Advisory Body on Legal Matters (ABLM).

The bill of lading is a contract signed between two parties, being the shipper and the carrier. The inclusion of the intermediary via a ‘Merchant’ clause is a recent phenomenon over the last decade. It provides for the ability of the carrier to hold an intermediary responsible or accountable for acts and/or omissions of others, despite in many instances, not having any beneficial interest in the cargo. This includes freight forwarders acting as an agent only and identified as a ‘notify party’.

The wording of such ‘Merchant’ clauses is, for the most part, widespread and homogeneous in construction. Commonly, it will define a ‘Merchant’ as including the shipper, consignor, consignee, receiver and owner of the goods, and ‘any person acting on their behalf’.

Such broadly worded ‘Merchant’ clauses therefore often subject third-party intermediaries, such as freight forwarders, to joint and several liability. This is particularly noted in relation to liability situations concerning abandoned cargo, as well as demurrage and detention charges, both of which FIATA has previously published best practice guidance on.

At the same time, there is a clear asymmetry in the requisite rights and obligations. Despite freight forwarders often being held responsible for charges as principals captured by the ‘Merchant’ clause, they are prevented from giving instructions and mitigating damage in the manner of a principal when something goes wrong in a movement.

Accordingly, it is considered that the inclusion of such third-party intermediaries that are not party to – and have not consented to the terms of the contract – is contrary to the notion of privity of contract and ordinary contract law principles, thus casting the net far further for the attribution of liability.

In consequence, such third parties will be bound to pay charges that the shipper is unable or unwilling to pay. Such practice constitutes overreaching on the part of the carriers in a blanket attempt to attribute liability to a party to pay charges that should not be their responsibility in the first place. It logically follows from this practice that a shipper or consignee can theoretically designate any third party as a ‘notify party’ without their knowledge or consent, automatically making them financially liable for shipper or consignee payment obligations.

Attribution of liability through Letters of Undertaking 

FIATA also notes that ocean carriers often try to force freight forwarders into signing Letters of Undertaking (LOU). These state that the freight forwarder agrees to be bound by the contract of carriage and to be jointly and severally liable for all costs and damages, as well as the provision of information, in connection to the contract of carriage. Concerns have been raised that some carriers even refuse to deliver the cargo or the bill of lading to a freight forwarder without having signed such a letter.

Such terms raise serious issues from a liability standpoint and again attempt to blur the distinction where freight forwarders are acting as an agent, this time going further to obtain explicit written agreement from the freight forwarder. The broad wording in such LOUs would be sufficient to hold freight forwarders liable for a myriad of different aspects, without even needing to invoke reference to the ‘Merchant’ clause. Such practices are illogical and would seem contrary to legal principles, effectively subjecting an unrelated party to charges by ‘association’.

FIATA strongly advises freight forwarders to exercise great caution when presented with such LOUs, and if possible, to refrain from agreeing to any terms that attempt to attribute such extensions of liability to freight forwarders.  The imposition of such terms as provided for in these LOUs seeks to change such general principles of law as regards the distinction between acting as an agent and as a principal. Consequently, such third parties will be bound to pay charges that the shipper is unable or unwilling to pay. This may also pose issues for forwarders’ insurance policies as it adds a further basis of liability.  

Where freight forwarders do sign such letters, it is recommended they be signed with a caveat that it does not apply if the forwarder is acting as an agent for the customer, who is then in a contractual agreement with the shipping line. Of course, it is underlined that treatment of such liability situations will vary depending on the specific laws of the jurisdiction in question, and it is recommended that freight forwarders seek independent legal advice.

FIATA dedicated to ensuring a level playing field 

As highlighted in FIATA’s recent Best Practice Guide on Abandoned Goods, associated costs and liabilities when something goes wrong with cargo can quickly skyrocket. FIATA urges freight forwarders to bear in mind the distinction between acting as a principal versus acting as an agent, and to be careful when asked to agree to terms that attempt to blur that distinction.

FIATA, through the auspices of its Working Group Sea Transport and ABLM, has been actively working on these topics to provide relevant resources to the freight forwarding community, and for the promotion of a level playing field. This is expected to continue to be a key priority for 2021.

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