Negligence and Cargo Surveyors

This article only deals with the type of surveyor who goes on board a ship which is loading or discharging cargo, and inspects the cargo operations on behalf of the seller or the buyer of the cargo.

The difference between contractual claims and claims for negligence or misrepresentation/fraud

It is worth clarifying how a negligence claim differs from a contractual claim or a claim for fraud. A contractual claim arises when two parties have a contract, one party breaches the contract and the other party suffers losses as a result. So, any dispute that arises between the surveyor and his customer (that is, the party who engaged him to carry out the inspection) is a contractual dispute and may give rise to a contractual claim.

A negligence claim is different. Although the surveyor is engaged by one party, the fact is that other parties such as buyers and banks may rely on the accuracy of the certificates that he issues. In those circumstances the surveyor assumes responsibility toward those third parties, even though there may have been no direct contact at all between them. If the surveyor does not perform his tasks with the appropriate standard of care and the third party suffers loss as a result, then that third party may be able to claim for the loss suffered.

One type of negligence is misrepresentation. A misrepresentation claim arises where one party makes a false statement of fact to another party, knowing that the other party will act in reliance on the statement. That other party does rely on the statement (thinking it to be true) and a loss results. Broadly speaking, if a false statement is made in a report, but the surveyor honestly believes at the time that it is accurate, then this is treated as negligence. However, if a false statement is made where the surveyor either knows that it is false or suspects that it may be false, then this is fraud. This distinction between negligence and fraud is critical because most professional negligence insurance policies will not cover fraud and higher damages will be awarded against a party for fraud than would be awarded against them for negligence.

It should be noted that if surveyors are involved in arbitration or litigation under English law, an arbitrator or judge can order them to disclose all their files relating to their work on the cargo. This includes internal correspondence and correspondence with the customer and also e-mails. Surveyors should therefore be extremely careful what they put in writing. A message containing loose language or a flippant comment about a situation can be very damaging in the context of a claim for either negligence or fraud.

We will now look at two scenarios where one of the parties involved in the shipping of the cargo breached its obligations in some way, but the surveyor became the centre of attention for failing to pick it up.

SCENARIO ONE

- Negligence claim arising out of false documents issued by other parties

In the first scenario a surveyor is involved in a transaction where falsified documents are issued and the surveyor fails to pick it up.

Niru are an Iranian battery manufacturer who in 1998 bought 10,400mt of lead C&F Bandar Abbas at a total cost of about US$ 5.8million. Payment was to be made by Letter of Credit (L/C) against a multimodal bill of lading and a certificate to be issued by a named surveyor, certifying that the quality and packing of the goods loaded complied with the specification in the invoice and the L/C.

To perform the sale the seller bought a consignment of lead that was in a warehouse in Sweden. The bank which financed that purchase did so on the basis that it would hold the warehouse warrants as security pending reimbursement of the price through the L/C. This presented a problem. As long as the warrants were sitting in the seller’s bank, the lead could not be released for loading and documents could not be presented under the L/C and the buyer’s bank would not pay for the lead.

To get around this, the seller first asked the surveyor to do his quality inspection of the lead while it was still in the warehouse, which the surveyor duly did. These inspections revealed that the lead complied with the contract. The seller then instructed its freight forwarder to issue a multimodal bill of lading stating that the lead had been taken into its charge for carriage to Iran. The surveyor was sent the false bill of lading. Not realising that this document was false, the surveyor agreed to issue a certificate confirming how the lead was marked and stating that the goods “loaded” conformed with the contract. The documents were presented.

The plan was that, as soon as the payment was made to the seller’s bank, they would release the warrants and shipment would indeed be made as per the bill of lading. However, the buyer’s bank did not pay out straight away because it could not get the currency together. While payment was delayed the whole deal unravelled. The market dropped, the seller’s bank became worried about its loan and sold the warrants to realise its security thinking that the whole deal had been called off. Unfortunately the buyer’s bank was not told that the deal was supposed to be off and it eventually paid the seller’s bank for the documents. The seller’s bank at that point should have returned the funds to the buyer’s bank, but it paid the funds out to the seller. It will come as no surprise to hear that the seller and the freight forwarder then disappeared. The buyer, Niru, lost the US$ 5.8 million which its bank had paid out for worthless documents.

Up until two years ago if you were dealing with negligence and cargo surveyors you would have said that there was no clear legal precedent. The only cases ever cited were about classification society surveyors and they were decided on reasoning which probably would not apply to cargo surveyors. However, that has now changed. The events just described came to court; the buyer’s bank and the buyer jointly came after the seller’s bank and the surveyors for the US$ 5.8m. The claim against the surveyors was for negligence because the surveyors had issued a certificate saying that the goods had been loaded and marked in a certain way, without making sure that they were in fact loaded and marked.

The surveyors said, in their defence, that they were asked to verify the quality of the lead and so their role was to guard against shipment of inferior goods. It was not their role to confirm that the goods had been shipped or to make sure that the bill of lading was honest. They said that the bank had relied on the bill of lading for confirmation of shipment, not on their certificate. They pointed out that there had been no direct contact at all between themselves and the buyer or the buyer’s bank.

The judge found the surveyors to be negligent. He said:-

Although a certificate of this kind does contain important statements about the characteristics of the goods, its primary importance lies in the very fact that it has been issued. The buyer does not so much rely on what the certificate says about the goods - after all he knows that if it did not state that the goods conformed to the contract, it would not have been tendered at all - as upon the fact that the certificate has been issued. Possession of a certificate covering the required matters, together with the other documents called for by the contract, enables the seller to demand payment. .... This is just as much true if the surveyor is required to certify that the goods have been loaded as it is if he is required to certify that they are of contractual origin or quality.

Inspection companies such as .... are instructed in connection with documentary sales precisely because they are understood to have the necessary facilities and expertise to enable them to determine whether the seller has performed his contract in the relevant respect and are trusted to exercise independent judgment. Although an inspection company may receive its instructions from the seller, it will be aware that its certificate is likely to be required for presentation to the buyer or a bank as part of the documents against which payment is to be made. It is aware, therefore, that the buyer, or a bank which ultimately has recourse to the buyer, will rely on the existence and accuracy of its certificate in paying the price of the goods. ... In my judgment it is inherent in the nature of the task undertaken by the inspection company that it assumes responsibility to the buyer for what is stated in its certificate that, after all, is the whole purpose of its employment.

In this case, in theory, the loss is going to be shared between the surveyors and the seller’s bank. But potentially surveyors can find themselves facing a claim for the entire loss resulting from a fraud, when they themselves have not been fraudulent at all, only negligent. What it comes down to is the fact that the surveyor’s role, often, is not just to certify quality and quantity, but to guard against fraud on the part of another party. This is when the independence of the surveyor comes under scrutiny.

SCENARIO TWO

- Negligent checking of cargo holds prior to loading.

In the first scenario, the buyer has lost out because the seller’s surveyor had failed to pick up the seller’s fraud or breach of contract. What happens if a buyer wants to make a claim but the buyer’s own surveyor has failed to pick up the breach?

A ship was chartered to collect a series of edible oil cargoes from the straits of Malacca for carriage to Rotterdam and Hamburg. Part of the agreement was that the ship would only load the oil into tanks which had previously carried a cargo from the list of ‘acceptable previous cargoes’ which was used almost universally by the edible oil trade. The ship arrived in a Far Eastern port to load the vegoil late on a Saturday night. The surveyor who was attending for the purposes of the sale contracts was asked to check and pass the tanks. The ship’s log showed that the tanks in which the cargo was going to be loaded had previously carried gasoil, which was not on the ‘acceptable’ list. After some discussions, the surveyor passed the tank for loading. By the time the mistake was discovered large volumes of oil were on their way to Europe, which were unsellable because they had been shipped in tanks that had previously carried gasoil.

This problem arose because:

a) the owner and the surveyor were both unclear about the extent of the cargo surveyor’s authority. Had it been clear that the surveyor was only attending to document operations for the sale contract, the owner may have been more cautious about loading cargo without reference to the charterer;

b) the cargo surveyor was not sufficiently familiar with the edible oil trade requirements to know that gasoil was not an acceptable previous cargo. He also did not speak good English and, when the master argued that gasoil was acceptable even though it didn’t appear on the list of acceptable cargoes, he got confused.

In the ensuing arbitration, the owner said that the damages claim should fail because the buyer’s own surveyor had passed the tanks for loading. This argument failed. The arbitrators found that the surveyor did not have sufficient authority to waive the buyer’s rights under the charter party and that the owner’s obligation to provide a fit ship was not in any way diluted by a surveyor mistakenly passing the tanks.

How does this fit with the Niru Battery case where the surveyor was found liable? The answer is in the chain of causation. In the Niru case the seller and the forwarder colluded to produce false certificates. The surveyor produced certificates which were inaccurate because he did not check the facts and the bank then relied on those certificates and paid out the money – and that is when the loss was incurred. The judge said that the issue of those inaccurate certificates was an ‘effective cause’ of the loss.

In the cargo contamination case, the ship contaminated the cargo, then the surveyor afterwards made a particular decision. The cause of the loss in those cases was the ship contaminating the cargo, not the decision of the surveyor afterwards. So the issue of causation is really important and it is particularly important where the problem has arisen with the ship, because under the Hague Rules there is a provision that says that the carrier and ship are not responsible for losses arising from the acts or omissions of the shipper or cargo owners or their agent. So, if the ship can show that the loss arose from the act of the surveyor, then again the ship will be able to escape liability. Yet again, if the ship escapes liability then the loss may fall on the surveyor.

The issuance of documents is therefore an absolutely critical part of the surveyor’s task. It is not more important than attending the ship and doing all the right things there, but from the liability point of view, a surveyor is far more likely to be sued for inaccurate documents than for not performing tasks properly on the ship because it is the documents that are relied on when large sums of money are paid out.

In the vegoil case the surveyor issued certificates that clearly stated that the last cargo was gasoil, so there was no misrepresentation, and so a claim against the surveyor would probably never have succeeded.

The standard that is expected/ knowledge that a surveyor is expected to have:

It is really important for the surveyor to be clearly briefed by his customer as to what tasks need to be done and how they are to be done. That is all well and good, but isn’t the customer entitled to assume that the surveyor will have a certain amount of knowledge already? Yes he is.

In the Niru battery case the judge said that the surveying company had been appointed because it had an office in Iran and so understood what was required by the Iranian banking authorities in terms of documents and wording. So, in addition to understanding how international documentary sales work, a surveyor should be familiar with regulatory requirements that apply to the country in which the surveyor offers his services.

Is the surveyor expected to know who all the parties are and how they interlink for every cargo that he inspects ? No, in the Niru Battery case the surveyor was liable to the buyer even though there had been no direct contact at all between them. But a surveyor should have an understanding of the industry or trade in which he operates. If the surveyor advertises membership to bodies such as the IFIA or is ISO accredited then it is to be expected that the surveyor will abide by any codes of practice issued by those bodies.

If the surveyor’s marketing materials state that all surveys are carried out by highly trained, experienced specialists, then the parties relying on his documents are entitled to assume that the survey has been carried out by a highly trained, experienced specialist. Negligence is about measuring someone’s performance against the standard that is reasonable in the circumstances. For this reason there is a link between the promises made when a new client is taken on, and the surveyor’s exposure to claims. The surveyor should be aware that the way that he projects himself can have the effect of raising the standard against which his performance will be measured should a problem arise.

The above is an abridged version of a presentation given by Annabelle Panesar, Solicitor, Richards Butler at the ITIC Forum 2004.