Misdirected arrows - ignore them at your peril!

ITIC Members (particularly ship agents and ship managers) are regularly sued in addition to, or even instead of, the shipowner. There are a number of reasons for this.

In some countries, agents have joint and several liability with their principals, either in accordance with the law of their country or by port authority enactment, for liabilities which would normally only attach to the principal. These include cargo claims, customs penalties, dock damage and wreck removal. ITIC provides insurance in cases where, despite every effort to make the principal honour his liabilities, the agent is held liable to pay. In other cases the agent may have been careless in the way he has contracted and failed to make his agency status clear (see “Signing off..“. in the September 1999 and March 2000 editions of the “Intermediary“ available on the Club’s website or from the Managers).

There are, however, cases when agents are joined into proceedings where they do not have joint and several liability and where there is no basis in law for a claim against them. The Club calls such claims “misdirected arrows“ and spends considerable sums defending them, especially in countries where the legal costs cannot be recovered from the party making the claim. These costs can run into hundreds of thousands of dollars.

Although suing a party who is clearly not liable appears to be a waste of the claimant’s time and money there is often a hidden agenda. Sometimes agents are joined into claims as a means of establishing jurisdiction in the claimant’s own country. For example it is fairly routine for cargo claimants in India to commence legal proceedings in the Indian courts against both the ocean carrier and his local agent. Even though the bill of lading may provide for claims to be dealt with in a Far Eastern jurisdiction, the shippers bypass the jurisdiction clause by suing a local entity. Indian law provides that agents for disclosed principals have no personal liability if that principal fails to fulfil his liabilities. However, the fact that the local entity is not liable is not a deterrent, as costs awarded by the Indian courts for such misdirected actions are minimal. Sometimes the claimant and his lawyer genuinely believe there is a valid claim against the agent. In one case a consignment of hand made carpets lay unclaimed by the receivers in Rotterdam and were eventually sold by the port. The shipper of the carpets was convinced that the ship agent in Mumbai was to blame for their loss. This took twelve years to resolve.

When a Member is sued in addition to his principal, it is extremely important that a proper defence is filed for the agent, using all the arguments available. The law of agency of most countries provides that an agent is entitled to be indemnified by his principal for losses, costs and so forth properly incurred in the performance of his agency duties. It is, therefore, normal practice for the principal’s P & I Club to appoint a lawyer to defend both the ocean carrier and his agent. This appears to be the right solution. The agent should not have been sued and so the principal should meet the costs for the defence. There are, however, potential dangers for ship agents who simply pass the claim to the shipowner’s P & I Club’s local correspondents and forget about it. It is imperative that the conduct of the claim be monitored by ITIC’s correspondents. The reasons are best illustrated by the following two cases:

An agent in a South American country had no liability under his country’s laws for a claim for cargo loss, but was nevertheless sued by the cargo owners in addition to his principal, a shipping line for whom he had been the agent for 60 years. The agent relied on the lawyers appointed by the shipowner’s P & I Club to defend his interests. The incident occurred in 1991, but it was not until February 2000 that the court of first instance found both agent and principal not liable for the cargo damage. In the meantime, the shipping line had sold its ships and its business to another well known carrier. The P & I Club’s local lawyer continued to deal with the matter until the end of 2000, when the appeal court found for the cargo owner and awarded a claim amount and costs totalling US$200,000. Only at this stage did the principal’s P & I Club inform the agent that they would not be paying the claim or the costs which related to it. All P & I policies have a provision known as the “pay to be paid“ Rule, which means that the shipowner must first pay the claim before the Club is liable for reimbursement. In this case the shipowner had ceased trading and could not do so. The cargo claimants seized funds in the agent’s bank accounts to enforce the award. Only at this stage was the claim reported to ITIC. It was ascertained that the P&I Club’s local lawyer had failed to enter the defence that the agent was not liable by reason of his agency status and it was by then too late for such a defence to be entered.

The second case involved an Indian agent, where both the agent and the foreign shipowner were sued. Legal proceedings in India take not years but decades to complete. As is often the case, by the time the claim had passed through the courts, the shipowner had ceased trading. As no security had been provided, a decision was made by the P & I Club to cease defending the claim. The local P & I correspondent withdrew his lawyer, but no-one informed the ship agent, as a result of which a default judgement for the cargo claim was entered against the ship agent, even though he was not legally liable.

Both these cases illustrate the need for agents to pay attention to all claims made against them, even though their principal’s P&I Club appears to have taken over the handling of the matter. This is particularly important in jurisdictions where court cases take years to be finalised. It is not sufficient for the agent to sit back and allow someone else to conduct his defence. The agent must report any claim in which he has been named as a defendant to ITIC. The Club will not necessarily appoint a separate lawyer to defend the agent, but it will monitor the defence provided by the principal’s lawyer to see that all defences available to the agent have been used. If appropriate the Club will try and obtain a Letter of Indemnity from the principal’s P & I Club to avoid the situation where, ten years later, the principal’s insurers will be able to simply walk away from the claim.