OVERSEAS FACTORS, INC. AND GERTRUDES CARLOS, PLAINTIFFS AND APPELLEES, VS. SOUTH SEA SHIPPING CO., LTD. A. MAGSAYSAY INC., THE CAPTAIN AND CREW OF THE S. S. OCEAN TRADER AND THE…

Overseas Factors versus South Sea Shipping

The Case

This is a civil action for injunction and related relief brought by Overseas Factors, Incorporated and Gertrudes Carlos against South Sea Shipping Company, Limited, its local agent A. Magsaysay, Incorporated, the captain and crew of the vessel S.S. Ocean Trader, and the Collector of Customs of Manila. The plaintiffs had chartered the vessel to carry rice from Karachi, Pakistan, to Manila, and they came to court because the captain and crew refused to unload the cargo unless the balance of freight and other charges was first paid. The case matters because it is a compact lesson on how a charter party allocates the risk of freight payment, demurrage, and lien, and on the effect of a performance bond given to guarantee the charterer's obligations.

Procedural History

The action was commenced in the Court of First Instance of Manila. The defendants answered and set up a counterclaim for freightage, demurrage, detention charges, and other expenses. The National Rice and Corn Corporation intervened to protect its interest, and the South Sea Surety and Insurance Company filed a cross-claim against the plaintiffs. After trial, the trial court rendered judgment in favor of the plaintiffs, holding that the Pakistan rupees received by the shipping company's representative constituted full payment of the freight, that the delay in unloading was not the plaintiffs' fault, and that the claim of lien had no legal basis. The trial court cancelled the injunction bond and the performance bond, dismissed the complaint against A. Magsaysay, Incorporated, the captain and crew, and the Collector of Customs, and dismissed the defendants' counterclaim. The defendants South Sea Shipping Company, Limited and A. Magsaysay, Incorporated appealed, and the case reached the Supreme Court on that appeal.

Facts

In September 1954 the National Rice and Corn Corporation contracted with Overseas Factors, Incorporated for the supply of Kangni and Joshi rice, and the buyer established irrevocable letters of credit with the Philippine National Bank in favor of a supplier in Karachi. On 30 October 1954 the shipping company's authorized representative and the charterer's representatives agreed on the terms of a charter party for carriage of the rice aboard the S.S. Ocean Trader, and a formal contract of charter party was signed in Karachi. On 12 November 1954 the parties amended the freight clauses in Hongkong, giving the owners the option to be paid either in British sterling or in Philippine currency at forty two pesos per metric ton.

On 5 November 1954 Overseas Factors, Incorporated as principal and Gertrudes Carlos as co-principal, with the South Sea Surety and Insurance Company as surety, executed a performance bond in favor of the shipping company to guarantee full payment of freight, demurrage, dead freight, and other losses. The rice was loaded in Karachi in late November 1954, totaling more than seven thousand six hundred metric tons, and the vessel sailed on 25 November 1954, arriving in Manila on 18 December 1954.

Upon arrival, the captain and crew refused to unload the cargo unless the balance of freight and other charges was paid, and the plaintiffs sued. The evidence showed that the shipping company's representative had received two hundred fifty thousand Pakistan rupees for the Kangni rice, credited as partial freight, and that a further sum in Pakistan rupees had been paid for the Joshi rice but was held by the owners' agents pending government approval for transfer to Hongkong. The vessel was detained from 27 December 1954 until the cargo was unloaded in early January 1955.

Issues

• Whether or not the sums received by the shipping company's representative constituted full payment of the freight due under the charter party.
• Whether or not the plaintiffs are liable for demurrage for the delay in loading at Karachi and for the detention of the vessel at Manila.
• Whether or not the shipping company had a valid claim of lien over the cargo for unpaid freight.
• Whether or not the performance bond and the injunction bond should be cancelled.

Applicable Provisions

The charter party fixed the rate and payment of freight in these terms:

Rate of Freight: Sterling One hundred Shillings (100/—) per metric ton, free in, free out and free stowed. Payment of Freight: The freight to be paid in case without discount on signing bills of lading in British Pound Sterling transferable to the Owners at Hongkong within fourteen (14) days from the date of the vessel's departure from Karachi.

This clause fixes the obligation the Court measured the payments against, and its amendment allowed payment in Philippine currency at forty two pesos per metric ton at the owners' option.

The charter party likewise provided for demurrage:

Four running days on demurrage at the rate of £300.—Sterling per day or pro rata for any part of a day, payable day by day, at Hongkong to be allowed Merchants altogether at ports of loading and discharging, £100.— per day for despatch.

This clause supplies the rate the Court applied to the four running days of demurrage at the port of loading.

On the discharge of cargo, the charter party provided:

Cargo to be received by Merchants at their risk and expense alongside the vessel not beyond the reach of her tackle and to be discharged in seven (7) running days, free of expenses to the vessel.

This clause fixes the laytime at Manila and bears on whether the detention of the vessel was chargeable to the charterers.

Finally, the arbitration clause provided:

Any dispute arising under this charter to be referred to arbitration in London, one Arbitrator to be nominated by the Owners and the other by the Charterers, and in case the Arbitrators shall not agree then to the decision of an Umpire to be appointed by them, the Award of the Arbitrators or the Umpire to be final and binding upon both parties.

This clause removed the remaining thirteen days of delay from the Court's power to award demurrage and left that matter to arbitration.

Ruling

On the first issue, the Court held that the freight had not been fully paid. The payment for the Joshi rice in Pakistan rupees was held by the owners' agents merely for the account of the charterers pending government approval for transfer to Hongkong, and the bill of lading itself recited that the amount was paid pending transfer. The Court therefore computed the freight due at forty two pesos per metric ton, amounting to three hundred twenty thousand one hundred ten pesos and twenty centavos, deducted the sterling payment already credited, and found a balance of two hundred three thousand four hundred forty nine pesos and fifty seven centavos still owing.

On the second issue, the Court held the charterers liable for four running days of demurrage at three hundred pounds per day, or one thousand two hundred pounds, converted at the prevailing rate to six thousand seven hundred twenty pesos. The Court refused to charge seven hundred pounds a day for the remaining thirteen days because that rate applied only if the ship was detained after loading of the cargo, and here the vessel sailed after loading. That remaining delay was subject to arbitration in London under the charter party.

On the third issue, the Court sustained the trial court's finding that the claim of lien had no legal basis, since the freight had been paid in Karachi before the shipment arrived in Manila.

On the fourth issue, the Court upheld the cancellation of the injunction bond and the performance bond, the latter having secured an obligation that the Court had now measured and partly satisfied.

Doctrine

First, freight is payable in accordance with the charter party, and payment in a foreign currency held pending government approval for transfer is not payment to the owner. Second, demurrage accrues at the stipulated rate for the running days allowed at the port of loading, while any further delay governed by an arbitration clause must be referred to arbitration and cannot be awarded by the courts. Third, a claim of lien over cargo for unpaid freight has no basis where the freight has in fact been paid before arrival. These rules flow directly from the charter party clauses quoted above.

Disposition

The Supreme Court modified the judgment of the trial court, holding the charterers liable for the unpaid balance of freight and for demurrage of six thousand seven hundred twenty pesos, while sustaining the dismissal of the lien claim and the cancellation of the bonds.

Remember This

The one line to memorize: freight paid into the hands of an agent pending government approval is not freight paid to the owner. Examiners use this case to test the computation of demurrage under a charter party and the effect of an arbitration clause on the court's power to award damages for delay.