Himalaya and other warranty and indemnity clauses

Himalaya and other warranty and indemnity clauses

There has always been a problem in common law countries such as the UK in seeking to confer benefits on third parties to the contract, such as subcontractors, because of the arcane legal rules concerning consideration and privity of contract. Various attempts have been made to get around these problems by constructing an agency on the part of the carrier for its subcontractors which is more theoretical than real. The result has been the so-called Himalaya Clause, which has sometimes, but not always, been upheld in UK courts. In the UK, Himalaya clauses have been legitimated within narrow confines by the Contracts (Rights of Third Parties) Act 1999. In civil law countries, some aspects of Himalaya clauses may be upheld, particularly to prevent a stevedore being liable for more than the limit of liability enjoyed by the carrier.

The Himalaya clause seeks to prevent shippers from proceeding against servants, agents and subcontractors of the carrier. Another associated clause, the circular indemnity, may require the shipper to compensate the carrier for any claim, made by shipper interests outside the bill of lading terms, which bounces back onto the carrier because of its own separate contracts with its subcontractors.

When reasonable recourse is available against the carrier under the bill of lading and when the indemnity is only for any claim above that normally recoverable from the carrier itself, such clauses may be considered reasonable, but they often go much further. Any indemnity, which a shipper is not able to negotiate away contractually, creates a potential liability, which should be covered by insurance, but it may be difficult or impossible to obtain cover, with the danger that the claim for indemnity may rest with the shipper.

It should be noted that bill of lading terms contain other warranties and indemnities, for example as to the accuracy of information supplied by the shipper. These also create potential liabilities which should be covered by appropriate insurance cover where possible.

Typical bill of lading terms incorporating Himalaya and circular indemnity clauses

Two sets of clauses are shown by way of illustration, the first possibly stretching Himalaya principles beyond the reasonable and enforceable, the second remaining within a broadly acceptable framework. The first set of clauses reads:

'The merchant undertakes that no claim or allegation whether arising in contract, bailment, tort or otherwise shall be made against any servant, agent or subcontractor of the carrier which imposes or attempts to impose upon any of them or any vessel owned or chartered by any of them any liability whatsoever in connection with the goods or the carriage of the goods whether or not arising out of negligence on the part of such person, and, if any such claims or allegation should nevertheless be made, to indemnify the carrier against all consequences therof.'

While any ambiguity in this wording would be interpreted against the carrier, the carrier may seek to enforce this as an undertaking by the shipper on behalf of anyone who may become interested in the goods.

'Every such servant, agent and subcontractor shall have the benefit of all terms and conditions of whatsoever nature herein contained or otherwise benefiting the carrier... as if such terms and conditions were expressly for their benefit and, in entering into this contract, the carrier, to the extent of such terms and conditions, does so on its own behalf and also as agent and trustee for such servants, agents and subcontractors.'

'The merchant further undertakes that no claim or allegation in respect of the goods shall be made against the carrier by any person other than in accordance with the terms and conditions of this bill of lading which imposes or attempts to impose upon the carrier any liability whatsoever in connection with the goods, whether or not arising out of negligence on the part of the carrier, and if any such claim or allegation should nevertheless be made, to indemnify the carrier against all consequences thereof.

It should be noted that here the shipper expressly agrees that nobody, even persons over whom he has no control, will make a claim on the carrier outside the bill of lading terms. There is an indemnity by the shipper in the case of breach.

A more reasonable second type of provision is to be found in the North Sea Standard Conditions of Carriage of the Scandinavian countries:

'The defences and limits of liability provided for in these standard conditions shall apply in any action against the carrier for loss or damage to the goods whether the action be founded in contract or tort.'

The clause applies to the original shipper and maybe to a subsequent holder of the bill of lading. As the carrier enjoys protection anyway in relation to contract and tort claims to which the carriage conventions apply, the clause must be intended to deal with certain shore-based activities.

'If any action for loss or damage to the goods is brought against a servant, agent or independent contractor, including stevedores... such persons shall be entitled to avail themselves of the defences and limits of liability which the carrier is entitled to invoke under these standard conditions as if they were expressly made for their benefit and in entering into any contract of carriage the carrier does so not only on his own behalf but also as agent and trustee for such persons who shall to this extent be or be deemed parties thereto.'

This clause appears to be consistent with the very limited circumstances admitted by the 1999 UK Act. It does not seek to extend all the bill of lading liberties and rights to the subcontractors as does the first specimen set of clauses quoted.

'In any case, the aggregate of the amounts recoverable from the carrier and his servants, agents or independent contractors, including stevedores ...shall in no case exceed the limits provided for in these standard conditions.'

The clause seeks to ensure that the same limits will apply whether the claim is against the carrier or against subcontractors. This is consistent with the reasoning that has upheld circular indemnity clauses in the UK to the effect that a shipper should not seek to obtain more by getting around agreed trading terms by suing a subcontractor than it could obtain from the principal carrier. The answer is rather to negotiate better terms with the contracting carrier in the first place. The clause quoted is not, as such, a circular indemnity but seeks to arrive at the same result of limiting recoveries to those contractually agreed but without the potential injustices to the shipper which may result from a full-blown circular indemnity.

Position under international conventions

The international carriage conventions do not deal expressly with Himalaya and circular indemnity clauses. However, Himalaya clauses developed primarily to overcome the situation under the Hague and Hague Visby Rules, where the carrier is not liable beyond 'tackle to tackle' but invariably engages stevedores to carry out the physical loading and unloading nonetheless. Claims were and are therefore often brought against the shore-based stevedores in an attempt to make a full recovery, not limited by the Hague or Hague Visby Rules. Himalaya clauses will often effectively block such claims by the shipper.

However, it has been argued that where a carrier tries to incorporate a Himalaya clause and/or a circular indemnity clause together with a demise or identity of carrier clause, it would effectively seek to deny the shipper any recourse against anyone in any circumstances and this could fall foul of the international carriage conventions. It has been argued that such a combination of clauses could be treated as a non-responsibility clause under Hague and Hague-Visby Rules and thus be unenforceable.

The Hamburg Rules minimise the circumstances under which a carrier might legitimately seek to incorporate a Himalaya clause. Firstly, the carrier is liable under the Hamburg Rules for port-to-port shipment and thus responsible for stevedoring activities on the same basis as sea carriage. Its liability is therefore limited by the Hamburg Rules rather than potentially unlimited under the two older conventions. Secondly, the Rules provide for both the contractual and actual carrier to be liable. Stevedores and terminal operators could therefore be held to be actual carriers and so both liable under and protected by the Hamburg Rules.

The UK Contracts (Rights of Third Parties) Act 1999 validates properly written Himalaya clauses where sea carriage is concerned but in quite a restrictive way. A third party can only benefit from the provisions of a contract for carriage of goods by sea to take advantage of an exclusion or limitation clause but no further. It should be noted that the Act appears to block any positive benefits for third parties to the contract of sea carriage that could otherwise have potentially been enjoyed by shippers.

Practical measures by shippers

Contract stage

Inasmuch as both Himalaya clauses and circular indemnity clauses are inserted for the protection of carriers and their sub-contractors and are not a feature of the international transport conventions, shippers having sufficient commercial muscle can contemplate seeking their deletion from contracts. A compromise position would be to authorise only a clause that does not prevent a recovery against the carrier for services it has undertaken to provide, directly or through others, and which imposes an indemnity limited to any excess beyond the sum a shipper could claim direct from the carrier under the bill of lading terms. The North Sea standard conditions quoted above are much closer to this compromise position than the other set of clauses quoted.

There is another issue to be considered with indemnities in both Himalaya and circular indemnity clauses. The shipper undertakes responsibilities in relation to persons with whom it may itself have no contract and over whom it may have no control. The buck in relation to the indemnity may rest with the original shipper even though the claim may be brought by a third party. The only way around this, other than through insurance cover, is to incorporate a similar indemnity in terms of sale with ones' customers. This may potentially be effective but it may not be commercially acceptable to customers of the shipper. There is therefore a continuing dilemma for shippers faced with such clauses.

Claim stage

Where a carrier seeks to rely on a Himalaya or circular indemnity clause, the circumstances of the loss should be carefully scrutinised. Even if the clause does not go beyond what is theoretically enforceable in various countries, it will be interpreted against the carrier if there are ambiguities or it does not cover the actual circumstances. There may be loopholes in the first example of clause quoted above because it is not sufficiently precise. There may also be loopholes if it turns out that the carrier was not responsible at all in the bill of lading terms for the activity covered by the subcontractor. In that case, it could be argued that it could not contract as agent or trustee for an activity in which it has no interest. These possible weaknesses of the clauses may warrant investigation on a case-by-case basis whenever a carrier seeks to make practical use of them.

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