The difference in the interpretation of the prepayment clause is considerable when the goods are lost in transit. The prepaid sum, if advance freight, cannot normally be recovered, but, if paid as a loan, can be recovered by the shipper. The interpretation of the clause depends entirely on the intention of the parties, which is not always easy to ascertain. The courts have evolved the rule that, when freight has to be insured by the shipowner, the prepayment is likely to be a loan, but, if it has to be insured by the shipper, it is likely to be advance freight.
Prepaid freight and freight collect bills of lading
We have so far considered the obligations arising from the contract of carriage by sea, as far as they concern the questions of who has to pay the freight and when freight is payable. Another problem arises between the seller and the buyer under a c.i.f. contract. Whether one or other method is used, depends on the agreement of the parties. 'When the first method is used the seller provides freight prepaid bills of lading. When the second method is used, he provides what have been conveniently called freight collect bills of lading, that is to say, bills of lading under which freight is payable by the receiver (who may be the buyer himself or a sub-buyer from the buyer) to the ship at the port of discharge.
The distinction is of considerable commercial importance. If freight collect bills are used, the buyer's obligation to pay freight to the shipowner is conditional on the arrival of the goods. Notwithstanding this condition, the contract is a true c.i.f contract.
pro rata freight
pro rata freight is payable in exceptional circumstances only, namely, where the parties to the contract of carriage conclude a new contract to the effect that the goods shall be delivered at and intermediate port, and not the port of destination named in the bill of lading. Such agreement, unless concluded expressly, is only inferred from the circumstances where the shipper has a genuine choice of having his goods carried to the destination originally agreed upon. The shipper is, therefore, not obliged to pay pro rata freight where the shipowner leaves the goods at an intermediate port and is unable or unwilling to carry them to the port of destination. The shipowner is entitled to pro rata freight where he loads only part of the agreed cargo or delivers only part of the total loaded cargo, the delivery of the remainder having become impossible through excepted perils.
Back freight
The shipper is liable to pay back freight where the goods shipped are carried, on his instructions or in his interest, to a place other than the port of destination. Where the shipper, in his capacity of unpaid seller, exercises his right of stoppage in transit and instructs the shipowner to deliver the goods at a port other than the port of destination named in the bill of lading, the shipper is liable for any additional freight and, if he instructs the shipowner to deliver the goods whort of the original port of destination, he has to pay the total original freight as damages because, by giving notice of stoppage, he was in breach of the contract of carriage concluded with the shipowner and prevented the latter from earning the freight. Where the master, in the interest of the shipper, considers it advisable to carry the goods to a place other than the bill of lading destination, because, for example, that port is strikebound, the shipper is liable to pay the additional freight as back freight.
Dead freight
Where the shipper fails to load the cargo or the full cargo after arranging with the shipowner for its carriage, he is in breach of the contract of carriage and is liable to pay the agreed freight as damages (dead freight). But the shipowner who uses the freight space which would have been taken up by the goods of the defaulting shipper, and carries therein goods of other shippers, has to deduct the earned freight when claiming damages. He may claim from the defaulting shipper the difference between the agreed and actually earned freight, e.g. if he had to accept cargo which earned a lower rate of freight.
Primage
Some bills of lading refer to the remuneration payable to the shipowner as "freight and primage (if any)". Primage was originally a small payment made by the shipper to the master in consideration of the care and attention which he was to give during the voyage to the shipper's cargo. However, such payment is no longer customary.
In modern practice, primage is not normally charged. Where it is claimed, it means hardly more than a percentage added to the freight which is payable to the shipowner.
Freight rates fixed by shipping conferences
The standard freight rates for shipments in liner vessels are often fixed by so-called shipping conferences. These are combinations or pools of shipowners maintaining regular liner services to particular parts of the world. The rates which they offer are frequently lower than those which non-conference shipowners are able to quote, but regular services can only be profitably maintained if supported by regular freight bookings.
The validity, in law, of a conference arrangement was upheld in the famous Mogul case, where a non-conference shipowner sued members of the conference formed for the shipment of tea from China to Europe. It was held that the conference arrangement was not illegal as being a conspiracy because its members pursued the lawful object of protecting and extending their own trade and had not employed unlawful means to achieve this object.
The liner conference system was also criticised by some developing countries which claimed that in some instances it operated in a discriminatory fashion against their shipowners, shippers and foreign trade. On the suggestion of UNCTAD, a Convention on a Code of Conduct for Liner Conferences was signed at Geneva on April 6, 1974 and became effective on October 6, 1983. An E.C. Regulation provides for ratification of the Convention by E.C. States but subject to reservations. The aims of the Convention have been described thus.
"The code aims at striking a just and fair balance between many interests. Discrimination between the members of a liner conference and non-members which are recognised national shipping lines shall be avoided; this provision, it is thought, modifies the ruling of the House of Lords in the Mogul case. The relations between the members of a liner conference, who often have disputes among themselves, are regulated. Transactions between conference mombers and shippers, including the grant of loyalty rebates, are covered. Important rules for freight determination, including promotional freight rates for non-traditional exports, are laid down. Altogether, this is a very comprehensive code."
The Code also provides a mandatory conciliation procedure for certain specified disputes. Prior to the Convention coming into effect, the Unites Kingdom passed enabling legislation, viz. the Merchant Shipping (Liner Conferences) Act 1982, to which the Code was appended in the Schedule. The Act came into force on March 14, 1985.