It is competent for the parties, when commercial necessities so require, to evade application of the ordinary rule for payment of freight on delivery, by inserting express terms into the contract of affreightment. In such cases charterparty can provide for the freight to be payable on the shipment of goods or for at least a portion of freight to be paid in advance.
By the policy of the law of England freight and wages, strictly so called, do not become due until the voyage has been performed. But it is competent to the parties, to a charter-party, to covenant by express stipulations in such manner as to control the general operation of law. The question in this case is whether the parties have not so covenanted by the stipulations of this charterparty. If the charter-party be silent the law will demand a performance of the voyage, for no freight can be due until the voyage be completed. But if the parties have chosen to stipulate by express words, or by words not express but sufficiently intelligible to that end, that a part of the freight (using the word freight) should be paid by anticipation, which should not depend upon the performance of the voyage, may they not so stipulate?
De Silvale v Kendall (1815) 4 M & S 37 per Lord Ellenborough CJ at p.42
Such freight is called advance freight and usually the bigger part of it (from 80 to 95%) is paid upon completion of loading, with the balance paid on delivery.
Time of payment is essential characteristic of advance freight, while provision as to payment at port of shipment alone, such as "the shippers paying freight for the said goods in London" was held to mean that it only stipulates a place for payment of freight upon delivery of the goods at the port of discharge. Time of payment usually expressed in such words like "on signing bills of lading" or "within [number] days of master signing bills of lading".
Another characteristic of advance freight which distinguishes it from the loan is an insurance procured by the shipper on the sum advanced. As Lord Campbell ruled in Hicks v Shield (1857) 7 E & B 633 at pp.638-9:
A sum of 300£ is to be advanced, subject to certain deductions, one of which is for insurance. If it is to be insured, it must be for freight in advance; for a mere loan could not be insured: and, if it is not a mere loan, but advance of freight, the plaintiff cannot recover it back.
Rule that the shipowner’s right to advance freight is unaffected whether he subsequently makes ‘right and true delivery’ or not, bases on principle that being a liability in debt, the freight risk is irrevocably transferred from the shipowner to the charterer on the moment when this advance payment made.
There are, however, several qualifications to this rule.
1. Vessel must be seaworthy when she began her voyage.
If she sailed on the voyage in a seaworthy condition, the merchant was to advance one fourth of the freight, which he could not recover back if the ship, having so sailed, should afterwards be lost by the perils of the sea, without having delivered any part of her cargo. … But [the shipowner] could not have the benefit of this indemnity unless, at the commencement of the voyage, the ship was seaworthy.
Thompson v Gillespy (1855) 5 E & B 209 per Lord Campbell at p.223
2. If goods are lost by negligence of the shipowner, the charterer as a part of his damages is allowed to claim against the shipowner an amount equal to the freight advanced.
3. The shipowner’s breach of the charterparty may preclude him from claiming advance freight in case when the broken term is a condition precedent to his right to freight.
4. Liability to pay advance freight does not per se affect the time when freight is earned. It is simply an obligation to make a payment on account of freight at a time when it has not yet been earned. However that obligation is subject to a customary incident, capable of being varied or confirmed by express stipulation that advance freight paid pursuant to the contract is not returnable or recoverable should the contract be frustrated before the freight can be earned.
Advance freight is not recoverable where the contract of carriage is frustrated before the cargo reaches its destination because there is no total failure of consideration, as well as in situations when contract is frustrated by reason of the fact that the goods have perished, which are expressly dealt with by s2(5)(c) of the Law Reform (Frustrated Contracts) Act 1943.
To achieve desired effect, as case of the Lorna I shows, advance freight provisions shall be drawn sufficiently clear. Thus when standard words that "freight shall be prepaid within five days of signing and surrender of final bills of lading" were supported by the second phrase, which reads "full freight deemed to be earned on signing bills of lading", both phrases together were construed in a way "that the owners’ right to the freight accrued on completion of the signing of all the bills of lading, but payment was postponed until five days after the bills of lading, having been signed, were delivered to the shippers."
In later case the Karin Vatis Lloyd LJ clarified that "earned" and "deemed earned" or "considered as earned" all mean the same, namely that the shipowners have done all they have to do to earn their freight once the cargo has been loaded. His Lordship furthermore stated that:
The provision that freight is deemed to be earned as cargo loaded is, to my mind, the paramount or controlling provision. It is well understood by commercial men. It casts the risk in relation to freight on to the charterers.
Accordingly, it was held that concluding part of clause
Ninety-Five (95%) Percent of freight to be paid within three (3) banking days after completion of loading and surrender of signed Bills of Lading … vessel and/or cargo lost or not lost. Balance of freight demurrage/despatch to be settled within twenty (20) days after completion of discharge.
deals only with manner of payment, i.e. provides a formula for ascertaining the date of payment and arranges for all pending payments to be settled at the same time. Some voyage charter forms expressly provide for advance payment of freight, thus cl.4(b) of GENCON94 says (lines 35-39):
Prepaid. If according to Box 13 freight is to be paid on shipment, then it shall be deemed earned and non-returnable, Vessel and/or cargo lost or not lost. Neither the Owners nor their agents shall be required to sign or endorse bills of lading showing freight prepaid unless the freight due to the Owners has actually been paid.
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