Sea Carriage – Page 8 – The Institute of International Shipping & Trade Law (IISTL) Blog

Cargo claims and recovery for third party losses.

When can the lawful holder of a bill of lading claim damages for losses sustained by a third party? That was the question before the court in Sevylor Shipping and Trading Corp v Altfadul and SIAT[2018] EWHC 629 (Comm), 23 March 2018. Altfadul were the lawful holder of the bill of lading and SIAT were the assignees of their claim under the bills of lading against the carrier. That claim arose in respect of damage to a cargo of bananas, totalling just over $4.5m. In respect of this claim, Altfadul had received partial compensation from their seller, who were the voyage charterers, of just over $.2.5m. The arbitrators found that Altfadul were able to claim the full amount of the damages sustained by the cargo, and that the $2.5 m for which they had been compensated by their sellers could be recovered under s2(4) of COGSA 1992. This provides:

Where, in the case of any documents to which this Act applies-

(a) a person with any interest or right in or in relation to goods to which the document relates sustains loss or damage in consequence of a breach of the contract of carriage; but

(b) subsection (1) above operates in relation to that document so that rights of suit in respect of that breach are vested in another person,

the other person shall be entitled to exercise those rights for the benefit of the person who sustained the loss or damage to the same extent as they could have been exercised if they had been vested in the person for whose benefit they are exercised.

The arbitrators found: (i) s2(4) was not limited to situations in which the third party whose loss was being claimed by the lawful holder had been a previous lawful holder and had lost its rights through s2(5): (ii) s2(4) did allow Altfadul to recover for their seller’s loss. Section 2(4) required one to hypothesise that the Charterers had vested in themselves the rights of suit under the bill of lading and if so, whether they have been entitled to recover the loss suffered, to which the answer was ‘yes’.

The owners appealed from the tribunal’s decision. Andrew Baker J agreed with the first finding of the arbitrators but not with the second finding. The seller had been an intermediate holder of the bill of lading but as it had a voyage charter with the shipowner, under the rule in The Dunelmia [1970] 1 QB 289 the bill of lading in its hands was a mere receipt. The statutory vesting of rights of suit in him under s2(1) did not entitle a charterer to whom the mere receipt rule applied to sue the carrier under the bill of lading for losses suffered by him. His entitlement to recover those losses from the carrier was governed by the charter alone. Section 2(4) required one to hypothesise whether the person who sustained loss would have been able to exercise rights of suit under the Act if they had been vested in them. The answer with a charterer to whom the ‘mere receipt’ rule applied, was clearly ‘no’. Accordingly, s. 2(4) did not entitle the lawful holder to exercise its rights for its seller as the person who had sustained loss or damage, through the partial compensation it had paid to Altfadul in respect of the cargo damage.

However, Andrew Baker J went on to find that the tribunal’s decision to award the full amount of loss to Altfadul was correct under common law principles as regards damages entitlements under contracts for the carriage of goods by sea. In R&W Paul Ltd v National Steamship Co Ltd (1937) 59 Ll L Rep 28 Goddard J had found that a recovery from an intermediate seller was res inter alios acta as regards the bill of lading holder’s contractual entitlement to damages. The bill of lading holder would have to account to its seller in respect of the damages received in relation to that recovery, but that did not affect its contractual entitlement to recover damages in full from the shipowner. The later decision in The Sanix Ace [1987] 1 Lloyd’s Rep 465 had not qualified that principle and restricted it to situations where the claimant could establish that it had owned, or had the immediate right to possession of, the cargo at the time at which it had been damaged. Andrew Baker J summarised the principles of recovery, thus.

Assuming title to sue in contract, the carrier is liable to full damages if sued by the receiver who, by reason of the carrier’s breach, receives damaged rather than sound goods (R&W Paul) or if sued by a claimant who did not receive the damaged goods but who owned the goods when they were damaged by the carrier’s breach (The Sanix Ace), in each case irrespective of how financial loss reflecting or resulting from the cargo damage is or comes to be distributed across the sale of goods chain (ibid). The former sues as the owner of the damaged goods since but for the breach he would have been the owner of undamaged goods; the latter sues as the owner whose sound goods were damaged.

LOI and delivery to agent of nominated receiver. The Songa Winds.

In The Songa Winds [2018] EWHC 397 (Comm) the court considered the enforceability of a letter of indemnity for delivery of cargo without production of a bill of lading. Songa had time chartered their vessel to Navig8 who had concluded a voyage charter with Glencore carrying crude sunflower oil from the Ukraine to New Mangalore and Kakinada. Delivery was made without production of bills of lading in return for indemnities on back to back terms from Glencore to Navig8 and from Navig8 to Songa. The indemnities were on the terms of the International Group’s Letter of Indemnity for delivery of cargo without production of a bill of lading which provides

“we, [insert name of party requesting delivery], hereby request you to deliver the said cargo to “X [name of the specific party] or to such party as you believe to be or to represent X or to be acting on behalf of X” at [insert place where delivery is to be made] without production of the original bill of lading.”

Both indemnities stipulated delivery to Aavanti, who had purchased the cargo from Glencore. Delivery, however, was made to Ruchi, who were Aavanti’s sub-purchaser. A claim was made against Songa by SocGen, who had financed Aavanti’s purchase and claimed to be the lawful holder of the bills of lading.

Andrew Baker J found that Ruchi had been acting as Aavanti’s agent and gave summary final judgment that the two LOIs had been triggered. Although Ruchi had not paid Aavanti, the evidence showed that it was acting as its agent at the two discharge ports. There was a standing practice, between Aavanti and Ruchi, for delivery to be made to Ruchi of cargo quantities sold to it by Aavanti without production of bills of lading. Aavanti had issued LOIs to Glencore requesting it to procure delivery to Ruchi although it had not been paid and without reference to whether it was going to be paid before delivery. Aavanti had no representative office or other presence in India and no right to import cargo into India and had not appointed anyone to receiver the cargo on its behalf at the two Indian ports. Ruchi had its own dedicated tanks at both ports and the overwhelming likelihood was that the cargo was discharged into those tanks.

Hague rules. No limitation for bulk cargo.

On Wednesday in The Aqasia [2018] EWCA Civ 276 the Court of Appeal upheld the decision of Sir Jeremy Cooke [2016] EWHC 2514 (Comm) that “unit” in Article IV rule 5 of the Hague Rules means a physical item of cargo and not a unit of measurement. The case involved a cargo claim against owners under a voyage charter for the carriage of bulk fishoil, which provided that “The Owners in all matters arising under this Contract shall also be entitled to the like privileges and rights and immunities as are contained in Sections 2 and 5 of the Carriage of Goods by Sea Act 1924 and in Article IV of the Schedule thereto …”

Flaux LJ reasoned that the word “package” clearly referred to a physical item and the use of the words “package” and “unit” together and in the same context pointed strongly to both words being concerned with physical items rather than units of measurement. “Unit” refers to a physical item which is not a “package”, because, for example, it is incapable of being packaged or is not in fact packaged. This was the construction accepted by courts in other common law jurisdictions and favoured by the majority of academic commentators and textbooks.

It was also clearly confirmed by the travaux préparatoires for the Hague Rules. There was no suggestion in the travaux préparatoires that “unit” had been introduced to cater for bulk cargoes. Any limitation by reference to weight or volume was abandoned by the end of the session on 31 August 1921, as was any limitation by reference to a multiplier of freight by the end of the session on 1 September 1921. The word “unit” had been introduced to cater for items of cargo which are carried without packaging, such as cars or boilers.

Accordingly, there is no limitation available under the Hague Rules in respect of loss or damage to bulk or liquid cargo. The Court of Appeal also rejected owners’ argument that the words of Article IV were written into the charterparty so that every provision in the Article must be given meaning and effect in the context of the carriage of the bulk cargo contemplated by the charterparty. On the correct construction of the charterparty, owners were entitled to rely upon no more than what Article IV provides.

Barratry and the Hague-Visby Rules

Glencore Energy UK Ltd v Freeport Holdings Ltd [2017] EWHC 3348 (Comm) raised the question of whether barratry affected owners’ entitlement to rely on two of the exceptions in art. IV (2) of the Hague-Visby Rules. A fire started inside the engine control room of the “Lady M” while the vessel was on a laden voyage from Russia to the USA. The fire resulted in owners engaging salvors to tow the vessel to Las Palmas where owners declared general average. Cargo interests denied liability to contribute on the basis that there had been the fire had constituted a breach of the contract of carriage, which was subject to the Hague-Visby Rules. I

t was agreed that the fire was started deliberately by a member of the crew with the intent to cause damage and for the purposes of the preliminary issues the assumed facts were that: the perpetrator was the Chief Engineer; he acted alone; at the time of starting the fire deliberately and with intent to cause damage he was: “a. under extreme emotional stress and/or anxiety due to the illness of his mother; b. alternatively, suffering from an unknown and undiagnosed personality disorder and/or mental illness;c. alternatively, neither a nor b above.”

Three preliminary issues came before Popplewell J.

(1) Did the conduct of the chief engineer constitute barratry?

(2) Is Article IV Rule 2(b) capable of exempting the Owners from liability if the fire was deliberately or barratrously caused?

(3) Are the Owners exempt from liability under the “any other cause” exception in Article IV Rule 2(q)?

Popplewell J defined barratry as (i) a deliberate act or omission by the master, crew or other servant of the owners (ii) which is a wrongful act or omission (iii) to the prejudice of the interests of the owner of the ship or goods (whether or not such prejudice is intended) (iv) without the privity of the owner. A “wrongful act or omission” would be: one that is generally recognised as a crime, including the mental element necessary to make the conduct criminal; or (b) a serious breach of duty owed by the person in question to the shipowner, committed by him knowing it to be a breach of duty or reckless whether that be so. It would be necessary for the crew member to have had the necessary knowledge or intent that what he is doing is either a crime or a serious breach of duty owed towards his owners, or at least recklessness in that regard. On the assumed facts the chief engineer may or may not have constituted barratry, depending upon further facts as to his state of mind. However, the issue of barratry was not determinative of the second and third preliminary issues.

Popplewell J went on to find that the owners were able to rely on the fire exception in art. IV (2)(b) applied, whether or not the fire was caused by barratry. However, they would not be able to rely on the “any other cause” exception in art. IV (2)(q) as the chief engineer was acting within the course of his employment on the agreed facts. His access to the control room arose directly from the field of activities entrusted to him by the owners and his setting fire to the control room, with intent to cause damage, was a misuse of his position in the field of activities for which he was employed.

Operating expenses incurred during ransom negotiations. Now allowable under Rule F of YAR 1974.

In The Longchamp reported in our blog of 9 August 2016, the Court of Appeal held that four items of vessel operating expenses incurred during ransom negotiations with pirates were not allowable in general average as substituted expenses under Rule F of the York Antwerp Rules 1974.

Rule F provides:

“Any extra expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.

The items claimed in respect of this period were: crew wages; the high risk bonus due to the crew for being at sea in a high risk area; crew maintenance; bunkers consumed. The expenses were incurred over a 51 day period of negotiation with the pirates which resulted in the release of the vessel on payment of a ransom of US1.85m, as opposed to the US$ 6m initially demanded. The Court of Appeal held that Rule F presupposes some real choice being made. Acceptance of the initial ransom demand is not a true alternative; nor is acceptance of any other ransom sum less than that initially demanded but greater than that eventually agreed.

The Supreme Court has now overturned the decision of the Court of Appeal and held, Lord Mance dissenting on the facts, that the four operating expenses were allowable under Rule F. The Supreme Court disagreed with the Court of Appeal’s decision that the operating expenses did not fall within Rule F because payment of a reduced ransom was not an ‘alternative course of action’ to paying the ransom initially demanded, but was merely a variant. This reasoning required a different means to be adopted to complete the adventure from that which might normally be expected. This was the prevailing view of the texts on General Average and among practitioners, but was not supported by the language of Rule F. In any event, incurring the operating expenses did represent an ‘alternative course of action’ to paying the ransom intially demanded.

Both lower courts had found that the reference in Rule F to “another expense which would have been allowable as general average” is to an expense whose quantum is such that it would have qualified as a claim under Rule A. Both lower courts had accepted that on the facts payment of the ransom in full would have been reasonable. The Supreme Court disagreed with this construction of Rule F. The reference in Rule F to ‘allowable in General Average’ did not mean that the expense (in this case payment of the full ransom demanded) had to be reasonably incurred. It had to be of a type that would constitute a General Average expense. If so, the substituted expense (in this case the payment of the lower ransom together with the operating costs during the period of negotiation) would be allowable, but only to the extent that it did not exceed the sum avoided and that it was established that it was reasonable to pay the ransom that was paid together with incurring the operating expenses and the negotiation expenses during the 51 days.

The Supreme Court also rejected cargo interest’s argument that the exclusion of indirect loss including demurrage from General Average under Rule C served to exclude the operating expenses from Rule F. Rule C did not apply to expenses recoverable under Rule F which by definition were expenses not themselves allowable in General Average but were alternatives to sums that were allowable.

Undeclared deck cargo and carrier’s right to limit Hague-Visby Rules? Canadian court says ‘yes’.

In De Wolf Maritime Safety BV v Traffic-Tech International Inc (‘The Cap Jackson’) 2017 FC 23, the Federal Court in Canada has held that (1) undeclared on-deck carriage did not prevent the application of the Hague-Visby Rules to the bill of lading and (2) that the carrier was entitled to rely on the limitation provisions in art. IV(5) of the Hague-Visby Rules. The decision on both points is in accordance with English law on the Hague-Visby Rules and deck cargo.

Something fishy in the containers. Package limitation under the Hague Visby Rules

The High Court has just tackled the thorny issue, raised in the Australian case of The El Greco [2004] 2 Lloyd’s Rep 537 of what is the applicable limitation of liability for loss or damage of goods carried in a container under a contract of carriage subject to the Hague-Visby Rules. Kyokuyo v AP Moller –Maersk [2017] EWHC 654 (Comm) involved carriage of three containers from Spain to Japan. The contract of carriage initially provided for the issue of straight bills of lading, consigned to the claimants, but the carrier and shipper subsequently agreed to issue seawaybills which were handed over to the consignee. As the contract of carriage contemplated the issue of bills of lading and the contract of carriage was made in Spain the contract of carriage was subject to the mandatory application of the Hague-Visby Rules under Rule X(b), even though the shipping documents that were issued were seawaybills.

The goods in the three containers were frozen tuna, some of which were carried in packages, some in individual units. The individual tuna pieces constituted ‘units’ for the purposes of package limitation and constituted the ‘packages or units’ of the cargo as packed. By operation of Article IV rule 5(c) of the Hague- Visby Rules they were the ‘packages or units’ for the purposes of Article IV rule 5(a). It sufficed that the language of enumeration was consistent with the truth (something that had not been the case in The El Greco). The limitation figure was presumed to be a single one for each container, unless the claimant could prove that there had been enumeration of the packages or units as packed within the container. The waybills had referred to the number of individual tuna pieces, on a ‘said to contain’ basis, but had not referred to the packages of tuna. The limit for the damaged goods in each container was a separate limit of 666.67 SDRs for each enumerated unit, the individual tuna pieces, and a single package limit of the larger of 666.67 SDRs or 2 SDRs per kilo of the gross weight of the damaged packaged tuna.

Bulk Carriage: Package limit or no package limit: That is the question.

The decision of the Commercial Court (Sir Jeremy Cooke sitting as a Judge of the High Court) in The Aqasia [2016] EWHC 2514 (Comm); [2016] 2 Lloyd’s Rep. 510 (noted swiftly in this blog; a picture of the vessel in question appears here) has clarified an issue that has been at the heart of cargo claim negotiations for decades, namely whether a carrier of a bulk cargo is entitled to limit his liability under the Hague Rules. Article IV Rule 5 of the Hague Rules provides that: “Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with goods in an amount exceeding £100 per package or unit”.

Whilst there had hitherto been no English authority directly on point the Commercial Court adopted the approach that has been followed by courts in Commonwealth countries and by textbook commentators and held that the words “package or unit” could not be applied to bulk cargo as they were intended to refer solely to physical packages or other units such as cars. It should be appreciated in this connection that the Hague Rules were adopted in the 1920s at a time when bulk ships were not common. Consequently, it appears that a carrier of a bulk cargo may have no right to package limitation under the Hague Rules.

By the time that the Hague-Visby Rules were adopted at the end of the 1960s, bulk shipments had become common and it was recognised that the Hague Rules wording was no longer fit for purpose. Consequently, Article IV Rule 5 (a) of the Hague-Visby Rules provided that a bulk carrier could limit his liability to “666.67 units of account per package or unit or 2 units of account per kilo of gross weight of the goods lost or damaged, whichever is the higher”. The highlighted words were intended to provide a bulk carrier with limitation rights (i.e. based on weight) that were not available under the Hague Rules.

It should also be appreciated that the version of the Hague Rules that the USA adopted in its Carriage of Goods Act 1936 is also worded differently and provides that a carrier may limit his liability to”$500 per package…or in the case of goods not shipped in packages, per customary freight unit…” The phrase “customary freight unit” has been construed to refer to the unit of measurement that is customarily used to calculate the freight for that particular type of carriage (e.g. so much per ton or US Barrel etc) and not to a physical unit.

Therefore, it is important for a bulk carrier (particularly in high value claims) to determine which version of the Rules is applicable in any particular case. This is also important when the Rules are adopted by means of a Paramount Clause since there are many different types of Paramount Clauses some of which refer to the Hague Rules, some to US COGSA 1936 and some to the Hague-Visby Rules. A reference to the “Vague Rules” could be expensive!

Costs of defending cargo claim. Recovery under Inter-Club Agreement.

In London Arbitration 30/16 the tribunal held that where a claim was made against owners, in circumstances in which they incurred no liability to the claimants under the bill of lading, the costs of defending the claim were recoverable under clause 3 of the 1996 Inter-Club Agreement. This had been incorporated into the time charter on NYPE 1993 form.

The claim had been brought in a foreign court against the registered owners, the master, and the charterers and judgment had been given against the time charterers. In doing so the tribunal departed from a previous arbitration award in London Arbitration 10/15 where it was held that such costs could not be recovered when there was in fact no liability to cargo owners. Alternatively, the tribunal found that the owners would be able to recover under an implied indemnity as the cause of the cargo damage was the charterer’s order to wait outside the discharge port for 35 days.

Delivery without bills of lading. Enforceability of LOI.

The Zagora (Oldendorff GmbH & Co KG v. Sea Powerful II Special Maritime Enterprises) [2016] EWHC 3212.

Where bills of lading are not available at the discharge port, it is common practice for the cargo to be discharged to the receiver against a letter of indemnity which will be conditional on delivery of the cargo to the receiver specified therein. The Zagora involved an allegation that delivery had not been made to the nominated receiver and the LOI was therefore unenforceable.

A series of indemnities down the chartering chain were given in respect of delivery in China in December 2013. When the bank brought a claim for misdelivery the owners called on their indemnity from the charterers who made a similar claim on the indemnity from the receivers. The indemnities required delivery to Xiamen, the first buyer in a chain of sales, or “to such party as you believe to be or to represent Xiamen… or to be acting on behalf of Xiamen.” Delivery was made to the agent of Xiamen’s sub-purchaser, Sea Road, and it was argued that the indemnities were not enforceable as there had been no delivery to Xiamen.

Teare J held that the indemnities were enforceable and that the sub-purchaser’s agent was also Xiamen’s agent, and, if that were not the case, then the owners believed that they had been acting as such. The master’s recollection was that the representative of Sea-Road who boarded the vessel stated that he was there to handle discharge on behalf of Xiamen. The inevitable inference to be drawn from Xiamen naming itself as the person to whom the cargo should be delivered in the absence of an original bill of lading was that Xiamen intended that the nominated agent Sea-Road would take delivery of the cargo on its behalf. Conversely, the shipowners had no interest in discharging the cargo into the possession of Sea-Road as their own agent, as this would not provide the protection of the LOI because the owners would not have delivered the cargo to Xiamen, but would have retained possession of the cargo through Sea-Road.