Ocean carrier’s limitation of liability pursuant to Hague-Visby Rules clarified by the UK High Court of Justice

Introduction

The English and Welsh High Court of Justice recently clarified the “true construction and application” of Art IV r 5(a) of the Hague-Visby Rules. Specifically, the High Court held that Art IV r 5(a) applies to claims pertaining to economic loss as opposed to just those that arise as a result of physical damage to cargo.

Background facts

Trafigura Pte Ltd. (the “Claimant”) owned a bulk load of zinc calcine (the “Shipment”) for which they arranged for carriage on board the THORCO LINEAGE (the “Vessel”) from Baltimore, USA to Hobart, Australia pursuant to a bill of lading issued on May 31, 2018. The Shipment weighed approximately 10,287.07 WMT. On June 21, 2018, the Vessel suffered extensive damage due to engine failure and was run aground in French Polynesia.

The Vessel was subsequently towed to a number of ports for repair, resulting in the Shipment being offloaded from the Vessel on multiple occasions. On June 25, 2018, the master on behalf of the property entered into a Lloyd’s Standard Form of Salvage Agreement (the “LOF”) with Smit Singapore Pte and The Nippon Salvage Company Limited (collectively, the “Salvors”), which is an agreement that determines the amount of remuneration to be awarded to salvors for saving property at sea. The LOF contained a clause which provided that the Salvors had a maritime lien over the salved property until they were provided with security from the Claimant. The Claimant provided salvage security to the Salvors on November 6, 2018 in the sum of $7,355,000.00 USD so that it could obtain possession of the Shipment. The Shipment eventually arrived in Australia on December 26, 2018 with the majority of the Shipment (9,523 WMT) free of physical damage.

The Claimant claimed indemnity against TKK Shipping Pte Ltd. (the “Defendant”) for approximately $8.5 million USD as a result of incurring extensive costs for repairing the Vessel, storing the Shipment and providing the salvage security to the Salvors. The exact amount of damages is summarized as follows:

• $7,355,000.00 USD: Liability to pay the Salvors;
• $278,658.31 USD: Physical loss and/or damage to the cargo;
• $723,831.85 USD: On-shipment costs in respect of the cargo (some of which was physically damaged and some of which was not); and
• $58,934.74 USD: Costs incurred in arranging for the salvage sale and/or disposal of some of the physically damaged cargo.

Issues

Art IV r 5(a), which is the authority in the Hague-Visby Rules that pertains to bills of lading and contracts of carriage, provides as follows:

Unless the nature of the value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or before liable for any loss or damage to or in connection with the goods in an amount exceeding 667.67 units of account per package or 2 units of account per kilogram of gross weight of the goods lost or damaged, whichever is higher [emphasis added].

At issue was:

• whether the phrase “goods lost or damaged” applied only to claims pertaining to physically lost or damage goods;
• whether the foregoing phrase also applied to claims pertaining to economic loss; and
• if the phrase did account for claims pertaining to economic loss, whether such a loss was:
  1. 1. limited to the weight of the entire cargo;
     2. limited to the weight of the physically damaged cargo; or
     3. unlimited?

Decision of the Court

The Claimant argued that the Shipment was “damaged”, as contemplated by Art IV r 5(a), due to the diminution of its market value and the various costs that the Claimant incurred as a result of damage to the Vessel. They submitted that Art IV r 5(a) ought to be read as a whole and take the surrounding circumstances into account, which, in this instance, would result in “liability for any loss or damage to or in the connection with the goods” having to be accounted for. Further, they argued that the entire weight of the Shipment ought to be used when calculating the Defendant’s limit of liability, given that the costs were incurred in respect of the Shipment as a whole.

The Defendant argued that the Art IV 5(a) limits claims for economic loss to the weight of the physically damaged cargo at issue, not to the weight of the entire cargo, given that Art IV r 5(a) only contemplates losses pertaining to changes to the physicality of the cargo. They argued that this effectively limited their liability to approximately $800,000 USD given that only a small portion of the Shipment sustained physical damage.

Through analyzing the ordinary meaning of the phrase, Sir Nigel Teare of the High Court of Justice held that Art IV r 5(a) applies to claims for economic loss, as the phrase “lost or damaged” includes liability to a third party, transship requirements, costs incurred, and diminution of market value. Further, a carrier’s limit of liability is to be calculated by reference to the weight of the cargo that was physically or economically damaged. In the claim at issue, this applied to the full weight of the Shipment applied, given that the entire Shipment suffered a diminution of value. Notably, Sir Teare stated:

… as illustrated by many cases decided in this court since its creation in 1895, casualties can occur at sea which imperil both ship and cargo as a result of which the good can only be delivered at the discharge port in sound condition as a result of additional and unexpected expenses being incurred by the merchant. The master may have engaged the services of salvors on the basis of LOF. If the salvage service is successful the owners of the vessel and the owners of cargo will be obligated to pay for the salvage service in proportion to their respective salved values. Where the safe place to which the salvors take the vessel and cargo is not the port of discharge the owners of the cargo may be obliged to incur the costs of on-carriage to get the cargo to the port of destination. This case is an example of two such expenses, salvage payable pursuant to LOF and the cost of on-shipping goods from a place of safety to the port of discharge. In such cases the goods, though in sound condition, will have for the merchant a diminished value at the port of discharge to the extent of the additional expense which he has incurred. In such cases it can fairly be said, and I have no doubt would be said by the merchant, that the goods have suffered economic damage as a result of the casualty at sea. The cargo is as much the victim of the casualty as it is where physical damage is caused… I therefore think that when one has regard to the context of the carriage of goods by sea there is a cogent argument that the ordinary meaning of “lost or damaged goods” in Article IV r.5(a) of the Hague-Visby Rules can include goods which have been economically damaged. Otherwise one is closing one’s eyes to the risks inherent in such carriage and the typical consequences of such risks.

Takeaway

 While this decision broadens the scope of the application of Art IV 5(a) of the Hague-Visby Rules, it has provided much needed clarity with respect to this issue by confirming that claims pertaining to economic loss are considered permitted. Such claims will nevertheless be limited to the weight of the cargo that was implicated by such a loss; however, in the case of economic loss, it is possible that the weight of the full cargo will be taken into account when calculating the limitation of liability, and not just the physically damaged portion.

Should you have any questions regarding marine liability in Canada, please feel free to reach out to any member of Miller Thomson LLP’s Transportation & Logistics team.