A O Smith Electrical Products v Blue Anchor Line & Ors

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DMC/SandT/12/13

Hong Kong

A O Smith Electrical Products (Changzhou) Co Ltd v Blue Anchor Line & Ors

Hong Kong Court of First Instance: Reyes J: [2012] 1 HKLRD 301: 18 November 2011

Mr Edward Alder, instructed by Clyde & Co, for the plaintiff shippers

Mr Richard Khaw, instructed by DLA Piper Hong Kong, for the third defendant carrier

CARRIAGE OF GOODS BY SEA: WAYBILL: LETTER OF UNDERTAKING: INTERPRETATION: GOVERNING LAW OF CARRIAGE: APPLICABLE LIMIT OF LIABILITY

Summary

This case was a trial of preliminary issues over the applicable limit of liability for claims in respect of cargo carried from Shanghai to various ports in the United States. Reyes J held that on a proper construction of the terms of the waybills and a letter of undertaking signed between the parties, Hong Kong procedural law, including its conflict of law provisions, governed the carriage. The waybills clearly provided for PRC substantive law to apply, except where US ports were involved. That was the case here. Accordingly, US COGSA applied. Thus, the applicable limit was that stated in US COGSA. It was not overridden by the non-derogation clause in the PRC Maritime Code as the Code was not compulsorily applicable to the carriage in question.

This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.

Background

The present case concerned a dispute over contracts of carriage entered into between the plaintiff shippers, AO Smith Electrical Products (Changzhou) Co Ltd, and the third defendant carrier, China Shipping Container Lines Co Ltd. The cargoes in question were carried from Shanghai to various US ports. Their carriage was governed by three sea waybills (“the Waybills”) issued by the carrier, incorporating the terms of their Combined Transport Bill of Lading.

Clause 7(1) provided that, “[e]xcept as provided for in cl.7(2),” the Waybills were to be “subject to the provisions of the PRC Maritime Code”. Clause 7.2 provided that if the relevant carriage involved a US port, the Waybills were to be subject to the US Carriage of Goods by Sea Act(US COGSA).

Clause 26(1) provided that the Waybills were “governed by the laws of the [PRC]” and “[a]ll disputes arising under or in connection with [the Waybills] shall be determined by the laws of the [PRC].” Clause 26(2) provided that “[n]otwithstanding the provisions of cl.26(1)”, where carriage involved a US port, the Waybills were to be “subject to the provisions of the US COGSA”; US COGSA “shall be deemed to have been incorporated herein and nothing herein contained shall be deemed a surrender by [the carrier] of any of its rights, immunities, exceptions or limitations or an increase of any of its liabilities under US COGSA.”

Cargo claims arose between the parties. On 19 January 2010, they entered into a letter of undertaking (LOU) under which the insurer of the carrier put up security to prevent the vessel from being arrested in this (Hong Kong) action and the shippers agreed that the claims “shall be subject to Hong Kong law and to the exclusive jurisdiction of the [Hong Kong High Court]’’. It was further stated that the LOU was made “without prejudice to any right of defence available to [the carrier] including but limited to… the right to limit liability in accordance with applicable law.”

There was a dispute as to the applicable limit of liability. The limit under the US COGSA was lower than that stipulated in Chapter IV of the PRC Maritime Code.

Two preliminary issues were tried before the Court:

(1) Did Hong Kong law govern carriage under the Waybills and (if so) with what results?

(2) Did the limit in the PRC Maritime Code or that in US COGSA apply to carriage under the Waybills?

Judgment

In relation to Issue (1), Reyes J rejected the carrier’s argument that Hong Kong substantive law governed the Waybill by the virtue of the LOU. In his view, the plain meaning of the LOU was that parties agreed to the exclusive jurisdiction of the Hong Kong High Court and to the resolution of the dispute in that forum in accordance with Hong Kong procedural law. The LOU was stated to be without prejudice to any right of defence the carrier might have to limit liability “in accordance with applicable law”, and the parties had left open what the “applicable law” was. Thus, the LOU was no more than an agreement to submit to the Hong Kong forum and to its civil procedure.

Even if the LOU was to be read such that the claims would be subject to Hong Kong law, the body of substantive Hong Kong law included conflict of law principles. Hong Kong law would thus have to have regard to the effect of clauses 7(1), 7(2), 26(1) and 26(2) and the choice of law (PRC law or US COGSA) therein. Nothing was to be gained by the carrier even if this issue were decided in its favour.

In relation to Issue (2), Reyes J rejected the shipper’s argument that the limit of liability under the PRC Maritime Code applied. Under the principle of freedom of contract, even if (without deciding) PRC law applied purely as a matter of the parties’ contractual choice, they must also be free to agree as between themselves that PRC law was not to apply in specified situations. The clear effects of Clauses 7(1) and 7(2) was that as US ports were involved, the Waybills would be subject to US COGSA and not the PRC Maritime Code. The same conclusion could be reached under Clauses 26(1) and 26(2). Thus, the limits under US COGSA applied.

Reyes J further noted that there was no evidence that PRC law was compulsorily applicable to the carriage in question and that the PRC Maritime Code applied as an overriding statute regardless of the intention of the parties. Thus, although the PRC Maritime Code would nullify any provision in a carriage contract which derogated from the limit of liability set out therein, it did not apply to override the US COGSA limits in this case.

This issue was akin to that which used to occur in relation to the Hague-Visby Rules, namely, that parties could by agreement incorporate the Hague-Visby Rules into a bill of lading but, by suitable drafting, exclude Article III(8) which struck down any provisions in the bill which imposed lesser liability than that stipulated under the Rules. Many jurisdictions had solved this problem by providing for the Hague-Visby Rules to be compulsorily applicable by force of law, regardless of the agreement of the parties, but that was not the case with the PRC Maritime Code.