Geofizika v MMB International - The Green Island

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DMC/SandT/12/08

England

Geofizika DD v. MMB International Limited and Greenshields Cowie & Co Ltd: “The Green Island”

English Court of Appeal; Lord Neuberger, Thomas LJ, and Sir Nicholas Wall; [2010] EWCA Civ 459, [2010] 2 Lloyds Rep 1; 28 April 2010

Tim Wormington, instructed by Keates Ferris Solicitors, for the buyers, Geofizika

John Russell, instructed by Hill Dickinson LLP, for the sellers, MMB International

Richard Lord QC, instructed by Barlow Lyde & Gilbert LLP, for the Part 20 Defendants, the freight forwarders, Greenshields Cowie & Co Ltd

INCOTERMS 2000 CIP: CARRIAGE ON DECK: OBLIGATIONS OF FREIGHT FORWARDER: CONTRACTUAL INTERPRETATION: CAUSATION

Summary

The Court of Appeal dismissed the buyers’ claims against the sellers for cargo washed overboard because (a) the sellers had procured an appropriate contract of carriage and (b) although the sellers had failed to procure appropriate insurance, even if the appropriate insurance had been procured, it would not have covered the buyer’s loss. In the course of their judgments, Thomas LJ commented on the duties of freight forwarders while Lord Neuberger commented on contractual interpretation.

This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), an advocate and solicitor of the Singapore Bar

Background

The buyers purchased three ambulances on INCOTERMS 2000 CIP (Carriage Insurance Paid) Tripoli from the sellers. The sellers contracted with the freight forwarders, who arranged the shipment to Tripoli and insurance.

As requested by sellers, the freight forwarders procured carriage with the carriers on a RO-RO basis (roll on roll off). This was the first time the freight forwarders had worked with this particular carrier. The carriers’ booking confirmation stated: “ALL VEHICLES WILL BE SHIPPED WITH “ON DECK OPTION” this will be remarked on your original bills of lading.”

The ambulances were indeed shipped on deck. The bills of lading eventually issued contained a standard form liberty clause granting the carrier the liberty to ship cargo on deck under Hague Rules terms without notice to the shipper, but without liability to the carrier if the bills of lading were claused to evidence on-deck shipment. There was no such clausing on the bills of lading in this case. The freight forwarders declared the shipment under their open cover under ICC(A) terms. As the bills of lading were not claused, the freight forwarders warranted that the ambulances were shipped under deck.

Two ambulances were washed overboard en route from England to Libya. The buyers hired replacements. They then claimed against the insurers, who refused to pay, citing breach of warranty. The buyers then sued the carriers in Libya and obtained a settlement insufficient to cover their loss. The buyers finally sued the sellers for failing to procure an appropriate contract of carriage and appropriate insurance. The sellers joined the freight forwarders as Part 20 defendants.

Mackie QC at first instance held for the buyers against the sellers (and ultimately against the freight forwarders) because (a) the contract of carriage allowed on-deck shipment and the sellers had therefore failed to procure a contract of carriage on the usual terms, (b) the sellers had failed to provide valid insurance, and (c) the freight forwarders had negligently procured the contract of carriage and had given the warranty without checking whether the ambulances were actually shipped under deck.

The sellers and freight forwarders appealed.

Judgment

The contract of carriage

The Court of Appeal found that the carrier had no right to carry cargo on deck without clausing the bills of lading. In reaching this decision, the Court of Appeal was heavily influenced by the default position that if goods are to be shipped on deck, the bills of lading will be claused appropriately. It also concluded that the booking confirmation was an antecedent agreement between the shipper and the carrier overriding the liberty clause in the bills of lading, and that the booking confirmation, though poorly worded, had to mean that, if the cargo were carried on deck, the bills of lading would be claused. Therefore, the sellers had procured a contract of carriage on the usual terms.

In the course of his judgment, Lord Neuberger made various comments on contractual interpretation. First, regardless of how poorly worded a contractual term is, if the term was intended to have contractual effect, the Court will not disregard it. Secondly, the first impression of the meaning of the clause can assist in interpretation, especially in cases (such as those involving bills of lading) where the party receiving the document in question will only look at its terms very briefly, if at all. Thirdly, common sense, commercial purpose, and longstanding trade practice (for example, that bills of lading for deck cargo are usually so claused) will help indicate the correct interpretation.

The warranty that the ambulances were shipped below deck

The sellers were to procure insurance on ICC(C) terms. The insurance procured was on ICC(A) terms but subject to a warranty of under-deck shipment. As the ambulances were shipped on deck, the warranty had been breached from the onset of the voyage and the sellers had therefore failed to procure suitable insurance.

The freight forwarders had failed to check that the ambulances were actually shipped below deck before giving the warranty to insurers. The Court of Appeal held that the freight forwarders should have done so especially since (a) they had not worked with the carrier before, and (b) the terms of the booking note were ambiguous. The freight forwarders’ arguments that they had assumed that the cargo was stowed below deck because the service had been described as “RO-RO” and the bills of lading were not claused accordingly, were rejected.

Further, Thomas LJ emphasised that with regard to giving insurance warranties, freight forwarders are in the same position as insurance brokers. That is, because a breach of warranty has the severe consequence of invalidating the insurance cover, due care/reasonable steps must be taken to check the facts before warranting that they are true. This is so even if, as was the case here, there would have been no on-deck carriage had the contract of carriage had been performed according to its terms.

However, the freight forwarders’ failure to check before providing the warranty and the sellers’ corresponding failure to procure suitable insurance were not causative of the loss suffered by the buyers. This was because INCOTERMS 2000 only obliged the sellers to procure insurance on ICC(C) terms, which did not cover cargo being washed overboard. In other words, even if the insurance procured had been under ICC(C) terms without any warranty, the buyers would not have been able to make recovery from the insurers.

For these reasons, the Court of Appeal allowed the appeal and dismissed the buyer’s claims.

Comment

The Green Island makes it clear that a professional service provider, such as a freight forwarder, giving a warranty to an insurer, should take reasonable care to ascertain the truth of the facts being warranted. Relying on the terms of a contract with a third party and assuming that the third party will not breach that contract may well be insufficient. However, Thomas LJ’s statements should not be taken as imposing any overly onerous duty on parties giving insurance warranties. On the facts of The “Green Island”, the freight forwarders had done absolutely nothing to check. Had the freight forwarders made enquiries with the carriers, who inaccurately represented that the ambulances were shipped below deck, the duty to take due care would probably have been met. In other words, parties in the position of a freight forwarder, would be well advised to make the appropriate enquiries before giving insurance warranties but their duty is only one of reasonable care.

On another note, Lord Neuberger’s comments on contractual interpretation provide a useful and realistic encapsulation of the Court’s approach to contractual interpretation when faced with badly drafted terms.

Finally, The Green Island underscores the importance of proving both the breach and its causative effect. The Court of Appeal had with some regret dismissed the claims against the sellers and the freight forwarders on grounds related to causation. Thomas LJ went so far as to state that had the buyers pursued the line of argument that in the circumstances insurance should have been procured on ICC(A) terms, (because INCOTERMS 2000 state that ICC(C) terms are not suitable for manufactured goods and because the documents showed that the contract price was calculated on the basis of insurance on ICC(A) terms), that “may well have been a good point decisive of the case…” But the buyers had not pursued this issue (and had indeed expressly disclaimed that this was an issue), which meant that witness testimony during the first instance hearing on the point had not been subject to cross-examination. The Court of Appeal accordingly refused to render a decision on this point.