View source for Trafigura v TKK Shipping - The Thorco Lineage

DMC/SandT/23/05

'''England'''

'''Trafigura Pte Ltd v TKK Shipping Pte Ltd (The “Thorco Lineage”)'''

'''English Commercial Court: Sir Nigel Teare: [2023] EWHC 26 (Comm): 12 January 2023'''

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2023/26.html

John Russell KC and Benjamin Coffer (instructed by Stephenson Harwood LLP) for Trafigura (Cargo Interests)

Nevil Phillips and Peter Stevenson (instructed by MFB Solicitors) for TKK Shipping (Contractual Carriers)

'''BILL OF LADING: VESSEL GROUNDED DUE TO LOSS OF POWER LEADING TO SALVAGE OF VESSEL AND CARGO: SALVORS EXERCISED A MARITIME LIEN ON CARGO: CARGO INTERESTS OBLIGED TO PUT UP SECURITY TO OBTAIN CARGO: CARGO INTERESTS ALSO INCURRED EXPENSE TO ON-SHIP CARGO TO INTENDED PORT OF DISCHARGE: WHETHER ARTICLE IV(5)(A) OF THE HAGUE-VISBY RULES REGARDING FINANCIAL LIMITS OF LIABILITY OF CONTRACTUAL CARRIERS BASED UPON THE WEIGHT OF THE “GOODS LOST OR DAMAGED” INCLUDED ALSO GOODS THAT WERE ECONOMICALLY DAMAGED, NOT JUST THOSE PHYSICALLY LOST OR DAMAGED BY THE CASUALTY: DETERMINATION OF A POINT OF LAW UNDER SECTION 45 OF THE ARBITRATION ACT 1996'''

'''Summary'''

On an application for the determination of a preliminary point of law under section 45 of the Arbitration Act 1996, which was based on the assumption that the maritime casualty in this case came about by reason of a breach of the contract of carriage by the Contractual Carriers, the High Court held that goods that were economically damaged, through incurring a maritime lien for salvage, and on-shipment costs to the intended discharge port, were within “goods lost or damaged” in Article IV r.(5)(a) of the Hague-Visby Rules.  The result was that the Contractual Carriers’ liability was limited by reference to the weight of the whole cargo, not the lesser weight of the cargo that was physically lost or damaged.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes

'''Background'''

Pursuant to a bill of lading, the Contractual Carriers shipped 10,287.07 WMT of bulk zinc calcine on their vessel, “Thorco Lineage”, for carriage from Baltimore, USA to Hobart, Australia.  The bill of lading incorporated a charterparty which provided for English law and London arbitration to apply to any dispute.

Whilst en route to the discharging port, the vessel lost power following an engine failure.  The vessel later grounded on Raroia Atoll in French Polynesia.  This caused extensive damage to the vessel and salvage services were required.

After salvage services were engaged, the vessel was refloated and taken to Papeete, French Polynisia for inspection and temporary repairs.  Thereafter, the vessel was towed to Gwangyang, South Korea for permanent repairs.

The Salvors had a maritime lien over the vessel and the cargo, which led to the Cargo Interests having to put up security of USD8m for the cargo to be released, for transhipment to the intended port of discharge on another vessel.

In the result, 9,523 WMT of cargo was not lost or physically damaged and 764.07 WMT was lost or physically damaged.  The Cargo Interests commenced arbitration and sought an indemnity or, alternatively, damages for loss, damage and expense in respect of the cargo.

For the purposes of the application, it was assumed that the casualty was caused by a breach of the contract of carriage by the Contractual Carriers and resulted in the following loss and damage claimed:

(i) Liability to pay the Salvors USD7,355,000.

(ii) Physical loss and/or damage to the cargo USD278,658.31.

(iii) On-shipment costs in respect of the cargo (some of which was physically damaged and some of which was not) USD723,831.85.

(iv) Costs incurred in arranging for the salvage sale and/or disposal of some of the physically damaged cargo USD58,934.74.

The Hague-Visby Rules had the force of law in relation to the bill of lading and contract of carriage, with Article IV r.5(a) thereof providing that:

“Unless the nature and 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 become liable for any loss or damage to or in connection with the goods in an amount exceeding the equivalent of 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 the higher.”

The preliminary point of law for the High Court to determine under section 45 of the Arbitration Act 1996, in respect of the Cargo Interests’ liability for salvage and the on-shipment costs, was:

“Whether on the agreed and assumed facts, the Defendant is entitled to limit its liability, and if so, in what amount in respect of each head to loss?”

'''Judgment'''

Having addressed the background to the dispute, the parties’ rival submissions, the relevant parts of the Hague-Visby Rules, and the correct approach to the construction of an international convention, the Judge commenced his analysis and determination of the preliminary point of law raised.

Discussion

The Judge noted that he had to ascertain “the ordinary meaning of the words used, not only in their context but also in light of the evident object and purpose of the convention”.  The essence of the dispute, as identified by the Judge, was whether the words “goods lost or damaged” referred and referred only to physically lost or damaged goods.

The Judge was minded to accept the Cargo Interests’ submission, that “goods lost or damaged” included goods which were economically damaged, because to require the presence of physical damage to define or quantify the limit of liability would not properly reflect the intention of the delegates to the convention to confer a right on shipowners to limit their liability for loss or damage “in connection with the goods”.

However, before doing so, the Judge first had to have regard to the travaux préparatoires (the text of the preparatory works) to the Hague-Visby Rules, the relevant authorities, in particular the judgment of Buxton J in The “Limnos” (fn.1), and the textbooks and commentaries on the topic.

Travaux Préparatoires

The judge noted that the travaux préparatoires were of no assistance because the particular issue, the ordinary meaning of “goods lost or damaged”, had not been addressed. 

Authorities

Having considered three authorities cited by the parties, from which he was able to find little or no assistance, the Judge turned to consider The “Limnos” in detail.

In that case a cargo of US corn had suffered a small amount of wet damage of between 7-12 MT, which was segregated and disposed of, with an additional 250 MT suffering damage (broken kernels) as a result of the need to use bulldozers to discharge the cargo.  As a condition of allowing any discharge, the local authority also required the whole cargo to be fumigated and treated with chemicals.

As a result of moving the cargo within silos ashore to enable the required fumigation and treatment, the damage to the kernels increased.  That led to the whole cargo acquiring the reputation of being a distressed cargo and its sound market value was depressed by USD13 per MT.  In addition, a range of other expenses and liabilities were incurred by the cargo owners in relation to the fumigation, segregation and silo storage of the cargo.  All those losses were claimed on the basis that they had either been caused by the contractual carrier’s breach of the contract of carriage or had been incurred in reasonable mitigation of the loss which would otherwise have been incurred, namely the loss of the whole cargo.

The contractual carrier’s case was that the limit of its liability was to be based on the kilogrammes of the goods physically damaged.  The cargo owner’s case was that the limit was to be based per kilogramme on the weight of the whole cargo, which would have more than covered the sum claimed.  Burton J found in favour of the contractual carrier.

The Judge noted that the doctrine of precedent did not require him to follow the decision of Burton J, despite that decision having stood for almost 14 years, if on his own analysis, he was satisfied that Burton J’s decision was wrong.

The Judge accepted that Burton J had been correct when he identified that the physically undamaged goods had been “affected”, that there had been a “depression in respect of their price” and that the goods had been “depreciated”.  Those words explained what had happened to the whole of the cargo as a result of a casualty at sea.  But the Judge felt that Burton J had been wrong in his conclusion.

However, the question was whether that form of economic loss enabled one to say that the whole cargo had been “damaged”.  The Judge was of the view that it could, having regard to the particular context of carriage of goods by sea.  As such, with great respect, the Judge differed from Burton J on this aspect.

The Judge was also unable to agree with Burton J’s holding that in the phrase “loss or damage to or in connection with the goods” the goods in question were the goods that had suffered physical loss or damage.  On the facts of that case, the depreciation in value of the whole cargo caused by the cargo having acquired a reputation as a distressed cargo was in connection with the cargo, which had suffered physical damage.  In particular, the economical loss was consequential on the physical damage.

Accordingly, the Judge held that “the goods” must refer to the goods that were the subject of the contract of carriage.  If loss or damage occurred in connection with those goods, then the shipowners’ liability was within the class of claims that were subject to the limit.  Delayed delivery was an example of loss or damage in connection with the goods where there was no physical damage.

Lastly, the Judge did not agree with Burton J’s treatment of the anomalies that arose on restricting the meaning to physical loss and damage.  The result of Burton J’s construction of Article IV r.5(a) was that claims for economic loss caused by delay were not subject to a limit.  In circumstances where the early part of that Article purported to apply a limit to such claims, that was an anomaly that was inconsistent with the aim or object of Article IV r.5(a), which was to provide a limit to such claims.  To construe the words “goods lost or damaged” consistent with that intention would not rewrite the compromise reached by the contracting states, but would rather give effect to that compromise.

The same analysis applied to the financial costs of taking steps to mitigate loss and damage.  They were another example of economic loss or damage in connection with the goods, the shipowner’s liability for which was intended to be limited.  If the steps to mitigate were wholly successful so that there was no physical loss or damage then, on Burton J’s approach, there would be no limit to a claim for the mitigation costs.  That would be an anomaly, given the intention to limit such liability.  Such an anomaly could be avoided by construing “goods lost or damaged” so as to give effect to that intention.

Consequently, the anomalies were so striking that, in the Judge’s judgment, they caused one to doubt the construction of Article IV r.5(a) that gave rise to them.  In so far as it mattered, the types of economic loss suffered in the present case, liability to pay salvage and on-shipment costs, were, in the Judge’s experience, very common.  On that basis, the Judge was persuaded that the decision of Burton J in The “Limnos” was wrong and that he should not follow it.

Textbooks and Commentaries

The Judge noted that the textbooks and commentaries indicated the decision in The “Limnos” was not altogether satisfactory and somewhat anomalous and did not provide him with any ready solution.  As such, the Judge had to decide the case on the basis of the arguments that had been addressed to him.

Conclusion

In view of the above construction of Article IV r.5 (a), the liability of the Defendant Contractual Carriers in respect of the Claimant Cargo Interests’ liability to the Salvors was limited to 2 SDRs per kilogramme of the whole cargo.  Likewise, the liability of the Defendant in respect of the on-shipment costs incurred by the Claimant was limited to 2 SDRs per kilogramme of the whole cargo.

'''Comment'''

This judgment helpfully closes a 14 year old peculiarity that arose from Buxton J having accepted in The “Limnos” a number of anomalies that arose if “goods lost or damaged” in Article IV, Rule 5(a) were construed as referring only to goods physically lost or damaged, despite it not being uncommon for a breach of the contract of carriage to give rise to economic loss or damage.

It is to be hoped that, in due course, this judgment will be followed and affirmed, and in the meantime, that it will receive a more positive treatment in practitioner textbooks and commentaries.  For now, this is an end to the matter, the Judge having refused leave to allow the Defendant to appeal to the Court of Appeal.


Footnote 1: Serena Navigation Ltd v Dera Commercial Establishment [2008] EWHC 1036 (Comm), [2008] 2 Lloyd’s Rep. 166