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Hague Rules Package Limitation does not apply to bulk cargoes

The Commercial Court has recently given judgment in a cargo damage claim, holding that the Package Limitation Provisions in Article IV Rule 5 of the…

The “Aqasia”: Vinnlustodin HF and another v Sea Tank Shipping AS (Commercial Court) [2016] EWHC 2514 (Comm) (Sir Jeremy Cooke)

Executive summary

The Commercial Court has recently given judgment in a cargo damage claim, holding that the Package Limitation Provisions in Article IV Rule 5 of the Hague Rules do not apply to the bulk cargo that was in issue in the case. The defendant owner was accordingly unable to limit its liability for the claim. The ruling has resolved an issue on package limitation that has remained undecided for more than 90 years.

Facts

The vessel carried a bulk cargo of fish oil from Iceland to Norway. The cargo was subject to a charter party providing for the carriage of 2,000 tons of fish oil in bulk, 5% more or less in the charterer’s option. The freight for the cargo was payable on a lump sum basis. The bill of lading for the cargo recorded the shipper’s description of the goods as “Icelandic Fishoil in bulk – 2.056.926 kgs”. At the discharge port, about 550,000 kilograms (about 550 metric tons) of the cargo was found to have sustained damage. The claim was brought under the charter party, which incorporated Article IV of the Hague Rules as appended to the Carriage of Goods by Sea Act 1924.  Article IV Rule 5 provides:

“… Neither the carrier nor the ship shall in any event be or become liable for loss or damage to or in connection with goods in an amount exceeding 100 [pounds sterling] per package or unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading …”

The charter party provided for disputes to be subject to English law and arbitration in London. The claimant brought a claim against the owner for damage to the cargo in the sum of US$367,836. The owner accepted liability but argued it was entitled to rely on Article IV Rule 5 to limit its liability to the sum of £54,730.90. This sum was equivalent to £100 per metric ton of the cargo damaged.

Notwithstanding the arbitration agreement, the parties reached an agreement that the Commercial Court should have jurisdiction to determine an agreed preliminary issue as to whether the defendant owner was entitled to limit its liability for the claim.

Decision

The primary issue for the Commercial Court was whether Article IV Rule 5 of the Hague Rules, and in particular the reference to “unit” in the rule, could apply to a bulk cargo.  As a matter of ordinary language, the word “unit” could refer to an individual physical item or object on the one hand, or to a unit of measurement on the other, such as a kilogram, cubic metre or metric tonne.  However, at the time of the original Hague Rules Convention in 1924, the price of bulk cargoes then being shipped was such that limitation would not have been seen as relevant.

The Court reviewed the circumstances in which the inclusion of the word “unit” had been made to Article IV Rule 5 by way of a late drafting amendment the night before the Rules were ratified, and approved the summary of the position by Alsop J in the Australian case of the El Greco [2004] 2 Lloyd’s Rep 537. This was that the late addition of the words “or unit” was to clarify that Article IV Rule 5 could apply to individual articles that were capable of being carried without packaging, such as boilers, cars and the like.

The Court also considered the reference to “customary freight unit” in the parallel limitation provision in the US Carriage of Goods by Sea Act 1936. However, in this case, the freight under the charter party was a lump sum freight, and there was specific United States case law that lump sum freight would simply be one freight unit. This would produce a miniscule limit of liability. 

Following a detailed review of the authorities and various statements of principle in the commentaries and textbooks on the point, the Commercial Court concluded that the word “unit” in Article IV Rule 5 was not apt to apply to bulk cargoes.  Even if it could apply, the only legitimate application would be to interpret “unit” as a “freight unit” which could not be done in the present case because of the lump sum nature of the freight. The Court accordingly held in favour of the cargo claimants that the owner was not entitled to limit its liability for the claim.

Comment

The decision provides welcome certainty on a question that has remained open for a considerable period. That judgment confirms that there is no limit of liability in bulk cargo cases that are subject to the Hague Rules, as there is no “package or unit” to which the limit can apply within the meaning of Article IV Rule 5.

To discuss any of the issues in this update please contact: Terry Donaghy, Consultant at  terry.donaghy@weightmans.com  or call on 0151 242 6528