Liability question addressed by court

Court confirms applicable package limit when cargo interests have to pay salvage

By William Chetwood, Ince

Article IV 5(a) of the Hague-Visby Rules (HVR) provides that the carrier shall not "…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".

If only part of the cargo is damaged but all of the cargo is liable to pay salvage, should you calculate the limit on the basis of the weight of the physically damaged cargo, all the cargo or is the carrier's liability unlimited?

In Trafigura Pte Ltd v. TKK Shipping Pte Ltd (Thor Lineage) [2023] EWHC 26 (Comm), the claimant cargo owner loaded zinc calcine onboard the Thorco Lineage which ran aground. Salvors were engaged under LOF terms. A small percentage of the cargo was physically damaged but the whole cargo was subject to the salvors' maritime lien.

The claimant argued that the vessel grounded due to the carrier's breach of the HVR. Consequently, it claimed damages based on the physical damage, on-shipment costs and the sums payable to salvors as "economic damage to cargo". The defendant carrier denied liability but argued that it was in any event entitled to limit any liability by applying the HVR limits to the damaged portion rather than the full cargo. Although the claimant had commenced arbitration, it was agreed that the limitation point would be decided by the Court.

The arguments

The defendant relied on The Limnos [2008] 2 Lloyd's Rep 166, in which the Court had held that cargo which had not suffered physical loss or damage could not be said to be "goods lost or damaged".

The claimant's primary argument was that The Limnos was wrongly decided and that the words "goods lost or damaged" in Art IV 5(a) HVR cover both physical and economic damage. Accordingly, the limit should be based on the weight of the whole salved cargo.

The Court had to determine the correct interpretation of the words "goods lost or damaged" in Art. IV 5(a) HVR. After an exhaustive review of the authorities, it declined to follow the reasoning in The Limnos.

The Court stated that the purpose of HVR is to protect the interests of both the carrier and the shipper by establishing clear and consistent standards for the international carriage of goods by sea. In the Court's view, it cannot have been intended that goods that were economically damaged were outside the limitation regime. Rather, the Court thought that the phrase "goods lost or damaged" means "goods lost or damaged physically or economically". Accordingly, the Court held that the limit had to be calculated by reference to the weight of the entire cargo. The Court went on to find that even if the reasoning in The Limnos was correct, on the facts of this case the entire cargo was damaged because the salvors' lien damaged the claimant's proprietary interest in the whole cargo.

If only part of the cargo is damaged but all of the cargo is liable to pay salvage, should you calculate the limit on the basis of the weight of the physically damaged cargo, all the cargo or is the carrier's liability unlimited?

Comment

The decision was a substantial victory for cargo interests because it meant that the claim was in practice unlimited as the value of the claim was less than the limit calculated on the weight of the full cargo.

However, the decision is not unmitigated bad news for owners. It sets a higher limit of liability where there is a mixture of economic and physical loss, but the Court's reasoning would apply a limit where there is only economic loss, whereas The Limnos indicated that in such cases the claim would be unlimited.

Leave to appeal was denied so the decision stands and there are now two conflicting first instance decisions. It remains to be seen which of the two decisions will be followed in future.

However, the Court's reasoning was more fully set out in this case than in The Limnos. Moreover, the earlier decision has been heavily criticised by some academic writers.

It is submitted that this decision avoids some of the somewhat surprising outcomes that could result in future cases. For example, it is interesting to compare what the results would be if two identical bulk cargoes on identical ships were subject to salvage, and on one vessel a single ton of cargo is physically damaged and on the other none. If The Limnos is followed, any claim by cargo on the first ship would be limited to 2 SDRs per kilo of the physical damage (less than US$3,000 at the time of writing) but on the other ship there would be no limit at all. On the reasoning in this case, if the cargo weights were the same, so would the limits be.

This article was written by William Chetwood, a partner at Ince in London, with the assistance of trainee, Eleni Achnioti. They can be contacted on +44 (0)20 7481 0010.