When cargo goes awry

Giving with one hand and taking away with the other. To some observers in the maritime industry, not least marine underwriters, this is perhaps increasingly the summation of parties' undertakings in contracts of carriage.

One view is that important obligations are rendered meaningless, where wide exemptions and limitations can afford a prospective "get out" for the performing party faced with large liability claims. Pleasant reading perhaps for marine operators' liability insurers, though less so for those insurers with high-value - yet ultimately valueless - subrogated recovery claims.

The recent Admiralty Court decision in A Turtle [2007] EWCA 794 provides a stark illustration of this trend. The dispute concerned the ill-fated tow of a semi-submersible drilling platform from Brazil to Singapore. The tug ran out of fuel in the South Atlantic and the tow was released and washed up ashore a total loss at Tristan da Cuhna.

Culpa, mea culpa

The tug owners were sued in the admiralty court for a breach of their obligations under the well-known Towcon form. In particular, the rig owners alleged that the tug owners breached part II clause 13, in that there was a failure to exercise due diligence to render the tug in a seaworthy condition and ready for the voyage: the owners should have known the vessel had insufficient fuel to reach Cape Town.

That the admiralty court agreed there was a clear breach and that the tug was not seaworthy indicated that liability would follow. This is not what transpired, however, because the court decided that clause 18 of Towcon nonetheless provided a clear exemption in relation to damage to the tow owner's property as part of the overall contractual knock-for-knock scheme, which was understood commercially. As such, despite the flagrant contractual failing, there was no liability.

As the case illustrates, there is often an uneasy tension between what appear to be fundamental contractual obligations of the performing party in which the customer - often a vessel charterer - and its insurers will find security against exemption clauses that seem to offer licence to excuse that performance.

The legal seascape has therefore changed since the landmark decision in the 1960s in Suisse Atlantique [1967] 1 AC 361, from which the "fundamental breach" doctrine developed. It was then understood that certain contractual terms were so critical that total breaches of them could never be excused.

The modern approach is dictated by freedom of contract; the seriousness of a breach is no longer the yardstick. The validity or otherwise of exclusion or limitation clauses is defined purely by the construction of each discrete contract. Further, in the context of sea carriage, UCTA 1977 will often not be applicable.

In The Irbenskiy Proliv [2004] EWHC 2924, fresh frozen chicken was loaded on board a vessel in Brazil, though defrosted poultry was then discharged in Japan. Faced with substantial claims, the carrier admitted that the refrigeration failed but relied upon the bill of lading terms - the document used as proof that the goods have been loaded onto the ship - to excuse it from liability for loss or damage "however caused ... including arising out of unseaworthiness, unfitness of vessel, errors or negligence ... or otherwise howsoever".

Cargo interests cried foul. That could not be right, in their opinion, because it relieved the carrier from liability for its most basic and primary obligation: to carry and deliver the goods in the condition loaded. The court disagreed. Although exclusion clauses were to be construed strictly, parties were free among themselves to apportion risk.

Further, the clause did not ignore the object of the contract - it would not apply in certain extreme circumstances, such as where the carrier was dishonest, deliberately jettisoned cargo or wrongfully misdelivered. The clause was not obviously repugnant to the whole contract and could be given a restricted meaning.

Significantly for insurers, the court commented that a clause exempting liability for damage to goods was "not inconsistent with the purpose of a commercial contract of carriage, where the bearer of a risk had insured against it".

Another sea carriage case, The Kapitan Petko Voivoda [2003] EWCA 451, bore similar hallmarks. In serious breach of the contract of carriage, machinery was carried on deck rather than under it. In heavy weather, the cargo broke free of its lashings and was lost overboard. While stowage on deck was a flagrant breach of carriage instructions, the carrier pointed to the limitation of liability in article IV rule 5 of the Hague Rules - tantamount to a total exclusion - which referred to the right to limit "in any event". Notwithstanding this being about as serious a breach as they come, the court - as in the similar case of The Happy Ranger [2002] 2 Lloyd's Rep 357 - held that the words "in any event" had to be given their natural meaning: the limitation was therefore perfectly valid despite its denying a right of recovery.

Blame worthy?

This modern English law approach is not inflexible, however, because the particular contract and circumstances will always differ. MSC v Trafigura Beheer BV [2007] EWCA 794 saw a different result: 18 containers of copper were shipped from South Africa to Shanghai and, after their discharge into a warehouse, the carrier then wrongfully misdelivered the cargo to a fraudster company that had generated false bills of lading for presentation. A significant damages claim followed.

The carrier sought protection from the bill of lading terms that exempted the carrier from liability to cargo owners after goods had been discharged - the typical Hague Visby Rules position. On the face of it, the cargo owner's claim should therefore have failed, however, the commercial court decided that such an obligation to deliver against a genuine bill of lading was of such fundamental importance that the exclusion was only to have limited application.

The current judicial approach therefore leaves marine insurers in a position that ignorance of the terms by which their assureds contract may lead to expensive consequences. When it comes down to assessing risk, knowledge - as ever - is power.

- Mike Burns is a partner in the marine and transit department at Weightmans.