Limitation under the Hague-Visby Rules where there is physical damage and economic loss to the cargo

In this recent decision the English High Court considered the ability of a shipowner to limit its liability where there has been both physical damage and economic loss to cargo.

In this case, although there had been a major casualty during the voyage and significant costs incurred by cargo owners including contribution towards salvage, there was relatively minor physical damage to the cargo. The shipowners sought to limit their liability under the Hague-Visby Rules to an amount calculated by reference only to the small amount of cargo that had suffered physical damage. If correct, the resulting limit of liability – and thus the amount recoverable by cargo interests – would have been very low. Cargo interests argued that the limit was to be calculated by reference to all of the cargo in this instance, which would not limit the amount of loss recoverable.

Cargo owners shipped a cargo of bulk zinc calcine onboard the Thorco Lineage for carriage from Baltimore to Hobart. While en route to Australia the vessel lost power following an engine failure. It then grounded on an atoll in French Polynesia and suffered extensive damage. The vessel was re-floated and towed under a Lloyd’s Open Form to South Korea for repairs. Most of the cargo (9,253 mt) was not lost or physically damaged but a small portion (764 mt) suffered physical damage. Eventually, the undamaged cargo was shipped to the intended port of discharge on another vessel. Cargo owners were required to make a significant contribution towards the salvage costs pursuant to the terms of the bill of lading and a lien over the cargo exercised by salvors. Although the cargo actually damaged was only worth $27,800, cargo owners had incurred other significant economic losses, in particular:

  1. A liability to pay the salvors USD$7 million.
  2. On-shipment costs of USD $700,000 in respect of the undamaged cargo.
  3. Costs of USD $58,000 for disposal of the damaged cargo.

Cargo owners have sought to recover these losses from shipowners although the substantive merits of the recovery claim are yet to be determined. The issue before the English High Court for determination in this case was limited to the extent to which the shipowner was entitled to rely on the limitation provisions of the Hague-Visby Rules.

Article IV Rule 5 (Rule 5) provides as follows (emphasis added):

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 666.67 units of account per package or unit or 2 units of account per kilogramme of gross weight of the goods lost or damaged, whichever is the higher.

Shipowners argued that the limitation is to be calculated by reference only to that portion of the goods lost or physically damaged. The cargo owners argued that all cargo that is either physically damaged or economically damaged (i.e. even if it did not suffer physical damage) should be used as the basis of the calculation.

Shipowners relied on a 2008 Court decision in The Limnoss. That case concluded that the words of Rule 5 should be read as applying the limitation only to the “goods [physically] lost or damaged”, and not to “economically” damaged goods. A number of commentators have criticised the Limnos decision as not reflecting a correct interpretation of the Rules.

The Judge in this present case reviewed all the authorities, the preparatory papers in relation to the interpretation of the Hague-Visby Rules, and concluded that there was no particular precedent for how the words of Rule 5 should be interpreted. The Judge referred to the language of Rule 5 itself as being the most “authoritative” guide to the intention of the delegates to the drafting of the Rules. The Judge’s view was that the object and purpose of Rule 5 was to provide a maximum limit of liability in the minority of cases where the value of the goods was exceptional and that for the great majority of cases the limitation would not apply at all because the value of losses would not exceed it.

The Judge then observed that if “economic” loss was taken out of the formula for arriving at the limitation, then potentially there was no ability for shipowners to limit their liability for economic losses at all. The Judge considered that it cannot have been the intention to create a two-tier system where liability was limited for physical damage but not economic loss. Where goods are carried by sea they may, as a result of fault by the carrier, be damaged physically or economically. The Judge sought to give pragmatic effect to the words “goods lost or damaged” and not to frustrate the aim of Rule 5, which was to limit the carrier’s liability for “loss or damage to or in connection with the goods”.

The Judge concluded that if the phrase “goods lost or damaged” includes cargo that is lost or damaged physically or economically then the aim of Rule 5 is achieved. The Judge also observed that such a meaning is the ordinary meaning of “goods lost or damaged” used elsewhere in contracts for the carriage of goods by sea.

The decision clarifies that claims for pure economic loss, such as diminution in market value and quasi-physical losses, such as those arising from the imposition of a lien for salvage or General Average, are limited under Rule 5 whether or not there is conventional physical damage. However, the limit will be based on the full weight of the cargo to which the losses relate.

Applying his interpretation to the facts of this case, the Judge found that shipowners’ limit of liability was to be calculated by reference to the whole of the cargo, because the whole of the cargo had been the subject of loss or damage (physical damage to a small portion of the cargo and economic loss in respect of the remainder by virtue of required contributions to salvage). This represented a significant outcome for the cargo owners because the weight of the entire cargo was such that the limitation figure exceeded the total sum claimed in any event.

This is good news for cargo interests as it means the weight (or number of packages) of all cargo affected by the loss will form the basis for shipowners’ calculation of limitation (not simply the physically damaged cargo). The silver lining for shipowners is that even in cases where there is no physical damage, the Rule 5 limitation provisions can be applied to their liability for economic losses.

If you would like to know more about the issues discussed in this article, please contact Andrew Colgan or Matthew Flynn.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.