The Court of Appeal has confirmed that package limitation under the Hague Rules does not apply to bulk cargo.

By
Rania Tadros and Monika Humphreys-Davies, Ince & Co,

 

The Court of Appeal has recently unanimously upheld the Commercial Court decision handed down at the end of 2016, confirming that package limitation under the Hague Rules does not apply to bulk cargo. This decision provides further clarity in the long-standing debate as to whether “unit” in Article IV Rule 5 of the Hague Rules refers to a physical item of cargo or a shipping unit, or is a reference to a unit of measurement used to denominate or quantify the cargo in the contract of carriage and is thus capable of applying to bulk cargo.

Background explored

The charterparty for the carriage of fish oil in bulk on board MT Aqasia (the “Vessel”) between the Disponent Owner (the “Owner”) and the Charterer incorporated, among other things, the privileges and rights and immunities as contained in Sections 2 and 5 of the Carriage of Goods by Sea Act 1924 and Article IV of the Hague Rules.

The Court of Appeal confirmed that in the context of the Hague Rules, “unit” refers to a physical item of cargo and not to a unit of measurement Photo: Adam Cohn/flickr/CC BY-NC-ND 2.0

When the Vessel arrived at the discharge port, approximately a quarter of the cargo was found damaged. The Charterer brought a claim against the Owner under the charterparty in order to recover its losses of US$367,836.

The Owner accepted liability in principle, but sought to limit its liability to £54,730.90 under Article IV Rule 5 of the Hague Rules, which provides as follows: “Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with goods in an amount exceeding 100.l 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.”

It should always be remembered that this is merely the default position

In the Commercial Court, the Charterer contended that the Owner was not entitled to limit its liability under Article IV rule 5 because that provision does not apply to bulk cargoes. A bulk cargo could not form a “unit” or “package” pursuant to Article IV Rule 5. It was common ground that “package” could not apply to bulk cargoes, but it was unclear whether “unit” could do so.

The Owner argued that, on its true construction, the charterparty demonstrated a clear intention of the parties to apply limitation under the Hague Rules to bulk cargoes because that was the only type of cargo subject to this contract of carriage.

The Commercial Court was asked to rule on the limitation question as a preliminary issue and concluded that a “unit” does not apply to bulk cargoes. The Commercial Court held that “unit” in this context meant a physical unit for shipment and not a unit of measurement. Among other factors that the Commercial Court took into consideration was that “package” and “unit” were used together and in the same context in Article IV Rule 5, suggesting that they both meant physical item or items, rather than a unit of measurement.

At the Court of Appeal

The Owner appealed to the Court of Appeal on essentially two grounds. Firstly, that the judge erred in concluding that the limitation of liability in Article IV rule 5 of the Hague Rules did not apply to bulk cargo. Secondly, that the Commercial Court failed to give effect to the intention of the parties to the charterparty that the Owner should be entitled to limit its liability in respect of bulk cargo.

The Charterer submitted, among other things, that the judge’s analysis of the meaning of “unit” was entirely correct and that the Owner’s alternative argument was misconceived, as there was no basis for concluding that Article IV rule 5 had a different meaning under the charterparty than in the Hague Rules themselves.

The Court of Appeal confirmed that in the context of the Hague Rules, “unit” refers to a physical item of cargo and not to a unit of measurement. In his reasoning, Lord Justice Flaux stated that the word “package” clearly refers to a physical item and as the words are used together in the same context, that points strongly to both words being concerned with the physical items rather than units of measurement. Further reference was also made to other provisions of the Hague Rules, which again point towards the conclusion that the word “unit” is concerned with physical items, rather than measurements.

The Court also considered the travaux preparatoires, authorities from the UK and other countries and commentaries. The Court concluded its analysis by stating that all of the sources referred to, supported the conclusion that it is clear that the word “unit” means a physical item of cargo or shipping unit and neither a unit of measurement nor a freight unit.

Agreeing with the Commercial Court, the Court of Appeal also rejected the notion that the United States Carriage of Goods by Sea Act 1936 and the Hague-Visby Rules can assist with determining the meaning of “unit” under the Hague Rules, simply because the wording used in these two instruments differs from the wording used in the Hague Rules.

The Court also dismissed the Owner’s second argument and found that, on the proper construction of the charterparty, the Owner is able to rely on the protection afforded by Article IV and no more than that.

Accordingly, the Court concluded that the Owner did not have the protection of the limit of liability in Article IV rule 5 under the charterparty.

Regardless of the fact that it affirms what seems to have been a widely held view, whether this decision is well received by the industry depends on whether you look at it from the position of a shipowner or a cargo interest. In any event, decisions which provide certainty and clarity are always welcome. It should always be remembered that this is merely the default position and that there is nothing preventing shipowners from amending the charterparty to incorporate a deeming provision giving the word “unit” a different meaning or extending the ambit of any limitation of liability clause.

Rania Tadros and Monika Humphreys-Davies are Managing Partner and Associate respectively at Ince & Co, an international commercial law firm. To contact Ms Tadros, call +971 4 307 6000 or email rania.tadros@incelaw.com. To contact Ms Humphreys-Davies, call +971 4 307 6000 or email monika.humphreys-davies@incelaw.com.