Inherent Vice: Who proves what and how?

Volcafe Ltd v Compania Sud Americana de Vapores SA (“CSAV”) [2016] EWCA Civ 1103.

It’s indeed a good day for carriers as the CA has now restored the balance between carriers’ and cargo owners’ interests by reversing the controversial first instance judgement in Volcafe Ltd  v CSAV [2015] EWHC 516 (Comm).

This case arose out of condensate damage to nine consignments of coffee, which were carried in unventilated containers from Buanaventura in Colombia to destinations in North Germany. The High Court (Mr David Donaldson) rendered a judgement in favour of the cargo owners on the basis that, although the cargo damage was attributed to inherent vice of the goods carried, the carrier had not disproved his negligence. The carrier had failed to establish that he had adopted a sound system as underpinned by a theoretical calculation or empirical study.

The CA (Lady Justice Gloster, Lady Justice King and Mr Justice Flaux, sitting in the Court of Appeal) allowed the carrier’s appeal in respect of his defences of inherent vice.

Flaux J, who delivered the leading judgement, ruled that that once the carrier had established the inherent vice exception, the burden of proof shifted to the cargo owners to show that there had been negligence on the part of the carrier. He further held that such an approach is consistent with the weight of the authorities, which have applied the principles enunciated in The Glendarroch, even where the contract of carriage is governed by the Hague Rules, as well as with the principle that “he who alleges must prove”. In addition, he found that the adopted approach is supported by the wording of the “catch all exception” which is the only excepted peril that expressly requires the carrier to disprove his negligence before relying on this exception.

In addition, Flaux J rejected trial judge’s analysis of ‘complete circularity’ between Hague Rules, art. III, r.2 and art. IV, r. 2(m) because this approach deprives the exception in paragraph (m) of its force and that it has been long recognised as an excepted peril. Furthermore, he rejected trial judge’s approach to a “sound system” and in particular his requirement for a scientific calculation or empirical study. He held that such an interpretation imposes a standard beyond what the law requires. He also reiterated the well-established position that one of the indicia of a sound system is that it is in accordance with general industry practice.

The CA decision in Volcafe is welcome not only because it strikes a fair balance between carriers’ and cargo owners’ competing interests but also because it promotes the uniform application of the Hague and in turn the Hague-Visby Rules. In particular, the CA decision brings English case law in line with authorities in the United States and New Zealand who have held that, in case of inherent vice or other excepted perils (excluding the q defence), it is the shipper who bears the burden of showing that the damage resulted from negligence or fault caused by the carrier (See for example, Quaker Oats Co. v. M/V TORVANGER, 734 F.2d 238, 1984 AMC 2943 (5th Cir. 1984), U.S. v. Ocean Bulk Ships, Inc. 248 F.3d 331 (5th Cir. 2001), Terman Foods, Inc.v. Omega Lines 707 F.2d 1225 (11th Cir. 1983) and Shaw Savill & Albion Company Ltd v Powley & Co [1949] N.Z.L.R. 668).

As a final remark, one should not underestimate the impact of Volcafe on the approach to the burden of proof in all of the defences (except from the “catchall exception”) enumerated in Hague and Hague-Visby Rules, art. IV, r.2. Flaux J found the wording of the “catchall exception” as supporting the analysis that, in the case of all other exceptions, the carrier’s reliance on any excepted peril is not dependent upon the carrier disproving his negligence.

Piggy back jurisdiction under CMR? The Supreme Court answers ‘No’

Where jurisdiction is established over the first road carrier under the CMR, can proceedings against successive carriers be brought in that forum? In British American Tobacco Switzerland S.A. and Others v Exel Europe Ltd [2013] EWCA Civ 1319, [2014] 1 Lloyd’s Rep. 503, the Court of Appeal said ‘yes’. The Supreme Court has now reversed the decision, [2015] UKSC 65.

The cargo owner entered into a CMR contract of carriage with a carrier, based in England, and agreed exclusive English jurisdiction for disputes arising out of the contract of carriage. The claims arose out of thefts of cigarettes from two cargo containers while in the custody of Dutch sub-contractors, the first in Belgium, the second near Copenhagen. The cargo sued the first carrier and the two Dutch sub-carriers. An advantage of suing in England would be that recovery of customs duty is allowed in full under art. 23(4) CMR by the English courts.

Although it was entitled to bring proceedings in England against the first carrier, this was not the case as regards the successive carriers who did not fall within any of the grounds of jurisdiction in art. 31 of CMR. What about art. 34 which has the effect of joining a successive carrier to the contract of carriage on the terms of the consignment note? The jurisdiction clause did not appear in the consignment note and it would be contrary to principle to hold a party to a choice of court clause of which he had no express notice. Then there is art. 36, under which joint and several liability is imposed on the first, the last, and the guilty carrier. However, this was not to be interpreted to include an additional head of jurisdiction allowing for a defendant domiciled in one member state to be sued in the courts of the place where a co-defendant was domiciled. The 2001 Brussels Judgments Regulation did not provide any other basis for jurisdiction over the two sub-contractors or otherwise act as an aid to the interpretation of the CMR.

Lord Clarke and Lord Sumption both considered that the commercial logic of articles 34 and 36 points towards the recognition of a jurisdiction to receive claims against all three carriers in one set of proceedings. However, they agreed with Lord Mance that the language of the CMR clearly provides otherwise. The only way for a cargo owner to ensure that its claims against all the carriers that are potentially liable under art. 34 is to ensure that the jurisdiction clause in the head contract is expressly referred to in the consignment note.

Demurrage is not just for ships – and cannot last for ever.

Demurrage is a provision for liquidated damages for breach of the charterer’s obligation to load or discharge the vessel within the agreed laytime. Demurrage provisions are also to be found in carriage contracts in respect of detention of containers supplied by the carrier. In MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2015] EWHC 283 (Comm), we have the first case considering container demurrage, which is of general interest in its treatment of the carrier’s right to keep a repudiated contract alive and continue claiming demurrage.

In the summer of 2011 the carrier made several contracts with the shipper to carry containers of raw cotton by sea from Middle East ports to Chittagong in Bangladesh. However, the goods were never collected and the containers still remain in a yard in the port at Chittagong and the customs authorities have at all material times refused to allow the containers to be released.

The carrier claimed demurrage from the shipper pursuant to cl.14.8 of the bill of lading which provided for a period of free time for the use of containers and providing that the responsibility of the “Merchant”, defined as including the shipper, was “to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery”. Demurrage on a daily basis was to be payable by the Merchant thereafter in accordance with the carrier’s tariff. As at 1 January 2015 the total demurrage claimed, from the expiry of free time in 2011, exceeded US$1m.

Leggatt J held that the shipper was liable to pay demurrage under cl. 14 (8) and that there was no scope for reducing the amount payable for this breach on the grounds that the carrier had not taken reasonable steps to mitigate its loss. A liquidated damages clause made proof of the claimant’s actual loss unnecessary and irrelevant.

However, demurrage would not run forever. On 27 September 2011 the shipper had committed a repudiatory breach of the contracts of carriage by sending an email to the carrier in which it indicated that there was no realistic prospect of it being to arrange for any of the containers being collected. The question now arose as to whether the carrier should accept the repudiation and sue for damages or whether it could keep the contract alive.

Following a repudiation, the innocent contracting party may decide to keep the contract alive, unless it has no legitimate interest in doing so which will be the case when: (a) damages are an adequate remedy and; (b) maintaining the contract would be “wholly unreasonable”. Here, the carrier had no legitimate interest in maintaining the contract of carriage. It was restricted to a claim for damages, which would be subject to the mitigation principle. If the containers were in its possession it could mitigate by unpacking them. If, as was the case here, the containers were not in its possession, it could mitigate by buying replacements. Had cl. 14 (8) purported to give the carrier an unfettered right to ignore the shipper’s repudiation and carry on claiming demurrage indefinitely, the clause would have been treated as penal and would be unenforceable.

Temporal scope of Hague Rules

Volcafe v CSAV [2015] EWHC 516 (Comm); [2015] 1 Lloyd’s Rep 639.

Loading of a cargo of coffee inland by the carrier into its containers has been held to fall within the temporal scope of the Hague Rules. This may seem somewhat surprising in the light of Article 1 (e) of the Rules which provides: “(e) “Carriage of goods” covers the period from the time when the goods are loaded on to the time they are discharged from the ship.” However, David Donaldson QC in the London Mercantile Court has held that the initial loading into the carrier’s containers and the subsequent loading of the container onto the vessel were to be regarded as part of a single loading process. Even if this were not the case, the parties had exercised their freedom to agree what constituted loading under art 1. (e) which they had done by providing that the carrier would stuff the cargo into its own containers.

Simon Baughen