Goods Lost or damaged

Background

Article IV (5) (a) of the Hague Visby Rules allows a carrier to limit its liability "for any loss or damage to or in connection with the goods".

The limit is calculated by reference to the gross weight of the "goods lost or damaged" at the rate of 2 SDR per kilogram.

The Commercial Court in London has recently considered the meaning of the phrase "goods lost or damaged" in the context of a claim for damage to a bulk cargo of corn where only part of the cargo suffered physical damage.

The facts

A cargo of 43,998.66mt of US corn was carried from Louisiana to Aqaba on the vessel " LIMNOS ". On arrival at Aqaba a small amount of wetting damage was discovered, primarily in holds 2 and 3. The wet damaged cargo (approx. 12mt) was disposed of. A further quantity of approximately 250 mt of cargo in holds 2 and 3 had to be discharged by bulldozers and because of this, the number of broken kernels increased and the cargo was damaged.

As a condition of allowing any discharge of cargo from holds 2 and 3, the local authorities required that the whole cargo should be fumigated and treated with chemicals.

As a result, the cargo had to be moved within silos and this caused a further increase in the number of broken kernels and depreciation in value of the cargo of some US$362,142.

Last but not least, because of the incident, the whole cargo acquired a reputation in the market as a distressed cargo, and its value was therefore, further depreciated by some US$571,842.

The total loss claimed by the cargo owners was approximately US$1.55m, which included additional costs of fumigation and storage ashore.

The sound market value of the 262mt of cargo, which had suffered physical damage, was only US$38,000.

A preliminary issue was referred to the High Court to determine the meaning of the words "the goods lost or damaged" in Article IV Rule 5 (a) of the Hague Visby Rules.

The decision

Mr Justice Burton was unable to find a reported authority on the meaning of the words "goods lost or damaged" in England or in any other jurisdiction. He decided that they referred to two categories of goods being:

-goods that were lost, in the sense of vanished, gone, disappeared, destroyed; and
-goods that were damaged, in the sense of not being lost, but surviving in damaged form.

The Court also decided that the appropriate time to ascertain whether goods are "lost or damaged" is discharge/delivery and not any later.

In the circumstances, it was held that the carrier could limit its liability for the cargo owners' claim to an amount calculated by reference to the physical damage to cargo only.

Comment

• An unfavourable Judgment for insurer claimants.

• Difficult questions remain unanswered where only economic loss has been suffered and potentially also in the case of mitigation costs.

• Although the Court did not express a concluded view on the point, the Judge appears to have accepted that the logical conclusion of the argument on the part of Counsel for the carrier, is that where there is economic loss only, there would be no limit of liability because there have been no goods "lost or damaged".

As the Judge said, for there to be no limit in such a case, could be "an unexpectedly generous approach towards cargo owners".

• As for mitigation costs, if whilst the cargo is still on board the vessel, remedial steps are taken at the expense of the cargo owners in order to minimize loss, with the result that all of the damaged cargo is saved and rendered sound, there would be an economic loss alone and arguably therefore, no limitation under Article IV (5). If the remedial work is not wholly successful and a very small amount of damaged cargo remains (even though the majority has been saved) and even though the same costs had been expended on mitigation, the recoverable claim against the carrier would be limited by reference to the small amount of remaining damaged cargo.

• Limitation will be calculated by reference to the weight of physically damaged cargo at the time of discharge and not the weight of any greater quantity of cargo perhaps "affected" by the mitigation efforts. Could this be a disincentive to cargo owners to expend costs to mitigate loss?

• The position as for economic damage occurring before discharge is not clear. The Judge was not prepared to accept that the " LIMNOS " cargo was economically damaged at the time of discharge. However, this leaves open the possibility that a Court could find that other cargo in different circumstances is economically damaged and that a higher limitation calculation should be made based on the weight of such cargo.

• To take the example of a machine designed to operate as single unit, but shipped in a number of different packages, none of which could separately function on their own (i.e. the whole system is economically and practically useless because of the damage to one of the packages), could it be said that the entire system is "economically damaged" and therefore, that limitation should be calculated by reference to the weight of the entire system and not just the package that suffered physical damage?

This "affected weight" argument is dealt with by Article 22 of the amended Warsaw Convention, but is not mentioned in the Hague or Hague Visby Rules.

Disclaimer – Professional advice is not intended in this article. Case details summarized for general understanding only.