July 12, 2018

“BALTIC STRAIT” – Who is Entitled to Sue for “Full Damages” in Respect of Cargo Damage?

It is not unusual for a seller of goods to raise a credit note to their buyer, in respect of goods that are received in a damaged condition, as a result of the failure by a carrier to properly and carefully carry the goods. However, in this situation, it is often the buyer/receiver who has contractual title to sue under the bill of lading, by virtue of being the lawful holder of this document, pursuant to the operation of s.2 (1) of The Carriage of Goods by Sea Act 1992 ("COGSA 1992"). It is likely, however, that the buyer/receiver has not suffered any loss, because it has been reimbursed by the seller.

The implications this may have for title to sue in cargo recovery claims were recently considered by the English High Court in the case of Sevylor Shipping and Trading Corp v Altfadul Company for Foods, Fruits & Livestock & Another [2018] EWHC 629 (Comm) (“The BALTIC STRAIT").

The judgment considers issues relating to which party or parties are entitled to sue the carrier for the full extent of the loss arising from damage to a cargo, and the application of s.2(1) and s.2(4) of COGSA 1992. This case was an appeal to the Court from an arbitration award, in respect of a claim for loss and/or damage to a cargo of bananas ("the Cargo").

The seller/shipper, Co.Ma.Co ("CoMaCo"), sold the Cargo to Altfadul, who was the purchaser and receiver of the Cargo, and the lawful holder of the bill of lading. CoMaCo had also chartered the vessel, pursuant to a charterparty with the shipowners who were also the bill of lading contractual carrier.

On discharge, the cargo had deteriorated in condition and, as a result, had diminished in value in the amount of approx. US$4,500,000 ("the Full Damages"). CoMaCo agreed to give credit in the sum of approx. US$2,500,000, spread over the next three shipments, by way of a settlement under the sale contract (although not expressly stated, this was likely done to reflect the insurance proceeds that CoMaCo had received from the cargo insurers who were unable to pay Altfadul).

Altfadul commenced arbitration proceedings against the carrier claiming the Full Damages.

The shipowners contended that Altfadul's claim against them must be reduced accordingly, as the loss they suffered had been reduced by US$2,500,000. However, the Tribunal awarded the Full Damages to Altfadul (in fact the real claimant, acting as the assignee of Altfadul's rights, was SIAT, the subrogated cargo underwriters, but this is not relevant for the present article) on the basis they were entitled to bring an action for loss suffered by any other party interested in the Cargo, in this instance CoMaCo, pursuant to section 2(4) of COGSA 1992.

COGSA 1992 states, inter alia, as follows:

2. Rights under shipping documents

(1) Subject to the following provisions of this section, a person who becomes-

(a) the lawful holder of a bill of lading;

(b) the person who (without being an original party to the contract of carriage) is the person to whom delivery of the goods to which a sea waybill relates is to be made by the carrier in accordance with that contract; or

(c) the person to whom delivery of the goods to which a ship’s delivery order relates is to be made in accordance with the undertaking contained in the order,

shall (by virtue of becoming the holder of the bill or, as the case may be, the person to whom delivery is to be made) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.

(4) Where, in the case of any documents to which this Act applies-

(a) a person with any interest or right in or in relation to goods to which the document relates sustains loss or damage in consequence of a breach of the contract of carriage; but

(b) subsection (1) above operates in relation to that document so that rights of suit in respect of that breach are vested in another person,

the other person shall be entitled to exercise those rights for the benefit of the person who sustained the loss or damage to the same extent as they could have been exercised if they had been vested in the person for whose benefit they are exercised.“

Leave to appeal from the Arbitration Award was granted to the carrier on the following two questions of law:

  • Does s.2(4) of COGSA 1992 operate at all where rights of suit under the bill of lading contract have not previously been vested in the party which has suffered loss, or does it only operate where rights of suit were previously vested in that party, but it has lost them by virtue of the operation of s.2(1) of COGSA 1992; and,

  • Where the charterers of a vessel suffer loss and damage but no longer pursue a claim against the carrier under the charterparty, can the lawful holder of the bill of lading claim for the charterers’ loss under the bill of lading contract, by virtue of s.2(4) of COGSA 1992, or can the lawful holder of the bill of lading only claim under that provision for losses suffered by a party who does not have rights of suit against the carrier under any other relevant contract of carriage?

It was argued that the carrier's appeal should fail, in any event, on the basis that Altfadul, as owner of the Cargo, was entitled under English Common Law to claim for the Full Damages on the basis of the case R&W Paul Ltd v National Steamship Co Ltd (1937) 59 Ll L Rep 28. This gave rise to a third question of law, which was dealt with first, in the judgment, as follows:

Whether on the facts found in the award, Altfadul (and therefore SIAT) was entitled under English common law to recover the Full Damages irrespective of any recovery or entitlement to recover from its seller, CoMaCo.

The appeal was dismissed and the Judge held that, assuming title to sue in contract, a carrier is liable to Full Damages if sued by the receiver, who, by reason of the carrier's breach, receives damaged rather than sound goods (on the basis that the receiver is the owner of the damaged goods) or, if sued by a claimant who did not receive the damaged goods, but who owned them at the time when they were damaged. In the case of a seller who is a charterer, such title to sue under contract can only be under the charterparty.

On this basis, the Judge found that Altfadul was entitled to recover the Full Damages regardless of the partial credit provided by CoMaCo, and that an amount of the recovery equal to that credit would be held on trust for CoMaCo.

The Judge went on, however, to provide some useful guidance as to the operation of sections 2(1) and 2(4) of COGSA 1992.

In his obiter comments, the Judge held that under sections 2(1) and 2(4) of COGSA 1992:

  • A lawful holder and transferee of a bill of lading may bring a claim for loss suffered by any other party interested in the cargo carried, pursuant to that bill of lading (save for the exception in point c below), regardless of whether the party that suffers the loss has previously had rights under the contract of carriage contained in, or evidenced by, the bill of lading (e.g. a claim can be brought on behalf of an intended future holder of the bill of lading or other receiver of the cargo);

  • Section 2(4) of COGSA 1992 will operate where there has been a transfer of a bill of lading for the purposes of section 2(1) even where the transferor has another contract of carriage with the bill of lading carrier (e.g. a charterer where the disponent owner is the bill of lading carrier); and

  • Save in limited circumstances, a lawful holder is not permitted to bring a claim for loss suffered by a party who has another contract of carriage, e.g. a charterparty, with the bill of lading carrier. This is because, in the hands of a charterer, a bill of lading is a mere receipt for the goods. Section 2(4)(a) of COGSA 1992 requires the loss to arise out of a breach of the contract of carriage contained in, or evidenced by, the bill of lading, in order to operate, which would not be the case if the claim was brought by a charterer.

Comment

This decision is a helpful clarification in relation to the operation of section 2(1) and section 2(4) of COGSA 1992 and the common law rules in relation to which parties may bring a claim for the full loss suffered as a result of damage to cargo.

Effectively, a claimant can base their claim either on the basis of COGSA 1992 or on the basis of the common law rules.

Section 2(4) of COGSA 1992 will permit a lawful holder of a bill of lading to bring a claim against a bill of lading carrier, in respect of loss suffered by any party interested in the cargo, so long as there has been a section 2(1) transfer. The only exception to this rule is that a claim based on section 2(4) will not succeed where the party who has suffered the loss is a party to another contract of carriage with the bill of lading carrier (e.g. a charterparty). This party’s claim must be pursued in its own name, under the separate contract of carriage. 

The above exception may be circumvented under the common law, which will permit a lawful holder of a bill of lading, who is also the receiver and owner of the goods (the latter two elements not being necessary in a section 2(4) claim), to pursue a claim for loss suffered by any party in the sale contract chain. This will include losses suffered by a party who has a separate contract of carriage with the bill of lading carrier.

For the above reasons, the manner in which the claim is framed will be important and cargo interests should be careful to keep all recovery routes open, which may include seeking time extensions under charterparties, in addition to bills of lading.