December 5, 2018

UK Supreme Court clarifies burden of proof in cargo damage cases under the Hague Rules

The UK Supreme Court has clarified the nature of the burden of proof upon carriers of goods by sea who seek to rely upon the inherent vice exception under Article IV.2 of the Hague Rules, in a successful appeal by cargo interests represented by Andrew Nicholas and his team at Clyde & Co LLP.

Volcafe Ltd and others v Compania Sud Americana de Vapores SA [2018] UKSC 61 – reversing the decision of the Court of Appeal - confirms the relevance of bailment as a common law concept to the burden of proof in modern cases involving contracts for the carriage of goods by sea under the Hague Rules.

Lord Sumption, with whom the other Justices unanimously agreed, held that the carrier has the legal burden of proving that he took due care to protect the goods from damage, including due care to protect the cargo from damage arising from its inherent characteristics. As a result, in order to rely on the inherent vice exception under article IV.2(m) of the Hague Rules, the carrier must first disprove negligence by establishing that he took reasonable care to protect the cargo in relation to the anticipated contractual voyage. 

Background to the case:

Between January and April 2012, nine consignments of bagged coffee beans were carried in 20 unventilated containers from Buenaventura, Colombia to Northern Germany.  The bills of lading issued by the carrier incorporated the Hague Rules and recorded the carrier’s receipt of the cargo in good order and condition.  The bills were issued on LCL/FCL terms, meaning that the carrier was contractually responsible for preparing and stuffing the containers for the voyage.

Coffee beans are a hygroscopic cargo, i.e. the cargo absorbs, stores, and emits moisture.  During carriage of such cargoes from warm climates to cooler climates in unventilated containers, condensation inevitably forms on the walls and roof of the containers.  Therefore, it is necessary to line the roof and walls of the containers with an absorbent material – such as Kraft paper used in this case - to protect the cargo from water damage. 

Upon delivery, it was discovered that the cargo in 18 of the 20 containers had suffered wet damage as a result of the condensation which had formed inside the containers dripping onto the bagged coffee beans.  

Cargo interests brought claims against CSAV as carrier for the loss and damage to cargo, arguing under the common law of bailment that the carriers had failed to re-deliver the cargoes in the same good order and condition recorded on the face of the bills of lading, in breach of the carrier’s duties as bailee. Alternatively, it was argued that the carrier had negligently breached its obligation under article III.2 of the Hague Rules to "properly and carefully load, handle, stow, carry, keep, care for and discharge" the cargoes.  This negligence primarily concerned the carrier's failure to adequately prepare the containers in its use of the Kraft paper.

The carrier argued that the sole cause of the damage was inherent vice on the basis that the coffee beans were unable to withstand the ordinary levels of condensation forming in containers during the voyage.  Cargo interests argued in reply that any inherent characteristic of the cargo which resulted in damage, did so only because of the carrier’s negligent failure to adequately dress the containers to protect the cargoes.

The High Court

The trial judge in this case, Mr Justice Donaldson QC, found for the cargo claimants, see: [2015] EWHC 516 (Comm).  He determined that the damage to the cargo created a justifiable inference of breach of Article III.2 and the onus was then on the carrier to prove that the lining of the containers with the Kraft paper for the subject shipments constituted a sound system to prevent damage from condensation.

The trial judge found that there was no evidence of any generally accepted industry practice to which the carrier could claim to have conformed in relation to a sound system for prevention of damage.  The trial judge also found that there was no clear evidence of the number of layers of Kraft paper in place during the shipments – photos being inconclusive - and there was no evidence of the weight of the paper other than that it was more than 80 gsm.   On this basis, the judge held that the carrier had failed to discharge the burden to prove there was a sound system for the prevention of damage.

The Court of Appeal

The Court of Appeal reversed the decision of the first instance court, see: [2016] EWCA Civ 1103.  Mr Justice Flaux took a different view of the application of the burden of proof.  He considered that the legal burden of proof was on the carrier to prove that one of the exception circumstances listed in Article IV.2 existed at the relevant time, after which the cargo owner had the legal burden of proving the carrier's negligence in those circumstances, i.e. that the relevant excepted peril only resulted in damage to the cargo because of the carrier's failure to take reasonable care of the cargo.

Contrary to the trial judge's findings of fact, the Court of Appeal found that there was an accepted industry practice in 2012 for lining unventilated containers for the carriage of bagged coffee, which was said to involve using two layers of paper of at least 80 gsm or one layer of at least 125 gsm.  The Court of Appeal decided on examination of the photographs and of the pre-loading documentation that two layers of paper had been used.  The Court of Appeal therefore considered that it followed from the trial judge's findings that the paper used weighed at least 80 gsm and that the containers had been lined in accordance with accepted industry practice, ruling in favour of the carrier on the basis that cargo interests had not established any negligence on the part of the carrier.

Decision of the UK Supreme Court:

The Supreme Court unanimously ruled that the carrier bore the burden of disproving negligence under both Article III.2 and Article IV.2 of the Hague Rules.  Having failed to discharge this burden of proving the exercise of reasonable care for the cargo in respect of the preparation of the containers, the carrier was liable to the cargo claimants for the loss and damage sustained.

The issue of burden of proof arose at two stages.  First, it arose in respect of Article III.2, where it was necessary for the Supreme Court to determine whether the burden of proof lies on the cargo owner to prove breach of Article III.2, or whether the burden of proof rests with the carrier to prove compliance with Article III.2 once damage to the cargo has been determined.

Second, the issue of burden of proof arose in relation to the exceptions to a carrier's liability under Article IV.2.  Whilst the carrier accepted that they must prove the facts which bring the case within an exception in Article IV.2, the carrier argued that once he had done so, the onus was on the cargo owner to prove that the negligence of the carrier caused the excepted peril (in this case, inherent vice) to operate on the cargo.

Their Lordships first considered the position in the common law of bailment. Whilst the subject bills of lading incorporated the Hague Rules, the Supreme Court viewed the common law of bailment a vital feature of the background against which the Hague Rules were drafted; and the common law authorities decided before the Hague Rules came into force remain influential.  Their Lordships stressed that the delivery of goods for carriage by sea is a bailment for reward on terms of the bill of lading and nothing in the Hague Rules alters the status of a contract of carriage by sea as a species of bailment for reward on terms.  

The rule on burden of proof in English law is that in circumstances where goods are redelivered in damaged condition, the onus is on the bailee to show that the damage was not due to the absence of reasonable care on its part.  The Court held that this legal burden to disprove negligence is an important principle because the bailee is in possession of the goods and is therefore likely to be the only person in a position to account for the circumstances which resulted in the damage.

Article III.2 The Supreme Court highlighted that the common law obligation of a bailee to take reasonable care has always been treated as consistent with a rule imposing on the bailee the burden of disproving negligence.  The Court held that the imposition of a corresponding duty of care on the carrier under Article III.2 of the Hague Rules also imposes a similar burden of disproving negligence.  The Court held that, on the basis that Article III.2 is expressly subject to Article IV (under which it is well-established that the carrier bears the burden of proving facts which bring the carrier within an Article IV exception), it would be incoherent for the law to impose the burden of proving the same fact on the carrier for the purpose of Article IV but on the cargo owner for the purpose of Article III.2.  The Supreme Court agreed with the cargo claimants that the Hague Rules must therefore logically impose on the carrier the obligation of disproving negligence in respect of the damage to the goods sustained during the carriage.

Article IV.2(m): Inherent vice CSAV argued that once it had been proved that the cargo suffered from inherent vice, it was for the cargo owner to prove that it was only because of the carrier's negligence that those inherent characteristics of the cargo resulted in damage, citing the Court of Appeal decision in The 'Glendarroch'[1894] P 226.  The Supreme Court deemed that The 'Glendarroch' should no longer be regarded as good law as the source of a general rule governing the burden of proof and, importantly, deemed it out of place in the context of the Hague Rules.

The Court highlighted that cargo does not suffer from inherent vice in the abstract, but only in relation to some assumed knowledge and diligence on the part of the carrier.  The Court cited The 'Albacora' [1966] SC(HL) 19 when stating that the operation of the inherent vice exception must depend on the circumstances of the carriage envisaged by the contract.  Their Lordships determined that if the carrier could and should have taken precautions to prevent damage from being caused by some foreseeable inherent characteristic of the cargo on the contractual voyage – such as the hygroscopic nature of a cargo of coffee beans – then that characteristic is not inherent vice. The Supreme Court held that the carrier must first have positively proved that it took reasonable care of the cargo and that the damage occurred regardless.

As to the facts of the case, the Supreme Court noted that for a cargo of coffee beans in an unventilated container, for a voyage from Colombia to Germany, this reasonable care obligation on the carrier must necessarily include the taking of adequate steps to address the inevitable formation of condensation on the inside of the container upon transportation from the warmer climate of the South American port of loading to the cooler destinations of Northern Europe.  The Supreme Court endorsed the decision of the Court at first instance by noting that bagged coffee was commonly carried in unventilated containers from warm climates to cooler ones without damage and that the cargo in this case was not out of the ordinary in character.  It followed that with reasonable care the cargo was perfectly capable of withstanding the risks reasonably to be expected during unventilated carriage.

The Supreme Court stressed the importance of the notion that a trial judge's findings of fact should not be overturned simply because the Court of Appeal would have found them differently.  In this case the Court of Appeal had done so unjustifiably. 

Given the absence of evidence concerning the weight of the paper employed, the Supreme Court held that the carrier had failed to prove that the containers were properly dressed for the contractual voyage.  As a result, CSAV had failed to disprove negligence, thereby preventing them from being able to rely on an exception contained in article IV.2.  The Supreme Court found in favour of the cargo claimants and restored the decision of the trial judge.

Comment

This Supreme Court ruling provides an important clarification of the law for parties involved in cargo disputes where the Hague Rules regime governs the relationship between the parties. For similar disputes concerning the dressing of containers, its effect may be limited to cases where it is carriers who are contractually responsible for preparing and stuffing the containers, rather than shippers.  However, the clarification found in this ruling should be a welcome development for cargo insurers and P&I Clubs alike, in its pursuit of certainty in Hague Rules cases, with cargo interests likely to be placed in the more advantageous position going forward. It reflects both common sense and the commercial realities of the carriage of goods by sea that the legal burden of proof should be placed on carriers to have to account for the circumstances of cargo damage when they are the best-placed and often only party in a position to account for - and prevent - what happens during the carriage.