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Partial & Total Loss – Uninsured Cargo Interests

Jagan - April 25, 2018 - 3 comments

Our earlier article, Salvage & General Average – Uninsured Cargo Interests, did not touch either on Partial or Total losses. Given that some of the uninsured cargoes may either be a Partial or a Total Loss, we are writing this article to focus on these losses.

  1. As mentioned in our earlier article (Salvage & General Average – Uninsured Cargo Interests), average adjusters Richards Hogg Lindley have listed in their casualty website the list of containers in hold 1-3 which are believed to be a Total Loss due to the fire/heat damage. In addition, we believe that come containers in other holds would also have been affected by the heat/fire such that they would either be a Total or a Partial lossi.
  2. Some of the cargo in other holds may have been affected by heat or smoke during the fire extinguishing operations conducted in the adjoining holds. In principle, this should fall under General Average. However, as the General Average will be adjusted on the basis of York Antwerp Rules 1994ii, and in particular Rule III, which deals with Extinguishing Fire on Shipboard, these losses will not fall under General Average but instead have to be borne by the cargo interests themselves as Particular Average Lossiii. If the General Average is adjusted without the use of the York Antwerp Rules, then cargo damaged by smoke or heat caused by operations to extinguish the fire may be entitled to contributions under the General Averageiv.
  3. Partial and Total Losses are borne by the various interests by themselves in the first instance. In order to protect such losses, cargo interests cover such risks by insurance. However, as this article is focusing on uninsured cargo interests, there would be no possibility of seeking any recovery from cargo insurers. The question would therefore be is whether the uninsured cargo interests are entitled to recover their losses from the carriers given that the loss occurred whilst under their care and custody. In this regard, carriers invariably contract on terms and conditions which incorporate either the Hague or the Hague Visby Rules either by force of law or through incorporation into the contract by way of a clause paramount. In the case of Maersk Honam, the vessel called at China, S Korea and Singapore prior to the incident. We understand that both China and South Korea have not ratified either the Hague or the Hague Visby Rules, but have incorporated the elements of the Hague Visby Rules in the Chinese Maritime Code 1992 and the Korean Commercial Code. Singapore is a signatory of the Hague Visby Rules and which is incorporated in the Singapore Carriage of Goods by Sea Act. Accordingly, we consider the application of the Hague Visby Rules to govern the contract carriage (Both the Maersk and MSC Bills of Lading also provide for the contractual incorporation of The Hague Rules provided there are no compulsorily applicable rules).
  4. Art IV(2)(b) of the Hague and Hague Visby Rules entitle a carrier to exclude any liability for “Fire, unless caused by the actual fault or privity of the carrier” provided the carrier had fulfilled its obligations as provided in Art III(1)(a)vThe Carrier shall be bound before and at the beginning of the voyage to exercise due diligence to make the ship seaworthy”. If the carrier is not entitled to exclude liability, they could still limit liability as provided in Art IV(5)(a)vi of the Hague Visby Rules to a sum of SDR 666.67 per package or SDR 2 kg whichever is higher. Limitation could however be denied if the carrier was proved to be reckless as provided in Art IV(5)(e)vii of the Hague Visby Rules. Art III(6)viii provides for a one year time bar and therefore all cargo claims against the carrier would be time barred if a court action is not initiated within this period. Art VIIIix also allows a carrier to any provisions available under law in relation to the Shipowners Limitation of Liability.
  5. A carrier would be entitled to defend any cargo claims initiated against it on the basis that they fulfilled their obligations as provided in Art III(1) and therefore entitled to exclude liability as provided in Art IV(2)(a-q). In the case of Maersk Honam, it is too early to comment on the cause of fire and whether it was caused by any mis-declaration by cargo interests who may have loaded dangerous cargo instead of general cargo. If it is ascertained that the cause of the loss in any casualty is due to mis-declaration by the cargo interests, given that there have been similar incidents in the past, carriers should have been in caution and instituted operating procedures to weed out such cargox. At the very least, the carriers should have knowledge of their customers and the cargoes that they deal with it to try and restrict such risks (commonly known as Know Your Customer or KYC)xi. We submit that failure to have such processes may be considered as breach of the obligation to “make the ship seaworthy at the beginning of the voyage” such that the carriers would lose their entitlement to exclude liability as provided under Art IV(2)(b).
  6. Limitation of Liability:
    1. If the carrier is denied their right to exclude liability, they may still be entitled to limit liability as provided in Art IV(5)(a) of the Hague Visby Rules (SDR 2 per Kg or SDR 666.67 per package). While cargo interests could certainly try to deny the carrier’s right, given the wordings of the Hague Visby Rules, it is submitted that it would be very difficult to deny this right to limit liability (requires claimant to prove reckless conduct of the carrier). In this regard, the Hague Rules are certainly more favorable to the cargo interests and who are entitled to limit liability as of rightxii.
    2. As mentioned in 4 above, Article VIII of the Hague Visby Rules entitles a Carrier to limit liability as may be available under the Limitation Conventions (International Convention relating to the Limitation of the Liability of Owners of Sea-Going Ships, 1975or the Convention on Limitation of Liability for Maritime Claims, 1976 – commonly known as the 1957 Convention or 1976 Convention respectively). The reason why a carrier would wish to consider the 1957 or 1976 Limitation Conventions is because it would allow them to cap their exposure for all of their claims arising from the incident (barring a few exceptions), and which is calculated on the basis of the Gross Tonnage of the vessel. The main differences between the 1957 and 1976 Convention for cargo interests is mainly on the limitation amounts together with the opportunity to deny this right to Carriers. While the 1976 Convention does provide for a higher limitation amount, it would be very difficult for cargo interests to deny this entitlement given that the standard required is higher as provided in Art IVxiii. We understand that the Maersk Honam is presently off Jebel Ali (U.A.E.). We have conducted a web search and understand that while the United Arab Emirates have ratified the 1976 Convention, U.A.E. courts appear to be reluctant to uphold limitation and are known to put a heavy burden on the party seeking limitation. However, it does not bar Maersk Honam from setting up a limitation fund in other jurisdictions.
    3. There may be many contractual carriers involved in a voyage and the issue would be whether each of them would be entitled to the benefits provided under the Shipowners limitation convention.The 1957 convention is restrictively worded such that only Owners of the vessel are entitled to limit liability. In the case of the 1976 convention, shipowner is defined as “owner, charterer, manager …”. Accordingly, if the other contractual carriers were acting as slot-charterers, they would also be entitled to limit liability as was decided in The “MSC NAPOLIxiv.
  7. Fire Statue Defence: As mentioned in 4 above, Art VIII of the Hague Visby Rules also entitles the carrier to any defences available under statue. In this regard, some jurisdictions permit ships registered in their jurisdictions to defend claims from property interests in respect to firexv. The fire statue defence offers the carrier more protection than the fire exception provided in the Hague Visby Rules (there is no requirement for the carrier to prove that they exercised “due diligence to make the vessel seaworthy” as is required under Art III(1) of the Hague Visby Rules). However the entitlement to exclude liability could be denied if it falls foul of the fire statue such as …the loss or damage resulted from any such personal act or omission of the carrier. In this regard, we understand that the Maersk Honam is registered in Singapore and would therefore be entitled to the defences available under the Singapore Merchant Shipping Act 1995.
  8. Actions to be taken for recovery: The uninsured cargo interests should consider pursuing carriers to recover their losses. In this regard, they should consider the following:
    1. Negotiate a settlement with the carriers on best terms and if this is not possible, consider initiating action at the competent jurisdictionxvi for recovery.
    2. Security: Cargo interests should demand security from the carrier. Failure to provide security may entitle claimants, in certain jurisdictions subject to certain requirements, to arrestxvii a vessel owned by the carrier. The advantage of this course of action, if available, is that cargo interests would not only be provided security to secure their claim but that they may also be able to found jurisdiction at the location where the arrest is accomplished.
    3. Time Bar: Cargo claims will be time barred as provided in Art III(6)xviii of the Hague Visby Rules. Cargo claimants must therefore seek an extension of time from the carriers and if not provided, initiate action in the competent jurisdiction to interrupt the counting of time.
  9. Conclusion: An uninsured cargo interest should consider as to whether they are entitled to pursue the carrier for recovery and in which case, they must
    1. Protect time so as to avoid the claim becoming time barred.
    2. If entitled, seek security from the carrier and which will also aid in negotiating the claim.
    3. Negotiate the claim on best terms keeping in view the chances of recovery (considering the defences available to the carrier as listed in 2-5 above) keeping in mind the costs of pursuit. If a negotiated settlement is not possible, consider engaging recovery agents / lawyers to pursue the carrier (which will depend on the quantum of loss and the costs of pursuit and whether it makes commercial sense to pursue).
    4. Consider risk management processes to deal with future such incidents by way of risk transfer i.e. Insurance has been suggested in our earlier article, Salvage & General Average – Uninsured Cargo Interests.

i. S 56(1) of the English Marine Insurance Act 1906 deals with Total and Partial loss and states “A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss”.

ii. Damage done to a ship and cargo, or either of them, by water or otherwise, including damage by beaching or scuttling a burning ship, in extinguishing a fire on board the ship, shall be made good as general average, except that no compensation shall be made for damage by smoke however caused or by heat of the fire.

iii. Particular Average Loss is defined in S 64(1) of the Marine Insurance Act 1906 and which states “A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and which is not a general average loss”.

iv. See Starlight Trading Inc v S S San Francisco Maru (1974) A.M.C. 1523 (S.D.N.Y.)

vThe Carrier shall be bound before and at the beginning of the voyage to exercise due diligence to make the ship seaworthy.

vi. Unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the goods in an amount exceeding the equivalent of 666.67 units of account per package or unit or units of account per kilo of gross weight of the goods lost or damaged, whichever is the higher.

viiNeither the carrier nor the ship shall be entitled to the benefit of the limitation of liability provided for in this paragraph if it is proved that the damage resulted from an act or omission of the carrier done with intent to cause damage, or recklessly and with knowledge that damage would probably result.

viiiUnless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, or, if the loss or damage be not apparent, within three days, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading.
The notice in writing need not be given if the state of the goods has, at the time of their receipt, been the subject of joint survey or inspection.
Subject to paragraph 6bis the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery or of the date when they should have been delivered. This period, may however, be extended if the parties so agree after the cause of action has arisen.

In the case of any actual or apprehended loss or damage the carrier and the receiver shall give all reasonable facilities to each other for inspecting and tallying the goods.

ixThe provisions of these Rules shall not affect the rights and obligations of the carrier under any statute for the time being in force relating to the limitation of the liability of owners of sea-going vessels.

xPlease see an article “Fighting Fire with facts” by TT Club’s risk management director Peregrine Storrs-Fox published in Lloyd’s List where he calls for greater diligence in the handling of hazardous materials which are generally the cause of such casualties.

xi. The Standard Club published a loss prevention bulletin on “Better Box Booking” and which deals with various related issues including measures to avoid such mis-declaration. Gard has also published an article “Tackling cargo misdeclaration – a first line of defence against container fires”. We would recommend every container operator to consider the suggestions made in both the bulletin and article to avoid any mishaps by the carriage of mis declared cargo.

xii. The English Court of Appeal in Kapitan Petko Voivoda [2003] EWCA Civ had ruled that owners and charterers are entitled to rely upon the Hague Rules limitation notwithstanding the unauthorised deck carriage.

xiii. …personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result.

xivMetvale Limited v Mosanto International SARL[2008] EWHC 3002 (Admlty).

xvS186(1) of the UK Merchant Shipping Act 1995, S135(1) of the Singapore Merchant Shipping Act 1995.

xviBoth the Hague and Hague Visby Rules do not have any provisions on the where the claims should be heard. Accordingly, jurisdiction would be decided either by the lex fori (the law of the country in which an action is brought) or lex loci contractus (law of the place where the contract is made). The Hamburg Rules and The Rotterdam Rules have provisions related to jurisdiction where the claim can be dealt with.

xvii. Section 3 of the Singapore High Court (Admiralty Jurisdiction) Act [HC(AJ)A] sets out a closed list of claims for which the Singapore Court may exercise its Admiralty Jurisdiction to arrest a vessel. The list is similar to S20(2) of the UK Supreme Court Act 1981.

xviii. the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery or of the date when they should have been delivered. This period, may however, be extended if the parties so agree after the cause of action has arisen.


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