The “THORCO LINEAGE” - Clarification of limitation under Art IV r.5(a) of The Hague-Visby Rules in respect of economic loss

The judgment of the English High Court in Trafigura PTE Ltd v TKK Shipping PTE Ltd (the “THORCO LINEAGE”) EWHC 26 (Comm) [2023], handed down on 13 January 2023, clarifies an important point of law relating to the application of Article IV Rule 5(a) of the Hague-Visby Rules to claims for economic loss (such as diminution in cargo value due to loss of market or where the cargo is subject to a lien in respect of liability for salvage remuneration).

This point has arisen previously in the “LIMNOS” [2008] 2 Lloyd’s Rep 166, in which it was held that a carrier’s liability for economic loss is limited under Article IV r.5 of the Hague-Visby Rules by reference to the weight of only the cargo that has been physically damaged. If no cargo is physically lost or damaged, a claim for economic loss would be unlimited.

The decision in the “LIMNOS” led to a number of anomalies, one of which is demonstrated on the facts of the “THORCO LINEAGE”, namely if a small amount of cargo is physically damaged, a much larger claim (for example for an indemnity in respect of sums paid for salvage in respect of the whole cargo) would be severely limited. On the other hand, if there was no physical damage to the cargo, the same salvage indemnity claim would not be limited at all.

In his judgment in the “THORCO LINEAGE”, Sir Nigel Teare declined to follow the decision of Mr Justice Burton in the “LIMNOS” (described by some commentators as “controversial”) and instead held that the Article IV r.5(a) of the Hague-Visby Rules limitation is to be calculated by reference to the weight of cargo physically and/or economically damaged.

Background

A cargo of 10,287.07 metric tons of zinc calcine was loaded on board the “THORCO LINEAGE” pursuant to a bill of lading issued in Geneva for carriage from the United States to Australia. During the voyage the vessel grounded due to a main engine failure and had to be re-floated by salvors and a small part of the cargo, 764 metric tons, was physically damaged during the re-floating efforts. As a result, the cargo owner incurred a liability to pay salvage remuneration. 

The cargo owners argued that the grounding was caused by the failure of the carrier to exercise due diligence to make the vessel seaworthy and claimed against the carrier the sum of USD7.355 million in respect of their contribution to the salvage costs, USD278,000 in relation to the physically damaged cargo and approx. USD800,000 in respect of on-shipment and cargo disposal costs.

In its defence, the carrier argued that its liability should be limited in accordance with Article IV Rule 5(a) of the Hague-Visby Rules, calculated by reference to the weight of the small quantity of cargo that was physically damaged (following the decision in the “LIMNOS”). If correct, this would have limited the carrier’s liability to approx. USD2 million compared to the more than USD8 million that was being claimed.

Article IV Rule 5(a) of the Hague-Visby Rules limits a carrier’s liability for “loss or damage to or in connection with the goods” to the higher of 667.67 units of account per package or 2 units of account per kilogram of gross weight of the “goods lost or damaged” (a unit of account is a Special Drawing Right, currently equivalent to USD 1.35).

The cargo owner Claimant argued that the damage in the expression “goods lost or damaged” referred to both physical and economic damage. They argued that, since the payments to salvors and the on-shipment costs were incurred in respect of the entire cargo, the carrier’s limitation of liability should be calculated by reference to the weight of the entire cargo, not just the weight of physically damaged cargo. If correct, the cargo owner’s claim would not be subject to any limitation.

Although this dispute arose during arbitration proceedings, both sides agreed that the point of law should be determined by the Court as a preliminary issue based on agreed facts.

The Previous Position

The previous leading authority on this point of law was Serena Navigation Ltd and another v Dera Commercial Establishment and another (the “Limnos”) [2008] EWHC 1036 (Comm), in which Burton J held that “goods lost or damaged” solely referred to physically damaged cargo, regardless of whether economic damage was also suffered. Somewhat bizarrely, this meant that if there was no physical damage to a cargo, a claim for economic loss would be unlimited, whereas if there was physical damage to a small amount of cargo, the same claim could be heavily limited.

The Decision

The Judge acknowledged that when construing an international convention, such as the Hague-Visby Rules, the Court must apply broad principles of interpretation which are generally accepted, rather than the rules of construction particular to English law.  To further this aim, the Court may have reference to transcripts of the delegates' discussions appointed to draft the Hague and Hague-Visby Rules (“the travaux préparatoires”). In citing this approach the Judge made reference to a number of important court judgments in recent cases handled by Clyde & Co relating to interpretation of articles of the Hague and Hague-Visby Rules.

It was noted that in the travaux préparatoires, there was a clear intention that Article IV r.5(a) was to limit “economic losses which arise in connection with the goods but without physical damage”. In that case, to construe the words “goods lost or damaged” in Article IV r.5 as requiring the presence of physical damage to quantify the limitation would not accurately reflect the intention behind the Rules.

Where the cargo owner has incurred and paid a significant liability to salvors, the cargo has diminished in value at the port of discharge to the extent of the additional expense that has been incurred, despite the fact the cargo was in sound condition on arrival. The Judge acknowledged that the sound cargo is therefore as much the victim of the casualty as it is where physical damage is caused and that the ordinary meaning of “lost or damaged goods” in Article IV r.5(a) of the Hague-Visby Rules can include goods that have been economically damaged.

The effect of this judgment is that claims for pure economic loss (such as diminution in value or a salvage indemnity) are limited under Article IV r.5, regardless of whether there is any physical damage to cargo. However, the limit will be calculated by reference to the weight of the entire cargo, which in this case meant that the claim was unlimited by the terms of Article IV. Rule 5.

Commentary

The 2008 “LIMNOS” decision has been described by academic commentators as “altogether unsatisfactory”, so it is perhaps not surprising that the point of law has been considered again by the Court and that the Court has chosen not to follow the earlier decision.

The decision in the “THORCO LINEAGE” makes commercial sense and should generally be welcome news for cargo owners and their insurers, on the basis that it will prevent claims for economic loss being severely limited where only a small amount of cargo is physically damaged. That said, there will no doubt be instances where carriers will be able to rely on this decision to argue that claims only involving economic loss will now be limited based on the cargo’s weight, whereas similar claims were previously unlimited.

This judgment is not subject to appeal and the Judge’s detailed analysis of Article IV r.5(a) of the Hague-Visby Rules, the travaux préparatoires, the textbook commentaries and the “LIMNOS” decision itself, will make the “THORCO LINEAGE” the preferred decision to be followed by courts and arbitration tribunals in future cases.