Think Recoveries: Limitation in cargo recovery claims

In any cargo recovery claim, it is always important to consider the amount that will be recoverable at the outset, as the recoverable amount can be diminished significantly if there is a limitation provision in the contract of carriage or the applicable convention or rule limits the responsible carrier's liability.

Generally, a responsible carrier will be entitled to limit their liability based on either the weight of the lost or damaged cargo (weight limitation) or the number of packages of cargo that were lost or damaged (package limitation).

Sea Carriage

The Hague-Visby Rules are most commonly applicable in sea carriage claims.  They provide a limitation regime based on both weight and package limitation, namely 2 SDRs (special drawing rights) per kilogramme or 666.67 SDRs per package, whichever is greater.

The U.K. has repealed the Hague Rules, the predecessor to the Hague-Visby Rules, but many countries remain signatories.  It is also common for the Hague Rules to be incorporated into Charterparties and bills of lading by express contractual agreement between the parties.

The Hague Rules provide a package limitation of £100 per package (see Article IV, Rule 5). However, this must be read in conjunction with Article IX, which provides that the £100 limit is to be the gold value.

In the case of the "ROSA S", the English Courts held that the gold value is to be taken from the Coinage Act 1870. Package limitation should, therefore, be calculated on the basis of that specific day’s gold value in $ per troy ounce x 23.5416. The gold value currently equates to around USD30,000 per package and is, therefore, substantially higher than £100 per package, which is why it is important to give early consideration as to whether the Hague Rules apply.

The Hamburg Rules, whilst not adopted by the U.K., may apply where a cargo claim arises where the country of loading or discharge is a contracting party to these rules. Pursuant to Article (6)(1)(a) of the Hamburg Rules, a carrier may be entitled to limit their liability to 835 SDRs, or 2.5 SDRs per kilogramme, which can result in a 25% uplift on the limitation of liability provided for in the Hague-Visby Rules. Interestingly, where the Hague-Visby Rules only apply to contracts of carriage by sea, the Hamburg Rules will extend to a period of storage at the port of loading and any equivalent period at the discharge port, prior to delivery.

Road carriage

It is very common, when shipping cargo by road, for there to be a freight forwarder and multiple carriers in the contractual chain. Before considering on what basis a cargo recovery may be limited, it is important to establish the role of each of the carriers in the contractual chain.

In the international carriage of goods by road, if a party has acted as a carrier, the Convention on the Contract for the International Carriage of Goods by Road (CMR Convention) may apply. If a party contracted as a freight forwarder, as an agent, then it is likely that there will be other contractual terms which will require consideration, such as British International Freight Association (BIFA) terms. Whether or not the CMR Convention or BIFA terms apply will have a significant impact on limitation of liability (2 SDRs per kg of weight pursuant to BIFA terms compared with 8.33 SDRs per kg of weight pursuant to the CMR Convention). 

Limitation of liability can also extend to those carriers who are undertaking domestic road carriages. It is common for U.K. domestic road hauliers, insofar as they are members, to incorporate the Road Haulage Association's Conditions of Carriage (RHA) into the contract of carriage. These terms entitle the carrier to limit liability to £1,300 per tonne, which can significantly reduce the value of the claim. Incorporation of these conditions is key. If the carrier cannot evidence that the conditions have been incorporated into the contract of carriage, limitation will not apply.

Breaking Limitation

Breaking limitation in sea carriage claims was unheard of in the English Courts until the case of the "ATLANTIK CONFIDENCE" in 2016.

The facts of this case were unique and complex in relation to tonnage limitation, with reference to the 1996 Protocol to the 1976 Limitation Convention. The outcome highlights the importance of investigating the circumstances which give rise to loss or damage early on in order to consider whether there are any circumstances which may break limitation.  However, very rarely will limitation be broken in sea carriage claims.

In respect of international road carriage where the CMR applies, Article 29 of the CMR Convention states that a carrier will not be entitled to rely on the provisions limiting liability where the loss or damage resulted from wilful misconduct (such as driver theft). This also applies to that carrier's servants, agents or sub-contractors.

Theft of cargo during carriage has become increasingly common in recent years. As such, many cargo interests will insist on having contractual terms in place with their nominated road carriers which set out the minimum security provisions that drivers are to follow, such as the requirement to park in secure carparks on the roadside, or not to deliver to anyone other than an individual authorised to take receipt. Unfortunately, some drivers do not follow these security provisions and we have seen many cases where drivers have chosen to park in unsecure lay-bys or have been subjected to "round the corner scams", resulting in significant cargo losses due to theft.

In such circumstances and where there has been a blatant disregard of the agreed security provisions or where the driver has followed instructions from a third party in a "round the corner scam" without verifying the instructions from the consignee or their employer, it may be possible to break limitation.

There have been a number of cases before the English Courts where there has been alleged wilful misconduct and, whilst the Courts will look at the merits of each specific case, the general approach adopted by the Courts is to consider whether there was either (a) an intention by the driver to do something which he knew to be wrong; or (b) a reckless act in the sense that the driver was aware that loss might result from his act and yet he did not care whether loss would result or not. 

In the well-known case of Lacey's Footwear (Wholesale) Ltd v Bowler International Freight Ltd , which concerned a "round the corner scam", the Court held that wilful misconduct could be inferred despite the evidence showing that the driver did not know what he was doing was wrong when he was deceived by criminals into delivering the cargo to another location.

Theft by employees may also be considered as an act of wilful misconduct on the part of the carrier (see Datac Electronic Holdings Ltd v United Parcels Service Ltd).

It should be noted that Courts in other jurisdictions approach wilful misconduct with differing levels of leniency. In the Dutch Courts, for example, the threshold for proving wilful misconduct is higher, which results in some carriers rushing to issue declaratory proceedings before the Dutch Courts when they become aware of an impending claim. It is advisable to consider whether it is appropriate, if considering a cargo recovery claim in these circumstances, to seize the jurisdiction of the English Courts (or another favourable jurisdiction) first.

Forum shopping (choosing the jurisdiction which may provide the most favourable outcome) is common in CMR cases. More information on jurisdiction and forum shopping is available here.

Comment

There are a number of factors that will determine whether or not a carrier is entitled to limit their liability, including whether a convention, set of rules or contractual conditions are compulsorily applicable or have been incorporated into the contract of carriage and whether there are any circumstances which enable the cargo claimant to break limitation.

We frequently see carriers attempting to apply limitation to settlement proposals at levels well below their legal liability, often based on erroneous interpretation of the law. The law surrounding breaking limitation can be complex and the outcome of claims will very much depend on each set of circumstances. As such, early referral for a careful legal analysis of the merits of breaking limitation is advised. 

Limitation of liability may mean the difference between recovering a substantial proportion of the losses and the value of a recovery being significantly reduced. This will also impact on a claimant's decision as to whether or not it is cost effective to pursue certain claims in the Courts.