Supreme Court Decision on the “CMA CGM LIBRA” – GA Defence - Legal Development 10 November 2021

The Supreme Court has upheld the decisions of both the High Court and the Court of Appeal had confirmed that a defective passage plan will render a vessel unseaworthy. All nine judges involved in the High Court, Court of Appeal and the Supreme Court have therefore determined that the claims for General Average pursued against our clients by the Shipowners of the “CMA CGM LIBRA” failed.

This decision reinforces the view that in principle there is no conceptual limit on a shipowner’s obligation to exercise due diligence before and at the commencement of the voyage to make the vessel seaworthy.

It also clarifies that a shipowner will be liable for a causative error of navigation (and thus unable to rely on the error of navigation or management defence in the Hague and Hague-Visby Rules), provided the error occurred before or at the commencement of the voyage. 

Shipowners informed us that all of the cargo interests not represented by Clyde & Co settled the claims for General Average at between 98.5% and 100% of the sums claimed.

Factual background

On 17 May 2011, the 11,356 TEU “CMA CGM LIBRA” sailed from Xiamen laden with 5,983 containers. Shortly after departure from Xiamen, on 18 May 2011, the vessel deviated from her intended course, navigating out of the buoyed fairway and grounded shortly thereafter.

The vessel grounded in a position immediately adjacent to a shoal with a depth of 1.2 meters, the existence of which had been the subject of a Notice to Mariners promulgated by the United Kingdom Hydrographic Office (UKHO) several weeks before the incident.

In addition to the paper chart BA 3449 said to have been in use on board the vessel at the material time, the vessel was also equipped with an “unofficial” electronic chart on which the shoal on which the vessel grounded was not shown.

A further Notice to Mariners (6274(P)/10) had also been issued by UKHO in December 2010, warning mariners that depths shown on the chart beyond the confines of the buoyed fairway in the approaches to Xiamen were unreliable and that the waters were shallower than recorded on the chart.

The paper chart did not indicate the full extent of the shoal on which the vessel grounded, and it had not been updated with the warning contained in 6274(P)/10.

The vessel was subsequently refloated by professional salvors. The Shipowners are said to have incurred expenditure in the sum of approximately US$13 million and declared General Average to recover around $9m of this from cargo interests.

Approximately 92% of cargo interests agreed to pay either 98.5% or 100% of their proportion of General Average, resulting in approximately US$8 million being paid by cargo insurers to the Shipowners and/or their insurers.

The remaining cargo interests declined and maintained that they were not liable to pay contributions in General Average on the basis that (amongst other things) a defective passage plan, rendering the vessel unseaworthy, caused the grounding, giving rise to a defense to the Shipowners’ claim.

High Court

The Shipowners asserted that the effective cause of the grounding was the existence of a shoal not shown on either the paper chart BA 3449 or the vessel’s electronic chart and that all charts had been fully corrected prior to the vessel’s departure from Xiamen. That view was not shared by the High Court. The Admiralty Judge at first instance held that there was an error of navigation but that the absence of an adequate passage plan, which is a requirement under the 1999 IMO Guidelines for Voyage Planning, was causative of the grounding. It was also held that the Shipowners were in breach of their obligation to exercise due diligence to make the vessel seaworthy as required by Article III Rule 1 of the Hague (or Hague-Visby) Rules. Consequently, the Cargo Interests were not liable to contribute in General Average.

Court of Appeal Decision

The Shipowners appealed to the Court of Appeal on two questions of law.

1.   Does a defective passage plan render a ship unseaworthy for the purposes of Article III Rule 1 of the Hague Rules?

2.   Can the actions of a ship’s master or crew which are carried out in their capacity as navigators be treated as (attempted) performance by the shipowner of its duty as carrier to exercise due diligence to make the ship seaworthy under Article III Rule 1 of the Hague Rules?

The Court of Appeal found that the Admiralty Judge at first instance correctly applied long established principles of English law to the facts of this case.

It also held that attempts to draw a distinction between acts of the master and crew qua carrier (for which the shipowners are responsible) and their acts qua navigator (for which the shipowners are not responsible) were misconceived. Any failure by the master and crew in preparing an adequate passage plan amounted to unseaworthiness provided that the failure arose before the voyage commenced.

Accordingly, both grounds of appeal failed, and the appeal was dismissed. The Shipowners appealed to the Supreme Court on the same two questions of law.

Supreme Court

The first question: The five Supreme Court Judges unanimously found that the Admiralty Judge at first instance and the Court of Appeal Judges (all of whom were experienced maritime lawyers) directed themselves properly in law, and the findings made support the conclusion reached that the defective passage plan resulted from the Shipowners’ failure to exercise due diligence to make the vessel seaworthy.

Given the importance of passage planning for the safety of navigation, a vessel is likely to be unseaworthy if she begins her voyage with a defective passage plan.

The fact that the defective passage plan, which by definition must be prepared before sailing, involved neglect or default on the part of the master and/or crew (and which was characterized by the Shipowners to be an error in navigation as per the Article IV Rule 2(a) exception) was no defense to a claim for loss or damage caused by unseaworthiness.

The second question: The essence of the Shipowners’ case on this point was that they had provided the vessel (and the master/crew) with the necessary instructions, charts and nautical publications etc. to enable an adequate passage plan to be drawn up prior to the commencement of the voyage, on which basis they had discharged their burden of exercising due diligence.

The Supreme Court rejected the Shipowners’ case on due diligence, branding it novel and unsound. A carrier cannot escape its Article III Rule 1 obligations by delegating them to its servants or agents and the carrier is responsible for any causative failure by the crew to exercise due diligence. It makes no difference if those obligations include elements that involve navigation.

Therefore, both grounds of appeal failed, and the appeal was dismissed. The claim for General Average contributions from the Cargo Interests failed entirely.

Impact on the Industry

The International Group of P&I Clubs expect the decision to have a wide-ranging impact. As set out in the submissions made by Shipowners, the decision has “clearly caused a lot of consternation. It has been relied on with considerable frequency. In March this year, the Group estimated that the total value of claims concerning passage planning that had been received by the IG member clubs since the decision of the Admiralty Court in this case is in excess of $116 million.”

Conclusion

This is a significant decision. It confirms that the well-established legal principles of due diligence and seaworthiness apply to passage planning in the same way as they do to any other aspect of seaworthiness.

Further, the argument that an error in planning the passage prior to the commencement of the voyage should be characterized as an error of navigation rather than unseaworthiness has also been resoundingly rejected.

In practice, this judgment also underlines the need to ensure that charts are kept fully up to date (including the application of Temporary and Preliminary Notices to Mariners) and that careful accurate passage planning is carried out before departure.

The judgment further highlights the importance for Cargo Interests to give careful consideration to any request for payment of contributions in General Average, as considerable savings can be made.

The Supreme Court has reiterated that the carrier’s obligation under the Hague Rules to make the vessel seaworthy is non-delegable, “The carrier cannot escape from its responsibilities under article III rule 1 of the Hague Rules by delegating them to its servants or agents qua navigators, or qua managers, or qua engineers or qua ship repairers.”

However, the carrier may not be liable for lack of due diligence which occurs before he has responsibility for the vessel or the cargo. The carrier cannot be held responsible if the failure to exercise due diligence was, for example that of the shipbuilder prior to the carrier’s acquisition of the vessel, or of a shipper prior to the carrier’s acquisition of control over the cargo.

The fact that a defect is remediable may also mean that a vessel is not unseaworthy. This however is likely to depend on whether it would be reasonable to expect that the defect is remedied before any danger to vessel or cargo arose.

The owners had submitted that the risk of cargo damage or GA expenses arising from a failure to exercise due diligence to make the vessel seaworthy is borne by shipowners and their insurers, and a decision that negligent passage planning may render the vessel unseaworthy will lead to more cargo damage or GA claims being made against shipowners and their insurers. While this may be the result, it would still be necessary for claimants to prove in  each case that the defect in the passage plan was sufficiently serious to render the vessel unseaworthy, and that it was causative of the loss or damage.

Can maritime insurance contracts be terminated before the insurance period ends?

Introduction

Providers of maritime transport, warehousing and other logistics services ("transport providers") will often purchase liability insurance with a fixed insurance period (e.g. one or two years) to insure potential risks and liabilities that may occur during the course of service.

However, if several incidents that result in large losses occur, some insurers may unilaterally terminate such insurance contracts in advance of the expiration of the insurance period.

It is important for transport providers to know whether insurers are entitled to unilaterally terminate insurance contracts in advance without their consent. This article summarizes insurers' termination rights under Chinese law.

Insurers may terminate insurance contracts on the basis of statutory termination rights or agreed termination rights.

Statutory termination rights

There are relevant provisions about insurers' statutory termination rights in:

• the Insurance Law;
• the Maritime Law; and
• some judicial interpretations of the Supreme People's Court.

In the context of maritime insurance, if these laws have different provisions on the same specific issue, the provisions of the Maritime Law will take precedence over the Insurance Law and other laws.

The provisions of the above laws provide that insurers are entitled to exercise statutory termination rights in the following circumstances.

Where transport providers do not pay premiums in time
Where transport providers fail to pay their insurance premiums to the insurer in time, the insurer will have the right to terminate the insurance contract before the insurance liability begins, except where the insurer has already issued insurance documents.

However, after the commencement of the insurance liability, Chinese courts will not support insurers' requests for termination of the contract on the ground that the transport provider has not paid the premium.

Where transport providers fail to inform insurers of material circumstances
According to the Maritime Law, before a maritime insurance contract is concluded, a transport provider must truthfully inform the insurer of the material circumstances of which it has knowledge or ought to have knowledge in its ordinary business practice and which may have a bearing on the insurer in deciding on the premium or whether it agrees to insure.

Upon the intentional failure of the insured to truthfully inform the insurer of such circumstances, the insurer has the right to terminate the contract without refunding the premium. The insurer will not be liable for any losses arising from the perils insured against before the contract is terminated.

Where transport providers do not comply with warranties under insurance contract
According to the Maritime Law, a transport provider must notify the insurer in writing immediately where the transport provider has not complied with the warranties under the contract. The insurer may, upon receipt of the notice, terminate the contract or demand an amendment to the terms and conditions of the insurance coverage or an increase in the premium.

Where degree of peril of subject matter insured greatly increases
Where the degree of risk to the subject matter of insurance increases appreciably during the term of the insurance contract, a transport provider must notify the insurer in accordance with the contract in a timely manner. The insurer may, in accordance with the contract, increase the insurance premium or terminate the contract.

Where transport providers intentionally cause an insured incident
Where a transport provider intentionally causes an insured incident, the insurer will have the right to terminate the insurance contract, not to pay indemnity and not refund the premium.

Where the insured fails to maintain safety of subject matter
Where a transport provider fails to perform the obligation of maintaining the safety of the subject matter insured as agreed upon, the insurer will have the right to increase the insurance premium or terminate the contract.

Agreed termination rights

In addition to the aforementioned statutory termination rights, generally speaking, neither an insurer nor a transport provider may terminate a contract after the commencement of the insurance liability. However, both the Maritime Law and the Insurance Law respect contract freedom and enable both parties to agree on specific termination circumstances in an insurance contract.

Insurers will usually put in some specific termination circumstances in their general standard insurance clauses and the issued policy. Some insurers add termination-at-will rights in their standard insurance clauses or policies to protect their own rights and interests. However, Chinese law places some restrictions on insurer termination rights. For example, cargo insurance contracts and voyage insurance contracts may not be terminated by the parties once the insurance liability has commenced.

One case that exemplifies this is that of a transport provider that had bought liability insurance for one year. However, after several large payments, the insurer notified the client that the insurance contract would be terminated. The client argued that the insurance period had not expired. Upon reviewing the insurance contract's clauses, a clause was found that provided for the following:

Unless otherwise agreed, the insurer may terminate this insurance contract by sending a notice of termination to the insured 15 days in advance. After the termination of this insurance contract, the insurer will charge the actual premium based on the actual operating income during the period from the commencement of the insurance liability to the termination of the contract.

Therefore, the client was advised to find another insurance company to cover the potential risk in the future as soon as possible, instead of filing a lawsuit which could have an adverse effect.

Comment

Insurers may legally terminate maritime insurance contracts in advance of the expiration of the insurance period, provided that this termination right has been clearly agreed in the contract. Under such circumstances, transport providers will have to seek the services of another insurance company quickly to insure any subsequent potential risks and liabilities. This may be inconvenient for the transport provider and may result in them taking on uninsured liability.

It is therefore suggested that, as well as avoiding the occurrence of the statutory termination circumstances, transport providers should pay more attention to the relevant provisions of insurance clauses and policies. They should carefully consider whether to accept clauses that enable the insurer to unilaterally terminate the insurance contract in advance of the expiration of the insurance period.

Significant amendments to Carriage of Goods by Sea Act

 Introduction

In July 2021 the Carriage of Goods by Sea (Amendment) Act (2020) (the "Amendment Act") and its supplementary Carriage of Goods by Sea (Amendment of First Schedule) Order 2021 (the "Order") officially came into force.

The Amendment Act and the Order brought into effect the long-awaited changes to the Carriage of Goods by Sea Act 1950 (the "Principal Act"), which has been in force since 23 May 1950.

Reasoning

Prior to the amendments coming into force, the Principal Act regulated the carriage of goods by sea in Peninsular Malaysia by adopting the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, which was incorporated as the First Schedule in the Principal Act.

The main reason for amending the Principal Act is to implement:

• the "Visby Rules" – the Protocol to Amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading of 23 February 1968; and
• the "The Hague-Visby Rules" – the Protocol (SDR Protocol) Amending the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading of 25 August 1924 (The Hague Rules), as amended by the Protocol of 23 February 1968 (Visby Rules).

The Amendment Act consists of four sections. This article focuses on the following changes:

• The scope of documents relating to shipping transactions, which was limited to bills of lading, has been expanded to keep up with the rapid evolution of international maritime industry practices.
• The First Schedule of the Principal Act has been amended in accordance with the The Hague-Visby Rules.

Amendments

Expanded scope of documents

Prior to the amendments, the Principal Act applied to bills of lading. This can be seen in section 4 of the Principal Act, which states as follows:

4. Statement as to application of Rules to be included in bills of lading

Every bill of lading, or similar document of title, issued in Malaysia which contains or is evidence of any contract to which the Rules apply shall contain an express statement that it is to have effect subject to the said Rules as applied by this Act.

However, in section 2 of the Amendment Act, the words "bills of lading" have been replaced with the words "sea carriage document(s)".

Similar changes have also been introduced to section 6 of the Principal Act. The original section 6 was restrictive and encapsulated only the weight of any bulk cargo inserted in the bill of lading. The original section 6 stated as follows:

Where under the custom of any trade the weight of any bulk cargo inserted in the bill of lading is a weight ascertained or accepted by a third party other than the carrier or the shipper and the fact that the weight is so ascertained or accepted is stated in the bill of lading, then, notwithstanding anything in the Rules, the bill of lading shall not be deemed to be prima facie evidence against the carrier of the receipt of goods of the weight so inserted in the bill of lading, and the accuracy thereof at the time of the shipment shall not be deemed to have been guaranteed by the shipper.

Subsequent to the alterations to section 3 of the Amendment Act, all references to "bill of lading" in section 6 have been updated to "sea carriage document".

Therefore, the amendments allow the Principal Act to recognize broader types of sea carriage documents commonly used by seafarers when conducting maritime trade. This effectively widens the substantive legal protection afforded to seafarers and maritime traders, thereby boosting international maritime traders' confidence to do business in Malaysia.

The Hague-Visby Rules

Section 4 of the Amendment Act introduces a new section 6A to the Principal Act, which empowers the minister of transport to amend the First Schedule to the Principal Act by way of an order published in the Gazette.

Section 6A of the Principal Act came into force on 15 July 2021. Pursuant to the power under section 6A of the Principal Act, the minister of transport amended the existing First Schedule in the Principal Act, which was based on the The Hague Rules.

In general, the amendments have facilitated a universal substitution of references to "bill of lading" to "sea carriage document".

Amendments to article I – definitions

A new paragraph (aa) has been added to article I.

The addition has amended the Principal Act, providing a clearer definition of a "consignment note". Under paragraph (aa), a consignment note means a non-negotiable document that:

I. contains or evidences a contract of carriage by sea in connection with which no bill of lading or similar document of title has been issued;

II. clearly states that no liability for any loss of, damage to or delay of the goods will be accepted by the carrier of the goods; and

III. is clearly marked as being non-negotiable.

Paragraph (b) of the original article I was replaced with a new paragraph that defines a contract of carriage as that it:

applies only to contracts of carriage covered by a sea carriage document, in so far as such document relates to the carriage of goods by sea, including a negotiable sea carriage document issued under or pursuant to a charter-party from the moment at which the document regulates the relations between its holder and the carrier concerned.

To add clarity to the amended Principal Act, a new paragraph (ba) has also been inserted to provide a definition of "data message". Under the new paragraph:

"data message" means information generated, stored or communicated by electronic, optical or analogous means, including electronic data interchange, electronic mail, telegram, telex or telecopy, even if the information is never reproduced in printed form.

In conjunction with the expansion of the scope of documents recognised and governed under the amended Principal Act, new paragraphs – (f) and (g) – are now in service to provide definitions for "negotiable sea carriage document" and "sea carriage document". Under paragraphs (f) and (g), these terms are now defined as follows:

(f) "negotiable sea carriage document" means-

(i) a bill of lading other than a bill of lading that, by law, is not negotiable; or

(ii) a negotiable document of title that is similar to a negotiable bill of lading and that contains or evidences a contract of carriage of goods by sea;

(g) "sea carriage document" means-

(i) a bill of lading;

(ii) a negotiable document of title that is similar to a bill of lading and that contains or evidences a contract of carriage of goods by sea;

(iii) a bill of lading that, by law, is not negotiable; or

(iv) a non-negotiable document including a consignment note and a document of the kind known as a sea waybill or the kind known as a ship's delivery order which either contains or evidences a contract of carriage of goods by sea . . .

New article IA – sea carriage documents

By virtue of the Order, further and more comprehensive details have been given under the new article IA on the applicability of sea carriage documents.

The new article begins by affording equal legal protection to a digital sea carriage document as that of a printed sea carriage document. Reading this amendment together with the newly added paragraph (ba) under article I, it means that a sea carriage document does not need to be printed to be afforded legal protection under the amended Principal Act. Sea carriage documents presented in soft copies also enjoy legal protection.

Paragraph 2 of the new article IA provides for the time and manner in which a sea carriage document should be issued and transferred. Paragraph 2 provides that:

a. a sea carriage document is issued when a data message is generated in a way that constitutes issue of such a document within the system being used by the parties to the relevant contract of carriage; and

b. a sea carriage document is transferred when a data message is generated in a way that constitutes transfer of the sea carriage document within the system being used by the parties to the relevant contract of carriage.

Amendments to article II – risks

The amendment also introduced additions to article II. In particular, the following paragraphs have been added to afford greater protection to carriers for goods carried on or above deck:

2. For the purpose of paragraph 1, "goods includes goods, except live animals, carried on or above deck".

3. Where the shipper has specific stowage requirements for goods carried on or above deck, then, for paragraph 1 to apply, the shipper shall tell the carrier in writing of those requirements at or before the time of booking the cargo.

4. Notwithstanding Article IVbis, if a carrier carries goods on or above deck contrary to an express agreement with the shipper of the goods made at or before the time of booking the cargo, then, for any loss or damage to the goods that results solely from the goods being carried on or above deck, the carrier is not entitled-

(a) to any exception or exemption under these Rules; or

(b) to any limit provided by these Rules to its liability for the loss or damage.

Amendments to article III – responsibilities and liabilities

The Order has not changed the substance of article III but it has amended the original article 4 to afford a negotiable sea carriage document (which has substituted the bill of lading) greater evidential value in the event of a dispute.

Under the original provision, it was declared that a bill of lading was prima facie evidence of the receipt of the goods by the carrier, as described in accordance with:

• paragraph 3(a) (marks necessary for the identification of the goods);
• paragraph 3(b) (number of packages, price or the quantity or weight of the goods); and
• paragraph 3(c) (apparent order and condition of the goods).

However, the Order has introduced amendments that have increased the evidential value of a negotiable sea carriage document. Now, not only is a negotiable sea carriage document prima facie evidence of receipt of the goods by the carrier, but also any proof to the contrary is inadmissible if a negotiable sea carriage document has been transferred to a third party acting in good faith.

The wording of paragraph 6 of the Principal Act has been amended. The former wording was as follows:

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.

The new wording is as follows:

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.

Further, a new paragraph, 6bis, has been inserted to allow for an action for indemnity against a third party. Paragraph 6bis reads as follows:

6bis. An action for indemnity against a third person may be brought even after the expiration of the year provided for in the preceding paragraph if brought within the time allowed by the law of the court seized of the case. However, the time allowed shall be not less than three months, commencing from the day when the person bringing such action for indemnity has settled the claim or has been served with process in the action against himself.

Amendments to article IV – rights and immunities

Prior to the amendments, paragraph 5 of article IV limited the liability of a shipper or carrier to any loss or damage of goods shipped, unless the value of the goods had been declared.

The Order overhauled this approach and inserted a more commercially practical approach by calculating the amount for which the shipper or carrier will be liable if the goods have been damaged or lost and the value was not declared in the sea carriage document.

The Order has removed the cap of £100 per package or unit for damages. The new system calculates damages using:

• the unit of account per package or unit; or
• the unit of account per kilogram of gross weight of the goods that have been lost or damaged.

The higher value of the two options is used for the calculation. The total amount recoverable is calculated by referring to the value of the goods at the place and time that the goods were discharged, or should have been discharged, from the ship.

Article IVbis – defence and limit of liability

Article IVbis has been inserted as a specific provision under the First Schedule of the amended Principal Act, to govern the defences and limit the liability afforded to a carrier in a sea contract.

This article provides that the defences and limits of liability provided in the amended Principal Act, as a whole, will be applicable to "a servant or agent of the carrier", notwithstanding any potential actions resulting from the contract or in tort. However, article IVbis expressly prohibits the carrier or its servant and/or agent from relying on the defences or limits of liability stipulated under the amended Principal Act "if it is proved that the damage resulted from an act or omission of the servant or agent done with intent to cause damage or recklessly and with knowledge that damage would probably result".

Amendments to article VI – special condition

Article VI, as amended, still provides that notwithstanding the preceding articles, a carrier, master or agent of the carrier, and a shipper will be at liberty to enter into any agreement in any terms for the responsibility and liability of the carrier for any particular goods. This is also the case as regards the rights and immunities of the carrier in respect of such goods, or their obligation to achieve seaworthiness, "so far as this stipulation is not contrary to public policy, or the care or diligence of his servants or agents" in regard to the following actions conducted for carrying goods by sea:

• loading;
• handling;
• storage;
• carriage;
• custody;
• care; and
• discharge.

The amendments to article VI introduced the following additional requirements:

a. the terms so agreed must be set out in a receipt or consignment note; and

b. the receipt or consignment note must be, and must be marked as being, non-negotiable; and

c. the receipt or note must state that no other sea carriage document has been, or will be, issued for the carriage.

Article VI, as amended, stipulates that any agreement entered into will have full legal effect. However, article VI does not apply to ordinary commercial shipments made in the ordinary course of trade; it applies only to other shipments where the character or condition of the property to be carried or the circumstances, terms and conditions under which the carriage is to be performed are such that would reasonably justify a special agreement.

Amendment to article IX

The amendment to article IX removed much of the original content. The original paragraph provided that "the monetary units mentioned in these Rules are to be taken to be gold value". However, it has been replaced with a paragraph that reads as follows:

These Rules shall not affect the provisions of any international Convention or national law governing liability for nuclear damage.

Comment

The Carriage of Goods by Sea Amendment Bill was introduced in Parliament in 2019 to amend the Carriage of Goods by Sea Act 1950, which contained procedures that were no longer in line with global practice in the maritime trade industry. The provisions of the The Hague Rules, as provided for in the First Schedule to the Carriage of Goods by Sea Act 1950, were inadequate to meet the current conditions and practices of carrying goods by sea.

The amendments to the Principal Act have occasioned changes that have been welcomed by stakeholders in the maritime trading industry.