QLU Summer 2018: Carriage of Goods by Sea Act 1992, s.2(1) and s.2(4) - Bill of lading holder not required to give credit for prior recovery from intermediate seller, The correct application of the “mere receipt rule” under s.2(4) explained

QLU Summer 2018: Carriage of Goods by Sea Act 1992, s.2(1) and s.2(4) - Bill of lading holder not required to give credit for prior recovery from intermediate seller, The correct application of the “mere receipt rule” under s.2(4) explained

Sevylor Shipping and Trading Corporation v Altfadul Company for Foods, Fruits and Livestock and Another (The"Baltic Strait") [2018] EWHC 629 (Comm)

Facts

A cargo of 249,250 boxes of fresh bananas was shipped from Ecuador to Libya on board the vessel Baltic Strait under bills of lading with Altfadul as holder of the bills and thus consignee. The cargo was found damaged on discharge.  Altfadul initially tried to reject the cargo under its CIF sale contract with the seller, Co Ma Co  SpA (‘CoMaCo’), who had voyage chartered the vessel from the vessel owner (“Owner”), and claimed a refund of the price paid. It seems an agreement was then reached between Altfadul and CoMaCo under which CoMaCo allowed a credit of US$2,586,105.09 spread over three subsequent sales to Altfadul. Altfadul having received this credit assigned its rights under the bill to CoMaCo who in turn assigned the rights to the cargo insurers, SIAT.

Altfadul and SIAT then brought arbitration proceedings against the Owner as carrier for breach of the bills of lading contracts. They were awarded the sum of US$ 4,567,351.13 by the tribunal, this being the difference in value between the value of the cargo as discharged and its value had it been sound on arrival, plus interest. The sum of US$ 4,567,351.13 was made up of two parts; (a) US$ 1,981,246.04 representing Altfadul’s own recoverable loss, and (b) US$ 2,586,105.09, loss suffered by CoMaCo by virtue of s.2(4).

Owner contended that the awarded sum should be reduced by (b) because s.2(4) did not apply to enable a recovery of CoMaCo’s loss. 

Altfadul and SIAT disputed Owner’s contention on the ground that;

  1. The sum of US$2,586,105.09 was an insurance recovery and so res inter alios acta  (latin for “a transaction between others does not prejudice one who was not a party to it”), or alternatively
  2. Altfadul could recover CoMaCo’s loss by virtue of section 2(4) COGSA 1992. 

On the evidence before them, the arbitrators concluded that the credit was not an insurance recovery despite the close similarity in the amounts of the credit given and the cargo insurance proceeds. 
 
The arbitrators however accepted Altfadul’s and SIAT’s alternative argument that Altfadul could recover CoMaCo’s loss by virtue of s.2(4) of COGSA 1992.

Owner appealed maintaining that s.2(4) did not operate in the circumstances of the case. Altfadul and SIAT resisted the appeal on the basis that;

  1. The arbitrator’s award was correct in law and so should be upheld even if the arbitrators were wrong about s.2(4), alternatively 
  2. The arbitrators were correct in concluding that s.2(4) applied.

Judgement

Leave to appeal was granted to the Owner on the following two questions of law:

i. Whether s.2(4) of COGSA 1992 operate where rights of suit under the bill of lading contract have not previously been vested in the party which has suffered loss, or whether it only operates where rights of suit were previously vested in that party but it has lost them by virtue of the operation of s.2(1) of the Act.

ii. Where the charterers of a vessel suffer loss and damage but no longer pursue a claim against the carrier under the charterparty, can the lawful holder of the bill of lading claim for the charterers’ loss under the bill of lading contract by virtue of s.2(4) of COGSA 1992, or can the lawful holder of the bill of lading only claim under that provision for losses suffered by parties which have no rights of suit under any relevant contract of carriage?

In the course of argument, question (ii) was refined to: “Whether the lawful holder of the bill of lading can claim by virtue of s.2(4) of COGSA 1992 losses suffered by the charterer of the vessel in respect of the bill of lading voyage whose charterparty was with the bill of lading carrier.”
 
A third question of law arose from Altfadul’s and SIAT’s argument that the arbitrators’ award is correct in law and should be upheld even if the award was wrong about s.2(4). Altfadul and SIAT contended that under English common law, on the direct authority of R&W Paul Ltd v National Steamship Co Ltd (1937) 59 Ll L Rep 28, a bill of lading holder suing on the bill of lading may recover full damages despite an earlier recovery from an intermediate seller and that, therefore, Altfadul was entitled to recover full damages without reference to the US$2,586,105.09 paid to it by CoMaCo “by way of settlement of a sale contract dispute between them”, (as per the Tribunal’s finding). This third question was phrased as follows:

iii. Whether on the facts found in the award, Altfadul (and therefore SIAT) was entitled to damages equal to the full value of the cargo damage irrespective of any recovery or entitlement to recover from its seller, CoMaCo.

The High Court Judge addressed question (iii) first as this question had the potential to defeat the appeal in itself.

The Judge confirmed as sound the proposition in R&W Paul as relied upon by Altfadul and SIAT pursuant to which Altfadul was entitled to claim the full loss represented by the damage to the banana cargo, irrespective of any earlier recovery from CoMaCo as intermediate seller, a position which the Judge found was unaffected by the much later case of The Sanix Ace as relied upon by Owner. The arbitrators' award of full damages in favour of SIAT, as assignee of Altfadul, was therefore correct in law whether or not the arbitrators were right in their view as to the effect of s.2(4) COGSA 1992.  The Judge’s decision on question (iii) meant that the Award in Artfadul’s and SIAT’s favour would be upheld and Owner’s appeal dismissed.

The Judge nevertheless went on to decide questions (i) and (ii).

In question (i), Owner contended that the scope of s.2(4) was limited to cases where the party which had suffered the loss had previously had rights of suit but had lost them by virtue of s.2(1).

The Judge rejecting Owner’s contention found that there was nothing in the statutory language to suggest this. If s.2(4) was indeed so narrow, it would have solved only half the problems it was meant to address. In particular, it would not have addressed cases where the loss had been suffered by a party below the bill of lading holder in the chain of dealings (eg. a sub-buyer). The Judge further noted that, had that been the intention, it would have been extraordinary for s.2(4) not to have been expressly drafted in such terms, or by reference to s.2(5), which deals expressly with the loss of rights resulting from the operation of s.2(1).

In relation to question (ii), the Judge explained that the Dunelmia [1970]1QB 289 is authority for the proposition that where a Charterer to whom the mere receipt rule applies is the holder of the bill of lading, the statutory transfer to and vesting in him of rights of suit under s. 2(1) does not entitle him to recover losses he may have suffered from the carrier through the exercise of those rights. On the findings of fact in the arbitration award, s.2(4) did not entitle SIAT (as assignee of Altfadul) to recover on behalf of CoMaCo its loss by way of the credit it promised Altfadul.

Comments

The Judge reviewing the Law Commission Report helpfully reminds us of the intention of COGSA 1992. The Act’s primary purpose was to remedy the perceived inadequacy of the Bills of Lading Act 1855. Under the 1855 Act, rights of suit could only pass to the bill of lading consignee or endorsee “upon or by reason of” the consignment or endorsement. 

A primary aim of COGSA 1992 was to increase the cases in which the party bearing the loss or damage to the goods would also be the party with the contractual title to sue under the statute.

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