QCR Winter 2018: Carriage of goods by sea — Contract of carriage in charterparty or bill of lading...
MOUNT ISA MINES LTD V THE SHIP "THOR COMMANDER"  FCA 1326, Federal Court of Australia
In January 2015, the vessel Thor Commander suffered an engine breakdown on a voyage from Angamos, Chile to Townsville, Australia and drifted towards the Great Barrier Reef. Salvors were immediately engaged, but the Australian Maritime Safety Authority (AMSA) was concerned if the salvage tug would reach the Thor Commander timely. The vessel Xinfa Hai offered assistance and AMSA directed Thor Commander to accept the tow until the salvage tug could reach her. Without entering into an LOF, the Xinfa Hai towed Thor Commander away from the reef for five hours until the salvage tug relieved her. Thor Commander was at the time carrying Mount Isa's cargo of copper anodes at a value ten times that of the vessel herself. She had been substituted under a charterparty from a pool and had different owners to the original vessel. Straight bills of lading were issued by her agents naming Mount Isa as consignee and notify party.
Once Thor Commander had been salved, she was taken to Gladstone where some of the cargo was delivered to Mount Isa against one of the original bills of lading and a letter of indemnity. The cargo required transshipment from Gladstone to Townsville at a cost of AUS$147,956.27.
General Average was declared and Mount Isa paid Xinfa Hai US$1 million for their assistance. A dispute arose between Mount Isa and Owners of Thor Commander, and the following questions were referred to the Federal Court of Australia:
- What carriage contract applied between Mount Isa and the shipowners: the bill of lading or the charterparty?
- Could Mount Isa sue the shipowners under the straight bill of lading when the shipper had yet to transfer their rights to Mount Isa?
- Was Mount Isa entitled to recover from the shipowners salvage of US$1 million paid to Xinfa Hai under a salvage settlement?
- Did the letter of indemnity preclude Mount Isa from recovering transshipment costs
- Was Mount Isa liable in General Average?
The Hague Rules at issue were the Rules as enacted by the Australian Carriage of Goods by Sea Act, referred to as the "amended Hague Rules".
The court held as follows:
- The substitution of the vessel did not result in a novation of the charterparty with owners of the substituted vessel. Owners of Thor Commander did not become a party to the charterparty in place of the original owners. A novation would have required the rescission of the original charterparty, negating remaining obligations of the original shipowner. Where therefore the owners of the substitute vessel were not a party to the charterparty, the bill of lading terms applied between it and the cargo interest. The shippers were not in a pre-existing relationship with Mount Isa under the bills of lading.
- Mount Isa was entitled to enforce, as lawful holder of the bill of lading, all rights under it as the contract of carriage as if it had been an original party, by force of sections 6 and 8 of the Sea-Carriage Documents Act 1996 (Qld).
- Mount Isa’s underwriters agreed to pay US$1 million to Xinfa Hai to settle the salvage claim. Although Owners of Thor Commander settled their portion of the salvage claim of US$100,000, the Court was asked to evaluate whether Mount Isa acted reasonably when settling the salvage claim with Xinfa Hai. The Court found that Mount Isa failed to seek advice from Australian lawyers as to the range within which Mount Isa could expect a salvage award to be made by an Australian court. It had also failed to seek legal advice regarding evidence required to prove that any settlement for which it claimed damages against Owners of Thor Commander would, or could, be found to be recoverable as damages. Despite having found that Mount Isa had not acted reasonably, the Court eventually found that the salvage award of US$1 milion was reasonable, taking into account the considerations in the International Convention on Salvage. Xinfa Hai was a volunteer in relation to Thor Commander, in spite of the direction issued by AMSA. Her actions were undertaken to assist a vessel in danger and therefore qualified as salvage operations. Considerable skill and effort had been deployed by the crew of Xinfa Hai and there was an element of risk. The total salved value was US$70 million, of which about 10 percent vessel and 90 percent cargo value. An overall salvage award of US$1 million would have been appropriate and Mount Isa was entitled to recover US$909,000 out of the US$1 million it had paid to Xinfa Hai from the Owners of Thor Commander.
- Mount Isa was not prevented from recovering transshipment costs from Owners of Thor Commander by the terms of the letter of indemnity. The transshipment costs were incurred because the ship was in Gladstone, instead of Townsville. Mount Isa agreed to take delivery of part of the cargo in Gladstone to mitigate losses. The purpose of the letter of indemnity was to protect against wrongful delivery to third parties, which did not include Mount Isa.
- On the issue of General Average, the evidence showed that the chief engineer and technical superintendent knew that the fuel injector nozzle (which caused the engine break down) needed to be replaced but failed to take action. The failure to replace the fuel injection nozzles and clean the fuel injection valves was a failure to exercise due diligence before and at the beginning of the voyage to make the ship seaworthy and to properly equip and supply her in breach of article 3(1)(a) and (b) of the amended Hague Rules. Mount Isa had a remedy in General Average under the exception to Rule D of the York Antwerp Rules, incorporated by the bill of lading, as a result of the finding of unseaworthiness, and could recover substantial damages equal to the amount of any contribution in General Average.
It comes as no surprise that the Court found a way to award Mount Isa the right to recover contribution for the full amount paid by them to Xinfa Hai for going to the rescue of Thor Commander without questioning the reasonableness of the amount claimed. It is the court’s practice to encourage vessels to go to the rescue of other vessels. Commercial considerations have no part to play when peoples’ lives or the safety of a vessel is at stake. The UK Club would expect that a similar result would be reached by an English court.
The decision is also a reminder to Owners not to declare General Average if there is an indication that the vessel was unseaworthy at the commencement of the voyage. As Members will be aware, appointing General Adjusters and arranging bonds or other forms of securities for contributions to the General Average is time consuming and can be expensive. Owners will be ultimately liable for all the costs and losses, including interest on the amount of securities provided, if the vessel is found to have been unseaworthy at the commencement of the voyage.
You may also be interested in:
QCR Summer 2019: Proprietary interest in cargo not required to bring a claim in negligence for pure economic loss
Wilmar Trading Pte Ltd v Heroic Warrior Inc.  SGHC 143
QCR Spring 2019: Whether holder of bill of lading bound to submit to arbitration of demurrage dispute notwithstanding it had not exercised rights of suit
SEA MASTER SHIPPING INC v ARAB BANK (SWITZERLAND) LTD (THE “SEA MASTER”)  1 Lloyd's Rep. 101 – 25th July 2018
IG Letters of Indemnity
Members are often asked to accept letters of indemnity (LOIs) from their shippers or charterers in return for the delivery of cargo without presentation of original bills of lading, the delivery of cargo at a port other than that named in the bill of lading (or both) and in various other circumstances
On 21 February, the English High Court in an unreported judgment of HARMONY INNOVATION SHIPPING v CARAVEL SHIPPING  2 WLUK 370 ordered charterers to provide security for the release of a ship under an LOI given to enable cargo to be delivered without production of the original bills of lading.