The question in this appeal is whether a carrier by sea, who carries cargo on deck in breach of a contract of carriage which is governed by the old Hague Rules, can take advantage of Article IV rule 5 to limit his liability for loss or damage to that cargo. Hirst J answered that question in the negative in The Chanda [1989] 2 Lloyds Rep 494; in the present case Langley J has answered the question in the affirmative [2002] EWHC 1306 (Comm), declining to follow The Chanda.

The proceedings arise out of the partial loss of and damage to a consignment of 34 new excavators carried on the Bulgarian vessel Kapitan Petko Voivoda from Korea to Turkey in September to November 2000.

The First Defendant was the charterer of the vessel. The cargo was carried pursuant to a charterparty between the First Claimant and the First Defendant and pursuant to 6 bills of lading issued by or on behalf of one or other of the Defendants.

For the purposes of the trial of preliminary issues the parties agreed a statement of assumed facts. It reads (so far as relevant) as follows:

The fax dated 22nd August 2000 provided that the carriage would be “underdeck only” (number 17). The Conline terms contained a General Paramount Clause (clause 2) the effect of which on the basis of the assumed facts is that the Hague Rules (but not the Hague-Visby Rules) as enacted in Turkey applied. The bills of lading also included the Conline terms.

The relevant provisions of the Hague Rules are:-

Although not relevant in the present proceedings, it is to be noted that the Hague-Visby Rules contain an exception to the application of the limitation of liability in the terms of the replacement Article IV rule 5, provided for by Article 2 of the Visby Protocol. The limitation itself appears in Article 4 rule 5(a) in substantially the same terms as rule 5 of the Hague Rules, save as to amount.

The replacement Article IV rule 5(e) reads:-

Preliminary issues were ordered to be tried in the Commercial Court in the following terms:-

Mr Hamblen QC, for the Claimant cargo-interests, stressed the importance of the carrier’s obligation to carry underdeck several times in his submissions. He categorised the breach of the obligation as a very serious breach and Mr Lord QC, for the carriers, did not in any way dissent from the proposition. Neither do I. However, the seriousness of the breach is no longer a self-sufficient yardstick for determining whether exception or limitation clauses apply to particular breaches. The doctrine of fundamental breach or breach of a fundamental term was discredited in Suisse Atlantique Société d'Armement Maritime S.A. N.V. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361 and given its formal burial in Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827 which decided that the question whether particular clauses applied to excuse or limit liability was solely a matter of construction of the contract. But the doctrine of fundamental breach never sprang fully fledged from the heads of judges in the middle years of the last century; it had a respectable commercial origin in the 19th century cases relating to “serious” breaches of contract such as deviation from the contractual voyage and storing goods in a warehouse other than that originally agreed. It has not yet been conclusively decided whether what I may call the deviation cases and the warehouse cases must be regarded as dead and buried along with the doctrine of fundamental breach. Mr Hamblen’s submission was that the obligation to carry cargo underdeck had the same importance as the obligation not to deviate and the obligation to store in the contractual warehouse – he even categorised carriage of cargo on deck as a “quasi-deviation”; he then submitted that, as a matter of construction, it could not have been the intention of the parties to apply the Hague Rules limitation to such a serious breach. By travelling the path of construction of the contract, he thus arrived at the cargo-owners’ desired destination.

This is a respectable argument with reputable antecedents and was skilfully deployed. Mr Hamblen made the following submissions on which I have ventured the occasional comment of my own:-

As against this barrage of authority Mr Lord was able to rely on the following arguments:-

The starting point for resolution of these conflicting arguments must be that the Hague Rules are an international convention; although they must in this case be construed as incorporated into a contract governed by English law, their interpretation is “not to be rigidly controlled by domestic principles of antecedent date but they are rather to be construed on broad principles of general acceptation” see per Lord Macmillan in Stag Line Ltd v Foscolo, Mango & Co Ltd [1932] AC 328, 350 and Mance LJ in Tilbury v International Oil Pollution Compensation Fund 7th February [2003] EWCA Civ 65, paras 16 and 21.

It may be difficult to know in any given case what “broad principles of general acceptation” are to prevail over domestic principles but the approach must be very relevant where it is sought to rely on the peculiarly common law principle derived from the deviation cases. This is not an appropriate case to decide whether what Lord Wilberforce called “a body of authority sui generis with special rules” [1980] AC at page 845 is consistent with the law as expounded in the Photo Production case. It is, however, on any view a peculiar creature of the common law. Although it appears to have been received into the United States and, indeed, to have been extended to apply to cases of carriage on deck in breach of contract, it cannot be described as a “broad principle of general acceptation”. Mr Lord commented that Article IV rule 4 itself abrogated the common law rule of deviation; he was also able to show that, at any rate in relation to deck cargo, the deviation principle does not apply in Holland, France or Italy where courts have decided that the carrier can rely on the Article IV rule 5 limit in deck cargo cases. Of course, such decisions cannot constitute precedents but they do at least show that the principle for which the deviation cases are authority is very far from being a principle “of general acceptation”. It is a question of some controversy whether they now exemplify even a principle of English law. As Lloyd LJ said in The Antares [1987] 1 Lloyds Rep 424, 430:-

It seems to me, therefore, that the cargo-owners can derive no benefit from the supposed principle stated in the deviation cases or, indeed, the warehouse cases. The duty of the court is merely to construe the contract which the parties have made.

Once the problem is treated purely as a question of construction the words “in any event” become very important. Their most natural meaning to my mind is “in every case” (whether or not the breach of contract is particularly serious; whether or not the cargo was stowed under deck). The French wording “en aucun cas” would, I think, support that view. Hirst J in The Chanda made no reference to these words at all which is surprising since he purported to treat the question before him as a pure question of construction. On any view they are highly relevant words. Mr Hamblen submitted that the phrase was, as he put it, “conjunctive and neutral” and meant no more than “notwithstanding the foregoing”. Since the rule foregoing Article IV rule 5 is Article IV rule 4 disapplying the strict common law rule about deviation it does not seem to me that Mr Hamblen’s construction particularly advanced the argument.

It is, moreover, on this aspect of the matter that the Antares and the Happy Ranger are particularly relevant. The question in the Antares was whether a shipowner who carried cargo on deck in breach of contract could rely on Article III Rule 6 of the Hague-Visby Rules which relevantly provided:-

The Happy Ranger was a case where Article IV rule 5 of the rules was held to apply where there had been a breach of the seaworthiness obligation contained in Article III rule 1. The court held that the Hague/Visby rules applied. There was no question of the damage being caused deliberately or recklessly so only Article IV rule 5(a) was in play, in materially the same terms as Article IV rule 5 of the old rules. The argument was that since the Privy Council had decided in Maxine Footwear v Canada Government Merchant Marine [1959] AC 589 that the seaworthiness obligation contained in Article III rule 1 was an overriding obligation and that the exceptions in Article IV rule 2 could not be relied on in the event of breach of that overriding obligation, so also the shipowner could not rely on Article IV rule 5. Tuckey LJ said (para 38):-

As stated, the Antares and the Happy Ranger favour the carriers’ argument. Evans v Merzario was a different case on its facts. Critical to all the judgments was the fact that the merchandise had previously been packed in crates on trailers but the carriers were proposing that in future it should be packed in containers. There was a conversation between the importer’s representative Mr Leonard and the carrier’s representative, Mr Spano. In Lord Denning MR’s words Mr Spano assured Mr Leonard “if we do use containers, they will not be carried on deck”. There was thus a wholly separate and collateral promise which induced the business to continue; Lord Denning called it an “oral promise or assurance” (page 1081F); Roskill LJ emphasised (page 1083G) that “the plaintiffs were only willing to agree to that change [viz containers instead of trailers] if they were promised by the defendants that those containers would be shipped under deck and would not have agreed to the change but for that promise”; Geoffrey Lane LJ called it a “new express term” (page 1084G). The defendant’s printed terms and conditions had been incorporated into the previous contracts made between the parties and (1) excused the defendants unless the loss or damage occurred while the goods were in their actual custody and under their actual control and (2) limited their liability to £50 per ton. Not surprisingly these clauses were held not to apply in the event of a breach of the new express term to carry under deck. Roskill LJ said [1976] 1 WLR 1078, 1084G:-

It is important to remember Langley J’s unappealed answer to question 2(b) of the preliminary issues to the effect that the defendants in the present case would be unlikely to be able to rely on the defences provided by Article IV rule 2 of the Hague Rules but that it would depend on the facts. The reason for this answer is that, granted there has been a breach of contract by shipment of cargo on deck, the loss will probably be caused by that breach of contract and the claimant will therefore be able to recover. If goods are shipped on deck in breach of contract and are also insufficiently packed with the result that they are lost, the shipment on deck is at any rate a cause of the loss. If they had been shipped in the holds, as they should have been, the insufficiency of packing is unlikely to have mattered and Article IV rule 2(n) could not be relied on. The same will apply to an exception of jettison whether stated as such in the contract or pursuant to Article IV rule 2(l). It is likely that the cargo shipped on deck will be the cargo to be jettisoned; if it had been loaded underdeck it would probably not have been that cargo which was jettisoned. That was the position in Royal Exchange Shipping Co v Dixon (1886) 12 App Cas 11, see especially the speech of Lord Halsbury LC which was thus never an authority that in the case of any on deck carriage the carrier could never rely on any exemption. It needs hardly to be added that Langley J was, of course, right to give the cautious answer he did to question 2(b), since the events giving rise to some of the exclusions from liability might apply whether the cargo was loaded on deck or not. Fire, act of God and act of public enemies furnish possible examples.

It follows that Hirst J’s reliance on Royal Exchange Shipping Co v Dixon and Evans v Merzario in The Chanda was misplaced. He extracted from them the principle of construction that clauses intended to protect the shipowner provided he honours his contractual obligation to stow goods under deck do not apply if he is in breach of his obligations. This, with respect, does little more than state the obvious and gives no guide as to how a judge is to ascertain (otherwise than by bald assertion) whether any particular clause is only intended to apply if a shipowner ships under deck or is not intended to apply if he ships the cargo on deck. Not surprisingly, when Hirst J comes to state his decision, it is only by assertion that he does so:-

Hirst J’s final conclusion was that the package limitation clause “being repugnant to and inconsistent with the obligation to stow below deck, was inapplicable”. This is, no doubt, a reference to the repugnancy principle of construction whereby, if a clause is inconsistent with other provisions of the contract, the main purpose of the contract will prevail. But once one takes account of the words “in any event” there is no such repugnancy. I would therefore agree with Langley J’s “diffident” conclusion in para 28 of his judgment that the Chanda should not be followed, because the words “in any event” were never addressed and the supposed repugnancy of Article IV rule 5 cannot be justified as a matter of construction. The Chanda has been followed in New Zealand in The Pembroke [1995] 2 Lloyd’s Rep 290 but without any independent reasoning. In my judgment we should now overrule The Chanda and should approve the contrary decision of Sheen J in The Nea Tyhi [1982] 1 Lloyds Rep 606 where, however, there is no sign that the point was argued.

Mr Hamblen painted a dire picture of cargo-owners’ interests if his appeal should fail. He said that the Turkish sum used in Article IV rule 5 was 100,000 Turkish lira per package or unit and that was equivalent to about 5 pence for each of the excavators which were totally lost. This, he said, was the equivalent of a total exemption from liability. Mr Lord said that all depended on whether the gold equivalent of the Turkish lira sum was to be taken as the relevant limitation sum but accepted that, on any view, cargo owners would not be adequately compensated. But Mr Hamblen’s fears are somewhat exaggerated. Cargo-owners can always declare the value of their goods and cause that value to be inserted into the bill of lading. They would then be able to recover the value of their goods. Cargo-owners could also require the application of the Hague-Visby rules with their more favourable provisions rather than the old Hague rules. In this sense, this appeal is less far-reaching than Mr Hamblen suggested. I would dismiss it.

I agree with Longmore LJ.

This appeal requires us to decide which of two conflicting decisions by respected Commercial Court judges relating to the construction of the Hague Rules 1924 is right. I shall therefore add some observations of my own.

The material facts are set out in Longmore LJ’s judgment. They require no repetition. In breach of contract, the appellants’ excavators were stored on deck, and not, as expressly agreed, under deck. Some were lost altogether, and some were damaged. On the assumption that none would have been lost or damaged if they had been carried under deck, the question for decision is whether the limitation provided by Article IV Rule 5 of the Hague Rules (which were incorporated into the contract) continued to apply to the advantage of the defendants, notwithstanding their breach of contract. Langley J decided that it did, and declined to follow the decision of Hirst J in The Chanda [1989] 2 Lloyds Rep 494, in which he decided, in identical circumstances, that it did not.

The relevant provisions of the Hague Rules are also recited in Longmore LJ’s judgment, and again, they require no repetition. Our direct concern is with the impact of part of Article IV Rule 5. Before coming to it, a number of other clauses providing for the avoidance or restriction of liability should be noted. Article IV Rule 2 is a true exemption clause. Langley J believed that this rule would be unlikely to avail the carriers in the present case, but the rule itself needs no further analysis in the present appeal. Article III Rule 6 does not, in the strictest sense, exclude liability. Rather, it imposes a contractual limitation period, so that, after this agreed period, any liability which might otherwise be established against the carrier is discharged, and the shipper’s right to proceed is barred. Article IV Rule 4 covers deviation, normally a serious breach, but for the purposes of saving life and property, or where the deviation is reasonable, deemed not to constitute a breach at all. Any liability in the carrier is also precluded under Article IV Rule 5, if the shipper knowingly misrepresents the nature and value of the goods to be carried. Although in one sense providing an exemption from potential liability, this protection is built into the contract to ensure that the shipper is honest in his dealings with the carrier.

These different provisions form part of an overall framework governing the responsibilities and liabilities, and the rights and immunities of the carrier, and the obligation to load, handle, stow, carry, care for and discharge the goods “properly and carefully” is subject the provisions of Article IV.

The part of Article IV Rule 5 with which we are directly concerned limits potential liability for loss or damage to a prescribed amount. As a result of this clause, the amount recovered by the shipper will often be, as it is here, far less than the actual loss, frequently, indeed, derisory. There is a simple escape from this limitation clause. As between the contracting parties, all that is required is a truthful declaration by the shipper about the nature and value of the goods, and the insertion of this information in the bill of lading. It is also open to the parties to agree a different, but increased maximum, exceeding the sums prescribed in Rule 5. Another possibility arises under Article VI. Yet another alternative escape route is for the relevant Hague-Visby Rules to be incorporated into the contract. All that said, we are required to consider the limitation clause which the parties agreed, rather than one they did not. However, when considering the argument that this clause is so wide that it effectively protects the carrier from non-performance of the contract, it is not irrelevant to notice that, if that submission were right, it is precisely what the shipper agreed, notwithstanding the opportunity, expressly provided by the contract, for him to escape from the consequences of the limitation clause.

It was further suggested in argument that as the shipper believed that the excavators would be stowed under deck in accordance with the contract, there was no need to take advantage of the escape provisions. Provided the carrier complied with his contractual obligations, the possibility of loss and damage was significantly reduced. Therefore, the shipper need not have been over-concerned with the limitation clause. The argument would be more compelling if the limitation clause did not apply generally to loss and damage occasioned by breach of contract. If, for example, the vessel had been unseaworthy, and sunk, the excavators would have been lost whether stowed on deck or under it, but if liability were otherwise established, the limitation clause would have applied.

In summary, the issue is whether the carriers’ breach of the obligation accepted by them, stowage on deck instead of under deck, fell outside the protective ambit of the limitation clause. It is obvious that stowage on rather than under deck was a serious breach of contract. Everyone understands that such stowage of itself significantly increases the risk of loss and damage. So from the shipper’s standpoint, the express contractual requirement for under deck stowage would have been, and plainly was, extremely important. Our attention was drawn to the sensitivity of the common law to secure the performance of particular types of obligation, such as those relating to bailment, and, in shipping cases, in relation to deviation in the geographical sense, from the agreed route, and to the unauthorised carriage of cargo on rather than under deck. (See, for example Gibaud v Great Eastern Railway Co [1921] 2KB426 at 435; Stag Line Ltd v Foscolo, Mango and Co Ltd [1932] AC328 at 347; Lilley v Doubleday [1881] 7QBD 510; and Royal Exchange Shipping Co v Dixon [1886] 12AppCas11.) None of these authorities supports the proposition that a limitation clause of the kind presently under consideration, is deemed to be impermissible, or unenforceable, where the loss and damage have resulted from “the unauthorised loading of deck cargo” (The Antares [1987] 1 Lloyds Rep 424). Ultimately, the question is one of construction of the contract (Photo Production Ltd v Securicor Transport Ltd [1980] AC827). The debate is not illuminated by considering whether different, theoretical breaches of the contract may have had more or less serious adverse consequences than the actual breach with which we are concerned. Indeed, carried to its logical conclusion, the argument at one stage came very close to reviving the moribund, if not defunct principle of the “fundamental breach”.

In The Chanda, Hirst J concluded that the limitation clause did not apply where the goods were stowed on deck, rather than under deck. He based his conclusion on Royal Exchange Shipping Co v Dixon, and J Evans and Sons (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1WLR1078.

I shall briefly examine Royal Exchange Shipping Co v Dixon, where, in breach of an express condition, goods were carried on and not under deck. The exemption clause relied on by the carriers referred exclusively to goods which were safely stored under hatches. The contrary was not argued. The main submission was that the loss of goods through “jettison” was not attributable to stowage on deck. Lord Halsbury LC described this argument as “hardly susceptible of plausible statement”. Lord Watson concluded that the circumstances in which the goods were jettisoned fell outside the exemption clause. The goods were being carried “in breach of the contract, and were not within the exceptions specified in the bills of lading”.

In my judgment this decision does not assist in the task of construing the limitation clause in the overall contractual context.

In J Evans and Sons (Portsmouth) Ltd v Andrea Merzario Ltd, beyond a passing reference in argument, the Hague Rules were not under consideration. For some years, machinery was packed in crates for shipment to England. The crates were stowed under deck. This course of dealings was subject to standard conditions, which, by condition 13 provided: “In no case shall the liability of the company exceed…”.

A change to the packing arrangements was proposed, and agreed, subject to new charges, and an express contractual term, made orally, that the containers would be carried under deck. In the result, the containers were shipped on deck, whence they fell into the water.

In the Court of Appeal it was decided that condition 13 did not limit liability. Lord Denning MR treated the limitation clause as equivalent to an exemption clause, and on the basis of authorities in which oral promises had been held to be binding in spite of written exemption conditions, decided that they should be “rejected”. Roskill LJ looked at all the evidence to discover “the bargain…struck between the parties”. He concluded that there was an enforceable contractual provision that the machines would be shipped under deck. The agreement to change from packaging in crates to containers was dependent on the promise that the containers would be shipped under deck. Approaching the problem as a matter of construction, he disposed of any possibility of reliance on the exemption conditions by concluding that, if they applied, the promise that the goods would be carried under deck would have been “illusory”. So the promise overrode any exempting conditions.

Neither judgment focused directly on whether there might be any distinction between exempting conditions and conditions which limited liability. That issue arises here because, whatever the impact or otherwise of the exemption conditions, we are concerned only with the limitation conditions. That question was directly addressed in the judgment of Geoffrey Lane LJ. He decided that the exemption conditions, including the limitation clause, were logically inconsistent with the “new” express terms.

The question decided in the Court of Appeal, therefore, was whether, given the new arrangements relating to containers, and the express oral promise that they would be carried under deck, the exemption clauses continued to be incorporated into the contract established by the course of previous dealings between the parties. By implication, Lord Denning concluded that, even if the standard conditions were incorporated, they were defeated by the oral promise. However, Roskill LJ identified the relevant terms of the contract, which were partly oral, partly in writing, and partly depended on inference from the conduct of the parties, and concluded that the exemption clauses did not override the oral promise. Geoffrey Lane LJ decided that the standard conditions implied from the previous dealings did not prevail over the new express terms. The contract was therefore not subject to the terms implied by the previous dealings.

In summary, therefore, the limitation clause in Evans did not apply, either because it was not incorporated into the contract then under consideration (Geoffrey Lane LJ) or because, looking at all the material, written and oral, or by way of inferences from conduct, in the contract under consideration, the exemption clauses did not avail the defendants (Roskill LJ).

In The Chanda, Hirst J relied on Evans to reach the conclusion that the limitation provisions in the Hague Rules did not apply to the claim for damages arising from unauthorised stowage on deck. Evans, he thought, illuminated a principle of construction that clauses

In my judgment, the decision in Evans does not support this broad proposition. At the risk of stating the obvious, if the shipowner honoured his contractual obligations, he would not have been in breach of them: the exemptions and limitations do not normally arise for consideration unless there is a breach. They protect one of the parties against his own default. They often limit the remedies which would otherwise be available to the wronged party. In that broad sense, of course, they are discordant with the contractual obligations of the party in default, and the anticipation of the wronged party. That explains why exemption clauses are closely scrutinised, both to check that they do indeed form part of the contract, and to ensure that they provide exemption from liability which would otherwise be established. Nevertheless, the ultimate decision depends on the proper construction of the contract agreed by the parties.

It is not suggested, nor could it be, that Article IV Rule 5, or any part of it, was somehow excluded from the contract. I respectfully disagree with Hirst J that, as the limitation clause was “repugnant to and inconsistent with the obligation to stow below deck”, it was “inapplicable”. The authorities on which he relied did not justify this conclusion. The limitation clause took effect “in any event”. This phrase appears on three relevant occasions, once in connection with the clause creating the time bar, and twice in the limitation clause with which we are concerned. It was suggested that the words should be read to mean, “Notwithstanding the foregoing.” I doubt whether this meaning greatly improves the shippers’ position, but whether it does or not, “in any event” are simple words, to be read in the context in which they appear, and it would be unwise to attempt to translate these three words into three, or fewer, or more different words. As Tuckey LJ pointed out in The Happy Ranger [2002] 2 Lloyds Rep 357:

By way of footnote, I should add that, notwithstanding that we are considering an international convention, I can see no advantage in commenting on decisions reached in different jurisdictions. I gratefully adopt Longmore LJ’s analysis of them.

I agree with both judgments.