Ali Reza-Delta Transport Co Ltd. v United Arab Shipping Co SAG

(As approved by the Court)

1. LORD JUSTICE PETER GIBSON: Lord Justice Tuckey will give the first judgment.

2. LORD JUSTICE TUCKEY: On 20 August 1996 a container of gas lighters exploded in the port of Damman, Saudi Arabia, destroying handling equipment belonging to the claimants. His Honour Judge Brian Knight QC, in the Central London County Court (Mercantile list), found the defendant carriers liable for the damage to the claimant's equipment, but held that they were only entitled to recover its market value. On this appeal the claimants contend that the judge should have awarded the cost of its replacement but, say, that in any event, he incorrectly assessed its market value.

3. At the time of the explosion the claimants were the container terminal operators in the port. The container had been shipped to Damman from where it was to be taken by rail to Riyadh on the terms of a combined transport bill of lading issued by the defendants. It exploded whilst it was being moved by a straddle carrier and loaded onto a trailer drawn by a dock truck. The carrier and the truck were damaged beyond repair. The trailer was also damaged and the cost of repairing it was agreed at US$800.

4. The claimants were insured against the loss. After investigation by local cargo surveyors underwriters paid the insured values of the carrier, US$200,000, and the truck, $26,600. Their subrogated claim in these proceedings was limited to these amounts. By their defence the defendants put the claimant to proof of their loss.

5. In support of their claim, the claimants relied on an expert in dock handling equipment, Mr John Gibbons. We have his report and a transcript of his evidence at the trial, to which I will have to refer in more detail. In summary he said that the sums claimed for the carrier and the truck were reasonable. The claim was advanced on the basis that these amounts were recoverable as the cost of replacing the damaged equipment, alternatively, as its market value at the time of the loss. The defendants denied that the claimant was entitled to recover replacement cost, because they had evidence to establish that they had replaced the carrier or the truck or that they had ever intended to do so. When the defendants' solicitors asked about this, they were informed by the claimants' solicitors in September 2002 that it had not been possible to discover whether or not the equipment had been replaced before the claimants had ceased to operate the terminal in 1997, at which time a new company had taken over. There was also no evidence of the financial effect, if any, of the loss of the equipment on the claimants' business.

6. The defendants said that it was not reasonable for the claimants' loss to be measured on the basis of replacement cost, and the claim put in that way should be rejected, as it was in the similar case of The Maersk Colombo [2001] 2 Lloyd's Rep 275. They accepted that they had to pay the market value, but contended that this was no more than US$100,000 for the carrier and US$15,000 for the truck -- sums referred to in Mr Gibbons' report.

7. The trial, which took three days, was mainly concerned with the issue of liability. The judge held the defendants liable under the terms of the port rules which imposed strict liability under Saudi law upon users of the terminal for all damage arising from their use of its facilities.

8. The judge dealt with quantum quite shortly. He had ruled that this was governed by English law. After summarising the parties' submissions and referring to The Maersk Colombo, he said:

"In the absence of evidence that the Claimants have or will replace the equipment, I cannot see that it would be reasonable for me to award a sum in excess of the market value of the items of equipment. Accordingly I award damages of $115,800."

9. It is apparent how the judge came to award this amount from an earlier passage in his judgment where he said:

"[Mr Gibbons'] evidence was that the price of a replacement straddle carrier and dock truck/tugmaster would be US$100,000 and US$15,000 respectively. (Damage to the trailer was assessed at $800 and is not in issue)."

10. So it is clear that the judge accepted the defendants' submissions on quantum. The claimants say he was wrong to do so. They were entitled to recover the replacement cost of the equipment but, if market value was to be the measure of their loss, they were entitled to the value of the equipment in Saudi Arabia. The sums which the judge awarded were what it would cost to buy the equipment second-hand in Europe. There was no market for the equipment in Saudi Arabia. So it is submitted that the judge was bound to award replacement value. The claimants say that the market value of the equipment in Saudi Arabia equated to the replacement value because it had to take account of transporting the equipment there from Europe and tropicalising it in Saudi Arabia.

11. The defendants say that the judge was right to reject the claim for replacement value for the reasons he gave. They submit that Mr Gibbons' evidence was that the equipment would have had a re-sale value in Saudi Arabia of the sums awarded by the judge, so the judge's award of those sums as the market value of the equipment is not open to criticism.

12. We have only heard argument on the market value issue for reasons which will become apparent. Before considering this issue, I should refer to The Maersk Colombo since, although that case was concerned mainly with replacement value, it also assists on market value. In that case the claimants operated the container terminal in Southampton. One of their cranes was struck and damaged beyond repair by the defendants' vessel. The crane was not replaced because before the casualty the claimants had ordered two new cranes. Loss of use of the damaged crane before the new cranes were delivered had caused some inconvenience, but no measurable financial loss. Nevertheless, the claimants asked for the replacement loss of the damaged crane (£2.395 million) being the agreed cost of buying, modifying and transporting a second-hand crane from the United States. The judge, however, only awarded the agreed resale value of the crane in Southampton (£665,000). This court upheld his decision. Clarke LJ (with whom Thorpe LJ and Holland J agreed) did so on the basis that, unless compelled by authority to do so, the cost of reinstatement by reference to transportation and modification costs, which had not and would never be incurred and which it would be unreasonable to incur, could not fairly be regarded as caused by the defendants' tort (see paragraph 23). In the following 56 paragraphs of his judgment Clarke LJ reviewed the authorities on this subject and concluded that they did not compel him to reach any other conclusion. In the course of this review, Clarke LJ accepted the following propositions, suggested by Holland J, as being appropriate to a case of this kind (see paragraphs 71 and 72):

"(1) On proof of the tortious destruction of a chattel, the owner is prima facie entitled to damages reflecting the market value of the chattel 'as is'.

(2) He is so entitled whether or not he intends to obtain a replacement.

(3) The market or resale value is to be assessed on the evidence, there being no standard measure applicable to all circumstances.

The fourth, fifth and sixth of those propositions are not relevant for present purposes.

13. The claim in the instant case was made under Saudi law but we are told that it was treated as a case of tortious destruction. It is now common ground that the claimants' loss fell to be measured in accordance with English law, as the judge ruled. I think Holland J's propositions admirably encapsulate the present state of the English law on this subject. They provide useful guidance as to how we should approach the issue which we have to resolve in this case.

14. It is common ground that the claimants were entitled to recover the market or re-sale value of the equipment, whether or not they intended to replace it. The judge had to assess this value on the evidence (propositions (1), (2) and (3)). It is also accepted that this value had to be assessed at the time and place where the equipment was destroyed (Saudi Arabia).

15. What was the evidence upon which this assessment had to be made? It came from Mr Gibbons. In his report he dealt, first, with the carrier. He said that its German manufacturers had gone out of business in 1996 but a comparable new machine would cost US$600,000. Of the possibility of buying anything other than a new machine, he said:

"(3.7) Machines of this type are used as a fleet and active users very rarely dispose of one of the fleet, they only come on to the market as a result of a complete change of operation or a fleet change by type.

(3.8) It is highly unlikely that an operator in the Middle East would dispose of a major piece of equipment in the immediate trading area because all of the port facilities are competitors.

(3.9) Hypothetically should it have proved possible to locate a suitable machine to replace the one lost the actual price of the machine would probably have been US$100,000 at the time for a machine in good enough condition to justify the additional high costs.

(3.10) My experience of this particular type of machines confirms my view that it would cost US$50,000 to dismantle the machine using a specialist company and hiring someone with experience of these machines to supervise dismantling, mark and pack everything for export shipment to Saudi.

(3.11) The costs of reversing the procedure in Damman as well as rectifying discovered problems, providing new fixings and fittings, painting the machine in the correct livery would be of the same order bearing in mind the high cost of living expenses in Saudi.

(3.12) On top of this there would be CIF costs and transport and almost certainly a non-recoverable duty element. The source of the machine would most likely be Germany so there would have also been costs to 'TROPICALISE' the machine for the extremely high Saudi temperatures. This is not a cheap exercise as it would require heat exchangers, bigger radiators and possibly bigger fans, some sun shielding as well as an operator A/C system, which were not standard in Europe at the time."

After pointing out that this whole process might take 12 months and the difficulty in integrating a machine by another manufacturer into an existing fleet, he concluded at paragraph (3.15):

"It is for all the reasons above that I believe that the value of US$200,000 for this machine is fair and reasonable under the circumstances and was certainly the lower cost of all of the options available to the operator."

16. He was cross-examined about his figure of US$100,000 by Mr Diwan, who appeared then as he does now for the defendants. Of the US£100,000 he was asked:

Q. "So this is the value that you estimate to be given to this straddle carrier?

A. No, not the straddle carrier that has been lost. That is the value of acquiring a machine somewhere in the world that would be in sufficiently good condition for you to take the risks on all the extra costs you have got to add to that to get it into the commercial condition in Saudi Arabia.

....

It would be very unlikely that anybody that had got a commercially working straddle carrier in Saudi Arabia would want to sell it, because of the difficulties of establishing it there, getting it working, keeping it running, and all the other paraphernalia of running an operation. These things are not sold individually on that basis.... That price is to persuade somebody that has got a working machine to part with it. He has the same problems there with Saudi Arabia with regard to his fleet. He has got to be inspired to let it go to some third party, and the amount of money has got to be of interest to him."

He was again asked about his figure of US$100,000 and said:

"This is my opinion of what you would have to [pay], to find a suitable machine in Europe that would be available for sale to a third party in the Middle East."

Finally, of the buyer of such a machine he said:

"His most likely source of buying new machines would have been one of the major ports in Germany, which would automatically have made the price fairly high. Then you would have to persuade them that out of their fleet of however many they had, they would gain advantage from $100,000 rather than having the machine and not wishing to sell it. So there would have to be sufficient money to inspire them."

17. Dealing with the truck, Mr Gibbons said that a new one would have cost US$100,000. Good second-hand machines of this type were best sourced in Scandinavia [where they are made] or Holland. Assuming that a good, second-hand, machine cost as little as US$15,000, it would still have to be tropicalised, customised and transported to Saudi Arabia in the same way as a carrier.

18. On the claimed value of US$26,600, Mr Gibbons concluded at paragraph (3.21) of his report:

"In my experience this is a reasonable Quantum for this part of the claim and is certainly not excessive."

19. Mr Diwan submits that Mr Gibbons was saying not only that the cost of buying this equipment second-hand in Europe was US$115,000, but that this is what its re-sale value in Saudi was as well. Both the seller in Europe and the seller in Saudi could be inspired to part with their equipment at the same prices. I do not accept this submission. Mr Gibbons' report might have been a little ambiguous, but in the passage I have cited from his evidence he made it clear that he was only talking about second-hand prices in Europe and not selling prices in Saudi Arabia.

20. Dealing first with the carrier, as I read Mr Gibbons' evidence, he is saying that it would cost US$100,000 to buy a second-hand machine in Europe. This machine would then have to be dismantled, shipped and reassembled, which would double the cost. Further, unspecified costs would then have to be incurred to tropicalise the machine, which could not be done cheaply. Insurance and freight would add to the cost. So what Mr Gibbons is saying that it would cost substantially more than US$200,000 to replace the carrier. He makes that point clear by a further answer which he gave in cross-examination when he said:

"When I started putting the figures together, I very soon ran out of enough money to be able to replace this machine for $200,000. I have not shown the other shipping costs; the reconversion costs; change the engine to the same type as the machine lost; the tropicalisation. I mean literally rather than make a 73-page document explaining how I wanted to make it a $500,000 machine, I stopped when I ran out of funds to be able to replace it for $200,000."

That is why Mr Gibbons concludes his report by saying that "the value of US$200,000 for this machine is fair and reasonable" and the lower cost of all of the options open to the operator. It seems to me that he is saying that this is the market or resale value of this machine in Saudi Arabia.

21. On the other hand, the judge's figure cannot be justified. The value of such a machine in Europe could not be the same as its value in Saudi Arabia, since the latter value must reflect the fact that such a machine has had to be transported to and imported into Saudi Arabia and tropicalised at substantial cost.

22. Mr Diwan argued that this was an old machine. By 1996 its value was unlikely to reflect much, if any, of the increased cost of getting it into Saudi Arabia and adapting it for use there. The US$100,000 was a hypothetical figure intended to tempt a seller to part with his machine. This is unlikely to be what this old damaged machine was actually worth. I do not accept these submissions. The market value of working equipment such as this must reflect the increased costs of getting it to Saudi Arabia and adapting it for use there however old it may be. Mr Gibbons' view was that this was a reasonable value for this carrier.

23. The same applies to the truck. Mr Gibbons' figure of "as little as US$15,000" was for buying such a machine in Scandinavia or Holland. Its value in Saudi Arabia would have to reflect the additional costs of tropicalisation, transport and duty. Mr Gibbons' view was that the sum of US$26,600 was a reasonable claim and certainly not excessive. Here again, he is giving his opinion as to the value of the machine, rather than a precise amount for the cost of replacing.

24. These conclusions make it unnecessary to deal with whether the judge was right to reject the claim for reinstatement value because that would make no difference to the result in this case; nor do they make it necessary to deal with Mr Karia's (counsel for the claimants) submission that, because there was no available market in Saudi Arabia, market value had to be the same as replacement value. All I need say about this submission is that I do not think that this follows from the cases upon which Mr Karia relied. In this situation I think Holland J's third proposition correctly states the law, ie there is no standard measure of market value applicable to all circumstances.

25. For these reasons, I would allow this appeal and substitute the sum of US$227,400 for that of $115,800 awarded by the judge in paragraph 1 of his order.

26. MR JUSTICE NELSON: I agree.

27. LORD JUSTICE PETER GIBSON: In The Baltic Surveyor [2002] 1 Lloyd's Rep 623, at paragraph 86 Rix LJ suggested that in the case of a second-hand chattel where there is no market, the proper approach in assessing the quantum of damages is to make a fact specific review of what has been lost and then to attempt to put a financial figure on it as best one can.

28. In the light of the facts of this case, and in particular the evidence of Mr Gibbons which appears to have been largely unchallenged, I, too, have reached the conclusion that this appeal must be allowed for the reasons given by my Lord, Lord Justice Tuckey, with which I am in full agreement.

Order: Appeal allowed with costs of appeal. As far as the costs below, the successful party is entitled to the indemnity costs plus an enhanced rate of interest to be assessed at 3 per cent over prime rate from 21 August 2001 until payment plus interest until payment. The enhanced rate includes the interest on the judgment itself from 21 August 2001.