In brief - An old war story in which key legal principles were applied to a shipping mystery

A "bizarre discovery" at a concrete processing plant showed that a batch of aggregate had been contaminated with water and sugar during its shipping. This led to an interesting case in 1979 where the cargo owners sued the carrier for breach of their contract of affreightment (COA) and negligence. The carrier in turn cross-claimed against the ship owner from which they had chartered the ship.

Water and sugar left over in ship's hold contaminate aggregate

In the case of South Coast Basalt P/L and Pioneer Concrete (NSW) P/L v RW Miller and Co P/L (NSWSC, Yeldham J, 22/04/1977, unreported), the two plaintiffs, South Coast Basalt and Pioneer Concrete (SCB and PC), were wholly owned subsidiaries of Pioneer Concrete Services Pty Ltd. SCB was the lessee of a basalt quarry at Bass Point, six hours by sea south of Sydney. From about 1973, basalt, which had been extracted from the quarry, crushed and graded into aggregates of various sizes, was shipped to Blackwattle Bay in Sydney, where PC used it in the manufacture of ready mixed concrete.

Miller entered into a long-term COA to carry the basalt for SCB on 22 June 1973. Initially it used its own vessel, the "Lisa Miller", for that purpose but it had grounded and the "Hexham Bank" had been used for one voyage while "Lisa Miller" was undergoing repairs. Miller time chartered the "Cobargo" from Hethking under a Baltime 1939 Uniform Time Charter dated 3 October 1974 to perform the COA. The "Cobargo" was managed by Hetherington Kingsbury Pty Ltd. It had been acquired by Hethking in about July 1973 and had carried sugar from the northern rivers of NSW to Sydney. The first two voyages under that charter involved the carriage of coal. On 15 November 1974, basalt was carried from Bass Point to Blackwattle Bay.

It was alleged by the plaintiffs that during that voyage a quantity of water in the No. 2 hold could not be removed by reason of a defective bilge pumping system. The water had derived from an excessively wet cargo of coal. It was further alleged that quantities of sugar which also remained in the hold became dissolved and approximately 400 tons of 10mm aggregate, which was stowed in the hold, became contaminated. As a result it was alleged much of the concrete made from that basalt failed to set properly, causing substantial damage to the plaintiffs.

The judgment of the Privy Council, to which reference is made later, contains the following description of the detection of the problem: "The mode of its discovery was bizarre. As a result of the evaporation by the summer heat of the water in which the sucrose was dissolved clouds of bees were attracted to the deposited sugar in a batch of aggregate passing along the conveyor belt to the Blackwattle Bay plant".

Plaintiffs allege negligence, breach of contract and implied warranty

SCB's claim against Miller alleged breaches of the COA, including clause 21(c) which provided that:

Miller shall ensure that there is no contamination of aggregate by coal or other materials (excluding sea water) or by different sizes of aggregate from the time of loading at Bass Point until discharge onto Basalt's Conveyors.

It was also asserted that Miller was in breach of an implied warranty of seaworthiness. Allegations of negligence were also made by the plaintiffs (PC only suing in tort).

Force majeure/exception clause relied on by defendant

By its defence, Miller denied that clause 21(c) had the effect contended for or that there was any implied warranty of seaworthiness; and that it was not in breach of either allegation. It also denied any causal connection between the damage suffered by SCB and any such breaches, and relied upon clause 17, the force majeure/exception clause in the COA which, inter alia, protected Miller from acts or neglects of the Master in the navigation or management of the ship. In answer to the negligence claims, Miller also denied any negligence or that any negligence was causally related to the damage claimed, and asserted contributory negligence. Clause 17 was also raised in response to the claim in tort by SCB.

In response to the reliance on clause 17, SCB relied on section 5 of the Sea Carriage of Goods (State) Act 1921, which made certain provisions in "any bill of lading or document" null and void.

Defendant cross-claims against Hethking Steamships P/L for breaches of time charter clauses

The claim against Hethking by Miller relied on breaches of clauses 1 and 3 of the time charter. Clause 1 described the vessel as "being in every way fitted for bulk cargo service with all cargo spaces swept clean" . Clause 3 required "the owners to provide and pay for all provisions and wages, for insurance of the vessel, for all deck and engine room stores and maintain her in a thoroughly efficient state in hull and machinery during service". Reliance was also placed on an implied warranty of seaworthiness.

Hethking denied those allegations and also relied on clauses 9 and 13 of the charter. Clause 9 provided: "The Owners not to be responsible.... for damage to or claims on cargo caused by bad stowage or otherwise". Clause 13 provided: "The Owners only be responsible for delay... and for loss or damage to goods on board, if such delay or loss has been caused by want of due diligence on the part of the Owners or their Manager in making the Vessel seaworthy and fitted for the voyage or any other personal act or omission or default of the Owners or their Manager. The Owners not to be responsible in any other case nor for damage or delay whatsoever and howsoever caused even if caused by the neglect or default of their servants..."

In response to Hethking's reliance on the charter party provisions Miller, in turn, relied upon section 5 of the Sea Carriage of Goods (State) Act.

Supreme Court judge hears expert evidence on sugar's harmful effects on concrete

The hearing before Yeldham J in the NSW Supreme Court lasted nine days. Expert evidence was given to the effect that a small amount of sugar in a concrete mix has a harmful effect on its setting properties. Yeldham J found that sugar had remained on the gusset plates, limbers, sheathing, tank top, and under the ceiling timbers forming the floor of the hold and between the side hopper boards and the skin of the ship. He also found that when in solution as a result of the water lying in the hold, it coated a considerable proportion of the basalt with sucrose.

Yeldham J accepted that the bilge pumping system was prevented from operating by reason of "thick and sticky quantities of sugar lying in the bottom of the hat box; in the pipe which protrudes up into it from below and in the holes in the strum box or straining surrounding such pipe".

Sugar residue should have been removed from vessel

In considering the liability of Miller to the plaintiff under the COA, Yeldham J construed the interaction of clauses 17 and 21(c) as not making Miller a guarantor or insurer against contamination. He held, however, that Miller was in breach of its obligation under clause 21(c). That obligation he construed as being "to take reasonable steps for the purpose of making sure that no contamination occurred i.e. that no foreign substances, whatever their likely effect, were present."  He thought "contamination" in this context referred to "the rendering of the aggregate impure by the presence of foreign substances irrespective of whether that impurity is likely to be relevant to the manufacture of concrete." Yeldham J found that Miller should have taken steps to ensure that the residues of sugar were removed from the vessel.

Implied warranty of seaworthiness applies for each voyage under COA

He also found that there was an implied warranty of seaworthiness which applied at the commencement of each voyage under the COA. He accepted that the warranty included "both the fitness of the ship to encounter the perils of navigation and her fitness to carry the cargo." (See Anglo Saxon Petroleum Co Ltd v Adamastos Shipping Co Ltd [1957] 2 QB 233)

Yeldham J concluded that although Miller and its employees were unaware of the likely effect of sugar on concrete made from aggregate contaminated by it, "the vessel was not fit for cargo of any kind by reason of the presence of sugar dissolved in water."

Exception clause and section 5 of Sea Carriage of Goods (State) Act considered by judge

He then considered clause 17 of the COA. He found that clause 17 did not avail Miller as the master and crew were not servants of Miller and, if they were, the negligence was not in the navigation or management of the vessel. (See Gosse Millard Ltd v Canadian Government Merchant Marine Ltd [1929] AC 223)

Interestingly, in his consideration of section 5 of the Sea Carriage of Goods (State) Act, Yeldham J concluded that the reference to "document" included the COA, as it was "a document relating to the carriage of goods by sea, just as is a bill of lading."

Remoteness of damage

In considering Miller's arguments to the effect that any damages suffered by SCB by reason of Miller's breach of its contractual obligations to SCB were not causally related, Yeldham J had to consider questions of remoteness. In reliance on well known cases (see Hadley v Baxendate [1854] 9 Ex 341; Victoria Laundry (Windsor) Limited v Newman Industries Ltd [1949] 2 KB 528;Koufos v C. Czarnikow Ltd [1969] 1 AC 350), Yeldham J held that SCB was entitled to recover the damages claimed on the basis that Miller "should reasonably have contemplated that if the vessel was unseaworthy, in the sense of not being fit for the reception of the aggregate, contamination could occur which would affect the final product and involve the first plaintiff in liability at the suit of those who purchased the aggregate from it."

In considering whether Miller could benefit from an argument that SCB was not strictly liable to its customers (by reason of its own terms and conditions), Yeldham J applied the reasoning of Banco de Portugal v Waterlow & Sons Limited [1932] AC 452; Levi Strauss (Australia) Pty Ltd v Mayne Nickless [Court of Appeal NSW, unreported 17 December 1976] in holding that SCB had acted reasonably.

His Honour also found that there was no liability by one plaintiff to the other under any condition implied by section 19(1) of the Sale of Goods Act 1923 and his Honour considered a number of cases, including some (at the time) recently decided leading cases such as Cammell Laird & Co Ltd v Manganese Bronze & Brass Company Ltd [1934] AC 402; Hardwick Game Farm v S.A.P.P.A [1969] 2 AC 31and Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441.

Duty of care owed but to what extent reasonably foreseeable?

In relation to actions in tort, his Honour had no difficulty finding that Miller owed PC a duty of care and applied the decision inOverseas Tank Ship (UK) Ltd v Morts Dock & Engineering Co Ltd (Wagon Mound No. 1) [1961] AC 388 and the requirement that "foreseeability of harm is the essential criterion for both the liability and the extent of compensation payable by one who is so liable." Yeldham J also referred to a number of other cases such as the Wagon Mound (No 2) [1967] AC 617; Bolton v Stone [1951] AC 850, Koufos v Czarnikow Ltd [1969] 1 AC 350; Dorset Yacht Co Ltd v Home Office [1970] AC 1004; Mount Isa Mines Ltd v Pusey 125 CLR 383 and Caterson v Commissioner for Railways 128 CLR 99.

His Honour held that it was "not foreseeable prior to the loading of the cargo of basalt into the hold on 15 November and its carriage to Blackwattle Bay, that the presence of dry sugar in the hold in the places and in the quantities in which they existed would be 'not unlikely' to deleteriously affect the concrete, for the manufacture of which the basalt was used, in any way which may have required its removal." Accordingly Miller, he found, was not in breach of its duty of care to PC because damage of the general nature of that which occurred, in so far as sugar contributed to it, was "not reasonably foreseeable by the defendant."

Furthermore, he held that even if he was wrong in that regard, the knowledge of the plaintiff's employee at the load port of the presence of the water in the hold, brought about by defects and blockages in the bilge pumping system, such water giving to the sugar a harmful effect, was an intervening act of such a kind as was itself not reasonably foreseeable.

Judge finds that Hethking breached the cleanliness of cargo spaces clause

In relation to Miller's cross-claim against Hethking, which relied upon clause 1, (which required the vessel to be presented "in every way fitted for the bulk cargo service with all cargo spaces swept clean" on 3 October 1974) his Honour noted that the words "with all cargo spaces swept clean" were not on the printed form but had been added by typewriter.

Yeldham found that there was a breach of clause 1. Although he considered the words "cargo spaces" referred to those areas into which it might reasonably be expected that bulk cargo would be received and there was no breach in the failure to remove sugar lying beneath or behind the boards which lined the after hold, there had been a lack of due diligence in removing the sugar from areas such as the gusset plates, limbers, sheathing and tank top. He relied on the decision in "The Brabant" [1967] 1 QB 588, where a specially typed clause had read "the decks and holds and other cargo spaces to be properly cleaned at owners risk and expense before loading."

Ship owners fail to ensure that vessel was thoroughly efficient, but no breach of implied warranty

Miller also relied on clause 3 which required the owners to maintain the vessel in "a thoroughly efficient state in hull and machinery".

Yeldham J rejected a submission by Hethking that because the bilge pumps were themselves efficient (although their operation was impeded by the blockage in the strum box), there was no inefficiency in hull and machinery. Likewise he rejected a submission by Hethking that because there was a relatively easy manner by which the water could be removed from the lower hold, the bilge lines could be regarded as being in a thoroughly efficient state. His Honour also distinguished the case of Giertsen & Others v George v Turnbull & Company [1908] S.C. 1101, relied upon by Hethking to support the proposition that clause 3 merely required the owner to bear the costs of maintenance and did not place a duty on it, breach of which made it liable in damages. Yeldham J relied on the decision in Hong Kong Fir Shipping Co Ltd v Kawasaki Kissen Kaisha Ltd [1962] 2 QB 26 in finding that clause 3 was a warranty, breach of which gave rise to a claim for damages.

His Honour was prepared to hold that the clause "did not impose an absolute engagement or warranty - i.e. that it was not in the position of an insurer" but that it did require that owners "should within a reasonable time take reasonable steps to make the vessel thoroughly efficient in hull and machinery and that if it fails to do so it is liable in damages." This they had failed to do.

Yeldham J did not find the implied duty of seaworthiness, which Miller relied upon, had been breached by Hethking at the time the charter took effect on 3 October 1974.

Do exception clauses protect Hethking?

Having found that Hethking was in breach of clauses 1 and 3 of the charter party, his Honour had to consider whether the provisions of clauses 9 or 13 protected Hethking.

The relevant part of clause 9 read:

The Owners not to be responsible for shortage, mixture, marks, more then the number of pieces or packages, nor for damage to or claims on cargo caused by bad stowage or otherwise.

In seeking to rely on clause 9, Hethking sought to argue that the words "or otherwise" were not to be construed "ejusdem generis" with bad stowage. Yeldham J held that clause 9 did "not purport to nor does it deal with circumstances such as those with which the present case is concerned."

In dealing with clause 13 (which has been set out earlier), Yeldham J quoted extensively from Westfal-Larsen & Co v Colonial Sugar Refining Co Ltd [1960] NSWR 170, which also had to consider this clause. It was a decision of Walsh J in the New South Wales Supreme Court and had been approved by McNair J in "the Brabant". Yeldham J held that Hethking was guilty of "personal default by failing to institute and supervise a proper system of reporting and effecting repairs."

Hethking director unaware that bilge pumps were not functioning properly

In a masterly cross examination of Mr Deane, the only working director of Hethking, Murray Gleeson QC, for Miller, obtained the following evidence:

Question: Would you agree with me if you had known on 15 November 1974 what you know about the entries that appear in the daily work book concerning the bilge pumps in October and November you would not have permitted the vessel to go to sea?

Answer: That is correct.

Question: What system was there within Hethking Steamships in October and November 1974 for bringing to your attention the entries that you now know exist in the daily work book of the vessel?

Answer: Those entries would have been brought to my attention by reports from the superintendent engineer.

Question: But they were never were brought to your attention, were they?

Answer: No, they were not.

Hethking had also relied upon section 5 of the Sea Carriage of Goods Act and argued that it did apply to the time charter agreement between Hethking and Miller. Yeldham J held that had Hethking been entitled to rely on clause 13 it would not have been deprived in so doing by section 5, because it did not encompass a time charter as a "document".

Remoteness of damage: Hethking liable to indemnify defendant against liability

As to whether Hethking was obliged to indemnify Miller against its liability to SCB, the question next arose as to whether the damages which SCB was entitled to recover from Miller and which Miller sought to recover from Hethking were too remote (as Miller had unsuccessfully argued as against SCB), or the intervening negligence of Miller, as well as members of the Pioneer Group, broke the chain of causation.

For the reasons discussed in relation to the SCB claims against Miller and on the basis that his Honour considered that those involved with the management of Hethking should reasonably have contemplated that Miller might be liable in damages to the shipper, Hethking was found liable to indemnify Miller against its liability to SCB.

Privy Council reverses finding on recovery of losses but confirms breach of implied warranty

SCB and Pioneer appealed to the Privy Council against that part of Yeldham J's judgment that denied them recovery of the losses claimed by Pioneer. (Interestingly, Sir Garfield Barwick, Chief Justice of Australia, sat on the appeal, together with Lords Diplock, Fraser, Scarman and Richmond). The plaintiffs were successful in having that part of his Honour's judgment overturned, that is the entitlement of SCB to recover from Miller the losses which Pioneer had claimed against SCB. Their Lordships found that the sale from SCB to Pioneer was subject to section 19(1) of the Sale of Goods Act.

As Hethking had challenged his Honour's finding that Miller was in breach of the implied warranty of seaworthiness to SCB, their Lordships rejected that submission and confirmed Yeldham J's view that the state of the after hold of the "Cobargo" "only needs to be described to justify the Judge's conclusion." (The Board did not need to deal with the alternative claim by Pioneer against Miller in negligence).

Hethking unsuccessfully challenges liability finding

Hethking also unsuccessfully challenged the decision of Yeldham J by which Miller's liability to SCB was passed through to it. Hethking had sought to argue that "although the contamination of the cargo by sucrose solution was damage of a kind that was a foreseeable consequence of the breach, the actual seriousness of the damage caused by such contamination to aggregate used in the manufacture of concrete, although it was common knowledge in the concrete industry, was not in the state of knowledge to be attributed to a reasonable shipowner, foreseeable by Hethking."

Their Lordships, approving Yeldham J's reasoning, confirmed that "it is sufficient that the damage actually resulting from the breach is of a kind which a reasonable shipowner at the time of entering into the charter party would have foreseen as being a not unlikely consequence of the breach, if he had thought about the matter" (i.e. the degree of the potential loss is not relevant).