Halani Lloyd, an Associate in our Dry Shipping Group, updates us on an appeal decision of the Full Court of the Federal Court of Australia in a case in which there was much international interest in 2005 when the decision of the Federal Court of Australia was handed down.

The Federal Court found two carriers liable for corrosion damage to steel coils carried from Japan to Australia for reasons including their failure to install dehumidifiers in the holds. The Full Court of the Federal Court of Australia has recently handed down its decision on appeal (CV Sheepvaartonderneming Ankergracht v Stemcor (Asia) Pty Limited [2007] FCAFC 77). The Court has upheld the trial judge’s decision against the carriers.

Background

Two cargoes of steel coils were carried in the vessels “ANKERGRACHT” and “ARCHANGELGRACHT” from Japan to Australia during the Northern Hemisphere winter in early 2002. Upon discharge, the coils were found to have suffered corrosion damage. The trial judge found that this had been caused by condensation.

The coils were cold rolled steel but had no chromate coating and were un-passivated, making them highly sensitive to corrosion. Neither the Owners nor the Master were informed expressly of this. It rained during loading operations, leading the trial judge to the conclusion that it was more likely than not that water had entered the holds with other cargo and dunnage. Condensation was found to have occurred after loading, during the course of both voyages.

The vessels’ holds did not have dehumidifiers. However, the trial judge found that the shipper was familiar with the vessels and the nature of the holds. The carriers also ventilated the holds numerous times during both voyages and, on all but one occasion, ventilation occurred only when the air dew point temperature outside the hold was lower than that inside the hold. The trial judge accepted that there was a practice of ventilating cargo holds in accordance with this dew point rule. The rule addressed the risk of condensation forming on the cargo as the vessel travelled south into warmer climates.

Nevertheless, the trial judge found that the carriers had breached their obligations under Article 3 Rules 1 and 2 of the Australian amended Hague Rules. (This is a modified version of the Hague-Visby Rules, enacted by the Australian Carriage of Goods by Sea Act 1991 (Cth)). In particular, his Honour Emmett J found that the vessels had been unseaworthy because they had no dehumidifiers to remove water that might enter the holds on cargo or dunnage, such entry being foreseeable. As the installation of dehumidifiers into the vessels was “practicable”, in his Honour’s view, the carriers were found liable for failing to exercise due diligence to make their ships seaworthy. Furthermore, the trial judge considered that ventilation had probably resulted in the ingress of air containing water vapour into the holds rather than the removal of water vapour from the holds, because the dew point rule offered only an approximate estimate of the suitability of prevailing conditions for ventilation. His Honour observed that, for this reason, it was standard practice in the shipment of steel from cold to warmer climates not to ventilate the holds.

The carriers did not succeed in establishing any defence under Article 4 of the Rules, including inherent vice and insufficiency of packing. The packaging of the coils was found to be consistent with general industry practice despite being unable to prevent the ingress of water vapour. Indeed, the evidence had not established that any available packaging could have prevented penetration by water vapour.

Decision on Appeal

Forty-four grounds of appeal were pleaded by the carriers, who argued inter alia that the Court had applied the Hague Rules’ seaworthiness obligation as though it imposed an absolute duty on the carrier to make the vessel seaworthy rather than a duty to exercise due diligence to make the vessel seaworthy. They contended that in the absence of evidence that dehumidifiers were installed in conformity with an industry practice or standard, together with the findings at first instance of proper practice in the ventilation of the holds and proper maintenance and correct operation of the hatches, they could not have breached Article 3 Rules 1 or 2. The carriers asserted that the effective cause of the corrosion of the coils was “cargo sweat” which was an inevitable consequence of voyages such as those in question and not attributable to unreasonable conduct on the part of the carriers.

The Court (comprising Ryan, Dowsett and Rares JJ) found against the carriers in two separate judgments.

The majority, Ryan and Dowsett JJ, upheld the trial judge’s decision under Article 3 Rule 2, agreeing that the carriers had failed to care properly and carefully for the cargo. Cargo interests’ expert evidence had been to the effect that non-hygroscopic cargoes such as steel (ie cargoes which do not absorb or attract moisture) should not be ventilated; that if it is necessary to do so, this should be done in accordance with the dew point rule; and that as this rule is difficult to apply in practice (because of difficulties in ascertaining the temperature of all the cargo), ventilation should be permitted only where the external air dew point temperature is three or five degrees lower than that in the hold. The majority held that ventilation should not have occurred on either vessel, and such ventilation as occurred was capable of causing, and did cause, condensation causing corrosion.

Separately, Rares J held that the imprecision of the carriers’ systems to measure when to ventilate allowed the introduction of moisture into the holds during ventilation and this justified the trial judge’s finding of a breach of Article 3 Rule 2. Like the majority, Rares J cited the House of Lords’ decision in Albacora SRL v Westcott and Laurance Lyon Ltd [1966] 2 Lloyd’s Rep 53 in which it was held that the word “properly” in Article 3 Rule 2 added something to “carefully”: namely a requirement that the carrier’s function be performed in accordance with a sound system. Both the majority and Rares J considered that the carriers’ system of caring for the goods, which included ventilation, had not been “proper” or “sound”.

Significantly however, on the seaworthiness issue, the majority did not agree with the findings of the trial judge. The majority held that there was no evidence of any practice of installing and using dehumidifiers and thus the duty to exercise due diligence could only have required such a step if the vessel and its crew might not otherwise have been able to deal with the problem. Evidence had been given that the crew undertook mopping and wiping to remove moisture from the holds in addition to ventilation.

Rares J differed from the majority on the seaworthiness issue, after giving detailed consideration of the authorities on Article 3 Rule 1 including both English and Australian cases. His Honour held that the carriers had to install dehumidifiers if they were to exercise due diligence, given the real risk of cargo sweat and that weather conditions would not permit ventilation to occur.

All three judges agreed with the trial judge that the carriers were unable to rely on any Article 4 defences.

Conclusions

This case is likely to attract the attention of the English Courts and other common law jurisdictions, given its detailed examination at appellate level of the carrier’s obligations under Article 3 Rules 1 and 2 of the amended Hague Rules. From an industry perspective as well, the case gives some interesting guidance (and precedent in Australia) as to the standard of care required by carriers of steel coils to satisfy their obligations under the amended Hague Rules.

The decision on appeal somewhat ameliorates the effect of the judgment at first instance, to the extent that the majority found that the carriers had complied with their seaworthiness obligations. However, the fact that the carriers remained liable for the condensation damage despite having had a system for caring for the cargo that was in accordance with usual practice, and despite cargo interests’ prior knowledge that the vessels did not have dehumidifiers in the holds, as well as their failure to inform the carriers of the cargo’s particular sensitivity to corrosion, may suggest a tilting of the balance of risks struck by the amended Hague Rules in favour of cargo interests, at least in Australia. Other common law jurisdictions ought not to go this far. Carriers of steel coils to Australia should take suitable precautions.