A saga of fraud, misdelivered copper cathodes and a carrier seeking to avoid liability

Trafigura Beheer BV & anr v Mediterranean Shipping Company [2007] EWHC 944

This was the claimants’ second success having previously succeeded before Mr Justice Aikens in April 2007.

The Claim

Trafigura (Cargo Owners) claimed against MSC (the Carrier) for conversion and breach of contract arising from the misdelivery by the Carrier of 18 containers of copper (“the Cargo”) shipped from Durban to Shanghai. The case raised important issues including whether:

  • the Carrier could exclude/limit its liability for misdelivery;
  • the Cargo Owners could recover damages for:
    • hedging losses; or
    • conversion comprising the value of the cargo as at the date of judgment.

How did the misdelivery occur?

As often occurs in cases of misdelivery, fraud was involved. Fraudsters created a false bill of lading (B/L) relating to the Cargo showing a Chinese company (“Ningbo”) as consignees.

Shortly after the Cargo had been discharged in Shanghai Ningbo presented the false B/L against which the Carrier issued a delivery order to Ningbo who then paid the customs duty. The next day the Cargo Owners presented the genuine B/L. The Carrier realised that the B/L was genuine and was able to prevent the Cargo from being removed from the container terminal.

Although the Carrier issued another delivery order in favour of the Cargo Owners it was not possible for the delivery order to be stamped with confirmation that customs duty has been paid (as this had already been paid by the Ningbo). Thus the Cargo Owners could not obtain the release of the Cargo. Although there are proceedings in China and between the Carrier and Ningbo the Cargo remains in the container terminal where it has been since October 2005.

Not only had the Cargo Owners been deprived of the use of their Cargo but because the Cargo had not been lost as usually happens in cases of misdelivery, the Cargo Owners were faced with an ongoing liability in respect of hedging positions taken to mitigate the price risk of the Cargo they owned. The Carrier was optimistic that it would obtain the release of the Cargo in China and with the Carrier’s knowledge and acquiescence, the Cargo Owners had kept open the hedging positions.

As a result of a sharp rise in copper prices since the date of misdelivery the Cargo Owners would have suffered a significant loss if they had to close out the hedge position without recovering either the Cargo or the full value of the Cargo as at the time the hedge position was closed.

The B/L was governed by English law and was subject to the English Court’s jurisdiction. The Cargo Owners brought proceedings against the Carrier in the English Court claiming damages for conversion and breach of contract. The Carrier claimed that under the terms of the B/L it had excluded liability for misdelivery or, if that was not the case, it was entitled to limit its liability under the HR/ the HVR or the express terms of the B/L.

Could the carrier exclude/limit liability for misdelivery?

This depended upon the answer to the following questions:

  1. Did the Hague Rules (“HR”) or the Hague-Visby Rules (“HVR”) apply to the B/L?. If the HVR applied was this by contract or by force of law?
  2. Under the terms of the B/L did the HR or the HVR apply to the period after the Cargo had been discharged from the ship but whilst it remained in the container terminal?
  3. If the HR or the HVR did apply to the post-discharge period did Article IV(5) of the HR or the HVR permit the Carrier to limit its liability for conversion of the Cargo during the post-discharge period? If so, to what amount?
  4. If the HR, or the HVR, did not apply to the post-discharge period did the exclusion clause contained in clause 22 of the B/L exclude or limit any liability of the Carrier for conversion during the post-discharge period?

In answering these questions both Courts were faced with interpreting elaborate and almost illegible terms in very small print on the back of the B/L.

The Courts’ Decisions

1. Did the HR or the HVR apply to the B/L?

The question was important because if the HR applied the Carrier’s liability was limited to £1,800 per container. If the HVR applied the monetary limit was much higher and closer to the value of the Cargo which was about US$2,8 million at the date of the Court of Appeal’s judgment.

To decide this question, both Courts considered the Paramount Clause in the B/L which provided:

For all trades…this B/L shall be subject to the 1924 Hague Rules…or, if compulsorily applicable, subject to the 1968 Protocol (Hague-Visby) or any compulsory legislation based on the Hague Rules and/or said Protocols. Where Hague Visby or similar legislation is compulsorily applicable, the Hague-Visby 1979 Protocol(“SDR”Protocol”) shall also apply whether or not mandatory”.

The Paramount Clause raises difficult issues of construction. Every one agreed that the Paramount Clause provided that if the HVR did not apply the default position was that the HR would apply. What was not agreed was whether the HVR applied under the Paramount Clause. Did the HVR only apply if they were compulsorily applicable under English law or could they also apply as a matter of contractual incorporation?

The Cargo Owners argued that Article X (c) applied. This provides that the HVR will apply if the contract provides that the legislation of any State giving effect to them is to govern the contract. The B/L referred to “any” compulsory legislation based on the HR or Protocols being applicable. Although not a Contracting State South Africa had enacted compulsory legislation giving effect to the HVR. Thus, the HVR were compulsorily applicable.

If that was incorrect the Cargo Owners said that the HVR could be applicable as a matter of contractual incorporation because the parties did not intend that the HVR would only apply if they were compulsorily applicable under English law.

Aikens J decided that Article X (c) could not apply because the B/L did not identify the legislation of a particular State. This would create too much uncertainty. Aikens decided that the HVR were applicable as a matter of contractual incorporation.

The Court of Appeal disagreed with Aikens J and decided that the HR were applicable. The words “compulsorily applicable” meant applicable according to the proper law of the contract, ie under English law and as South Africa was not a Contracting State the HVR were not compulsorily applicable. Thus, the HR applied as the default position.

The decision of the Court of Appeal does not however give meaning to the full terms of the Paramount Clause. It ignores and gives no effect to the words “or any compulsory legislation based on the Hague Rules and/or said Protocols” which indicate that it must have been intended that the Paramount Clause had a wider vista than English proper law.

2. Did the HR (or HVR) apply to the period after the Cargo had been discharged from the ship but whilst the Cargo remained in the container terminal to the order of the Carrier?

Both Courts held that the HR or the HVR rights and obligations are concerned with the carriage of goods by sea (although Aikens J accepted that this necessarily includes some activities both before loading on board and after discharge). However the parties to a B/L can determine the “temporal scope” of application of the HR/HVR and agree that the HR/HVR will apply after the end of the contract of carriage.

Clauses 4, 7 and 22 of the B/L sought to limit the Carrier’s responsibility to the period commencing with loading and ending with discharge and, in particular, referred to the “end of the Hague Rules period”.

Thus, it was clear from the wording of clauses 4, 7 and 22 of the B/L that the HR did not apply to the period after discharge whilst the Cargo was still in the custody of the Carrier in the container yard. The words “in any event” in Article IV(5) of the HR (and HVR) could not displace the “temporal scope” of the rules unless the parties expressly agree that certain parts of the HR are to continue after the end of the HR period. The parties had not done so in this case.

3. If the HR or the HVR applied to the post discharge period could the Carrier limit its liability for misdelivery?

Although this issue did not need to be decided because the HR/HVR regime was found not to extend to the post discharge period , Aikens J concluded that if HR or the HVR had applied to the post-discharge period Article IV(5) would suffice to enable a carrier to limit liability for misdelivery. This is the first time the English courts have expressed a view on this question.

However the Court of Appeal stated that the question was a difficult one which should be decided against concrete facts. As a result, the Court of Appeal said it neither agreed nor disagreed with Aikens J view and expressed no views on the issue.

4. Did clause 22 of the B/L exclude or limit any monetary liability of the Carrier for conversion?

Aikens J decided that under clause 22 of the B/L, the parties could not have intended the contractual limitation of liability provisions to apply to a period after which the Carrier no longer accepts responsibility for the goods. Clause 22 therefore had to be read in the context of clauses 4 and 7 of the B/L. Any reference to the HR did not extend the limitation of liability beyond the agreed “temporal scope”.

The Court of Appeal did not agree that the temporal limit was as clear as found by Aikens J but did conclude that the wording of clause 22 was not apt to “limit liability for the essential obligation to deliver against original bills of lading”. The Court of Appeal therefore agreed with Aikens J that clause 22 did not limit liability for misdelivery.

Could the cargo owners claim damages for hedging losses?

Aikens J accepted that most contracts for the sale of a physical cargo of copper will be the subject of a related hedging transaction at some time during the shipment of the cargo to the delivery point and that the Cargo Owners habitually hedged all metals against movement in the LME price. However he decided that the Carriers did not have enough knowledge of the mechanism of hedging of metals to have foreseen the hedging losses. This decision was not appealed to the Court of Appeal.

Could the cargo owners claim damages for conversion as at the date of judgment?

The Torts Interference with Goods Act (1977) gives the Court the power to make a variety of orders, including:

(a) an order for delivery of the goods and payment of consequential damages;

(b) an order for delivery of the goods but giving the defendant an alternative option to pay damages by reference to the value of the goods;

(c) damages for the whole of the innocent party’s interest in the goods.

With regard to (c), the Court’s discretion is such that it has the power to award damages calculated by reference to the value of the goods as at the date of conversion or, “if justice so requires”, the value of the goods as at the date of judgment.

In this case, although Aikens J held that Trafigura’s “hedging losses” were not recoverable as consequential losses because they were not sufficiently foreseeable, this did not affect the Court’s discretion to award the value of the cargo as at the date of judgment, thus effectively extinguishing most of the “hedging loss”.

The Court of Appeal agreed that the fairest way to compensate the Cargo Owners was to award them the value of the Cargo as at the date of judgment.

Conclusion

Both decisions are important for four main reasons, namely they:

(1) reinforce the fact that carriers who wish to limit or exclude liability for misdelivery post discharge, must ensure that the relevant limitation or exclusion terms in the B/L are clearly and carefully drafted;

(2) emphasise the need for shippers/consignees to check the complex, miniscule often illegible terms of the B/L to ascertain the extent to which the Carrier has excluded/limited liability for actions such as misdelivery;

(3) confirm the need for Cargo Owners who hedge risks relating to a physical commodity to make this known to carriers (particularly where cargo is carried in containers) so that carriers will be aware of the potential for cargo owners to suffer hedging losses in the event of misdelivery [see our client alert on hedging losses dated July 2006];

(4) demonstrate the use of the Court’s discretion to award damages for conversion at a date other than the date of conversion if justice so requires.