Australia: Inherent vice, insufficiency of packaging and the extent of the indemnity recoverable by a cargo owner

In brief - Federal Court refuses recovery of some items of expenditure claimed by cargo owner

In the case Alstom Limited v Liberty Mutual Insurance Company (No. 2) Pty Ltd [2013] FCA 116, the cargo owner, Alstom, sought to recover in excess of $3 million for damage sustained to the shipment of two transformers from Mumbai to Fremantle.

What was the proximate cause of damage?

The issues for Siopis J in the Federal Court of Australia were:

  • whether the proximate cause of damage sustained was inherent vice or the insufficiency or unsuitability of packing - in particular, whether the internal bracing to be applied to the component parts of the transformers during the voyage was "packing" or "preparation"
  • whether the insured gained the benefit of a deeming provision in the policy described as the "unsuitability of packaging clause"
  • the amount of the indemnity to be paid by the insurers in the event that the cargo owner succeeded

Exclusion provisions in marine cargo insurance policy

The cargo insurance included the Institute Cargo Clauses (A). Clause 4.3 provided that the insurance did not cover:

4.3 Loss damage or expense caused by insufficiency or unsuitability of packaging or preparation of the subject-matter insured (for the purpose of this Clause 4.3 "packing" shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants).

4.4 Loss damage or expense caused by inherent vice or nature of the subject-matter insured.

Unsuitability of Packaging Clause in insurance policy

There was an additional clause which provided as follows:

Unsuitability of Packaging Clause

Any packaging or external preparation of the interest insured is deemed to be sufficiently packed and prepared if:

(a)the packing and external preparation is in accordance with usual custom or trade or the Insured's custom, or

(b) any insufficiency or unsuitability of packing or external preparation has not arisen through fault of or with the knowledge and consent of the Insured.

There was also a "survey warranty", according to which insurers had an opportunity to "approve and/or attend all packing, loading, stowage ... arrangements and operations", but were not obliged to do so.

Detailed requirements concerning core and coil of transformers

The technical specification for the transformers which Alstom Limited had contracted to acquire from Crompton Greaves Limited of Mumbai contained detailed requirements concerning the core and coil of the transformers in order to protect them during the transportation. Each core coil assembly was placed into a steel container or tank which was also to house the parts comprising the transformer at destination.

The specification required that:

...the coil shall be solidly connected/grounded to the transformer tank. The core and end frame shall be securely clamped and bolted to prevent vibration so that the core assembly shall withstand, without change or shape or position, all stresses due to transport ... core clamping and tie rods shall be constructed of steel. Core clamping structures shall be insulated from the core.

As his Honour described them, the cores were essential components of each of the transformers. The cores were comprised of a great number of ultra thin laminations. This meant that there was some flexibility in the cores. The core was surrounded by windings referred to as the coil.

Packing to stop movement of core coil assemblies during voyage

To stop movement of the core coil assemblies in the tanks during the voyage some horizontal wooden packing braces were placed between the top of the core coil assembly and the inside of the transformer tank. Wooden braces were inserted between the side of the top of the core coil assembly and the inside of the transformer tank and a purpose made steel collar was used as temporary packing around the top locating posts.

Damage to cores suffered during voyage

The judgment refers to the fact that it was agreed by all parties that the sea conditions were what would ordinarily be expected on that voyage. Importantly, it was common ground that:

...during the course of the voyage, the top locating pins impacted against the lignostone strips surrounding the pins, and that the impact caused the lignostone strips to disintegrate. This in turn led to the top locating posts impacting against the sides of the flanges of the containers in response to the movement of the ship in the sea conditions.

This resulted in the movement of the core coil assembly of each of the transformers within each of the steel containers and damage to the cores.

Cargo owner argues that damage due to unsuitability of packaging

Unsurprisingly, in view of the "unsuitability of packaging clause", Alstom argued that the loss was caused by insufficiency or unsuitability of packing, namely the densified timber packing which held in place the top locating posts securing the core-coil assembly, to prevent it moving in its steel case. This was accepted by the Court.

Was cargo owner responsible for insufficiency or unsuitability of packing?

The competing argument by the insurers was that Alstom failed to bring itself within sub-paragraph (b) and establish that the insufficiency or unsuitability of packing or external preparation had not arisen through its fault or with its knowledge and consent. The insurers suggested that Alstom's agent in India was an insured for the purposes of that clause.

Whilst Alstom accepted that proposition, it argued that the policy was a composite policy and the reference to "insured" in that sub-clause was to be read as referring only to Alstom. That submission was accepted by the court after a detailed analysis of the differences between joint and composite insurance and the leading authorities on that issue such as State of Netherlands v Youell [1997] 2 Lloyds Rep 440; Samuel & Co Ltd v Dumas [1924] AC 421 and General Accident Fire & Life Assurance Corporation Limited v Midland Bank Limited [1940] 2 KB 388.

Alstom did not consent to having transformers shipped in inadequate state

The court also accepted that Alstom had established that any insufficiency or unsuitability of packing or external preparation had not arisen through its fault or with its knowledge and consent. His Honour interpreted those words as requiring "actual knowledge by Alstom that the packing of the core coil assemblies was insufficient or unsuitable to secure the core coil assemblies, and that it gave its consent to the transformers being shipped in that state".

Support for that proposition was said to arise from the English Court of Appeal decision in Compania Maritima San Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1977] 1 QB 49, where the words "with the privity of the assured" in section 39(5) of the Marine Insurance Act 1906 (UK) ( section 45(5) of the Marine Insurance Act 1909 (Cth)) were interpreted in the context of unseaworthiness.

What was the extent of the indemnity to which Alstom was entitled?

Another interesting aspect of the case concerned the extent of the indemnity to which Alstom was entitled. That turned upon the construction of section 61 of the Marine Insurance Act 1909, which provides that the insurer is liable for any loss proximately caused by a peril insured against but is not liable for any loss which is not proximately caused by a peril insured against.

The contrary argument put by insurers was that section 61 merely deals with risk and proximate cause and did not describe the types of losses for which a marine insurance policy would provide indemnity.

For that, reference needed to be made to sections 62, 63, 66, 67, 73 and 77, in particular, given the context of this case, section 77(c), where the measure of indemnity in respect of goods or merchandise is "such proportion of the sum fixed by the policy in case of a valued policy, or the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value". Thus it was argued that the limit of indemnity was the depreciated value of the damaged cargo only and did not apply to indirect or consequential losses.

Losses "proximately caused by a peril insured against"

Support for that argument was found in the Victorian Full Court decision of Mackinnon McErlane Booker Pty Ltd v P&O Australia Limited [1988] VR 534, where a barge which had been damaged off the North West Coast of Western Australia had been required to be towed to Singapore for repairs. The barge was subject to a charter which provided for redelivery in Singapore and the charterer took advantage of the towage of the barge to Singapore for repairs to redeliver the barge under the charter party.

The insurers argued that section 61 limited the indemnity to losses "proximately caused by a peril insured against" and therefore the towage costs were not proximately caused by the peril but by the charterer's decision to redeliver the barge in Singapore. In the leading judgment in that case, Murphy J said:

I do not consider that section 61 is directed to the issue of 'reasonable cost of the repairs' in section 75 of the Act. In my opinion section 61 is directed to the casualty and its cause, that is to say to the loss. If the casualty is proximately caused by a peril insured against, then one turns to measure the amount of the indemnity according to section 75, and in the present case, it is here that one finds that that measure is the 'reasonable cost of the repairs'.

Accordingly Siopis J refused recovery in respect of some items of expenditure claimed by Alstom, thereby offering some relief to the insurers.

Stuart Hetherington
Trade and Transport
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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