UK: Geographical Deviation And The Hague/Hague-Visby Rules

Last Updated: 17 October 2018
Article by Jai Sharma and Simon Culhane
Most Read Contributor in UK, November 2018

In international sea carriage, deviation from the usual geographic route has traditionally deprived the carrier of the rights and defences (including time bar) available under the Hague and Hague-Visby Rules.

This had been questioned in light of the abolition of the "fundamental breach" rule by the House of Lords in 1980. However, the recent case of Dera Commercial Estate v Derya Inc [2018] EWHC 1673 (Comm) ("Dera v Derya") has confirmed that the principle remains valid.

Cargo interests do, however, have to choose when they become aware of the deviation, whether to affirm the contract (in which case all the rights and defences remain in force) or whether to terminate it; and they would be well advised to bear these consequences in mind when making that decision.

Facts of the dispute

The claimant cargo interests, Dera Commercial Estate ("DCE"), purchased 18,000mt of maize from Rika Global Impex Ltd. Rika voyage chartered the Vessel from the Shipowners to carry the cargo from India to Jordan. Bills of lading were issued on the standard CONGEN form which incorporated the terms of the voyage charterparty, including the (English) law and (London) arbitration clause.

The Vessel arrived in Aqaba in August 2011 but the Jordanian customs rejected the cargo, citing "broken percentage foreign matters, impurities, damaged kernels ... and apparent fungus". The cargo remained on board the Vessel at Aqaba.

In September 2011, DCE issued proceedings against the Shipowners in Jordan seeking damages of approximately USD 8 million in respect of the damage to the cargo. The Shipowners' P&I Club  appointed an arbitrator in London on behalf of the Shipowners. They also applied to the English  Court for an anti-suit injunction to restrain DCE from taking any further steps in the Jordanian proceedings, which were in breach of the arbitration agreement. DCE agreed to appoint an arbitrator in October 2011, and the Jordanian proceedings were struck out.

Efforts to persuade the Jordanian customs to reverse their decision failed and, on 8 November 2011, the Vessel sailed to Turkey without the permission of DCE or the Jordanian authorities. The cargo was discharged in Turkey in March 2012 and sold by way of a judicial sale ordered by the Turkish court. The proceeds of the sale were transferred to the Shipowners in early 2013 pursuant to two enforcement orders of the Turkish Court.   

Proceedings in London

DCE's cargo claim had been commenced within the one year time limit provided in the Hague Rules, but no steps were taken by either side until March 2015 when the Shipowners sought a declaration of non-liability for the cargo claim. In June 2015, DCE served particulars of its cargo claim, some three years and eight months after the arbitration had been commenced.

On 13 June 2017, the arbitral tribunal issued an award declaring that there had been inordinate and inexcusable delay by DCE that had caused serious prejudice to the Shipowners and created a substantial risk that it was not possible to have a fair resolution of the cargo claim. The cargo claim was struck out.

DCE challenged the award before the English High Court on the basis of four points of law, although only one of those points is the focus of this update. Specifically, DCE requested that the High Court consider whether, in a contract evidenced by a bill of lading subject to the Hague Rules, geographical deviation precludes a carrier from relying on the one year time bar provided by Article III(6) of the Hague Rules. The answer to this question was of fundamental importance, as the outcome could effectively extend the applicable time limit for the cargo claim to the six year statutory time limit for contractual claims provided by the Limitation Act 1980, which had not yet expired.

Abolition of the Doctrine of Fundamental Breach & Deviation

The judgment is of particular significance as it directly considers the consequences of geographical deviation following the abolition of the doctrine of fundamental breach by the House of Lords in the cases of Suisse Atlantique Societe d'Armement Maritime SA v Rottedamsche Kolen Centrale (1967) 1 AC 371 and Photo Production Limited v Securicor Transport Limited (1980) AC 827. It was held in these cases that there is no generally applicable rule of law by which limitations or exemptions in a contract do not apply to a fundamental breach of contract, or breach of a fundamental term of the contract, and that the relevant outcome of any breach is always a question of construction of the contract. These cases were not directly concerned with geographical deviation.

Historically, English Common Law had developed so that the effect of a geographical deviation was to deprive a shipowner of the benefit of any limitation or exemption in the contract of carriage. The rationale for this was that the shipowner would become the de facto insurer of the cargo, if, as a result of the unjustified deviation, the cargo owner lost its insurance cover.    

Tate & Lyle Ltd v Hain Steamship Co Ltd [1936] 2 All ER 597 was the first case in which the House of Lords considered the earlier geographical deviation cases in detail. The House of Lords held that the effect of a geographical deviation was that the innocent party to the contract was entitled, upon discovering the deviation, to retrospectively declare itself no longer bound by any of the contractual terms. The innocent party could, however, affirm the contract and, if it did so, it would continue to be bound by all of the terms of the contract. There was no automatic displacement of the contract upon the deviation, as, otherwise, a shipowner may choose to deviate for their own gain. The House of Lords confirmed that deviation did not just expunge all limitation and exemption provisions in the contract but it affected all of the provisions. The effect of the deviation was, therefore, held to displace the entire contract. Subsequently, in Stag Line v Foscolo, Mango and Co [1936] AC 328, the House of Lords further confirmed that shipowners would lose their ability to rely on limitations and exceptions provided in the Hague Rules where they deviated from the contractual route.

In Dera v Derya, Carr J held that she was bound by the House of Lords judgment in Hain Steamship, notwithstanding the weight of modern authority supporting the opposite conclusion, and held that if there had been a geographical deviation by the Shipowners, and if DCE had elected to treat the contract of carriage as at an end, the geographical deviation would preclude the Shipowners from relying on the one year contractual time limit provided in the Hague Rules. The case has been remitted to the arbitration tribunal for a finding of fact on these two key issues. In the event of a finding in DCE's favour, the six year statutory time limit would apply instead.

Comment

The law remains clear. Unless cargo interests, with knowledge of the deviation, affirm the contract, a shipowner who geographically deviates from the contractual route loses the right to rely on (1) any contractual time limits for commencing the claim; (2) any contractual limitation of liability such as package and/or weight limitation provisions; and, (3) any defences or exemptions to liability such as those set out in Article IV Rule 2 of the Hague and Hague-Visby Rules.

The judgment is under appeal. Subject to the outcome of the appeal, the judgment should be welcomed by cargo interests as it provides a potential avenue around limitation of liability by reference to package/weight and also the one year time bar.

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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