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TOWARDS A NEW CARRIAGE OF GOODS BY SEA ACT

by

©Raj Sativale*

Introduction

There has been of late so much emphasis on reasserting Malaysia as a maritime nation, on ships, admiralty actions and admiralty courts.  Yet we are not a nation of shipowners but importers and exporters. Around 90% of the country’s exports and imports, says the Minister of Transport, are handled by foreign ships. (The Star, 25/9/05 at p.17).  Yet thus far there has been very little emphasis on carriage of goods by sea. 

My topic on maritime reform is focused on the law regulating bill of lading contracts of carriage.  The hundreds of thousands of cargo laden containers landed or shipped through Malaysian ports through vessels operating liner services are carried under bill of lading contracts. A bill of lading is issued by the ship operator or carrier after the goods are loaded on board the ship and for most practical purposes represents the contract of carriage.  This bill of lading can also be transferred while the goods are in transit, for the purpose of transferring the cargo and the contract relating to it.

I will not be concerned with charterparty contracts – the other usual contract of affreightment apart from bill of lading contracts - under which one party, the charterer, has the right to the services and shipping space of the whole ship or part of the ship of the shipowner or ship operator.  Shippers who charter ships invariably have or ought to have specialized expertise in house or paid advisors to obtain advice, negotiate and agree on the terms of the carriage with the carrier.  It is an established belief, though not always borne out in practice, charterparties are made between parties of equal bargaining power, and hence, freedom of contract applies such that the terms are unregulated both locally and internationally.

More importantly, it is in respect of bill of lading contracts where Malaysia lags behind in protection of its exporters and importers, where the existing laws require urgent reform. 

Historical Overview

What rules govern bills of lading contracts internationally? The story is one of a continuing classic battle between ship owner interests and cargo interests played out even in present times. 

Let’s take the early 19 century as the starting phase. This was the period where there was no legislation or control over carriage of goods by sea. Steam powered vessels had appeared and with it an expansion in international trade.  European ship owners, in particular, British ship owners, dominated the seas and they exercised great commercial strength over cargo owners. 

Though common law imposed strict liability on carriers except for a few exceptions namely acts of god, public enemies or inherent vice, ship owners, using their commercial muscle, inserted wide exemption clauses in bills of lading excluding many of their basic obligations implied under common law – even all liability for unseaworthiness and crew negligence.  The Courts applying laissez-faire notions of freedom of contract upheld these onerous terms.

This led to the next phase.  The fight back by cargo interests, particularly from USA, against the abuse of the carrier’s strong bargaining position.  The US enacted the Harter Act of 1893, to impose minimum standards on ship owners. Faced with this, ship owner interests responded which led to the enactment of the International Convention for the Unification of Certain Rules relating to Bills of Lading 1924, commonly known as the Hague Rules.

The primary objective of the Hague Rules was to curtail the widespread exclusion of liability by carriers and seeking to balance the interests between the carriers and cargo interests.  Under the Rules, the carrier owes non excludable duties of “due diligence” in furnishing a seaworthy and cargoworthy ship (this is a lesser standard then seaworthiness at common law) and in the care of cargo during the carriage (Articles II, III.1 and 2).

In return, the carrier is not liable in respect of a catalogue of seventeen exceptions “the excepted perils” set in Article IV Rule 2 (a-q), the most significant of which are negligence in the navigation or management of the ship; “fire unless caused with the actual fault or privity of the carrier and “perils of the sea”.  The Rules also allowed carriers to limit their liability to £100 gold value “per package or unit” unless a higher value is stated (which is rare) and there was a one year time limit within which suit had to be brought against carrier.  This time bar did not apply for actions brought by the carrier. 

Though the Hague Rules was very much tilted in favour of ship owners, when seen in the context of the situation prevailing then, it represented a breakthrough.

The next act was played in 1968.   Finding that Hague Rules needed tweaking after more than four decades of use, a Protocol to the 1924 Convention was agreed at Visby, Brussels that year and the amended Rules called the Hague Visby Rules.  The purpose of the amended Rules was to amend certain provisions of the Hague Rules recognized as causing particular problems.  The significant changes were 

• change in the package limit (Article IV Rule 5) for limitation of liability to around £500 per package. The limitation was to be calculated by reference to Poincare franc, a monetary unit defined by reference to gold value.

• An alternative limit to “the package or unit” based on weight to cater for bulk cargo and heavy packages on a certain sum per kilo of gross weight whichever of this and the package or unit limitation is higher.

• A specific provision dealing with limitation of liability for containers used to consolidate cargo (containers were not in use in 1924).

• Extension of the applicable defences and limits of liability of the carrier to any action brought against the carrier in a tort action to evade the provisions of the bill of lading contract.

In 1979, by a further Protocol, the Hague Visby was amended by replacing the calculation of the limits of liability by reference to gold francs by one on a basket of currencies based on the special drawing rights (SDR) issued by the International Monetary Fund.  

Essentially Hague Visby Rules, with addition of minor changes, are the same as Hague Rules.  Purely a facelift in a regime still very much tipped in favour of the shipowner interests.

The 1970s brings up the next phase where cargo interests from developing countries mount a more determined challenge for a change in the regime.  This was channeled through UNCTAD, prompted by two concerns.  One, Hague Rules (or Hague Visby) were outdated and legally defective, secondly, it was an international scheme largely produced by developed industrial countries and to which developing countries had been unable to contribute (UNCTAD report, p.30).  The pressure succeeded and UN Commission on International Trade Law drafted a new Convention known as the Hamburg Rules 1978 which came into force on 1 November 1992.

Hamburg Rules constitute a completely different regime for carriage by sea. The avowed intention was to redress more radically the imbalance said to exist in favour of the carrier under Hague regime considered to be prejudicial to developing countries.  The Hamburg Rules constitute a single regime of liability, that is, the carrier is presumed liable if the occurrence took place when the goods were in his charge, unless he proves that he, his servants or agents took all measures that could reasonably be required to avoid the occurrence and its consequences.  Article 5.1 of the Hamburg Rules sets out this basic liability:

“The carrier is liable for loss resulting from loss of or damage to the goods, as well as from delay in delivery, if the occurrence which caused the loss, damage, or delay took place while the goods were in his charge as defined in Art 4, unless the carrier proves that he, his servants or agents, took all measures that could reasonably be required to avoid the occurrence and its consequences.”

No doubt, Hamburg Rules has increased the liabilities of carriers against cargo owners.  The period of the carrier’s responsibility is extended beyond the ship rail to cover the period when the carrier has the goods in its charge.  The confusing system of liability in the Hague Rules is replaced with a uniform system of liability based upon the presumed fault of the carrier, along with joint liability of the actual and contracting carrier. Also, there are increased limits of liability and the time bar is lengthened to two years. 

Obviously, Hamburg Rules has been strongly opposed by carrier interests. The industrialized maritime countries have largely ignored it, and though a small number of developing countries, some landlocked, have brought them into force, in the end there is not much support.  

This brings us to present times, the current phase. With Hamburg Rules virtually doomed leaving Hague Visby regime dominant for now, the trend, however, is slowly but inexorably changing. Many countries, particularly developed nations, recognizing the deficiencies of Hague Visby Rules, are moving through local legislation to address its drawbacks.  Improvements are made, in many instances by incorporating the best features of Hamburg Rules on the bedrock of Hague Visby regime. Examples are Nordic countries, Japan, China and Australia whose domestic legislation contains features of both Hague-Visby and Hamburg, and also the US which is considering a new bill for implementation.

These, in a nutshell, are the international developments impacting on bills of lading.  Let us now examine the Malaysian position.  

The Malaysian Position

Malaysia has presently in place the Carriage of Goods by Sea 1950 Act (Act 527) which gives effect to the 1924 Hague Rules (“Cogsa 1950”).   The Act is really a carryover from the period before independence when UK adopted Hague Rules and applied it in its former colonies though now as an independent state, Malaysia is yet to ratify the Brussels Convention.

Given the passage of time and developments in sea transport, the deficiencies and consequent difficulties inherent are all too apparent.  For 55 years there has been no legislation to revise and bring COGSA in line to serve the needs of a modern Malaysia.  Now the Malaysian Ministry of Transport has confirmed that Malaysia would adopt Hague Visby protocol of 1968, probably also the SDR protocol, and thereafter, by the first quarter of 2006, enact local legislation to give effect to them.  Further details were not available.

If it’s purely Hague Visby, this being minor changes to Hague, the regime remains basically unchanged and outmoded.  Since Malaysia intends to revise COGSA after 55 years, the opportunity should not be missed to move forward for the good of shipping industry and for Malaysian exporters and importers, not wait for another half century to go by.   

Having already set out the minor changes Hague Visby will bring, further repetition is unnecessary except on one aspect.  This is the package limitation under Hague Rules where the liability of the carrier is limited to £100 per package or unit in gold value.  Taking into account inflation, this limit works in favour of cargo owners. 

In The Rosa S [1988] 2 Lloyds’ Rep.574., a decision of the English High Court, a reasoning  which applies equally to any other state applying the Hague Rules, the Court determined the modern equivalent of £100 in 1924, converted in accordance with gold values, was £ 6630.50 – this works out to RM46,410 per package or unit and probably lot higher today!. 

This means under Hague Rules, liability limits are even higher than Hague Visby or Hamburg!  In fact it is futile in most cases for the carrier to limit liability enabling cargo owners to obtain full recovery.  This decision was followed and upheld in other jurisdictions – examples are Australia in Brown Boveri (Aust) Pty Ltd v Baltic Shipping Co [1989] 93 ALR 171,   Singapore in Thomaseverett [1992] 2 SLR 1068.  

Unfortunately, the Malaysian Court of Appeal in Sebor (Sarawak) Trading v Syarikat Cheap Hin [2003] 2 CLJ 381, decided otherwise, that £100 per package means the Malaysia currency equivalent of £100 according to the prevailing interbank rate  However, this decision is per incuriam as the reasoning in The Rosa S was not referred to or cited by counsel to the court.   This potential benefit would be lost to cargo interests when moving from Hague to Hague Visby where the package limitation would work out to around RM3,600 per package (based on 666.67 SDRs).

Moving Forward

So we come back to the question what should Malaysia do – simply move from Hague to Hague Visby or go a little further?  My view is we should tweak it a little without being too out of line with international conformity.  Malaysia will not be alone as some other major trading countries - China, Australia, Venezuela and Japan for example (see  Survey of the Cargo by Sea Conventions, G.Chandler, March 2005) - have done so by incorporating in their domestic legislation features not covered by Hague Visby regime.

My wish list is for 4 aspects to be addressed in any new COGSA legislation.

First, is the extension of the period of responsibility for the goods in the charge of the carrier.  Under Hague and Hague Visby, this period commences from the time goods are loaded on board the ship until they are discharged from the ship, the tackle to tackle approach.  It is well known carriers take custody and charge of the goods at exporter’s premises, inland depots or at their container stations well before the ship’s tackle.  Similarly delivery is not made from the ship’s tackle at discharge ports but to consignee’s premises or other designated points inland.  To address the modern needs of multi modal carriage of ‘door to door” transport, the new COGSA ought to govern the entire period of carriage described in the through bill of lading.  So if goods are shipped from Ipoh to Southampton, COGSA should govern from the time goods are received at Ipoh Cargo Terminal, railed to Port Klang, shipped from there to ocean vessels, through the ocean voyage, discharge in Southampton, truck or rail transportation until delivery to consignee’s premises inland.

Second, is to widen the ambit of the applicability of the Rules. Presently Hague and Hague Visby apply only to contracts of carriage covered by a bill of lading or similar document of title.   This is too restrictive and fails to recognize the needs of modern commerce.  The new COGSA should have a wider applicability to cover non negotiable bills of lading whether they are consignment notes, seaway bills or ship’s delivery orders and negotiable sea carriage documents issued under a charterparty from the moment at which that document regulates the relationship between its holder and the carrier.  Further extension of the Rules to cover electronic sea carriage documents which are gradually being brought into use would also be prudent. 

Third, provision should be made for delays to delivery of goods. Hague Visby does not address delays.  Many Malaysian cargo owners have been left with little recourse for loss and damage through unwarranted delays in delivery, particularly so where goods are transshipped at major hub ports, even though the carrier has agreed to deliver within a certain time because clauses in bills of lading often completely exclude or otherwise limit liability for delay.  Legislation should subject the carrier to liability for loss, including economic loss, for delay in delivery of goods in circumstances identified as being inexcusable.  There is a delay if the goods are not delivered within the time allowed by the contract, or, if no time specified, within a reasonable time.  Hamburg rules specifically provide for this, providing also for a limitation of liability to an amount equivalent to two and half times the freight payable to the goods delayed.

Finally, somewhat radically, COGSA legislation should limit the effect of foreign forum clauses inserted into bills of lading which commonly stipulate a place convenient to carrier but for reasons of language, costs, court system, local facilities and unfamiliarity render suits virtually impossible in such locations for cargo owners.  The legal position in Malaysia in respect of such clauses is as follows. If it is a foreign arbitration clause, and a cargo owner brings an action in Malaysia in defiance of the clause, the carrier obtains a mandatory stay (s.6 Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985, Act 320).  If it is a foreign jurisdiction clause, the cargo owner bears the burden to convince a court as to why Malaysia is better forum than that stated in the bill of lading to resist a stay application (Globus Shipping & Trading v Taiping Textiles [1976] 2 MLJ 154) involving costs, and the results uncertain.

My suggestion is future COGSA legislation should override provisions in bills of lading designating foreign law and forum for cargo shipped to and from Malaysia.  So if the choice of forum clause calls for arbitration outside Malaysia for cargo shipped to and from Malaysia, any party may move a Malaysian court to order arbitration at the Kuala Lumpur Regional Arbitration Centre or elsewhere in Malaysia.  Similarly, clauses stipulating exclusive jurisdiction of foreign courts clauses should be made to give way to Malaysian jurisdiction for Malaysian cargoes.

*Raj Sativale is an Advocate & Solicitor of the High Court of Malaya. Managing Partner of Messrs. Sativale Mathew Arun, a firm specializing in maritime law. Has previously served appointments in the ports and shipping industry in Port Klang, Sabah and London.  Barrister at law, Middle Temple; LLM (maritime law), University of Wales;Member of Institute of Chartered Shipbrokers; Member of Chartered Institute of Transport and Logistics; Member of  Institute of Chartered Arbitrators.

*This paper was delivered at the 13th Malaysian Law Conference.