May 2007
Cargo misdeclaration is a problem. It is a particularly acute problem for operators of container vessels. It impacts on freight revenue, it puts at risk personnel, container handling equipment and stowage integrity. At its most extreme, misdeclaration of dangerous cargo has been alleged to be the cause of the serious fires/explosions on "Aconcagua", "CMA Djakarta", "Hanjin Pennsylvania" and "Hyundai Fortune", to name a few, each resulting in losses estimated at well over US$ 75 million. Despite these consequences, evidence suggests that a significant percentage of containerised cargo is misdeclared. This includes undeclared dangerous cargo passed off as innocuous, or misdeclared dangerous cargo where the particular dangerous characteristics have been misstated.
A container carrier is peculiarly exposed to misdeclaration of dangerous cargo for two key reasons: Firstly, containerisation means that the true nature of a cargo can be more easily concealed than in other methods of carriage. Whilst the technology is available to screen containers, the reality is that in most ports, only a tiny fraction of containers are ever screened. Even then, frequently, screening is aimed at detecting weapons or contraband, not at identifying the composition and reactivity of complex chemicals/materials such as, say, Directly Reduced Iron (DRI) or Calcium Hypochlorite - which have been blamed for catastrophic incidents.
Secondly, with the ever increasing size of container vessels, the concentration of cargo value on board a modern container ship - and therefore the liability a carrier is exposed to - can be immense. For a modern container vessel plying the Far East-Europe trade, an average cargo value per 40ft box of US$ 50,000, for a westbound voyage, is a conservative estimate. Multiply this by 5,000, 7,500 or even 11,000 TEU for modern container vessels, and a carrier’s exposure to cargo liability for a catastrophic incident might substantially exceed US$ 100 million.
When these factors combine, and an incident results in a casualty of the magnitude of "Aconcagua", "CMA Djakarta", "Hanjin Pennsylvania" and "Hyundai Fortune", a carrier needs to deploy some well known measures to exclude and/or limit its liability to cargo interests.
In fire/explosion cases, where bills of lading incorporate the Hague/Hague-Visby Rules, it is well known that the “fire defence” under Article IV, Rule 2(b) should come to the aid of a carrier who exercised due diligence to make the vessel seaworthy at the commencement of the voyage. Alternatively, there is Article IV, Rule 2(p) which provides a carrier with a defence in the event of latent defects not discoverable by due diligence and Article IV, Rule 2(q) which provides a defence in the event of any other cause arising without its actual fault or privity, or without the fault or neglect of its agents or servants. Those representing cargo interests, who seek a recovery from the carrier for their cargo loss/damage and an indemnity for general average and salvage liabilities, will work hard to prove that the vessel was causatively unseaworthy at the commencement of the voyage and refute evidence that the carrier exercised due diligence.
Against the background of cargo misdeclaration, one might legitimately ask that if a vessel is rendered unseaworthy at the commencement of the voyage by misdeclared dangerous cargo, might a carrier’s failure to have any or any adequate system of screening of containers in place, amount to a failure to exercise due diligence within the meaning of Article IV, Rule 1?
The English High Court has been prepared to extend the parameters of what constitutes unseawothiness and lack of due diligence in appropriate circumstances. For example, in The “Eurasian Dream”the Court held that the vessel "Eurasian Dream", a pure car carrier, was rendered unseaworthy as a result of, inter alia, a failure to provide the vessel with specific documentation dealing with the peculiar danger of fire on car carriers and the precautions to be taken to avoid such fires. The Court held that the defendants failed to prove that they (as bill of lading issuers), and those for whom they were responsible (owners/managers and crew), exercised due diligence to make the vessel seaworthy. [2002] 1 Lloyd's Rep 719
Might the English Court go further? If cargo interests can show that misdeclaration of cargo is endemic, and that the particular misdeclaration rendered the vessel unseaworthy, in order to establish due diligence for the purposes of Article IV, Rule 1, might a Court require carriers to have, say, an effective inspection regime in place at the port of loading in order to combat this known danger?
The enormity of the task that would face a carrier who was required to screen or inspect every container is highlighted by the defeat in the United States Senate in March 2007 of an amendment to the "Improving America's Security Act". The amendment put forward by U.S. Senators Charles Schumer and Robert Menendez proposed that within 3 years, 100% of containers entering the United States from majorforeign ports be screened for weapons of mass destruction and 100% of containers entering the United States from all foreign ports be screened within 5 years. The Bill faced vehement opposition, particularly from the Retail Industry Leaders Association, a trade association of the major U.S. retailers, who are key importers of containerised goods. Opponents of the proposal conceded that while the screening process might be well intentioned, as a matter of practice, the technology did not exist to ensure that this could be achieved effectively given the volume of container traffic that flows through modern ports. Further, the proposal was unrealistic and potentially decreased security by forcing containers to sit for extended periods of time, putting them at greater risk of tampering. It was also criticised as a diversion of resources away from the current successful risk assessment based approach of random screening. At a financial level, it was accused of being potentially damaging to the U.S. and global economies.
This provides a strong practical answer to any argument by cargo interests that carriers should have in place a blanket inspection regime. Add to this the fact that screening is unlikely to detect or be sensitive to the complex chemicals/materials that might put a vessel at risk, carrier’s might feel there are very strong prospects of resisting such an argument. Indeed, in the year 2000, the English Court in The “Kapitan Sakharov” [2000] 2 Lloyd's Rep 255 at 271rejected the argument that under Article IV, Rule 1, a carrier's duty extended to establishing that due diligence must be exercised by all concerned in the manufacture, packing, transport and stowage of the cargo before shipment. The Court held that there was no authority for extending a carrier's duty of due diligence to physical verification of the declared contents of containers.
Whilst this may represent the current position under English law, in the United States, it is anticipated that in Capitol Hill a potential dogfight is likely to ensue about the future of the Schumer/Menendez 100% screening proposal. Further, the Senate was persuaded to include in a revised amendment, a direction to the U.S. Secretary of Homeland Security to develop a plan for screening 100% of containers bound for the U.S.. Carriers should watch these developments carefully as there is the potential for the attitude of the Courts, particularly in the United States, to mirror the political climate and impose on carriers inspection requirements in order to permit reliance on Article IV, Rule 1 and 2 - even if these requirements fall short of 100% screening in favour of a deterrent based approach, such as random screening or having in place a coherent risk assessment procedure for cargo misdeclaration.
Any discussion about container liabilities would not be complete without reference to limitation. Package limitation under the Hague/Hague-Visby Rules Article 4, Rule 5 is also a valuable safeguard at a carrier’s disposal. However, package limitation can be sporadic in its application and its usefulness is largely dependant, in the container trade, on the number of “packages” within a container and how "package" is defined.
Tonnage limitation, under 1957 Convention on Limitation of the Liability of Owners of Sea-Going Ships, the 1976 Convention on Limitation of Liability for Maritime Claims, the 1996 Protocol to the 1976 Convention (with its high limits) or domestic legislation incorporating one or other of these regimes, potentially offers carriers (and their insurers) a backstop against potentially huge claims. However, a good deal of uncertainty surrounds the interaction between States that have ratified the 1976 Convention, States that have ratified the 1996 Protocol, States that have chosen to enact the wording of the Convention/Protocol into their domestic legislation, rather than ratify the Convention/Protocol itself and States, such as the U.S., which have a different regime altogether. This raises the prospect of multiple limitation funds.
In conclusion, a carrier's first line of defence in fire/explosion cases is the “fire defence” under Article IV, Rule 2(b), but carriers must be alive to the potential dilution of this defence. The political climate in the United States in relation to container screening provides a warning about potential developments in the law in this area. As things stand, a carrier might be confident of defeating an argument by cargo interests based on a failure to screen, but as technology advances and the political climate changes, this confidence may not continue.
With thanks to Richard Neylon of Holman Fenwick & Willan Solicitors for preparing this article.
This article is intended to highlight the legal issues involved and should not be relied upon as a substitute for specific legal advice on any particular aspect of the reader’s business.
