The Practical v Effective Cause of Loss and the Inter-Club Agreement

April 2006

The recent decision by the English High Court in the "Kamilla"¹ brought back into focus the English courts' approach towards the Inter-Club Agreement (ICA). Although designed to reduce litigation and disputes under NYPE Charterparties and to provide "rough and ready justice" without the need for lengthy legal proceedings, the ICA has not been free of litigation. The determination of the courts to stick to the terms of the ICA has meant that, in certain cases, parties may be held disproportionately liable for damage/loss to cargo, even though their percentage of blame is minimal. In the "Kamilla" the court, ignoring elements of foreseeability and causation, held that unseaworthiness was the practical cause of the loss and that the Owners were liable for the full amount under the ICA although unseaworthiness of the vessel caused only 1% of the cargo to be damaged.

The ICA was developed in 1946 as a memorandum of agreement between the various P&I Clubs as to apportionment of liability for cargo claims and disputes arising under the New York Produce Exchange Agreement. It was designed as a mechanism to settle disputes quickly and effectively under standard principles and rules. The ICA was drafted to avoid complicated legal wrangling between Owners and Charterers. As Lord Justice Kerr stated in the "Strathnewton"²:

"The object of the ICA was clearly to cut…across this balance of claims and defences by a rough and ready apportionment of financial liability between owners and charterers. The agreement does so in all cases by apportioning liability by reference to the cause of the loss and damage alleged in the cargo-owners' claim, 'which will have been properly settled or compromised…The ICA provides a more or less mechanical apportionment of financial liability which is wholly independent of these standards of obligation"

Arguably, and at first glance, the "Kamilla" is a clear example of the mechanical apportionment of financial liability and rough and ready justice - a failure to apportion responsibility for disproportionate loss caused by one of the parties in relation to causal responsibility.

The Owners of the "Kamilla" chartered the vessel on a time charter on the NYPE Form. On the voyage in question, she carried a cargo of 2,834.56 MT of lentils from Thunder Bay, Canada to Bejaia, Algeria. Unfortunately, the vessel's No. 2 hatchcovers were not secure, which rendered her un-seaworthy. En route to Algeria a small amount of seawater entered the hold and damaged 1% of the cargo. The damaged cargo was easily removed from the remaining 99% of the cargo, which had not suffered any damage. That notwithstanding, the Algerian Authorities rejected the entire cargo at a loss to Owners of USD 379,356.53. In their claim for indemnity under the ICA Owners accepted responsibility for the 1% of damaged cargo, but not for the remainder of the loss as they maintained that the Charterers and their agents (the receivers) failed to take any steps to minimise the loss by encouraging the Algerian Authorities to accept the sound cargo. They argued that this failure meant that this proportion of the claim rightfully ought to be considered at least as a claim for shortage as opposed to a claim due to unseaworthiness. Had this been the case then, under the ICA, Owners would have only been able to recover 50% of their loss as opposed to nothing if the case of the loss was "due to unseaworthiness" which, under paragraph (2) the ICA, were 100% for the account of Owners.

The arbitrators in the "Kamilla" considered whether damage "due to unseaworthiness" would include damage that was too remote to be foreseeable and agreed with the Charterers' argument on causation. They took the view that it would entirely contrary to the objectives of the ICA to read into it a legal requirement such as foreseeability and remoteness which did not expressly appear in the ICA and which were likely to give rise to complex factual and legal disputes.

This interpretation of the ICA; and the arbitrators' approach to causation was confirmed by the High Court on appeal. The Owners had argued that the Tribunal had wrongly decided causation on the basis of the "but for" test, and that the Authorities rejection of the entire cargo was irrational, unjustified and not within the reasonable contemplation of the parties. Therefore, the Owners argued the Tribunal was wrong to decide that unseaworthiness was the proximate cause of the loss. In contrast, Charterers' position was simply that provided unseaworthiness was, in a practical sense, a cause of the loss the test of causation was satisfied.

In reaching his decision Morison J agreed with the Tribunal that the test of causation was whether the act or default complained of is a proximate cause of the damage and endorsed the Tribunals test of causation that "provided the unseaworthiness of the vessel could be said to be a practical cause of the loss, it was not appropriate to embark on further enquiry as to whether it was the effective cause of the loss…". It was though not necessary to address whether the words "due to unseaworthiness" (paragraph (2) of the ICA) encompassed damage that was too remote to be recoverable because the Tribunal had rejected Owners' argument of remoteness; "… questions as to the interpretation of the ICA must therefore depend on the construction of the ICA itself and not on a construction of the Charterparty" and the decision of the Authorities to reject the cargo "was by no means unprecedented in our collective experience".

Therefore, in the circumstances of the rejection of the cargo, and even though the unseaworthiness caused only 1% of the loss, for the purpose of the ICA all that was necessary was that unseaworthiness was a cause of the remaining 99% of the loss and the Owners recovered nothing from the Charterers.

1. Kamilla Hans-Peter Eckhoff KG v. A.C. Oerssleff’s EFTF. A/B [2006] EWHC 509 (Comm) (The “Kamilla”)

2. D/S A/S Idaho v. Peninsular and Oriental Steam Navigation Co. [1983] 1 Lloyd's Rep 219 (The “Strathnewton”)