AO Smith Electrical Products (AOS) shipped goods from Shanghai to various ports in the US under three sea waybills issued by China Shipping Container Lines Co Ltd (CSCL). Those waybills incorporated the terms of CSCL’s Combined Transport Bill of Lading.

These terms provided in cl 7(1) that the waybills were to be subject to the provisions of the PRC Maritime Code (the Code), and in cl 7(2), if the relevant carriage involved a US port, the waybills ‘shall be subject’ to the US Carriage of Goods by Sea Act (COGSA). The terms further provided in cl 26(1) that the waybills 'are governed by the law of the [PRC]' and '[a]ll disputes arising under or in connection with [the waybills] shall be determined by the laws of the [PRC]'. However, cl 26(2) added that, '[n]otwithstanding the provision of Clause 26(1)', where carriage involved a US port, the waybills should be 'subject to the Provisions of the US COGSA'.

A dispute arose, and the parties disagreed over the applicable limit of liability. If COGSA applied, the limit would be lower than the limit in Ch 4 of the Code. According to the Code, any stipulation in a contract of carriage which derogated from the provisions of Ch 4 would be rendered null and void. AOS contended that the Code neutralised the applicability of cll 7(2) and 26(2) to the extent that they provided for a limit lower than that stipulated in Ch 4 of the Code. However, CSCL argued that PRC law and the Code were irrelevant to the waybills. US ports were involved, and the parties clearly intended by cll 7(2) and 26(2) that COGSA should govern the carriage. CSCL further argued that by a letter of undertaking (LOU) agreed between the parties to prevent CSCL's vessel from being arrested, it was agreed that the claims would be governed by Hong Kong law.

The issues to be decided were:

1. Does Hong Kong law govern the carriages under the waybills, and if so, with what result?
2. Does the limit in the Code or that in COGSA apply to the carriage under the waybills?

Held: Hong Kong procedural law governs the carriage. COGSA limits of liability apply.

Hong Kong law does not govern the contracts of carriage. The plain meaning of the LOU is that AOS and CSCL agreed to the exclusive jurisdiction of the Hong Kong High Court, and to the resolution of the dispute in that forum in accordance with Hong Kong procedural law. An indicator of this is that the LOU was agreed without prejudice to any right of defence CSCL might have to limit liability 'in accordance with applicable law'. The LOU amounted to no more than an agreement to submit to the Hong Kong forum and civil procedure. Therefore Hong Kong’s procedural law alone governed the carriage.

Clause 7(1) of the terms expressly provides that '[e]xcept as provided for in Clause 7(2)', the waybills 'shall be subject to the provisions of the Maritime Code'. In its natural and ordinary meaning, that must mean that where cl 7(2) is applicable, and the waybills are (in the words of cl 7(2)) 'subject to the provisions of [US COGSA]', the Code is not to apply. Clauses 26(1) and (2) lead to a similar result. It follows on the clear wording of the waybills that, where US ports are involved, COGSA applies to the exclusion of PRC law or the Code. The answer to the second question then must be that the COGSA limit applies.

However, the outcome of this case might well have been different if PRC law was compulsorily applicable to the carriage, and the Code applied as an overriding statute, regardless of the parties' express intentions in their contract.

The problem in this case is similar to those encountered when the Hague Rules are incorporated into a bill of lading, by agreement of the parties, as a clause paramount. In such a situation, by suitable drafting of the bill of lading, the parties can agree to limit the scope of application of the Hague Rules. This means that the parties can voluntarily agree among themselves that Hague Rules art 3.8 (striking down a provision in a bill of lading which imposes a lesser liability than that stipulated by the Hague Rules) would not apply in specific situations.

The Hague-Visby Rules have gotten around this problem. That is because the Hague-Visby Rules are typically made compulsorily applicable by force of law, regardless of what the parties may (or may not) have agreed in a bill of lading.

It is unnecessary to rule conclusively on whether PRC law and the Code would nullify the reference to COGSA. However, if PRC law (including the Code) applied to the carriage here, the COGSA limits of liability would be rendered null and void in so far as those limits derogated from Ch 4 of the Code. In other words, if PRC law were applicable to the carriage, the Code would override the limits in COGSA.