In 2008, steel pipes were shipped on the defendants' vessel Saga Explorer for carriage from Ulsan, South Korea, to various ports on the west coast of North America. Non-negotiable bills of lading were signed by Orion Shipping Co Ltd (Orion) as agents for the owners/carrier. The bills named Nexteel Co Ltd (Nexteel) as the shipper, and Kurt Orban Partners (KOP) as the consignee and notify party. The bills included an English jurisdiction clause and incorporated the Carriage of Goods by Sea Act 1936 (USA) (COGSA), which contained provisions similar to the Hague Rules (HR) and Hague-Visby Rules (H-VR). The bills stated that the cargo was shipped in apparent good order and condition but included a 'RETLA' clause worded as follows:

RETLA CLAUSE: If the Goods as described by the Merchant are iron, steel, metal or timber products, the phrase 'apparent good order and condition' set out in the preceding paragraph does not mean the Goods were received in the case of iron, steel or metal products, free of visible rust or moisture or in the case of timber products free from warpage, breakage, chipping, moisture, split or broken ends, stains, decay or discoloration. Nor does the Carrier warrant the accuracy of any piece count provided by the Merchant or the adequacy of any banding or securing. If the Merchant so requests, a substitute Bill of Lading will be issued omitting this definition and setting forth any notations which may appear on the mate's or tally clerk's receipt.

The load port survey carried out described the pipes as 'partly rust stained', 'wetted before shipment by rain', 'slightly scratched on surface', and 'partly rust stained in white oxidation on surface'. That survey also noted that these descriptions of damage were acknowledged by the vessel's master and appended to the relevant mate's receipt, and recommended that such descriptions be appended to the relevant mate's receipt and bills. The booking note signed by Nexteel and Orion stated that the bills were 'to be issued as per Mate's Receipt'. While the mate's receipt referred to the survey report containing the above-mentioned descriptions, the bills contained no such reservation. This was so because Nexteel requested that the bills be issued unclaused, with Nexteel providing letters of indemnity.

Surveys at the discharge port and thereafter also found the pipes to be rusted. Parties agreed that the cargo receiver would have suffered some loss due to the rust contamination. The parties accepted that there was no significant deterioration of cargo during the sea carriage.

Nine claimants alleged that the pipes were found damaged on arrival and sued, but only one of the claimants, KOP, was a party to the carriage contract. KOP was indemnified by their German insurers, who acted through and by Breffka & Hehnke GmbH & Co KG (B&H). There was a subsidiary issue of whether the first claimant, B&H, was entitled to sue and recover damages. The main issue concerned the representation in the bills as to the condition of the pipes on shipment, whether it was relied upon, and the damage flowing from any breach.

Held: Judgment for the first claimant. B&H is entitled to judgment for USD 458,655.69 as it was entitled to sue and recover damages for the false representations in the bills, which influenced KOP to credit monies against Nexteel's invoices instead of rejecting the pipes and the bills.

Some visible but superficial rust is likely to occur on the surfaces of steel cargo, unless specially manufactured or treated. It would cause widespread interference with international trade if such rust were to result in clausing of bills of lading. But the other extreme is where the rust is deep, difficult to remove, and when removed, reveals uneven pitting to the surface. There is some difficulty in describing rust in between these extremes.

Under art 3.3.c of the HR and H-VR, after shipment of the cargo on the vessel, the master (or agent) must, upon demand, issue to the shipper a bill showing 'the apparent order and condition of the goods'. To do that, the master (or agent) must form an honest and reasonable non-expert view of the cargo as seen, and in particular, its apparent order and condition. The master may ask for expert advice from a surveyor, but the ultimate judgment call on the appearance of the cargo falls upon the master: The David Agmashenebeli [2002] EWHC 104 (Admlty), [2003] 1 Lloyd's Rep 92 (The David Agmashenebeli) 104–106 (CMI752); Sea Success Maritime Inc v African Maritime Carriers Ltd [2005] EWHC 1542 (Comm), [2005] 2 Lloyd's Rep 692, 699.

The statement on the face of the bills that the cargo was shipped 'in apparent good order and condition' is a representation of fact which could be relied on as reflecting the reasonable judgement of a reasonably competent and observant master: The David Agmashenebeli 106; Guenter Treitel and FMB Reynolds, Carver on Bills of Lading (3rd edn, Sweet & Maxwell 2011) para 2-006.

A clause similar in wording to the RETLA clause was held by the US Ninth Circuit Court of Appeals in Tokio Marine & Fire Insurance Co Ltd v Retla Steamship Co [1970] 2 Lloyd's Rep 91 (Tokio Marine) to qualify the term 'good order and condition' in bills of lading. This part of the reasoning is uncontroversial. But the conclusion following is more debatable: the Ninth Circuit found that there was no affirmative representation that the cargo was free of rust or moisture when it was received by the carrier, and that all surface rust of whatever degree was excluded from the representation of apparent good order and condition.

The defendants argued that the holding in Tokio Marine that the RETLA clause was not limited to minor or superficial rust should be followed: Stewart C Boyd and others, Scrutton on Charterparties (21st edn, Sweet & Maxwell 2008) art 63; Bernard Eder and others, Scrutton on Charterparties (22nd edn, Sweet & Maxwell 2011) para 8-031. In contrast, B&H argued that to the extent that the RETLA clause was designed to except from liability, it should be read restrictively: Attorney-General of Ceylon v Scindia Steam Navigation Co Ltd [1962] AC 60 (PC) 74; Richard Aikens, Richard Lord and Michael Bools, Bills of Lading (Informa 2006) para 4.30. B&H argued that the RETLA clause only excludes (surface) rust which is likely to be found in any normal cargo and which would not detract from its overall quality and affect its merchantability.

B&H's argument has its problems: what is the degree of 'surface rust' which falls outside the representation, what is a 'normal' cargo of steel, and why is merchantability relevant to the representation by the master of the carrying vessel?

Nevertheless, the defendants' argument was rejected. The RETLA clause does not apply to all rust of whatever severity. The RETLA clause is a legitimate clarification of what was to be understood by the representation as to the appearance of the steel cargo upon shipment. It should not be construed as a contradiction of the representation as to the cargo's good order and condition, but as a qualification that there was an appearance of rust and moisture of a type which may be expected to appear on any cargo of steel: superficial oxidation caused by atmospheric conditions. The exclusion of 'visible rust or moisture' from the representation as to the good order and condition is thus directed to superficial appearance of a cargo which is difficult, if not impossible, to avoid. It is likely to form the basis of a determination as to whether there has been a further deterioration due to inherent quality of the goods on shipment under art 4.2.m of the H-VR.

The defendants' construction of the RETLA clause would rob the representation as to the good order and condition of the steel cargo on shipment of all effect. Furthermore, part of reasoning in Tokio Marine is objectionable. One of the grounds for the decision in Tokio Marine was that the clause provided that it was always open to the shipper to call for a substitute bill of lading showing the true condition of the cargo. But it is highly unlikely that a shipper of cargo would ask for a claused bill of lading (Michael F Sturley, 'Carriage of Goods by Sea' (2000) 31 J Mar L & Com 241 (Sturley) 245–248), as the present case reveals. Tokio Marine has attracted unfavourable comments (Sturley 245–248; John F Wilson, Carriage of Goods by Sea (4th edn, Pearson 2001) 131; William Tetley, Marine Cargo Claims, vol 1 (4th edn, Carswell 2008) 698–699) and does not appear to have been consistently followed (Sturley).

The Court reproduced a substantial part of Sturley 245–248 discussing provisions similar to arts 3.3 and 3.8 of the HR:

[Tokio Marine permits] carriers to include standard clauses in their bills of lading that essentially disclaim all responsibility for the required statement. Although COGSA § 3(8) explicitly prohibits any clause lessening a carrier's liability 'otherwise than as provided in this Act', 'rust clauses' have been justified on the ground that the shipper had the option of demanding a different bill of lading that did not contain the offending clause. In practice, such a demand would be unlikely … . Permitting the carrier to escape liability for the statement of apparent order and condition undermines the Hague Rules' goal of protecting the bill of lading as a commercial document on which third parties can rely. Indeed, one of the principal abuses that the Hague Rules were intended to correct was the carriers' use of 'reservation clauses' to exonerate themselves from responsibility for the description of the goods. Thus the rules required the bill of lading (if one were issued) to include the specified information without reservation unless the exception (found in the proviso to COGSA § 3(3)) applied. A carrier's use of a reservation clause when the exception did not apply would be 'null and void' under COGSA § 3(8). … The phrase 'on demand of the shipper,' upon which [Tokio Marine] relied so heavily, does not alter the carrier's obligation to include the information required by COGSA § 3(3) wherever it does issue a bill of lading.

The Court also highlighted the following sentence from a bulletin of the UK P&I Club (221-11/01) as pertinent:

Failure to properly describe the condition of the cargo leaves the carrier open to allegations of being a party to a misrepresentation, particularly from third-party purchasers of the cargo who have only contracted to do so based on a bill of lading and who have not been shown any pre-shipment survey by the sellers.

On the evidence, the pipes were not shipped in a normal and unexceptional condition, and did not fall within the RETLA clause. The pipes should have been (at a minimum) described as 'rust spotted' or 'partly heavily rusted'. None of the surveyors at the discharge port considered the cargo damage to be 'normal' or 'expected'. Instead, they noted extensive oxidation, described as 'moderate to severe' and 'heavily rusted condition' for a cargo which had been notified to have been shipped in apparent good order and condition. The decision to issue and sign clean bills involved false representations by the defendants' authorised agent, Orion, at the request of the shipper, Nexteel, which were known to be untrue and intended to be relied on.