This was an appeal from a single Judge of the Federal Court. The proceedings turned on liability for corrosion damage to coils of sheet steel on two sea voyages from Japan to Australia. The shipper of the coils was Tsuda Corp (Tsuda) who consigned the coils to Stemcor A/Asia Pty Ltd (Stemcor) (together, the plaintiffs). The first voyage was undertaken by the MV Ankergracht 91262 and the second by the MV Archangelgracht 91273. The defendants in the proceedings were the owners of the vessels, CV Scheepvaartonderneming Ankergracht (Ankergracht), and CV Scheepvaartonderneming Archangelgracht (Archangelgracht). Each carrier had issued a bill of lading in respect of the coils carried on its vessel.

The coils were damaged as a result of corrosion caused by contact with water before or during the relevant voyages. The carriage of the coils was governed by the Hague-Visby Rules as defined in s 7 of the Carriage of Goods by Sea Act 1991 (Cth) (COGSA). The plaintiffs relied on a breach by the defendants of the Rules. The defendants in reply relied on exempting provisions in the Rules.

Article 3.1 of the Rules focuses on the condition of the relevant vessel before, and at the beginning of, the voyage, whilst art 3.2 focuses on the carrier’s conduct before, during, and after the voyage. It follows that, in assessing seaworthiness and the conduct of the defendants, it may be necessary to determine, if possible, the stage or stages at which water entered the hold of each vessel. The primary Judge accepted the evidence of the expert witness that condensation probably did not occur before, or immediately after, loading and before sailing, and that it therefore occurred during each voyage. His Honour accepted that there was a practice of ventilating cargo holds during voyages, applying the dew point rule. However, his Honour also found that, because of the difficulty in measuring the temperature of all cargo, that rule offered only an approximate estimate of the suitability of prevailing conditions for ventilation. For this reason, as his Honour observed, '[i]t is standard practice in the shipment of steel from cold to warmer climates not to ventilate the hold'.

The primary Judge held that given the susceptibility of steel coils to corrosion if exposed to water, each vessel was unseaworthy because it had no dehumidifiers to remove water which might enter the hold on cargo or dunnage or in the form of rain, which entry ought to have been foreseen. His Honour also found that, in failing to fit dehumidifiers, the defendants had failed to exercise due diligence to make their respective vessels seaworthy as required by art 3.1 of the Hague-Visby Rules. His Honour further held that, given the known sensitivity of the coils to moisture and the absence of a dehumidification system, the admission of water into the hold in the course of ventilation was a failure to carry, keep, and care for the coils properly and carefully as required by art 3.2 of the Hague Visby Rules.

In their defences, the defendants relied on a number of the exclusions contained in art 4.2, in particular that the loss or damage arose or resulted from the following incidents:

• Act or omission of the shipper or owner of the goods, his agent or representative (art 4.2.i);
• Insufficiency of packing (art 4.2.n);
• Inherent defect, quality or vice of the goods (art 4.2.m); and
• Any other cause arising without the actual fault or privity of the carrier, or fault or neglect of the agents or servants of the carrier (art 4.2.q).

The defendants provided particulars of these defences. They alleged deficiencies in wrapping permitting the entry of moisture, and that the coils were wet when delivered for loading. It was also alleged that ventilation had only occurred when and where it was appropriate. The primary Judge gave judgment for the plaintiffs: see Stemcor (A/sia) Pty Ltd v CV Scheepvaartonderneming Ankergracht [2005] FCA 1808 (CMI2089). The defendants appealed on a number of grounds.

Held: Appeal dismissed.

Despite the defendants' 44 grounds for appeal, the three critical issues in the appeal are as follows:

1. Had each carrier exercised due diligence to make its ship seaworthy, and to make the holds in which goods were carried fit and safe for their reception, carriage and preservation within the meaning of arts 3.1.a and 3.1.c of the Hague-Visby Rules (as set out in Sch 1 of COGSA)?
2. Did each carrier comply with its obligation under art 3.2 of the Hague-Visby Rules to properly and carefully load, handle, stow, carry, keep, care for, and discharge the coils carried?
3. Can the carriers rely on an exemption under art 4.2 based on the packaging of the coils being:

• an act or omission of Tsuda or Stemcor (art 4.2.i);
• insufficient packaging (art 4.2.n);
• some other cause which arose without the actual fault or privity of the carriers (see art 4.2.q); or
• in the case of the Ankergracht cargo only, some inherent defect, quality or vice of the goods from which the loss or damage arose (art 4.2.m)?

In Great China Metal Industries Co Ltd v Malaysian International Shipping Corp Bhd [1998] HCA 65, (1998) 196 CLR 161, although forming no part of the ratio of the case, observations made in the joint judgment of Gaudron, Gummow, and Hayne JJ, and in the judgment of McHugh J, suggest that in applying arts 3 and 4 of the Hague-Visby Rules, the proper course is to identify negligence (usually a breach of art 3.2) before considering the availability of exceptions pursuant to art 4.2, and that the mere occurrence of loss or damage may not be sufficient to prove a breach of the former rule. In this case, the primary Judge adopted that approach.

The cargo was packed in a manner consistent with the standard practice for the packaging of cold rolled steel. The packaging of the coils was marked with a note requiring that they be kept dry and handled with care.

Condensation from moist air can form on steel coils in the hold of a ship if the surface temperature of the coils is below the dew point of the temperature of the air surrounding the coils, or the velocity of the air moving in the hold across the coils is low enough to permit the air to cool. The primary Judge found that the corrosion damage to the coils was caused only by condensation which occurred after each sea voyage had commenced. This finding was not challenged on appeal.

During a voyage from Japan in the winter conditions of the northern hemisphere to the Australian summer, the condition of the air within the hold and the temperature of the steel coils is likely to change. Even though each hold is sealed, air can leak into it from the outside, or the crew can intentionally ventilate it. The outside air would be at different temperatures and contain different levels of moisture compared to the air in the hold. There would also be a change of the temperatures of the air and the coils within the hold caused by heat transmission through the ship’s structure. Heat would enter the hold from the warmer, ambient air or sea outside, through the hull and hold layers. The amount of heat flow depends on the characteristics of the ship's design as well as the outside temperatures compared to the temperature inside the hold. If air with a higher moisture content enters the hold from outside, the likelihood of subsequent condensation in the hold will increase.

The first question posed by art 3.1.a of the Hague-Visby Rules is an objective one, namely: was the ship seaworthy? If not, the next question is whether the carriers exercised due diligence in the provision of the ship so as to fulfil their obligations under art 3.1.a.

The question of seaworthiness has to be judged at the time the vessel sailed. This involves considering how it was loaded and stowed. In Great China Metal Industries Co Ltd, the High Court stated [175]:

Fitness for the voyage may also encompass other considerations as, for example, the fitness of the vessel to carry the particular kind of goods or the fitness of crew, equipment and the like. The question of seaworthiness, then, may require consideration of many and varied matters.

Seaworthiness is not an absolute concept, but is related to the purpose for which the vessel is engaged at the time of assessment: FC Bradley & Sons Ltd v Federal Steam Navigation Co Ltd (1927) 27 Ll L R 396; see too Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) [2002] 1 Lloyd's Rep 692 [126]. But the vessel is either fit for the purpose of the particular voyage or it is not (Great China Metal Industries Co Ltd [28], [86]). Cresswell J said that seaworthiness is to be judged by the standards and practices of the industry at the relevant time, 'at least so long as those standards and practices are reasonable' (The Eurasian Dream [127]). That question of reasonableness is one of law.

The obligation of seaworthiness in the Hague-Visby Rules requires that the carrier is bound to exercise only due diligence to make the ship seaworthy, and to make the holds, fit and safe for the reception, carriage and preservation of the goods that were to be carried (see also s 17 of COGSA which negates for Australian contracts of carriage of goods by sea any absolute warranty of seaworthiness).

The defendants here were aware that this cargo was susceptible to corrosion. The defendants argued that the insufficiency of packing exception in art 4.2.n evinced an intention in the Hague-Visby Rules to allocate risk between carrier and shipper interests. They said that the Judge had subverted the scheme of risk allocation which the Hague-Visby Rules effected by imposing an absolute obligation on the carriers not to permit the entry of water vapour into the hold.

However, the defendants had accepted the cargo as being in apparent good order and condition for the carriage on the voyage. The carriers knew of the sensitivity of the cargo to the effects of water vapour, and, in particular, to cargo sweat. The cargo bore its own, visible, warning sign that it should be kept dry. Under the settled interpretation of the Hague-Visby Rules, art 3.1 operates to impose an obligation on the shipowner at a time before, and independently of, the operation of arts 3.2 and 4. The carriers had to conform to their obligations under art 3.1 to exercise due diligence to make the vessels both seaworthy and cargoworthy. There was nothing unusual about the cargo which the plaintiffs needed to reveal to the carriers, for the evidence showed its relevant characteristics were well known. And the evidence justified the Judge's finding that the packaging was usual.

In that context, the obligation to exercise due diligence under art 3.1 must relate to the known characteristics of the vessels on a voyage at the time of year between Yokohama to Sydney to experience condensation or cargo sweat. The exercise of due diligence had to have regard to the likelihood that either free water or water vapour would be present in the holds. And due diligence required preparation of the holds for the real possibility that it may not have been possible to ventilate them or, if it were, that water vapour could then enter the holds, because the temperature measurement methodologies available on the vessels were not sufficiently precise to ensure that condensation or cargo sweat would not occur. Suffice to say that, in striking a practical balance for the exercise of due diligence under art 3.1, his Honour was correct to avoid using art 4.2.n to confine or reduce the due diligence the carriers had to undertake to prepare the vessels for the voyage, on which known conditions, harmful to the cargo, were well understood but not the subject of reasonable efforts to eliminate them. The defendants had to install dehumidifiers in the present circumstances if they were to exercise due diligence, regardless of the affreightment contract. This consequence of the obligation of a carrier under art 3.1 flows from the carriers' decision to offer each vessel to carry the particular cargo

The defendants argued that art 3.1.c omits the definite article before the words 'goods are carried', in contradistinction to art 3.2. This, they said, suggested that the due diligence required to make the ship seaworthy or cargoworthy related generally to the carriage of goods, as opposed to the carriage of the particular goods presented. No authority was cited by either side as to this question of construction. But, at common law, the ship had to be fit to carry the particular goods presented for it to be seaworthy. Under the Hague-Visby Rules the objective test of seaworthiness, including cargoworthiness, requires that the ship be fit as a receptacle to carry the shipper's cargo as presented. The carrier's obligation under the Hague-Visby Rules is not now an absolute warranty. It is measured by asking whether the carrier has exercised due diligence in preparing the vessel and its holds to receive and carry safely the cargo, presented as it was.

In order to be able to exercise due diligence to prepare the vessel for the reception of goods on the next voyage, the carrier must have some knowledge of what it is that will be carried. The obligation under a provision such as art 3.1 is not that of an insurer, but one that due care would be used, so that a plaintiff must prove not only that the defective condition of the vessel made it unseaworthy, but also that the failure to discover the defect before the voyage began was due to negligence. The questions of seaworthiness and whether due diligence has been exercised are questions of fact. Where unseaworthiness and a failure to comply with the obligation of due diligence imposed by art 3.1 is a cause of the loss, the fact that some other excepted cause under art 4.2 may have operated concurrently will not relieve the carrier.

The trial Judge found that in order to satisfy the obligation of due diligence under art 3.1 of the Hague-Visby Rules, the carriers had to install dehumidifying equipment, either on a temporary or permanent basis, once they agreed to carry the cargo on each vessel. Due diligence in art 3.1 does not require the carrier to prepare the ship to encounter every foreseeable incident of the proposed voyage. The emphasis on due diligence in art 3.1 is on the carrier acting as a prudent owner, preparing the vessel and its holds for the voyage and cargo.

Here, it was not inevitable that all cold rolled steel in coils would suffer damage from cargo sweat in the ordinary incidents of the voyage from Yokohama to Sydney. That must be so because a considerable number of the coils on both voyages arrived without damage from cargo sweat. So, there was no inevitability of damage being sustained to every one of the coils in the ordinary incidents of the voyage. But, there was, on the evidence, a real and significant risk that cargo sweat would occur. And if cargo sweat occurred, there was a real risk that ventilation would not be able to be used effectively, or at all, to remove moisture or the risk of corrosion.

When a carrier accepts cargo known to be particularly susceptible to corrosion caused by moisture, such as the coils in this case, art 3.1 imposes on it an obligation to exercise due diligence to make the vessel cargoworthy for that cargo, including all its known susceptibilities. Here, the relevant purpose was to carry coils known to have the characteristic of being particularly sensitive to corrosion. Each vessel had to be 'fit for the purpose' if it were to be seaworthy. And each carrier, before and at the beginning of the voyage from Yokohama, had to exercise due diligence to make the vessel seaworthy for the purpose of carrying those very coils.

The defendants knew, or ought to have known, that there were real risks that weather conditions would not permit such ventilation to occur and because of the moisture (including in the air) admitted into the holds during loading which had not been removed that cargo sweat could cause corrosion. Weather conditions which might be experienced in an ordinary voyage from Yokohama to Sydney at the time of year at which each of these voyages occurred may make ventilation difficult or impossible. Because of this characteristic of the incidents of the voyage, which were known to the carrier, the primary Judge determined that each vessel was unseaworthy at the commencement of each voyage because the exercise of due diligence should have prepared it to encounter the known perils of moisture in the holds (as water and vapour), an inability to ventilate and cargo sweat. That is why he said that, unless the cost was prohibitive or it was otherwise unreasonable to incur it, due diligence would require that the cost of installing the dehumidifiers had to be borne by the carriers prior to offering the vessels for loading. This is correct. An ordinary prudent owner would not have been able to put to sea with the vessels in the state in which they actually were having regard to all probable consequences of what might occur during the course of the voyage. Due diligence to make the vessels seaworthy required, in the circumstances, the installation of dehumidifiers.

The defendants also breached art 3.2 of the Hague-Visby Rules. The imprecision of the defendants’ systems to measure when, and when not, to ventilate allowed the introduction of moisture into the holds during ventilation. This justified his Honour’s finding of a breach by the carriers of art 3.2. They did not 'properly' ventilate because they did not do so 'in accordance with a sound system' (see Albacora S R L v Westcott and Laurance Line Ltd [1966] 2 Lloyd's Rep 53).

The defendants cannot succeed on the insufficiency of packing exception. Likewise, the exception of act or omission of the shipper or owner of the goods or his agent or representative under art 4.2.i must fail. The shipper put a clear warning on the external packaging that the goods had to be kept dry.

For these reasons, his Honour was correct to have concluded that the plaintiffs proved that the unseaworthy condition of each vessel was the cause, or an effective cause, of the damage to the coils. The carriers failed to establish that they had exercised due diligence to make the vessels seaworthy at or before the beginning of the voyages. The inability to remove water and vapour from the air so as to ensure that no condensation would occur internally within the coils was the effective reason why, when the vessels were ventilated during the voyage, water was present and vapour entered the holds, so that ultimately the coils were damaged by the effect of corrosion from cargo sweat. Each of the failures to remove the moisture present when the voyage began, and to prevent moisture entering the holds when ventilation did occur, was a failure to care for the coils contrary to the carriers' obligations under art 3.2.