The appellant shipowners owned a vessel named the SS Granhill which sailed from Liverpool under a time charterparty to ports in West Africa. After loading cargo at Sapele, river water, which contained a substantial amount of mud, was fed directly into the boilers through filters. The vessel then proceeded to Lagos, Nigeria, where it loaded cargo belonging to the respondent cargo owners destined for London. While on the journey to London, the Granhill experienced boiler trouble, resulting in its towage to Falmouth before reaching London. Although the cargo was undamaged, general average expenses were incurred. The general average adjustment showed that the respondents owed GBP 22 10s 4d, which the appellants claimed.

Upon the finding by the arbitrators that the vessel was unseaworthy and that the appellants had failed to exercise due diligence to make the ship seaworthy, the respondents contended that the appellants' claim for general average contribution must be rejected.

In reply, the appellants argued that they were still entitled to maintain their claim pursuant to cl 9 of the bill of lading, which stated that general average was to be payable according to Rule D of the York-Antwerp Rules 1950, and art 3.6 of the Hague Rules, applicable by virtue of the Nigerian Carriage of Goods by Sea Ordinance No 1 of 1926. Rule D of the York-Antwerp Rules 1950 provides:

Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure; but this shall not prejudice any remedies which may be open against that party for such fault.

Article 3.6 of the Hague Rules provides: 'The carrier and the ship shall be discharged from all liability in respect of the loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered.'

The appellants made the following arguments:

1) The first part of Rule D provides the appellants with a right to contribution in general average, which is not affected even if the event giving rise to the general average expenditure was caused by, or was due to the fault of, the appellants.
2) The remedy open to the respondents for the fault of the appellants, preserved in the second part of Rule D, is that the respondents can sue the appellants for damages for breach of the contract of carriage, claiming as damages the amount of the general average contribution payable by the respondents to the appellants.
3) If the respondents' claim for damages for breach of contract was enforceable, they could use it as a defence against the appellants' claim for general average contribution by claiming damages equal to the contribution demanded. The Court would then give judgment for the respondents to avoid circuity of action.
4) However, the respondents' claim for damages for breach of contract has become unenforceable because it was a claim 'in respect of loss or damage' within the meaning of the third para of art 3.6 of the Hague Rules. Since the respondents did not bring a suit within a year after the goods were delivered, the appellants have been discharged from all liability in respect of the loss or damage.
5) Consequently, the appellants still retain their right to a general average contribution, but the respondents no longer have a defence or suit to set against that claim.

Held: The award of the arbitrator in favour of the respondents is affirmed.

The Court first clarified the relationship between the York-Antwerp Rules and the English common law. This was necessary because the York-Antwerp Rules did not provide a definition of the word 'fault' or a list or indication of the remedies which might be used against a party whose fault has caused the event giving rise to the general average expenditure. The Court found that the York-Antwerp Rules, being an international set of Rules, should not be presumed to have the same effect as English law and should not be interpreted in a way that makes them conform to English common law. However, the Court also acknowledged that the Rules are not made up of a 'complete or self-sufficient code', and the gaps in the provisions need to be supplemented by the general law applicable to the contract. Therefore, the meaning of the words 'fault' and 'remedies' must be determined by the general law applicable to the contract, which was English law. The Court also noted that the York-Antwerp Rules did not, in and of themselves, contain any legal force, and parties to a contract have to agree that they will be incorporated into any general average expenditure arising. Furthermore, parties were at liberty to not incorporate them at all, or to incorporate them with specific express or implied modifications.

Secondly, the Court dealt with the relationship between the first and second parts of Rule D. The Court held that the object and purpose of Rule D is to exclude all questions of alleged fault from the average adjustment and to keep intact the legal position until the stage of enforcement. The aim of the first part of the Rule is to allow the average adjustment to be compiled without any assumptions as to fault allocation. This is necessary when regard is had to the size and complexity that an average adjustment may contain, such as in the present case, where it consisted of 183 pages of information and numerous calculations. Average adjustment in a complicated case can even take years, and the task should not be further complicated or enlarged by issues of fault allocation. Additionally, questions of fault would, in any event, be settled by litigation or arbitration as they extend beyond the sphere of general average and may also affect other matters. The average adjusters should be given the opportunity to produce final figures, and once these figures are settled, enforcement would start, and it is at this stage that the second part of the rule becomes operative.

This, the Court held, is how the two parts of Rule D are intended to operate: the first part gives the rights to contribution in general average as set out in the average adjustment. The holder of such rights is entitled to receive payment of the contribution amount. However, the second part qualifies these rights by providing that the first part does not prejudice remedies for faults. The remedies referred to in the second part may override, nullify, diminish or affect in some way the 'rights' referred to in the first part. Accordingly, the rights in the first parts are prima facie rights of the appellants; however, the respondents may be able to defeat those rights by using their 'remedies' for the appellants' 'fault'.

Third, the Court considered whether the word 'remedies' in Rule D was wide enough to cover the respondents' 'equitable defence', which is defined as 'the principle that a person cannot recover from any other person in respect of the consequences of his own wrong …'. Considering that case-law illustrated that cross-claims were interpreted to be covered by the second part of Rule D, the Court held that the word 'remedies' was to be construed as being wide enough to cover defences as well as cross-claims. This decision was influenced by the object of Rule D, which is to preserve the legal position until the stage of enforcement.

Fourth and finally, the Court considered the effect of the third para of art 3.6 of the Hague Rules. The Court held that this article had not destroyed the respondents' equitable defence because its effect was not to bar defences, but rather to discharge liabilities. Given that it had already concluded that the equitable defence constituted part of the 'remedies' preserved by the second part of Rule D of the York-Antwerp Rules, the Court held that the defence was unaffected by art 3.6 of the Hague Rules.

Regarding cross-claims, the Court first noted that the word 'goods' in art 3.6 referred to the cargo owner's goods, and expressed doubt as to whether the words 'loss or damage' were limited to actual or physical loss or damage because of the precedents set by GH Renton & Co Ltd v Palmyra Trading Corp of Panama [1952] AC 149 (CMI2113) and Anglo-Saxon Petroleum Co Ltd v Adamastos Shipping Co Ltd [1957] 2 QB 333 (CMI2122). The Court interpreted art 3.6 to mean that the liability of the carrier and the ship must be a liability to the cargo owner, who is a party to the contract of carriage. The loss or damage for which the carrier or the ship is initially liable must arise out of the contract for the carriage of the cargo owner's goods, and the goods for which the date of delivery or non-delivery is significant for the cargo owner must be its goods.

Therefore, the Court held that the liability to pay general average was not related to the respondents' goods but rather to the ship's expenditure in this case. Similarly, in another case it might be related to the jettisoning of goods or damage to some other person's goods. The respondents' goods in this case were duly delivered, and there was no loss or damage in connection with them.

The Court further held that if a cargo owner has sustained loss or damage of or in connection with the goods, it would be aware of such loss or damage on or around the date of delivery. Under these circumstances, it would not be unreasonable for time to start running from that date. However, if the goods have been safely carried, discharged, and delivered, but general average arose in respect of other expenses, it would be unreasonable for time to start running against the cargo owner from the date of delivery of its goods, as it may have little or no knowledge of the events giving rise to the general average contribution. Therefore, the Court held that the respondents could make use of the cross-claim, and to avoid circuity of action, judgment would be given for the respondents.