In 1986, the bulk carrier Nicholas H loaded cargoes of lead and zinc concentrate at South American ports. The vessel loaded the cargo under bills of lading which incorporated the Hague Rules. After loading, the vessel proceeded on its voyage to ports in Italy and the Black Sea. During the voyage, the vessel developed a crack in its hull. The master reported the damage to the US Coastguard and there was concern as to the vessel's fitness for the voyage. The US Coastguard persuaded the shipowner to request its classification society, Nippon Kaiji Kyokai (NKK), to perform a survey of the damage. In order for NKK to conduct the survey, the vessel anchored three miles off San Juan, Puerto Rico. A surveyor acting on behalf of NKK inspected the damage while the vessel was at anchor. On 25 March 1986, the surveyor issued a recommendation that the vessel should proceed to the port of San Juan and undergo permanent repairs in dry dock. That would have required the unloading of the cargo which would have been very expensive. The shipowner objected to the idea of carrying out permanent repairs and instead instructed the vessel to proceed to the port of San Juan for temporary repairs. The shipowner sent an engineer and welder to the vessel and with the assistance of local divers carried out the temporary repairs.

On 3 March 1986, the surveyor of NKK recommended that, subject to the temporary repairs being further examined and dealt with to the satisfaction of an attending surveyor at the earliest opportunity after the vessel discharged its cargoes, and no later than May 1986, the vessel be retained in class for the original voyage. Shortly afterwards, the vessel reported that the welding of the temporary repairs had cracked. Despite attempted repairs at sea, the vessel sank a few days later. The cargo (valued in excess of USD 6 million) was totally lost.

The cargo owners sued the shipowner, the head charterers and NKK in the Commercial Court. The cargo owners abandoned their claim against the charterers, settled the claim against the shipowner for about USD 500,000 which was the extent of the shipowner’s liability applicable to the vessel (compare the LLMC 1957, given the force of law in the United Kingdom by s 503 of the Merchant Shipping Act 1894 (UK); replaced by the Merchant Shipping Act 1979 (UK), s 14, giving the force of law in the United Kingdom to art 2 of the Athens Convention 1974 [sic - s 17 of the Merchant Shipping Act 1979 (UK) giving effect to the LLMC 1976 is probably intended - see the reference to the 'London Convention']). The cargo owners pursued NKK for the balance of their claim, namely USD 5.7 million.

At first instance, Hirst J concluded that on the assumed facts, NKK owed the cargo owners a duty of care capable of giving rise to a liability in damages. NKK appealed and the Court of Appeal reversed the decision. The leading judgment of Saville LJ concluded that in the context of the Hague Rules it was not fair, just and reasonable to require NKK to shoulder a duty by which the Hague Rules primarily lies on shipowners. In addition, absent any dealing between cargo interests and NKK, the relationship between the parties did not support the existence of a duty of care.

The cargo interests appealed.

Held: Appeal dismissed (Lord Lloyd of Berwick dissenting).

The shipowner was primarily responsible for the vessel sailing in a seaworthy condition. The role of NKK was subsidiary. The carelessness of the NKK surveyor did not involve the direct infliction of physical damage in the relevant sense. This gives the right perspective on one aspect of the case.

There was no contact whatsoever between the cargo owners and NKK. It is not even suggested that the cargo owners were aware that NKK had been brought in to survey the vessel. This is not necessarily decisive but it also contributes to placing the claim in the correct context.

Dealings between shipowners and cargo owners are based on a contractual structure, the Hague Rules and tonnage limitation on which the insurance of international trade depends. Underlying it is the system of double or overlapping insurance of cargo. Cargo owners take out direct insurance in respect of the cargo. Shipowners take out liability risks insurance in respect of breaches of their duties of care in respect of the cargo. The insurance system is structured on the basis that the potential liability of shipowners to cargo owners is limited under the Hague Rules and by virtue of tonnage limitation provisions. Insurance premiums payable by owners obviously reflect such limitations on the shipowners’ exposure.

The recognition of a duty of care owed by a classification society to cargo owners will potentially expose classification societies to large claims by cargo owners. That increased exposure will lead to increased costs in obtaining appropriate liability risks insurance. Given their role in maritime trade classification societies are likely to seek to pass on the higher costs to shipowners. As a consequence, cargo owners or their insurers will be enabled to disturb the balance created by the Hague Rules and tonnage limitation provisions by enabling cargo owners to recover in tort against a peripheral party to the prejudice of the protection of shipowners under the existing system by the classification society. The international trade system tends to militate against the recognition of the claim in tort put forward by the cargo owners against NKK. For these reasons the appeal is dismissed.