The second plaintiff, Tsuda Corp, shipped coils of sheet steel carried by sea from Japan to Australia over two voyages. The first plaintiff, Stemcor (A/sia) Pty Ltd (Stemcor), was the consignee. The first and second voyages involved the MV Ankergracht 91262 (Ankergracht). The second voyage involved the MV Archangelgracht 91273 (Archangelgracht). BV Spliethoff's Bevrachtingskantoor operated both vessels. The defendants were CV Scheepvaartonderneming Ankergracht (Ankergracht) and CV Scheepvaartonderming Archangelgracht (Archangelgracht) (together, the carriers), who were respectively the owners of the two vessels.

To protect the coils from corrosion, the coils were lightly oiled but had no chromate coating to meet the requirements of Stemcor's buyer. The coils were loaded on board their respective vessels with dunnage and other cargoes that were wet with rain. Upon delivery, several coils were found to be similarly corroded, despite being having been shipped on different vessels.

Stemcor sued the carriers in contract, bailment, and negligence. The parties accepted that: (1) the coils were corroded due to contact with water before or during the voyages; and (2) the amended Hague Rules, as defined in s 7 of the Australian Carriage of Goods by Sea Act 1991 (Cth) (the AHR) applied. Parts of the AHR follow the Hague-Visby Rules (the HVR). Stemcor argued that the damage to the coils was due to the carriers' breach of HVR art 3.1 or HVR art 3.2. The carriers, however, relied on HVR arts 4.2.i, 4.2.m, and 4.2.n as defences. Article 1.a of the HVR defines the 'carrier' as including 'the owner … who enters into a contract of carriage with a shipper'.

The parties disagreed as to how water entered the packaging around the coils. Stemcor contended that the corrosion on the coils occurred solely because of condensation during the voyages. The carriers contended that there were three sources of wetting that caused damage: (1) external wetting which infiltrated the wrapping surrounding the coils; (2) condensation on the external packaging which infiltrated the wrapping; and (3) condensation that occurred within the packaging when water vapour was released from air that penetrated the wrapping and came into contact with the surface of the coil. However, external wetting was relied upon only in relation to the coils shipped on the Ankergracht, since there was no evidence that the coils shipped on the Archangelgracht were wet when loaded.

The carriers argued that: (1) the coils should have been wrapped in a manner which would have completely prevented the ingress of water either in liquid or vapour form; and (2) the inner wrapping did not provide protection against condensation developing within the coil, and instead trapped condensation within the wrapping.

The parties also disagreed on the measure of damages to which Stemcor was entitled if Stemcor proved that the carriers were in breach. Stemcor claimed the wholesale price charged by Stemcor to Stemcor's buyer. The carriers contended that the amount recoverable was the CIF value of the goods. Article 4.5.b of the HVR provides that:

The total amount recoverable shall be calculated by reference to the value of such goods at the place and time at which the goods are discharged from the ship in accordance with the contract or should have been so discharged.

The value of the goods shall be fixed according to the commodity exchange price, or, if there be no such price, according to the current market price, or, if there be no commodity exchange price or current market price, by reference to the normal value of goods of the same kind and quality.

Held: Judgment for the plaintiffs.

The carriers breached HVR arts 3.1 and 3.2. The corrosion of the coils was caused by the carriers' failure to carry, keep, and care for the coils properly and carefully during the voyages in circumstances where the vessels had neither dehumidification systems nor heating systems installed. The vessels were also not seaworthy for the carriage of the coils from Yokohama, Japan, to Sydney, Australia, on voyages commencing in December and February respectively, with the coils being transported through the tropics from a cold climate to a hot climate. It was practicable to install dehumidifiers in the vessels. But the carriers did not do so. They failed to exercise due diligence to make the vessels seaworthy and to make the holds fit and safe for the carriage and preservation of the coils.

On the evidence, corrosion would not have occurred if moisture had not been admitted into the cargo holds or if moisture, once admitted, had been removed by a dehumidification system. Ventilation during the voyages caused the ingress of water vapour, instead of removing it from the holds. Even if the coils for the Ankergracht were wetted in the barge, no water infiltrated the external and inner wrappers prior to the loading of the coils on to the Ankergracht.

Before discussing the relevant individual HVR provisions, the Court made the following general statements. Packing capable of preventing even the most minor damage is impractical. It is not expected for most commodities. Equally, the degree of care that would have to be exercised by a carrier in order to avoid all minor damage is also not always practical or expected. The Court must undertake a balancing exercise. Such an exercise involves finding some middle ground or rule of reason between a degree of packaging that will eliminate all possible damage on the one hand, and a degree of care on the part of the carrier that will eliminate all possibility of minor damage on the other hand. The law will involve a compromise of the conflict between the interests of the shipper and the carrier. Neither is required to accept total responsibility.

The Court thereafter considered HVR art 3.1. HVR art 3.1 requires carriers to provide a ship fit to carry the particular cargo on the particular voyage to the particular destination (Mitsui & Co Ltd v Novorossiysk Shipping Co (The Gudermes) [1991] 1 Lloyd's Rep 456, 472). However, the obligation imposed by art 3.1 is not absolute. The absolute duty at common law to provide a seaworthy ship is displaced by art 3.1, which requires the carrier to exercise due diligence to provide a seaworthy ship (Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) [2002] EWHC 118 (Comm), [2002] 1 Lloyd's Rep 719 [124]). In cases where damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence is on the carrier.

Seaworthiness is to be assessed according to the voyage under consideration and there is no single standard of fitness that a vessel must meet. Seaworthiness is to be judged in the light of the conditions the vessel will encounter (Great China Metal Industries Co Ltd v Malaysian International Shipping Corp Berhad [1998] HCA 65, (1998) 196 CLR 161 [27]). Seaworthiness is relative to the nature of the ship, to the particular voyage, and even to the particular stage of the voyage at which the ship is engaged. Seaworthiness must 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 [126]-[127]). The vessel must be in a suitable condition and must be in a fit state, as to equipment and in all other respects, to encounter the ordinary perils of the voyage in question (The Eurasian Dream [128]).

A carrier must demonstrate that it has exercised all reasonable skill and care to ensure that the vessel is seaworthy at the commencement of the voyage. The test to be applied is an objective one. The carrier must act in accordance with international standards and the standards of a reasonable carrier in the particular circumstances of the problem at hand. The more serious the consequences of unseaworthiness, the greater the effort that should be made to make the vessel seaworthy.

Stemcor argued that the vessels were unseaworthy at the time of commencement of the voyages because wet cargo and dunnaging was loaded into the holds and there was no dehumidification system or heater installed in the holds.

On the evidence, the absence of heaters fitted on the vessels was not, of itself, a basis for concluding that the vessels were unseaworthy, and that the holds were unfit, or that the carriers had not used due diligence to make the vessels seaworthy and the holds fit. The evidence does not establish that the use of heaters in vessels is commonplace, either generally in vessels carrying steel cargoes, or in vessels carrying coils of the nature in question. Stemcor did not adduce evidence of any vessel in which such heaters exist or are used. Nor was there evidence identifying the availability of such heaters in the shipping industry, either temporarily or otherwise.

In contrast, dehumidification systems had been used on vessels carrying moisture sensitive cargoes for many years. They are commonly installed on ships. They were available for installation on the vessels at Yokohama at the time of the voyages. Neither vessel, however, had any dehumidification system installed.

In this case, installing dehumidifiers on a temporary or permanent basis was reasonably practicable. Whether installation costs for dehumidifiers were reasonable must be gauged in light of several factors, including the freight to be earned by the carriage, and the value of the cargo to be protected and carried. Unless the cost of installing dehumidifiers was prohibitive or unreasonable to incur, due diligence would require that it be incurred. Besides, the carriers could have factored the cost of installation and operation of dehumidifiers into the freight rate.

Although the vessels are not unseaworthy merely due to a lack of dehumidifiers, in circumstances where the coils were known to be sensitive to moisture and it was known or ought to have been foreseen by the carriers that water would be admitted into the holds on other cargo and on dunnage and possibly because of rain, the vessels were not seaworthy for the purpose of carrying the coils on the facts of this case. It was reasonable for the carriers to take steps to ensure that water could not be admitted into the holds or, if that was not practicable, to install a dehumidification system to remove excess water from the holds and ensure that the dew point temperature of air in the holds would not fall below the surface temperature of the coils. The failure to do so was a failure to use due diligence to make the vessels seaworthy or, putting it another way, to make the holds fit and safe for the carriage and preservation of the coils.

As for the carriers' HVR art 3.2 obligations, the carriers failed to carry, keep, and care for the coils properly and carefully during the voyages. Such failure resulted in condensation that corroded the coils. Moisture entered the cargo hold during loading via rain and during the voyage via ventilation. The vessels had neither dehumidification systems nor heating systems installed. Dehumidifiers could have removed moisture. Heaters could have prevented condensation.

Stemcor argued that the carriers breached HVR art 3.2 by loading the vessel in circumstances where water was able to enter the cargo holds either on wetted cargo or as rain, and by failing to ventilate the cargo only in accordance with accepted proper practice. Alternatively, the carriers introduced water into the cargo holds by ventilating them during the voyage. Stemcor argued that the carriers ventilated their vessels in a way that was unnecessary and contrary to proper practice, and that such ventilation caused condensation.

A carrier would not normally breach HVR art 3.2 merely by reason of having loaded damp or moist cargo or dunnage, so long as the carrier exercises due diligence, with a proper system, to remove the moisture admitted into the holds. It is not possible for the carrier to dry cargo before it is loaded. That is especially so of cargo still on barges, such as the coils in question, or cargo on the wharf. Such cargo is not at that time in the possession of the carrier.

If there was water in the holds, ventilators would need to be used to remove that moisture. If the ventilators were operated in a way that permitted the ingress of further moisture, there was a failure to carry, keep and care for the coils properly and carefully.

On the evidence, the vessels adopted systems for the taking and recording the temperature of the air space in the hold, the external temperature, relative humidity, and dew points, so that ventilation decisions could be made. These systems were consistent with usual and good practice. The vessels had ventilated mostly in accordance with the dew point rule (ie that ventilation occurs only where the dew point of the air outside the hold is lower than the dew point of the air inside). Nevertheless, the dew point rule is an approximation. It is not necessarily decisive of whether the carriers properly and carefully handled, stowed, carried, kept, and cared for the coils in question. Temperatures of particular cargoes may be different from the temperature of the air in the hold. It is standard practice in the shipment of steel from cold to warmer climates not to ventilate the hold. Because of the imprecision of the criteria for determining when to ventilate and when not to ventilate, the question of dehumidifier installation is critical. Ventilation during the voyages admitted water vapour into the hold. In circumstances where the coils were known to be sensitive to moisture and there was no dehumidification system installed, the admission of water during the voyages was a failure to carry, keep, and care for the coils properly and carefully.

The Court then rejected the carriers' various defences.

The Court rejected Ankergracht's inherent vice defence under HVR art 4.2.m because, on the facts, there was no internal wetting of the coils. Ankergracht had argued that: (1) any loss or damage arose or resulted from inherent defect, quality or vice of the coils in the consignment on the Ankergracht, in that the coils had been wetted before loading and the water from that external wetting was able to infiltrate the external and inner wrappers and was therefore present on, and possibly within, the coils at the time they were delivered to the Ankergracht; and (2) the existence of that water within the inner wrapping of the coils was inherent vice, since corrosion would occur within hours of being in contact with that water.

The Court also concluded that while the coils were particularly susceptible to damage from corrosion consequent upon contact with water and the carriers were not specifically informed of any particular sensitivity of the coils, the sensitivity of steel to corrosion generally was well known in the industry.

Next, the Court was not persuaded that the packaging of the coils was insufficient within the meaning of HVR art 4.2.n. Insufficiency of package is the inadequate preparation of goods to withstand the foreseeable risks of carriage on the voyage contemplated. Packing will be sufficient if it is normal or customary in the trade. To be sufficient, packing must permit the relevant goods to withstand the normal hazards likely to be encountered on the specific voyage contemplated, and to prevent all but the most minor damage under normal conditions of care and carriage. Ordinarily, where goods have been packed in a manner that is normal or customary in the relevant trade, such that goods so packaged do not ordinarily suffer damage, it can be concluded that any damage to such goods was the fault of the carrier in failing to exercise proper care. Of course, the mere fact that the method of packaging was typical does not of itself mean that the actual packaging employed was sufficient.

Insufficiency of packing is a question of fact. The Court must pursue a middle ground between requiring ideal protection of stowage and tolerating flagrant disregard for the safety of the cargo. The Court must also pursue a middle ground between ideal protection of packaging and flagrant disregard for the safety of the cargo by the packer.

On the facts, although the coils were not packed in a way to prevent the ingress of water in vapour form, they were adequately packaged according to industry standards and practice. There was no evidence of any industry practice of wrapping coils in a way that prevents ingress of water in the form of vapour or otherwise. The carriers argued that sufficient packaging requires the adoption of a method that would not trap resulting moisture against the surface of the coils, but would allow condensation to evaporate or otherwise run off the coils. However, the carriers were unable to identify any method that would achieve this, which suggested that it would not be possible to devise a method of packaging that prevented all ingress of moisture.

As to Ankergracht's argument on the exposure of the coils to external wetting prior to loading as an act or omission of the shipper under HVR art 4.2.i, the evidence shows that there was no internal wetting of the coils. Accordingly, HVR art 4.2.i is not a defence to the claim.

As to the measure of damages under HVR art 4.5.b, the amount recoverable is the CIF value of the damaged goods.

Stemcor argued that HVR art 4.5.b required calculation by reference to the sale value of the goods to Stemcor in Sydney on the respective dates of unloading the goods loaded on each vessel. There was no relevant commodity exchange price. Stemcor contended, therefore, that the current market price was the appropriate measure. Stemcor argued that current market price was to be determined by what a willing buyer will pay.

The Court rejected Stemcor's argument. A claimant is entitled to be put in the position in which it would have been had the contract been performed. If the carriers were liable, Stemcor would be entitled to be put in the position of having undamaged coils in Sydney. Stemcor could only replace the damaged coils by import. Stemcor accepted that if there was no current market price for the coils in Australia or Sydney, Stemcor could recover the CIF value of the coils. The position might be different if Stemcor had permanently lost the profit on the proposed resale of coils to its buyer. In the absence of any such consequential loss, the appropriate measure of damage, consistent with general principles and the appropriate analysis of HVR art 4.5.b, was that Stemcor would be entitled to damages equal to the cost of replacing the damaged coils in Sydney.

[For the unsuccessful appeal to the Full Court of the Federal Court, see CV Scheepvaartonderneming Ankergracht v Stemcor (A/sia) Pty Ltd [2007] FCAFC 77 (CMI1946).]