In June 2006, Hilditch Pty Ltd (Hilditch) agreed to buy a cargo of three grades of refined oil products (Yubase 3, 4, and 6) from SK Corp (SKC) to be shipped from Korea to New South Wales. The total cost and freight price was about USD 1.327 m. The cargo of Yubase 6 alone was worth USD 380,616.55. To facilitate the shipment, SKC chartered the M/T Golden Lucy I from Dorval Kaiun KK (DK) on a voyage charter. The vessel was also carrying 8,500 tons of caustic soda for delivery to another recipient at both Port Botany in New South Wales and Geelong, Victoria. Hilditch established an irrevocable letter of credit in SKC's favour through the National Australia Bank (NAB) for USD 1.324 m, with a permitted variance of plus or minus 5%. For the transaction to be completed, NAB required a full set of shipped on-board charterparty bills of lading, made out to the order of shipper, and with a blank endorsement.

The same month, DK's agent issued three tanker bills of lading to SKC as the shipper, noting that the shipment aboard the Golden Lucy I had been loaded in apparent good order and condition. The bill was made out to the order of the shipper, with Hilditch named as the notify party. The bill of lading also specified that the shipment was made pursuant to the voyage charterparty between DK and SKC. All of the terms and conditions contained in the charter would apply save that on rate and payment of freight, and would impact on the rights of the parties involved.

The bill of lading also contained a clause paramount stating that if the bill was a document of title, the Carriage of Goods by Sea Act 1936 (US) or similar legislation would apply to its terms. However, the parties had agreed to apply the Carriage of Goods by Sea Act 1991 (Cth), including the amended Hague-Visby Rules contained in Sch 1A of that Act, and that these rules would impact on the rights and liabilities of the shipper, applicable assignees or holders, and the carrier in relation to the relevant shipment.

In July 2006, NAB gave one of the three bills of lading in respect of the shipment to Hilditch. Although there was a signature on the back of this bill of lading, it was not clear who had signed it, or whether the bill had been signed on someone's behalf. There was another signature as well, above a stamp that asserted that this was an authorised signature for the structured trade finance office of the Export-Import Bank of Korea.

Hilditch arranged to have the bill of lading presented to DK's agent so that it could receive the cargo. When the Golden Lucy I began to discharge the cargo at Port Botany, however, it became clear that the Yubase 6 had been contaminated. Caustic soda was stored in a tank adjacent to the Yubase 6 and was being discharged right before the Yubase 6, leading to the possibility that this was the contaminant. At the time it was agreed by the parties that the remaining Yubase 6 in the vessel's tanks appeared in good order, and that only the Yubase 6 that had already been discharged was unusable. Hilditch then had about 12,000 l of the Yubase 6 slopped to clear out the lines and pumps of any contaminant. However, the cargo still appeared cloudy by the end. The whole cargo was discharged, at which stage none of the Yubase 6 was usable, leading Hilditch to suffer a considerable loss.

Three major questions arose: first, could Hilditch sue as an endorsee of the bill of lading for the purposes of the Sea-Carriage Documents Act 1997 (NSW); second, did DK meet its obligations to properly and carefully discharge the Yubase 6, within the meaning of art 3.2 of the amended Hague-Visby Rules (the answer to which relied partly on where and how the damage to the Yubase 6 occurred, and if the caustic soda was the contaminant); third, was Hilditch contributorily negligent/partially responsible for its own loss because it allowed the Yubase 6 to continue being discharged although it knew it had already been contaminated by that stage (amended Hague-Visby Rules, art 4.2.i)?

Held: Hilditch was awarded judgment in the sum of AUD 637,571.37.

Scientific testing performed shortly before this decision revealed that what contaminated the Yubase 6 was in fact caustic soda, and not molasses, as was initially believed. There had been cargoes of tallow and molasses in the same tank as the Yubase 6 not long before. However, SGS surveyors in Korea found that the tanks were clean and dry and fit to load a cargo of Yubase 6. The cargo of Yubase 6 also met the necessary quality specifications tested by SGS surveyors at the point of loading. The vessel's lines and pumps were said to be clean and dry by the chief officer.

The previously unidentified signature on the bill of lading provided to Hilditch belonged to J Rock Lee, who also signed a commercial invoice issued to Hilditch for the three cargoes of Yubase on behalf of the general manager of SKC's base oil business team. Rares J thought that it was obvious that SKC had endorsed the bill of lading held by Hilditch, after looking at the documents required in the letter of credit, and despite the fact that the particulars in Hilditch's statement of issues asserted that the Export-Import Bank of Korea had endorsed the bill. J Rock Lee signed the reverse of the bill of lading given to Hilditch on behalf of SKC as an endorsement in blank of that bill. SKC had properly endorsed the bill in blank, in accordance with NAB's requirements.

The Export-Import Bank of Korea then received that bill of lading from SKC. The signature that appears on the bill from the bank was to authorise further dealings in the property by delivery of the bill as a negotiable instrument, to the extent the Export-Import Bank of Korea had any property in the bill or cargo. The signature did not impact on the character of the bill of lading as a negotiable instrument endorsed in blank, which it was when it was delivered to Hilditch by NAB.

Title to sue

In standard commercial legal practice, the endorsement in blank of a negotiable instrument made out to order converts that instrument to a bearer instrument. This allows the instrument to be filled by the person to whom it is delivered (in this case, Hilditch). As payment was due from Hilditch for the cargoes of Yubase 30 days after the charterparty bill of lading date (under the commercial invoice), it must have been the parties' intention that property in the goods that were the subject of the bill would pass with delivery of the bill of lading. SKC, as seller, was also entitled to draw on the letter of credit from NAB 30 days from the bill of lading date. By delivering a bill of lading endorsed in blank alongside an invoice for transmission to NAB, in accordance with the letter of credit that it had opened, SKC vested property in the cargoes of Yubase in whomever became the bearer of the bill. Hilditch was the bearer of the bill, and so Hilditch was entitled to delivery of the Yubase, which it received when it handed the bill over to DK. Further, at the time when the bill was presented, Hilditch already owned the cargoes of Yubase and had property in them. It would retain that property interest regardless of whether NAB happened to have a security interest in the goods.

The bill of lading, as originally made between SKC and DK, incorporated the charterparty between them and contained the clause paramount. The amended Hague-Visby Rules were incorporated as a clause paramount in the bill of lading when the bill was transferred as a negotiable instrument by SKC. Once transferred before the delivery of the cargo, the bill's terms, as amended by the clause paramount, constituted the contract of carriage for the cargo of Yubase 6, because the bill had been endorsed in blank by SKC and delivered to Hilditch, who became the holder and bearer of the bill of lading.

Rares J dismissed an argument by DK that all three original bills of lading had to be endorsed before Hilditch could claim the cargo had been duly delivered. This contradicted the entire principle of dividing bills of lading into parts so that one part, duly assigned, could have the same effect as all the parts together. Once one bill is accomplished, the others are voided so that the same cargo cannot be claimed more than once.

Rares J also concluded that Hilditch had become a lawful holder of the bill of lading for the purposes of the Sea-Carriage Documents Act (NSW) because it came into possession of the bill in good faith, which had been endorsed in blank and properly delivered. The endorsement in blank by SKC caused the bill to become a bearer bill. The bill went from SKC to the Export-Import Bank of Korea, to NAB, and then to Hilditch as a bearer bill, and Hilditch was the lawful holder (s 5(b) of the Sea-Carriage Documents Act (NSW)).

Application of art 3.2 of the Hague-Visby Rules

As noted above, the cargo of Yubase 6 was certified at the time of loading as meeting the necessary standards and being in good order and condition. Whatever happened to contaminate the cargo had to have happened when it was discharged (it was observed at the time of discharge that while the remaining Yubase 6 in the tank looked fine, the Yubase 6 that had already been discharged was unusable, thus the contamination did not happen during the voyage). That contaminant was caustic soda, which had been discharged from the Golden Lucy I's lines and pumps shortly before the Yubase 6, and was stored in tanks adjacent to those containing the Yubase 6.

The recipient of the caustic soda, Australian Vinyl Corp, arranged for Captain Peter Edgerton to supervise the discharge of that cargo. Captain Edgerton was highly experienced in the area of loading and discharging cargoes, and operating chemical and gas tankers. The two people supervising the discharge of the Yubase 6 on behalf of Hilditch were Priyadharshan Kanagasabai, an experienced Intertek Caleb Brett surveyor, and Matthew McCarthy, who was a relatively inexperienced Intertek Caleb Brett surveyor. Both parties negotiated between themselves what steps needed to be taken to avoid contamination between their respective cargoes and were conscious of the various lines, valves, and tanks in the ship, and how cross-contamination might occur. There were only two lines available for discharging cargo from the Golden Lucy I, according to the vessel's chief officer. The chief officer wanted to use line 2, which had been cleaned. The surveyors for Hilditch also asked for the strainers for pumps 1 and 2 to be re-cleaned.

Hilditch's logistics co-ordinator, Jimmy Lafkiotis, made the decision after speaking with Mr Kanagasabai to slop around 1,000-2,000 litres of the Yubase 6 to isolate any contaminated portion of it, and hopefully clear the lines and pumps of any contaminant. Both Mr McCarthy and Mr Kanagasabai informed Mr Lafkiotis that the Yubase 6 was off specification.

Intertek's practice when handling Yubase 6 was to take samples during discharge, which was also done in this instance. Mr McCarthy and the crew both took samples and found that these were brown and cloudy, not clear as they should have been. Mr Kanagasabai took another sample, which was cloudy also. He instructed the officer to cease discharging the Yubase 6, and spoke to the ship's master, who suggested that he should contact the Golden Lucy I's P&I club. Captain Edgerton saw a number of samples taken of the Yubase 6 during discharge and agreed that it appeared contaminated.

Mr Lafkiotis, together with the two Intertek surveyors, decided to discharge the entire cargo of Yubase 6 after slopping about 12,000 litres. None of it was clear or clean until the final 15 minutes of discharge the following morning. A total 23 samples of Yubase 6 were taken during the entire discharge period from both the ship's manifold and the terminal manifold, and five further one-litre samples were taken from the tanks that the Yubase 6 had to be discharged into once the only slopping tank had been filled. Other cloudy samples were taken from the ship's manifold, but no record was kept of them. All 23 samples in glass jars, and the one-litre samples taken from the additional discharge tanks, showed signs of contamination by caustic soda.

Based on the evidence from various people who tested or supervised the testing of the samples, Rares J concluded that there had been a leak on the Golden Lucy I which allowed the caustic soda to admix with the Yubase 6 before passing the ship's manifold. This admixing happened during discharge. DK had failed to comply with art 3.2 of the amended Hague-Visby Rules, and this failure caused the damage to the Yubase 6.

Liability under art 3.2 of the amended Hague-Visby Rules

Under art 3.2 of the amended Hague-Visby Rules, carriers are required to both exercise reasonable care in the discharge of goods, and to have a sound system for discharging those goods. DK did not lead any evidence in this case pointing to a system for discharging cargo such as Yubase 6 from the Golden Lucy I. Because the caustic soda contaminated the Yubase 6 while it was discharging and before the cargo passed the ship's manifold, DK had breached its obligations under art 3.2 of the amended Hague-Visby Rules to properly and carefully discharge the goods it carried.

Article 3.2 is subject to art 4 of the amended Hague-Visby Rules. Carriers may be able to rely on art 4.2 to exempt them from responsibility if they were not negligent or at fault, which is only possible if that carrier has not breached art 3.2. DK argued that it was entitled to rely on art 4.2.i in this instance, which exempts carriers and their vessels from responsibility for loss or damage to cargo when that loss or damage resulted from an act or omission of the shipper or owner of the goods, their agent or representative. DK, in raising this article, was referring to how Hilditch had elected to discharge the entirety of the Yubase 6 despite being aware that the cargo was being contaminated at the ship's manifold, and that the remaining Yubase 6 in the tanks was still in good condition.

As part of its argument, DK asserted that Mr Lafkiotis from Hilditch had the responsibility and the capacity to refuse to accept the cargo of Yubase 6. This argument seemed to place more responsibility on Hilditch's shoulders than was due, and failed to recognise the pre-existing obligations of DK to properly and carefully discharge the Yubase 6 under art 3.2. Hilditch's ability to reject or refuse to receive the Yubase 6 upon realising it was contaminated was entirely separate from DK's prevailing obligations.

The amended Australian Hague-Visby Rules are an attempt at compromise between the rights and responsibilities of carriers and shippers, wherein carriers are held to certain standards and must meet certain obligations, but can be released from those obligations if arts 4 or 4 bis apply. The Hague-Visby Rules do not contain any actual defence or exception of liability for contributory negligence by a shipper or cargo owner, which appeared to be what DK was asserting. The problem in this case was that DK did not meet its obligation to properly and carefully discharge the Yubase 6, and the exceptions to responsibility under neither art 4.2.i, or art 4.2 generally, applied. It was not Hilditch's legal responsibility to dictate to DK how the cargo should be discharged and how it should meet its obligations under art 3.2. Further, art 3.8 expressly prohibits carriers from contracting out of their responsibilities under the amended Hague-Visby Rules.

Rares J rejected DK's contention that Hilditch was at fault for not stopping it from discharging the Yubase 6, and found that DK was responsible for breaching its obligations anyway. Indeed, the officers and crew of the Golden Lucy I theoretically ought to have intervened and stopped the discharge operation once they were made aware the Yubase 6 was leaving the ship in a contaminated state, but they did not.

DK was not entitled to rely on art 4.2.i of the amended Hague-Visby Rules, because the damage did not arise from an act or omission by Hilditch, but rather because DK had breached its duties under art 3.2, extending to the failure to stop the discharge. The loss or damage would have never occurred if DK had a system in place to prevent admixing or to cater to cargoes like the Yubase 6 more specifically. Article 4.2.i also allows carriers to escape liability when the damage has arisen from something beyond the carrier's (or their servants') control, but this was not the case here, as the officers and crew could have intervened to stop the discharge.

Rares J referred to the case Shipping Corporation of India Ltd v Gamlen Chemical Co (Australasia) Pty Ltd (1980) 147 CLR 142 (CMI723) in which Mason and Wilson JJ discussed the purpose of the Hague Rules, and in particular the way in which the Rules impose particular responsibilities and liabilities on carriers and prevents them from contracting out of those, but does grant immunity to carriers where the damage did not arise from their own negligence. Concurrent causes of loss or damage were also considered in that case, as the carrier tried to argue that, while it had breached art 3.2 by not properly stowing the goods that it was carrying, it had also encountered perils of the sea and should thus be able to rely on art 4.2.c. Mason and Wilson JJ held that this argument should fail because the damage did not occur solely due to a peril of the sea. The peril of the sea was a joint source of the damage along with improper stowage, but the loss would not have occurred but for the improper stowage. This is relevant to the present case because it involves a situation where a carrier's breach of its obligations prevented it from relying on an exception in art 4, or rather, even the existence of a circumstance that would usually invite reprieve under art 4 was not enough to negate the effects of the carrier's negligence. To conclude otherwise would rob art 3.2 of its purpose and impact.

Whether a carrier can rely upon an immunity under art 4.2 of the amended Hague-Visby Rules depends on all the surrounding circumstances; if, as in Gamlen Chemical, a loss was caused by the concurrent effects of both the carrier's negligence and some excepted circumstance, the carrier remains liable. Article 4.2 is only applicable when the excepted circumstance alone was the cause of the loss or damage. Applying this reasoning to the current case, Hilditch was not responsible for the loss it suffered, and there was no act or omission on its part that would allow DK to rely on art 4.2.i to escape responsibility. There would simply have been no loss at all if DK had adhered to its duties under art 3.2.

Rares J also considered that, even if DK was entitled to rely on art 4.2.i, because the causes of the loss were concurrent (its own negligence, and Hilditch's act or omission), DK would have been liable to Hilditch in damages. Not only that, but DK's responsibility for the loss was much greater, because no contamination would have occurred but for its failure to properly discharge the Yubase 6 in accordance with its duty under art 3.2. Although Hilditch's appointed surveyors did not stop the discharge, the Golden Lucy I's crew and officers did nothing either. That would place both parties on equal footing in terms of their responsibility and efficacy, except for DK's pre-existing obligation under art 3.2 and the failure to meet it. If a proper system had been in place for discharging cargoes like the Yubase 6, and if the ship's crew had been acting with due care, they might have stopped the discharge from commencing or continuing while they sought out the source of the contamination. DK bore most of the responsibility for what happened with the Yubase 6. Even if Hilditch and DK shared equal responsibility for not stopping the discharge of the cargo, the decision in Gamlen Chemical compelled Rares J to hold DK liable for damages.

DK also suggested it had a defence under art 3.6 of the amended Hague-Visby Rules. Article 3.6 states that unless notice of loss or damage and the nature of that damage is given in writing to the carrier or their agent at the port of discharge before or at the time of removing the goods into the recipient's care (the person entitled to delivery), or else within three days if the loss or damage is not immediately evident, that removal is evidence of the delivery by the carrier of the goods as described in the sea carriage document.

Although two notices of protest were given by Mr Kanagasabai to the master both before and after discharge, DK argued the first notice of a claim for damage was received only when Hilditch's solicitors advised it that they were commencing proceedings in March 2007. This was because, DK argued, neither notice of protest was an actual notice of loss or damage as required under art 3.6, and all that the notices did was say that if there was loss or damage suffered, Hilditch would seek to hold DK accountable. Because of this, DK argued it was entitled to the presumption under art 3.6 and it would be appropriate to say it had delivered the goods in apparent good order and condition, as they were accepted by Hilditch.

However, the third and fourth paragraphs of the second notice of protest referred to the Yubase 6 being cloudy while it was discharged, making it evident to DK that the Yubase 6 had been contaminated in some way. Further, this notice was given to the master immediately after discharge finished. Rares J considered that art 3.6 likely contemplated 'removal of the goods into the custody of the person entitled to delivery' as incorporating cases where goods are kept at the wharf for some time before they are collected. That is what happened here with the Yubase 6 remaining at the wharf for a short while afterwards. Rares J argued that art 3.6 could not have been intended to require notices of loss or damage to be given immediately after goods passed the ship's rail.

Regardless, the fact was that the Yubase 6 was damaged as soon as it left the ship's tanks and passed the ship's manifold. The Yubase 6 did not reach Hilditch as described. Having initiated its case within a year, even if it did not give a notice, Hilditch was entitled to succeed once it had proven its case. In this case, the second notice of protest was given at the time of discharge and fell within the meaning of art 3.6.

Rares J accepted Hilditch's calculation of its loss and awarded judgment in that amount, with interest and costs.

[For previous proceedings in this matter, see Hilditch Pty Ltd v Dorval Kaiun KK [2007] FCA 752 (CMI1083).]