The Gladiola, owned by Adelaide Shipping Lines (Adelaide) and time chartered to Salen Reefer Services AB (Salen), was carrying 58,464 cartons of fresh lemons from Long Beach, California, to Gdansk, Poland. The cargo, owned by Sunkist Growers (Sunkist), was loaded onto the Gladiola in good order and condition.

Salen arranged for the Gladiola to stop at Ecuador en route to load bananas. Salen informed Sunkist of this arrangement by telex, and Sunkist did not raise any objections. This arrangement was permissible under the contract between Sunkist and Salen, and was in accordance with their usual course of dealings.

A fire broke out in the Gladiola while it was anchored in Guayaquil Harbor in Ecuador. The fire originated from a faulty joint in a fuel line in the engine room, which was automated and unstaffed. The engine officers could not contain the spread of the fire, which destroyed the refrigeration equipment but not the lemons.

Sunkist failed to find local refrigerated storage for the lemons, sell them to local markets, or tranship them, so donated them to the military authorities for distribution to the people. Sunkist sought to claim USD 350,784 from Salen and Adelaide for the loss of the lemons.

The District Court for the Northern District of California dismissed Sunkist's complaints against Adelaide and Salen, ruling that they were protected from liability by fire exemption statutes, namely the Fire Statute (s 182 of the Limitation of Liability Act 1851, 46 USC §§ 30501 ff (the Limitation Act)), and the COGSA fire exemption (s 4(2)(b) of the Carriage of Goods by Sea Act, 46 USC § 1300 ff (COGSA)). Sunkist appealed.

Held: The judgment of the District Court is set aside and remanded for further proceedings with directions to enter an appropriate judgment in favour of Sunkist.

Congress passed the Limitation Act to promote the expansion of the US Merchant Marine and to protect the capital investment of those engaged in maritime shipping. The enactment was to place US shipowning interests on a competitive basis with British interests, in so far as the limitation of liability was concerned (Gilmore & Black, The Law of Admiralty (2nd edn) pp 818-824).

Subsequently, Congress enacted COGSA to settle the adverse interests of carriers and shippers. The history, as outlined in Gilmore & Black, The Law of Admiralty (2nd edn) pp 139-144, revealed that the English courts generally upheld the validity of a practice where carriers contracted out of liability for their own negligence, or the 'negligence' exceptions in bills of lading, unlike the Federal Courts in the US, who held this practice to be against public policy. Consequently, the accessibility of courts or amenability to service of process made a crucial difference in the outcome of a litigation, and the British Merchant Marine became dominant in the Atlantic.

The US was vitally interested in seagoing cargo, both export and import, and Congress enacted the Harter Act, 46 USC §§ 190 ff, in 1893 to strike a balance between the interests of carriers and shippers. Carriers sought to be free from all claims based upon its negligence, whereas shippers wished to hold the carrier responsible for the consequences of any sort of negligence.

The compromise was that the Harter Act declared the 'negligence' exceptions in the bills of lading to be null and void, but carriers could only escape liability for goods damaged due to the acts or omissions of the shipper or the errors of the crew if they exercised due diligence to make the vessel seaworthy and to properly maintain, equip and supply the vessel. This compromise protected a shipper's interest when it litigated in US courts but not in most other countries, where shippers were still at the mercy of the exoneration clauses in the bills of lading, or at least the judicial interpretations of them.

The various stakeholders, including banking and underwriting interests, met at the World's Shipping Conference of 1920 to adapt the Harter Act principle internationally, culminating in the Brussels Convention of 25 August 1924, commonly known as the Hague Rules. The US did not ratify the Hague Rules or enact COGSA - its statutory codification - until 1936.

COGSA superseded the Harter Act for foreign trade, and was incorporated by reference in every bill of lading for foreign transport to and from the US. Its primary purpose was to protect carriers engaged in foreign trade to and from the US against all-encompassing liability, while protecting the shipper's interest by assuring that due care was exercised in making the ship seaworthy (Wirth Ltd v S/S Acadia Forest 537 F 2d 1272, 1279 (5th Cir 1976)).

Adelaide and Salen failed to discharge their obligations under ss 3 and 4 of COGSA before and at the inception of the voyage. Adelaide and Salen failed to provide a proper fitting in the low compression fuel joint that separated. The fitting had not been touched after the commencement of the voyage. The failure to use a flanged, rather than a compression, joint in the fuel line violated Lloyd's Rule, Chapter E, s 312.2.

Adelaide and Salen also failed to properly man and equip the vessel with crew properly trained in engine room fire-fighting. The engineers failed to utilise the proper equipment available to shut off the flow of oil spewing from the defective joint, and were unable to properly utilise the portable fire extinguisher. Their reactions to the fire indicated a lack of fundamental preparation and knowledge of the various means of controlling this type of fire efficiently.

The duty to exercise due diligence to make the ship seaworthy and to properly man, equip and supply the ship was an overriding obligation (see Maxine Footwear Co Ltd v Canadian Government Merchant Marine Ltd (The Maurienne) (1959) AC 589, 602-603; The Anglo-Indian (1944) AMC 1407). This obligation applied to the master and those in the management of the ship, as well as to the owners or charterers personally, or those who acted for the owners in a managerial capacity.

The Maurienne and The Anglo-Indian are Canadian decisions that involved the interpretation of the Canadian Water Carriage of Goods Act, which was enacted in 1936 and is in pari materia with COGSA. US courts should follow the decisions of the Canadian authorities that have interpreted the Hague Rules, so long as they do not conflict with US decisions. In Foscolo, Mango & Co Ltd v Stag Line (1932) AC 328, 350, Lord Macmillan held:

As these rules must come under the consideration of foreign courts, it is desirable in the interests of uniformity that their interpretation should not be rigidly controlled by domestic precedents of antecedent date, but rather that the language of the Rules should be construed on broad principles of general acceptation.

Similarly, the Supreme Court in Robert C Herd & Co Inc v Krawill Machinery Corp 359 US 297, 301 (1959) (CMI1735) held:

The legislative history of the Act shows that it was lifted almost bodily from the Hague Rules of 1921, as amended by the Brussels Convention of 1924, 51 Stat 233. The effort of those Rules was to establish uniform ocean bills of lading to govern the rights and liabilities of carriers and shippers inter se in international trade.

A carrier's duty to exercise due diligence to make ship seaworthy cannot be avoided by asserting the COGSA fire exemption. A vessel owner cannot close its eyes to what a prudent inspection would disclose (Waterman Steamship Corp v Gay Cottons 414 F 2d 724, 739 (9th Cir 1969)). This duty cannot be avoided by claiming a lack of 'privity or knowledge' under s 183(a) of the Limitation Act to obtain the exemption under the Fire Statute.

The Fire Statute must also be read in light of COGSA. It does not invalidate or affect COGSA's requirements that the carrier shall be bound to exercise due diligence to make the ship seaworthy. Section 8 of COGSA provides that the provisions of the legislation shall not affect the rights and obligations of the carrier under the Fire Statute and other legislation. An owner cannot rely upon either fire exemption unless the owner had exercised the due diligence required by COGSA (New York Mdse Co v Liberty Shipping Corp 509 F 2d 1249, 1251-1252 (9th Cir 1975)).

Sections 3(1) and 4(1) of COGSA place the burden on the carrier to show due diligence in providing a seaworthy ship. A carrier must overcome this burden to invoke the exemptions of either the COGSA fire exemption or the Fire Statute. The Court rejected the approach taken in Asbestos Corp Ltd v Compagnie de Navigation 480 F 2d 669 (2d Cir 1973).

Accordingly, Adelaide and Salen cannot rely on the COGSA fire exemption. They did not fulfil their obligations under s 3(1), and the non-fulfilment caused the damage. The overall cause of the breakdown of the vessel's refrigeration equipment forced Sunkist to donate the cargo of citrus fruit to the Ecuadorian Government. The cause of the cargo loss was not the fire, but the failure of the Adelaide and Salen to fulfill their obligations as required by COGSA. Adelaide and Salen did not overcome the burden to invoke the fire exemptions. If the carrier had used due diligence, the unseaworthiness would have been excusable.