Air‑conditioning machinery was shipped on the Hanjin Marseilles on a flat rack container from Seattle in the United States to Hong Kong. During the voyage, the cargo broke free from its lashing and tipped over. Trane Co (the plaintiff) sought to recover compensation for the damage. Hanjin Shipping Co Ltd (the defendant) contended that it was not liable to the plaintiff because the damage sustained by the cargo was due to inadequate lashing. This trial concerned the defendant's plea of limitation.

A bill of lading dated 21 November 1997 governed the carriage. Clause 2 provided:

(a) This Bill of Lading shall have effect subject to the International Convention for the Unification of Certain Rules relating to Bills of Lading, dated at Brussels 25 August 1924 (the Hague Rules) as enacted in the country of shipment, unless the protocol, dated Brussels 23 February 1968 (the Hague-Visby Rules) or the United States Carriage of Goods by Sea Act, 1936 (US COGSA, 46 USC Appendix 1300‑1315) apply compulsorily.

(b) When no such enactments are in force in the country of shipment, the corresponding Hague Rules, Hague‑Visby Rules or US COGSA legislation (Hague/Visby/COGSA legislation) of the country of destination shall apply, but in respect of shipments to which no such enactments are compulsorily applicable, the terms of the Hague Rules shall apply.

(c) The applicable Hague/Visby/COGSA legislation shall govern throughout the time when the Goods are in the actual or constructive custody of the Carrier. The Carrier takes all reservation possible under the Hague/Visby/COGSA legislation relating to the period before loading and after discharging and while the Goods are in the charge of another Carrier, and to deck cargo and live animals.

The plaintiff and the defendant disagreed as to the correct interpretation of 'apply compulsorily' in cl 2(a).

The plaintiff asserted that it referred to the compulsory application of US COGSA under the designated proper law of the contract. It claimed that Hong Kong law was the proper law because Hong Kong was the port of discharge. Since US COGSA did not apply compulsorily under Hong Kong law, the bill of lading was neither subject to US COGSA nor its package limitation. On the plaintiff's construction, the Hague Rules was the 'preferred default regime'.

The defendant contended that, as a matter of contract, the obligations arising under the bill of lading are governed by the provisions of US COGSA. It submitted that 'apply compulsorily' was directed to the status of the legislation in the country of shipment to which reference was made, and nothing else. Accordingly, cl 2(b) was only triggered when none of the Hague Rules, Hague‑Visby Rules or US COGSA was in force in the country of shipment.

The Court had to determine two preliminary issues. First, whether the bill of lading was subject to US COGSA. Second, if so, whether the defendant's liability was limited to USD 500.

Held: Preliminary issues answered in the affirmative.

Clause 2(a) was directed to the question of identifying whether the Hague Rules, the Hague‑Visby Rules, or US COGSA applied, in so far as the law of the country of shipment was concerned. The words 'enacted' and 'apply compulsorily' were transposed and used synonymously. Clause 2(b) assisted in interpreting 'apply compulsorily' in cl 2(a). The provisions in cl 2(b) would only be triggered when none of these three sets of legislation was in force in that country ie the United States. The provisions of cl 2(a) were also not 'proper law sensitive' and involved an incidental question of foreign law, ie whether a relevant enactment was in force in the country of shipment.

The Judge held that the words 'apply compulsorily' do not necessarily relate to whether there is compulsory application of the Hague-Visby or US COGSA legislation under Hong Kong law, and (so the argument goes) that it is only after first asking if there exists compulsory application under Hong Kong law that it is then permissible to proceed to have regard to the contractual position, which in this instance involves consideration of 'the next stage', namely cl 2(b).

The Judge considered the decisions on clause paramount in other jurisdictions, including The Pembroke [1995] 2 Lloyd's Rep 290 and The Botic [1999] 4 SLR 749. In The Pembroke, the proper law of the bill of lading was Panamanian (agreed to be the same as the law of New Zealand) under which the Hague‑Visby Rules did not apply compulsorily, but upon the 'neat question in dispute' centring upon the meaning of the word 'compulsorily'. Ellis J was prepared to proceed on the basis of compulsory application in the country of shipment, Germany, notwithstanding that German law was not satisfactorily proved. In The Botic, Khoo J concluded that the words 'apply compulsorily' meant that the Hague‑Visby Rules were in force in the country of shipment.