What’s my payout?

For those in the shipping game, when things go well, they go very well, and when they go bad they are horrid.

The normally invisible industry of containerised shipping was brought the public eye last May when the M.V. YM Efficiency lost 83 containers overboard off the coast of New South Wales. It also brought  to the front of the mind the question of  what the liability scheme is for damage to cargo when there is no obvious liability on either the shipper or the ocean carrier.

Containers (for the most part) don’t fall overboard and usually damage to cargo is noticed at port of discharge or during the unpacking of the cargo at the consignee’s premises.

And as such this event may have been a learning curve for those who had never experienced a total cargo loss event.

So if your container has fallen overboard (and you aren’t planning on retrieving it from the seabed floor); do you expect the ocean carrier will write a cheque for your full loss? It’s not an absurd notion if you’ve lost your cargo with no prospect of recovery.

Except… did you know that ocean carriers can limit their liability?

This means you (and your business) won’t necessarily get the full invoice value from the ocean carrier even if the shipment is a total loss

[Note: this is highly dependent and the YM Efficiency is being used to discuss limitation calculations generally and not necessarily on the circumstances specific to the YM Efficiency event]

1.How can carriers limit their liability?

International conventions (essentially a set of rules) allow ocean carriers to limit their liability (assuming they aren’t grossly negligent).

Most commonly used set of rules:

  • Hague Rules
    established in 1924 to set out an international convention to impose minimum standards upon commercial carriers of goods by sea.
  • Hague-Visby Rules
    established in 1967 as an updated and modified version of the Hague Rules.
    United States Carriage of Goods by Sea Act is US law that is mandatorily applicable when goods are travelling to / from / through the United States

Other Rules:
There are other sets of rules which exist but aren’t widely used. This may change in the future (especially in respect of the Rotterdam Rules)

  • Hamburg Rules
    resulting from the United Nations International Convention on the Carriage of Goods by Sea adopted in Hamburg on 31 March 1978
  • Rotterdam Rules
    formally, the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea). The aim of the Rotterdam Rules is to overhaul the standard Hague, Hague-Visby and Hamburg Rules and re-unify the conventions of international shipping. As they are so markedly different to the current (and widely used) rules there has been some resistance to their adoption and as yet these rules are not in force.

2. Which Rules apply?
There are a variety of factors in determining which set of rules apply:

1. Carrier’s B/L terms and conditions.
Each individual ocean carrier has a set of terms and conditions on the back of the B/L. These terms and conditions set out which rules apply.

2. Port of Load
Some countries state which Rules are applicable if cargo is exported from that particular country.

3. Port of Discharge
Some countries state which Rules are applicable if cargo is imported into that particular country.

4. Mandatory law of the country

This can depend on the port of load, port of discharge or the country in which the claim for cargo damage is brought before a court.

5. Port Pairs
  Some specific Port Pairs (Port of Load and Port of Discharge pairing) will determine which  rules are applicable.

3.Limitation calculation – general equation

Cargo being exported from Australia is subject to Australian legislation Carriage of Goods by Sea Act 1991. The  Amended Hague Rules can be found in Schedule 1 (with Schedule 1A showing the modifications).

Whilst the amended Hague Rules have differences from both the Hague and Hague-Visby Rules, for the  specific calculation of the limitation of liability it is the same as the Hague-Visby Rules.

This is how it works for the Hague-Visby Rules:

The carrier can limit their liability to the greater of:

          a)666.67 units of account per package or unit
this calculates the limitation value per package of the damaged cargo

         b) 2 units of account per kilogramme of gross weight of the goods lost or damaged.
This calculates the limitation value by weight of the damaged cargo

Units of account are known as “Special Drawing Rights” (“SDRs”) – this is a special unit of currency that is  made up of multiple currencies (such as the USD and Euro) to help even out exchange rate variations between currencies and help keep it immune to any one country having large exchange rate swings.

As at 17 August 2018 – 1 SDR = AUD1.91062.

4.Limitation calculation – how to work it out

Option A:

Limitation = (666.67)*(1.91062)*(Number of damaged packages)

Note: the number of packages is as shown on the face of the bill of lading. If you wrote 5 pallets you can’t claim 20 boxes.

Option B:

Limitation = 2 * (1.91062) * (Number of kilogramme of gross weight of the goods lost or damaged).

Whichever is higher between Option A and Option B is the carrier’s limitation for the damaged cargo.

5.Can I claim for delay / lost profits?

Generally not as these types of losses are usually specifically excluded under both the carrier’s terms and conditions and most conventions / sets of Rules.

What next?

Most carriers terms and conditions state you have three (3) days from delivery to notify them of any loss or damage.

Can I be pro-active in reducing my exposure and risk?

There are a number of ways to proactively manage your risk when it comes to cargo loss.

– Insurance
Marine insurance will enable you to protect the “gap” in carrier liability and additionally use the resources (where appropriate) of your insurer to handle the recovery. It is important that you fully understand the insurance coverage you have and what exclusions or gaps are in your policy for a full risk profile.

– Commercial Contract
The contract between yourself and the seller / buyer. Using the right risk management (either by Incoterms 2010 or other means) ensures you are aware of when your risks starts and ends to assist with having the right insurance coverage (and not paying for insurance you don’t need).

– Shipping contract (in addition to the bill of lading)
The bill of lading is the fundamental contract between the shipper and the ocean carrier. The terms on the back of the bill of lading are uniform for each carrier’s shipments (although different from carrier to carrier). It is possible to have a contract between the shipper and the carrier in addition to the bill of lading. Those who ship to / from the US will be familiar with the Federal Maritime Commission (“FMC”) contracts which are mandatory to have in place. These additional contracts allow you to can tailor the terms to your business requirements and have certainty around the liability to manage your risk.


The above is general information only and is not intended to be relied upon as legal advice. It may not take into account all information relating to your situation and does not create a solicitor-client relationship. Appropriate legal advice should be sought if you have specific issues.

By Alison Cusack


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