Geographical Deviation: The English High Court reaffirms the principle of fundamental breach and deviation

In the case Dera Commercial Estate v Derya Inc [2018] EWHC 1673 (Comm) (“Dera v Derya”), the High Court has confirmed the well-known international trade principle that a Carrier will lose the rights and defences afforded by the Hague and Hague-Visby Rules upon a geographical deviation of the vessel thus reinforcing the long-standing belief that such a deviation is to be treated as a fundamental breach of contract.

The facts

Dera (The Cargo Buyers) purchased a cargo consisting of 18.000 metric tons of maize that were transported from India to Jordan under a voyage charter that incorporated the Hague Rules by way of a General Paramount Clause contained in the (CONGEN) Bills of Lading. The vessel arrived in Aqaba, Jordan, on 16th August 2011 but was denied entry into the port as the local customs authorities declared the cargo to be “broken percentage, foreign matters, impurities, damaged kernels…and apparent fungus”. After unsuccessful efforts by Owners and the Cargo Buyers to persuade the authorities to discharge the cargo in Aqaba, on 8th November 2011 Owners ordered the vessel to proceed to Mersin, Turkey, where the cargo was discharged and sold in March 2012 pursuant to a judicial sale ordered by a Turkish Court. This voyage was conducted without Cargo Buyers’ nor Jordanian authorities’ permission.

In September 2011, the Cargo Buyers commenced legal proceedings in Jordan against the Owners, as contractual carriers under the bills of lading, seeking compensation in the amount of USD 8 million for damages to their cargo. On 25th October 2011 Cargo Buyers’ action was struck out when the Owners successfully applied to the English High Court for an anti-suit injunction. The Owners by then had commenced arbitration pursuant to the arbitration agreement contained in the bill of lading which provided for English law and London arbitration. The appointment of Owners’ arbitrator was within the one-year time limit set forth by Article III (6) of Hague Rules provides. In spite of this appointment, no further procedural steps were taken by either of the parties until March 2015 when the Owners sought a declaration of non-liability. The Cargo Buyers only offered particulars of its claim in June 2015, that is, over three years after arbitration had commenced.

An arbitration award was issued on 13th June 2017 dismissing the cargo claim on grounds of inordinate and inexcusable delay that had caused a serious prejudice to Owners. Cargo Buyers challenged the award before the English High Court on four points of law the main one being the potential deprivation of the Owners/Carriers from relying on the one-year time bar available under Article III (6) of Hague Rules as a consequence of their deliberate geographical route deviation to Turkey. The Cargo Buyers pleaded this fundamental breach effectively extended the time limit to six (6) years, the statutory time limit for contractual claims.

The Court’s decision

In arriving at her decision, the judge had to conduct an in-depth analysis of the existing doctrine in the context of geographical deviation including the authorities Hain Steamship Company Ltd v Tate & Lyle Ltd [1936] 41 Com Cas, 350 (“Hain Steamship”) and Suisee Atlantique Societe d’ Armement Maritime SA v Rotterdamsche Kolen Centrale [1976] 1 AC 361 (“Suisse Atlantique”). In the former case the House of Lords set forth the basis for defending deviation as a fundamental breach giving the innocent party the right to choose between no longer being bound by any of the terms of the contract or treating the same as subsisting.

In contrast, Suisse Atlantique abolishes the doctrine of fundamental breach conditioning the outcome or consequences of any breach to the construction of the specific contract to determine whether limitations or exceptions apply. In other words, a Carrier may invoke limitation and exception clauses if by the wording used the intention of the parties to maintain those rights is clear, even in the case of a deviation. The same principle was reinforced 13 years later in the case Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (“Photo Production”).

Notwithstanding the above two decisions, in “Dera v Derya” the judge felt compelled to follow the House of Lords ruling in Hain Steamship above meaning a geographical deviation must be considered as a fundamental breach preventing Owners from relying on the one-year time limitation. Consequently, a six year time bar would be applicable resulting in the cargo claim not being time-barred.

Conclusion

This decision reaffirms the old common law principle that any unjustified geographical deviation will cause the contractual carrier to lose his defences and exceptions otherwise available under the Hague-Visby Rules. The only way to cure this is by cargo interests affirming the contract upon discovery of the deviation so they are deemed to be bound by its terms. Otherwise cargo interests can retrospectively terminate the contract thus depriving the Carrier of the benefit of any limitation or exception including any contractual time limits for the commencement of a claim.

Assureds should notice that Owners were given leave to appeal which means Hain Steamship may not remain good law for much longer. We will write further once the Court of Appeal’s judgment is published.