A.O. SMITH ELECTRICAL PRODUCTS (CHANGZHOU) CO LTD AND OTHERS v. BLUE ANCHOR LINE AND OTHERS

HCAJ 198/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO. 198 OF 2009

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  This is a trial of preliminary issues.

2.  There is no dispute that, as between the Plaintiff shippers (AOS) and the 3rd Defendant carrier (CSCL), the relevant carriage from Shanghai to various US ports was governed by 3 Sea Waybills issued by CSCL.  Those Waybills incorporate the terms of CSCL’s Combined Transport Bill of Lading (the Terms).

3.  The Terms provide in cl.7(1) that, “[e]xcept as provided for in Clause 7(2),” the Waybills are to be “subject to the provisions” of the PRC Maritime Code.  Terms cl.7(2) stipulates that, if the relevant carriage involves a US port, the Waybills “shall be subject to” US Carriage of Goods by Sea Act (US COGSA).

4.  The Terms further provide in cl.26(1) that the Waybills are “governed by the laws of the [PRC]” and “[a]ll disputes arising under or in connection with [the Waybills] shall be determined by the laws of the [PRC]”.  But Terms cl.26(2) adds that, “[n]otwithstanding the provision of Clause 26(1),” where carriage involves a US port, the Waybills shall be “subject to the Provisions of the US COGSA”.

5.  The parties disagree over the applicable limit of liability. 

6.  If US COGSA applies, the limit would be lower than the limit stipulated in Chapter IV of the PRC Maritime Code.  But, according to the PRC Maritime Code, any stipulation in a contract of carriage which derogates from the provisions of Chapter IV shall be rendered null and void. 

7.  AOS contend that the PRC Maritime Code neutralises Terms cls. 7(2) and 26(2) to the extent that they provide for a limit lower than that stipulated in Chapter IV of the Code.

8.  CSCL, on the other hand, argues that, PRC law and the PRC Maritime Code are irrelevant to the Waybills.  US ports being involved, the parties clearly intended by Terms cls. 7(2) and 26(2) that US COGSA alone should govern the carriages here.

9.  CSCL also contends that, in any case, by a Letter of Undertaking (LOU) agreed between the parties on 19 January 2010 when CSCL’s insurers put up security to prevent CSCL’s vessel from being arrested in this action, AOS agreed that the claims here “shall be subject to Hong Kong law and to the exclusive jurisdiction of the [Hong Kong High Court]”.  The LOU additionally stated that it was made “without prejudice to any right of defence available to [CSCL] including but limited to ... the right to limit liability in accordance with applicable law”.  It is CSCL’s case then that Hong Kong law (not PRC law) governs the Waybills and Hong Kong law in enforcing Terms cls. 7(2) and 26(2) would apply the US COGSA limit.

10.  Finally, CSCL contends that, even if PRC law and the PRC Maritime Code were applicable, cls.26(2) and 7(2) evidence the parties’ intention that US COGSA should apply to the shipment.  PRC law would (CSCL says) respect the parties’ choice of law.  Consequently, PRC law (CSCL asserts) would not refuse to give effect to the parties’ choice of law by reason only that the limit of liability under US COGSA is lower than that prescribed by the PRC Maritime Code.

11.  In brief, the issues which I have to decide are as follows:-

(1) Does Hong Kong law govern the carriages under the Waybills and (if so) with what result?

(2) Does the limit in the PRC Maritime Code or that in US COGSA apply to the carriages under the Waybills?

12.  Both parties adduced expert reports on PRC law. At the start of this hearing, it was agreed that the reports would be admitted as evidence without cross-examination, counsel being free to make whatever submissions they felt appropriate in respect of the experts’ reports and the cases annexed to them.

II. DISCUSSION

A. Question (1): Does Hong Kong law govern the carriages?

13.  I am unable to read the LOU as an agreement that, irrespective of the terms of the Waybills, Hong Kong law is to govern the carriages. 

14.  The plain meaning of the LOU is that AOS and CSCL (acting by its insurers) agreed to the exclusive jurisdiction of the Hong Kong High Court and to the resolution of the dispute in that forum in accordance with Hong Kong procedural law.  

15.  An indicator of this is the stipulation that the LOU was agreed without prejudice to any right of defence CSCL might have to limit liability “in accordance with applicable law” (whatever that might be). That the parties left open what the “applicable law” was points, in my view, to the LOU amounting to no more than an agreement to submit to Hong Kong forum and civil procedure.

16.  But, assume to the contrary that in agreeing the claims were to be “subject to Hong Kong law,” the parties were agreeing that Hong Kong substantive (as opposed to procedural) law was to be applicable. That state of affairs would not actually assist CSCL. 

17.  The body of Hong Kong substantive law includes Hong Kong’s conflict of law principles.  Thus, even on CSCL’s reading of the LOU, a judge trying the parties’ dispute would still have to decide what effect to give to Terms cls.7(1) and (2) and 26(1) and (2) as matter of Hong Kong private international law. 

18.  It would still be open to the judge to hold (say) that, in light of Hong Kong’s conflicts rules, PRC law would apply because of the express choice of that body of law in cls. 7(1) and 26(1).  The judge could then go on to hold that, as a matter of Hong Kong private international law and Hong Kong principles of construing a contract, the choice of PRC law trumps the incorporation of US COGSA within Terms cls. 7(2) and 26(2).

19.  In other words, nothing is gained by CSCL’s argument that the LOU amounted to a choice of Hong Kong substantive (not just procedural) law.

20.  It might be suggested (albeit Mr. Richard Khaw (appearing for CSCL) rightly does not) that, in subjecting the Waybills to Hong Kong law, the LOU was referring to Hong Kong substantive law minus its conflict rules.  Such reading of the LOU would be strange in light of the provision reserving CSCL’s right (if any) to limit liability “in accordance with applicable law”.  That provision indicates that the parties meant the Court to apply Hong Kong conflicts rules to determine the applicable law and to decide whether on that law CSCL has any right to limit liability.

21.  Consequently, I would answer the first question: Hong Kong procedural law alone governs the carriages.

B. Question (2): Which limit applies?

22.  In determining the applicable law, one needs to construe, and give effect to, the terms of the Waybills.  There is no suggestion on the part of any party that the principles applicable to construing a contract are different in any relevant jurisdiction, whether Hong Kong, the PRC or the US.

23.  Terms cl. 7(1) expressly provides that “[e]xcept as provided for in Clause 7(2),” the Waybills “shall be subject to the provisions of the Maritime Code”.  In its natural and ordinary meaning, that must mean that where cl.7(2) is applicable and the Waybills are (in the words of cl.7(2)) “subject to the provisions of [US COGSA]” as a result, then the PRC Maritime Code is not to apply.

24.  Terms cls.26(1) and (2) lead to a similar result. 

25.  It is true that Terms cl.26(1) states that the Waybills are “governed by the laws of the [PRC]”.  But Terms cl.26(2) immediately qualifies this by stipulating that “[n]otwithstanding the provision of Clause 26(1),” where a US port is involved the Waybills “shall be subject to the Provisions of the US COGSA”. 

26.  For good measure, Terms cl.26(2) adds that US COGSA:-

“shall be deemed to have been incorporated herein and nothing herein contained shall be deemed a surrender by [CSCL] of any of its rights, immunities, exceptions or limitations or an increase of any of its liabilities under US COGSA”.

27.  It follows on the clear wording of the Waybills that, US ports being involved, US COGSA applies to the exclusion of PRC law or the PRC Maritime Code. 

28.  The answer to the second question then must be that the US COGSA limit applies.

29.  Note that the outcome of this case may well be different where PRC law is compulsorily applicable to the carriages and the PRC Maritime Code applies as an overriding statute, regardless of the parties express intentions in the contract.  Here there is no such suggestion. 

30.  Mr. Edward Alder (appearing for AOS) confined his case to the argument that PRC law applies as a matter of the parties’ express choice of law in Terms cls. 7(1) and 26(1).  But my difficulty is that, given a principle of freedom of contract, if PRC law applies purely as a matter of the parties’ contractual choice, then the parties must also be free to agree between themselves that PRC law is not to apply in specified situations.

31.  Mr. Alder suggests that I ignore the wording of Terms cl.7 as it only deals with limitation.  I am unable to do so since I have to construe the Waybill terms as a whole.  Terms cls.7(1) and (2) make clear what the parties intended by Terms cls. 26(1) and (2) dealing with “Law and Jurisdiction”.

32.  Mr. Alder suggests that the word “notwithstanding” in Terms cl.26(2) should be understood in a “weak” sense of “although PRC law applies generally by Terms cl.26(1), US COGSA should be treated as applying in addition to that law”. 

33.  But I am unable to accept that “weak” reading of “notwithstanding” in light of Terms cls.7(1) and (2) which expressly stipulate that the PRC Maritime Code should not apply where a US port is involved and US COGSA is applicable.  Nor is Mr. Alder’s submission compatible with the words which I observed above were added at the end of Terms cl.26(2).

34.  Mr. Alder notes that US COGSA is only a piece of legislation and not a complete body of law, such as PRC law.  If US COGSA applies, then (Mr. Alder asks) what happens if a question is not covered by any provision of US COGSA? What law would apply then? Mr. Alder submits that the answer would be PRC law.  According to Mr. Alder, this is because US COGSA should be treated for the purposes of determining rights and liabilities under the Waybills as a super-added contractual term incorporated into the Waybills, to be construed in accordance with the body of PRC law which governs the entirety of the parties’ agreement. 

35.  I am unable to accept that argument, which seems contrary to Terms cl.7(2) and the words at the end of cl.26(2) already identified above. 

36.  Assume, in any event, that there is some question of carriage that US COGSA does not deal and such question arises for determination under the Waybills in connection with a carriage involving a US port.  The matter may or may not be governed by PRC law.  That will depend on the proper construction of the Waybills in the context of the specific question needing to be resolved.  That the question may be governed by PRC law as Mr. Alder asserts, would not by itself logically mean that a matter plainly covered by US COGSA should also be subject to PRC law generally and the PRC Maritime Code in particular. 

37.  The problem in this case is akin to that sometimes encountered when the Hague Rules are incorporated into a bill of lading, by agreement of the parties, as a clause paramount.  In such situation, by suitable drafting of the bill of lading, the parties can agree to limit the scope of application of the Hague Rules. This means that the parties can voluntarily agree among themselves that Hague Rules Art. III r.8 (striking down a provision in a bill of lading which imposes a lesser liability than that stipulated by the Hague Rules) would not apply in specific situations.

38.  The Hague-Visby Rules have gotten around this problem.  That is because the Hague-Visby Rules are typically made compulsorily applicable by force of law, regardless of what the parties may or may not have agreed in a bill of lading.

39.  Both parties adduced expert evidence on PRC law and whether or not its application would negate the incorporation into the Waybills of US COGSA (especially the limit of liability found there). 

40.  In light of my conclusion, it is unnecessary to rule conclusively on whether PRC law and the PRC Maritime Code would nullify the reference to US COGSA.  It is sufficient if I indicate that, as a result of that evidence, had I found that PRC law (including the PRC Maritime Code) applied to the carriages here, I would have held that the US COGSA limits of liability were rendered null and void insofar as those limits derogated from Chapter IV of the PRC Maritime Code.  In other words, if PRC law were applicable to the carriages, the PRC Maritime Code would override the limits in US COGSA.

41.  Mr. Khaw accepted that, if the entire body of PRC law applied to the carriages here, the Waybills would be subject to the PRC Maritime Code as they involved carriages from Shanghai.

42.  Mr. Khaw submitted that PRC Maritime Code Art. 269 (allowing the parties to agree that a carriage be subject to a particular foreign law) trumps PRC Maritime Code Art.44 (striking down any derogation from Chapter IV of the Code).  But he could not cite any PRC case which explicitly or implicitly supported his proposition.  Nor was he able to explain why the wide words of Art.44 (if compulsorily applicable by force of law, rather than by the parties’ agreement) should be read as subject to an express choice of law under Art.269.

III. CONCLUSION

43.  The result is that US COGSA limits would apply despite Terms cls. 7(1) and 26(1). 

44.  I shall now hear the parties on costs and consequential orders.