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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Canada Maritime Ltd v Oerlikon Aerospace Inc. [1998] EWCA Civ 170 (06 February 1998) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1998/170.html Cite as: [1998] EWCA Civ 170

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(Mr. Justice Tuckey)

		Royal Courts of Justice Strand London WC2
		6th February 1998

LORD JUSTICE HIRST: This is an appeal by the plaintiffs by counterclaim, Oerlikon Aerospace Inc. (Oerlikon) and Her Majesty The Queen in Right of Canada from the order of Tuckey J dated 23rd May 1997, whereby it was ordered that the summary judgment against the second defendant to counterclaim, Maritima Valenciana S.A. (MV), and the judgment in default pursuant to O.19,r.7 against the third defendant to counterclaim, Transportes Fuente S.L. (TF), granted by Rix J on 24th November 1995 be set aside.

Oerlikon as the defendant in the main action brought against it by the plaintiff Canada Maritime, which was also the first defendant to counterclaim. I would like at the outset of this judgment to pay a warm tribute to Mr. Browne-Wilkinson for the skill and pertinacity with which he has advanced his arguments before us.

The appeal hinges essentially on two key aspects: first, upon the respondent's contention, which the judge upheld, that they have a real prospect of succeeding in a defence based on a Himalaya clause in the bill of lading, to which I shall shortly refer and to which of course they were not parties; secondly, upon the appellant's contention that the judge erred in principle in relation to the exercise of his discretion in the respondents' favour. I say the respondents in the plural, though in fact essentially that argument only relates to MV and not to TF for reasons I shall explain in due course.

The background to the case is that a tank belonging to Her Majesty the Queen, in her right as sovereign of Canada, was on loan to Oerlikon and was in the course of transportation from Canada to Turkey when it suffered damage at MV's container terminal at Valencia in Spain where it was awaiting trans-shipment. The value of the tank was assessed at Canadian dollars 15 million, and the extent of the damage was said to amount to approximately Canadian dollars 3 million. The damage occurred on 23rd August 1993 when the tank fell off a tank transporter being moved by a lorry belonging to the fourth defendants to counterclaim, Transportes Al Ghadban, who are not involved in the present appeal. At this juncture the tank was in the custody of MV, who are the port authority in Valencia, and they had contracted the operation of moving the tank to TF, who had in turn sub-contracted that task to the fourth defendants to counterclaim.

Under the terms of the relevant bill of lading, Canada Maritime Limited had agreed to carry the tank from Montreal to Valencia and then for trans-shipment on to Istanbul, where it was to go on exhibition. The bill of lading contained at clause 4.2 a Himalaya clause which is critical to the present appeal and which is in the following terms. I quote it as Tuckey J quoted it, inserting convenient nouns and tenses to make it more understandable:

"The [plaintiffs] undertake that no claim or allegation shall be made against any person whomsoever by whom the Carriage or any part of the Carriage is performed or undertaken (other than the Carrier) which imposes or attempts to impose upon any such person, any vessel owned by any such person, any liability whatsoever in connection [with] the Goods or the Carriage of Goods, whether or not arising out of negligence on the part of such person and, if any such claim or allegation should nevertheless be made, to indemnify the Carrier against all consequences thereof. Without prejudice to the foregoing every such person shall have the benefit of every exemption, limitation, condition and liberty herein contained and of every right, exemption from liability, defence and immunity of whatsoever nature applicable to the Carrier as if such provisions were expressly for his benefit...; and in entering into this contract, the Carrier, to the extent of these provisions, does so not only on his own behalf but also as agent and trustee for such persons."

There were other provisions in the bill of lading which stipulated English law and jurisdiction clause and limited the carrier's liability.

The counterclaim was served on MV and TF in Spain on 14th July 1994, but they did not respond to either claim against them, entitling Oerlikon to sign judgment in default of defence against both defendants under O.19,r.7, but they were none the less anxious to obtain an O.14 judgment. The case came before Rix J on 24th November 1995.

There were a number of procedural disputes with which we need not presently concern ourselves, and ultimately Rix J gave judgment under O.14 against MV because they were the intermediate bailees in possession of the tank, but he refused judgment under O.14 against TF on the footing that they might not have been bailees at all and were not bailees in possession, though he then proceeded to give judgment in default against TF under O.19,r.7. Neither MV nor TF took any part whatsoever in the hearing before Rix J.

When the matter came before Tuckey J, he first of all rejected a number of explanations put forward by MV and TF to justify their delay in responding to the claim against them, and also rejected a number of procedural objections put forward on their behalf as invalidating Rix J' conclusions. Some of these matters are resurrected by respondents' notice but, as will appear in due course, there is no need for us to consider them.

Tuckey J then came on to the crucial issue, namely the application to set aside. He first of all considered an argument by Mr. Browne-Wilkinson on behalf of the appellant, which he repeated before us, that a crucial distinction was to be drawn between the respective positions of MV and TF, since the applicable principles differ depending whether there has been a judgment on the merits or a judgment in default. This distinction was based on the decision of the Court of Appeal in Shocked v Goldsmidt (Leggatt, Roch and Morritt LJJ) [1998] 1 All ER 372, who decided in a nutshell that different considerations apply between the two categories of case; and that, in the case of a default judgment, the key question is whether there is a defence on the merits, whereas, in an application to set aside a judgment after a trial in which the defendant elected not to appear, the key consideration is the reason why the losing party the judgment was given absented himself. I shall be returning to that case in more detail later.

Mr. Browne-Wilkinson submitted that the default judgment against TF under O.19,r.7 fell into the former category, whereas the O.14 judgment against MV fell into the latter. Tuckey J was not prepared to accede to this argument in relation to MV, and held that an O.14 judgment fell somewhere in between the two categories identified in the Shocked case.

He then proceeded to consider the critical question, namely an assessment of the merits of MV's and TF's cases under the Himalaya clause. He stated that recent authority, to which I refer below, reinforces earlier decisions that sub-contractors can rely on bills of lading which contain Himalaya clauses. He then went on to consider whether (assuming such a requirement was necessary) the sub-contractors had given authority to contract on their behalf by subsequent ratification, but concluded by saying that it was not necessary for him to resolve the ratification issue, and that it was sufficient for him to say that MV and TF did have a defence based on the Himalaya clause which had a real prospect of success; and that, notwithstanding their undoubted delay, and the prejudice which Oerlikon would suffer, it would be right in the exercise of his discretion to set aside both judgments on fairly stringent terms which he then prescribed.

On behalf of the respondent, Mr. Jeremy Cooke QC supports Tuckey J's conclusions, and, in the forefront of his argument, he submits that there is now a strong prospect of his being able to establish as a matter of law that Himalaya clauses in a bill of lading are an exception to the doctrine of privity of contract, and that therefore proof of ratification is unnecessary. This argument was based on the recent decision of the Privy Council in The Mahkutai [1996] AC 650, to which Tuckey J referred in his judgment and to which I now turn, since, to my mind, it holds the key to the solution of the present appeal.

This was a decision of the Privy Council (Lord Goff of Chieveley, Lord Jauncey of Tullichettle, Lord Nicholls of Birkenhead, Lord Hoffmann and Sir Michael Hardie Boys) on appeal from the Court of Appeal in Hong Kong. The judgment of the Board was delivered by Lord Goff.

The facts in brief were that cargo being carried on a voyage from Jakarta in Indonesia to Shantou in China was found to have been damaged by sea water on arrival. The vessel then proceeded to Hong Kong, where the cargo owners instituted proceedings against the shipowners claiming damages for breach of contract, breach of duty and negligence. The shipowners, in answer to the claim, sought to rely on a Himalaya clause in the bill of lading to which they were not parties.

At the outset of his judgment, Lord Goff analysed in detail the impact of the Himalaya clause in the context of that case, and stated at page 658 as follows under the heading "The pendulum of judicial opinion":

"The two principles which the shipowners invoke are the product of developments in English law during the present century. During that period, opinion has fluctuated about the desirability of recognising some form of modification of, or exception to, the strict doctrine of privity of contract to accommodate situations which arise in the context of carriage of goods by sea, in which it appears to be in accordance with commercial expectations that the benefit of certain terms of the contract of carriage should be made available to parties involved in the adventure who are not parties to the contract. These cases have been concerned primarily with stevedors claiming the benefit of exceptions and limitations in bills of lading, but also with shipowners claiming the protection of such terms contained in charterers' bills. At first there appears to have been a readiness on the part of judges to recognise such claims, especially in Elder, Dempster & Co. Ltd v. Paterson, Zochonis & Co Ltd [1924] A.C. 522, concerned with the principle of bailment on terms. Opinion however hardened against them in the middle of the century as the pendulum swung back in the direction of orthodoxy in Midland Silicones Ltd v Scruttons Ltd [1962] AC 446; but in more recent years it has swung back again to recognition of their commercial desirability, notably in the two leading cases concerned with claims by stevedors to the protection of a Himalaya clause - New Zealand Shipping Co Ltd v A.M. Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 and Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty Ltd (The New York Star) [1981] 1 WLR 138."

Lord Goff then proceeded to consider in detail the swings in the pendulum of judicial opinion by reference to several cases which he considered in great detail at pages 659 to 664 of his judgment. He then concluded as follows at 664 C to 665 C:

"Nevertheless there can be no doubt of the commercial need of some such principle as this, and not only in cases concerned with stevedors; and the bold step taken by the Privy Council in The Eurymedon [1975] AC 154, and later developed in The New York Star [1981] 1 WLR 138, has been widely welcomed. But it is legitimate to wonder whether that development is yet complete. Here their Lordships have in mind not only Lord Wilberforce's discouragement of fine distinctions, but also the fact that the law is now approaching the position where, provided that the bill of lading contract clearly provides that (for example) independent contractors such as stevedors are to have the benefit of exceptions and limitations contained in the contract, they will be able to enjoy the protection of those terms as against the cargo owners. This is because (1) the problem of consideration in these cases is regarded as having been solved on the basis that a bilateral agreement between the stevedors and the cargo owners, entered into through the agency of the shipowners, may, though itself unsupported by consideration, be rendered enforceable by consideration subsequently furnished by the stevedors in the performance of their duties as stevedors for the shipowners. (2) the problem of authority from the stevedors to the shipowners to contract on their behalf can, in the majority of cases, be solved by recourse to the principle of ratification; and (3) consignees of the cargo may be held to be bound by the principle in Brandt v Liverpool, Brazil and River Plate Steam Navigation Co. Ltd [1924] 1 K.B. 575."

Next comes the the crucial paragraph:

"Though these solutions are now perceived to be generally effective for their purpose, their technical nature is all too apparent; and the time may well come when, in an appropriate case, it will fall to be considered whether the courts should take what may legitimately be perceived to be the final, and perhaps inevitable, step in this development, and recognize in these cases a fully fledged exception to the doctrine of privity of contract, thus escaping from all the technicalities with which the courts are now faced in English law. It is not far from their Lordships' minds that, if the English courts were minded to take that step, they would be following in the footsteps of the Supreme Court of Canada: See London Drugs Ltd v Kuehne & Nagel International Ltd (1992) 97 D.L.R. (4th) 261 and, in a different context, the High Court of Australia: See Trident General Insurance Co. Ltd v McNiece Bros Pty Ltd (1988) 165 C.L.R. 107. Their Lordships have given consideration to the question whether they should face up to this question in the present appeal. However, they have come to the conclusion that it would not be appropriate for them to do so, first, because they have not heard argument specifically directed towards this fundamental question and, second because, as will become clear in due course, they are satisfied that the appeal must in any event be dismissed."

Mr. Cooke naturally places strong reliance on The Mahkutai and submits that, in consequence, both MV and TF have an arguable defence on the basis that there should now be upheld, in Lord Goff's words, a fully fledged exception to the doctrine of privity of contract, thus escaping all technicalities such as the need for ratification, which was one of the three examples specifically mentioned by Lord Goff in the passage which I have just quoted.

Mr. Browne-Wilkinson, on the other hand, submits that, as the authorities presently stand, we are still bound by the Midland Silicone case which sets out the law as it is, and that we should not allow ourselves to be diverted by the siren song portending a future change in the law as suggested in The Mahkutai, however firm that prospect may be.

In my judgment, that is a wholly unrealistic standpoint, having regard to the powerful critique advanced by Lord Goff of the Midland Silicone's principle in cases of carriage of goods by sea which, as he pointed out, is supported by two leading Commonwealth authorities.

It is also noteworthy that even in Midland Silicones itself, Lord Reid foresaw the possibility of a change in the law at page 474, in a passage which Lord Goff categorized in The Mahkutai as a most important observation (page 661).

In my judgment, Mr. Cooke is plainly right on this point so there is no need to consider the detailed arguments concerning ratification on which Mr. Browne-Wilkinson criticised the judge for failing to come to a conclusion. The Mahkutai case shows that, in cases of carriage of goods by sea like the present, the doctrine of privity of contract may well be tottering on the brink of collapse.

Mr. Browne-Wilkinson next submitted that the judge erred in his application of the principles laid down in the Shocked case and should have treated the O.14 judgment against MV as fully equivalent to an adjudication on the merits, with the consequence that the judge's intermediate approach was wrong. It followed, he submitted, that MV's application to set aside the judgment (in contrast to TF's) should have failed because, as Tuckey J found, no satisfactory explanation had been provided for their delay and their failure to defend the proceedings, and because Oerlikon had suffered irremediable prejudice, in a manner which I shall describe.

The Shocked case is a very valuable analysis of the contrasting approaches to default judgments and judgments on the merits, as affirmed in a later Court of Appeal case, Flexible Options v Cullen, Lexis Report 16th February 1996, a judgment of Waite and Hobhouse LJJ.

However, it is not of course a statutory enactment, and in my judgment it would be wrong to treat the distinction that it draws as in effect delimiting black and white situations with no grey area in between.

In the present case, Rix J's judgment under O.14 against MV had a number of features which, to my mind, placed it well within the intermediate grey area in which Tuckey J located it, in between the two black and white extremes identified in Shocked. These features are as follows:

(1) Being a judgment under O.14, albeit on the merits after a half day hearing, it cannot be equated with a judgment after a full trial involving a complete investigation of the issues.

(2) The distinction drawn by Rix J between MV and TF was a purely technical one based on the law of bailment, as follows, substituting the abbreviations used in this judgment:

"It seems to me, however, that the positions of MV and TF are at any rate arguably for the purposes of such summary proceedings, rather different. MV were bailees, albeit intermediate bailees, in possession. TF may not have been bailees at all and were not bailees in possession. Mr Schaff has submitted that there is no authority to the effect that an intermediate bailee out of possession is liable for the default of a further sub-bailee down the line. It seems to me that he is right in that submission and that the position of TF is arguable, either because it never became a bailee in possession, or because a one time intermediate bailee out of possession is not responsible for the default of a further sub-bailee who is an independent contractor."

(3) Rix J did not consider the merits of a defence under the Himalaya clause which he stated had not been invoked by MV and TF: furthermore, even if he had done so, it would have been without the advantage of The Mahkutai which was decided in April 1996, five months after Rix J's judgment.

It therefore seems to me that the O.14 judgment against MV falls well within the intermediate grey area in which it was placed by Tuckey J. I cannot therefore accept Mr. Browne-Wilkinson's criticism that Tuckey J erred in principle on that score.

It is none the less only right that I should record and evaluate Mr. Browne-Wilkinson's careful arguments, which he advanced in reliance on the factors listed in Shocked as pertinent in the case of a judgment on the merits. This list, which was expressly quoted by Tuckey J in his judgment, is as follows:

"These authorities about setting aside judgment after a trial indicate that each case depends on its own facts and that the weight to be accorded to the relevant factors will alter accordingly. But from them I derive the following propositions or 'general indications' as Lord Wright might have called them:

(1) Where a party with notice of proceedings has disregarded the opportunity of appearing at and participating in the trial, he will normally be bound by the decision.

(2) Where judgment has been given after a trial it is the explanation for the absence of the absent party that is most important: Unless the absence was not deliberate but was due to accident or mistake, the court will be unlikely to allow a re-hearing.

(3) Where the setting aside of judgment would entail a complete retrial on matters of fact which have already been investigated by the court the application will not be granted unless there are very strong reasons for doing so.

(4) The court will not consider setting aside judgment regularly obtained unless the party applying enjoys real prospects of success.

(5) Delay in applying to set aside is relevant, particularly if during the period of delay the successful party has acted on the judgment ...

(6) In considering justice between parties, the conduct of the person applying to set aside the judgment has to be considered: Where he has failed to comply with orders of the court, the court will be less ready to exercise its discretion in his favour.

(7) A material consideration is whether the successful party would be prejudiced by the judgment being set aside, especially if he cannot be protected against the financial consequences.

(8) There is a public interest in there being an end to litigation and in not having the time of the court occupied by two trials, particularly if neither is short.

'Contrasting the cases in the two categories it seems to me that whereas in the first the court is primarily concerned to see whether there is a defence on the merits, in the second the predominant consideration is the reason why the party against whom judgment was given absented himself."

It is noteworthy that those 8 point are prefaced by the very important overriding principle that each case depends on its own facts and that the weight to be accorded to the relevant factors will alter accordingly.

Mr. Browne-Wilkinson properly lays emphasis on point (7), and stresses with particular force the prejudice which his client will suffer if the judgment is set aside. That arises in the following way. In the action between Canada Maritime and Oerlikon, there was an issue whether Canada Maritime were estopped from relying on clause 4.2 of the bill of lading as a result of oral assurances which Oerlikon contended, and Canada Maritime denied, had been given in August 1995. This controversy was ordered to be determined as a preliminary issue, the trial of which was due to start on 12th February 1996. Meantime, Rix J's judgment was delivered on 24th November 1995. However, on the very eve of the trial of the preliminary issue, the action as between Canada Maritime and Oerlikon was settled by an agreement whose recital clearly demonstrates that Rix J's judgment against MV and TF was a major factor in the equation. Furthermore, under the terms of the settlement, Oerlikon gave up a substantial part of their counterclaim against Canada Maritime running into several million Canadian dollars.

I fully accept that, subject to any further argument which Mr. Cooke may advance at some later stage, this was a material consideration of prejudice; it was one which Tuckey J took into account, as his judgment shows, though it is fair to say that he did not spell it out in the detail which I have just done.

At this juncture I wish to point out in parenthesis that this aspect of the case was relied on by Mr. Browne-Wilkinson in an entirely different context, on the footing that this estoppel issue, which remained unresolved as between Oerlikon and Canada Maritime, showed that this is not a pure Mahkutai case. I am not able to give any weight to this submission since the crucial issue of fact has never been decided, namely whether or not there was such a conversation leading to such an estoppel; thus it is still is still a completely open question which, if it is relied upon by Oerlikon in these proceedings, could go either way.

Coming back to the discretion argument, on the other side, by way of counterbalance to the prejudice, point (4) in Shocked requires the court to assess the prospect of success, and point (5) mentions the need for strong grounds for setting aside the judgment.

Here, for the reasons I have given based on The Mahkutai, I consider that MV and TF do enjoy real prospects of success; and I also consider that this furnishes very strong grounds for setting Rix J's judgment aside, especially as his judgment was given prior to the decision in the Mahkutai, which furnishes MV and TF with a strongly arguable defence of which they should not in the interests of justice be lightly deprived.

Mr. Browne-Wilkinson elaborated his submission on discretion with the following points towards the conclusion of his argument. First, he says and I fully accept, that the case starts with C$ 3m worth of damage to his client's tank.

Secondly and thirdly, he says that there are two points of view on Himalaya clauses as shown by The Mahkutai, and that there is no firm authority presently for upholding the Himalaya clause in the context of this case. I have already dealt with these two aspects in the earlier part of this judgment, and it seems to me that The Mahkutai shows the pendulum swinging very strongly back in favour of an exception to the privity of contract doctrine. Fourthly, he says that Oerlikon acted entirely according to the rules and dealt with everything in a regular manner: I accept that and so did Tuckey J. Fifthly, he says that Oerlikon had given up a possible good defence irremediably by the settlement with Canada Maritime: that I have already dealt with in relation to prejudice. Sixthly, he says that the judge paid insufficient regard to the fact that MV gave a misleading account of the events which led to them not appearing before Rix J: that matter was fully taken into account by Tuckey J who rejected their explanation and said he was sceptical about its validity.

In any event, at the end of the day, the ultimate discretion rested with Tuckey J and not with us; and in the absence, as I have already held, of any error of principle, it would be quite wrong for us to interfere with his exercise of his discretion in which he took all the material factors into account.

The grounds advanced by the respondents in the cross notice consequently become academic.

For all these reasons, I would dismiss the appeal.

LORD JUSTICE BUXTON: I agree.

SIR JOHN KNOX: I also agree.

Order: Appeal dismissed with costs; application for leave to appeal to the House of Lords refused.

(Order not part of the judgment of the court)