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Gard News 204, November 2011/January 2012

An article in the last issue of Gard News1 considered some contractual and risk allocation issues associated with heavy lift cargoes. This article comments on some of the claims handling issues associated with heavy lift incidents, which can often result in rather complex multi-million dollar claims.

Photo courtesy of Clipper Group AS.

The nature of incidents
It is perhaps not surprising that the often highly complex lifting operation is, in Gard's experience, when things most often go wrong. Nevertheless, incidents do occur after loading, during the voyage and before discharge, and these are most often connected with the securing of heavy lift units. A recent Gard Loss Prevention Circular2 featured the dangers of hot work on cargo securings - Gard has experience of this leading to a number of fires involving heavy lift cargoes. In one case the fire was not extinguished by the ship's carbon dioxide system and was only extinguished after flooding the hold with 700 m/t seawater. In another recent case the cargo securings were unable to prevent the loss overboard of a whole jack-up rig in heavy weather in the middle of the Atlantic.

Numerous claims and the insurance covers
Previous articles in Gard News3 have featured heavy lift incidents that gave rise to numerous claims. One of those incidents involved the tragic loss of life of two  crewmembers and serious injury to cargo interests' loading supervisor following capsize of the vessel during the lifting operation. P&I covered the Member's liability for contractual death compensation to the crewmembers' widows and the costs of defending claims filed in the US courts. The serious injury involved a US citizen, resulting in a significant settlement, also covered by P&I. The same incident saw P&I cover respond to the costs of cleaning up the pollution from the vessel's bunker tanks and to wreck removal of the vessel following hull underwriters' declaration of a constructive total loss and subsequent abandonment. Some cases will see Gard's "extra handling costs" rule4 come into play, which covers the Member for costs which would otherwise have been incurred in handling damaged cargo or cargo rejected by the consignee and/or the "loss of or damage to property" rule5 which covers liability for damage to property caused by the cargo, such as the berth or a loading barge. Claims for damage/loss to the heavy lift cargo itself (also covered by P&I) can be further complicated by the declaration of General Average. This is again where the P&I cover may come into play for cargo interests' share of General Average irrecoverable solely by reason of a breach of the contract of carriage.6 General Average would also involve the hull and machinery policy for the ship's share and the same policy would respond to damage to the ship itself, which can often be extensive.

Claims handling complexity
The numerous claims that often arise paint a complex enough picture, but for the claims handler that is just the start of it.

Initial response
A team of handlers will often be needed to assist the Member with the initial response, especially if harm has been caused to people and the environment, as well as to property. The P&I correspondent will play a key role in assisting the Club and Member to identify providers of response services and appropriate persons to monitor their activities and costs. The Club may also consider it beneficial to send to the scene an experienced handler from the Club to assist the Member and correspondent. These incidents can be rather dramatic from a media point of view and media attention may require advice from a consultant.

The investigation of the incident will be especially important in establishing facts and securing relevant evidence. The potential causes of an incident during the lifting operation are numerous. For example, the cargo unit and/or ship may have been unstable, the lifting gear or points may have failed, the cargo unit or crane itself may have failed, or the lift itself may have been performed improperly. The underlying causes will also need to be investigated. If for example, the lifting points failed, was this because the points themselves were faulty or under-strength, and if the latter, was the weight of the cargo unit provided by the shipper accurate? If, on the other hand, the cargo unit was damaged due to a loss of stability, was that because of a problem on the ship (e.g., ballast transfer) or because of a problem with the cargo unit itself (e.g., centre of gravity).Vital evidence can be lost if swift action is not taken. Immediately following an incident it may be necessary to make matters safe by moving the lift or certain gear. If this is not necessary, it is preferable that evidence is not disturbed until the arrangements at the time of incident have been properly evidenced.

The appointment of experts is likely to be needed as back-up to local surveyors who may be in initial attendance and who will often not possess the level of competence needed in these complex cases, especially if it may become necessary at some future stage to give evidence in legal proceedings. Physical evidence will need to be secured, such as failed lifting equipment. Laboratory tests may subsequently be needed to determine why certain materials failed, and this may require for example an expert metallurgist. An expert in the cargo itself may be needed - to help determine the nature and extent of damage. It is not uncommon that the main concern is the internal damage caused to cargo units, such as an electrical transformer, as opposed to the external damage. It may also be necessary to instruct the expert to monitor cargo interests' proposed course of mitigation.

Cargo interests' efforts will often be geared towards minimising the impact on a project for which the cargo unit is needed, but the extra costs that may involve would not necessarily be recoverable from the carrier. Mitigation starts with post-incident handling of the cargo unit and expert advice may be needed on avoiding even more damage.

Consideration will also need to be given to the appointment of lawyers to take statements from witnesses. Invariably, with heavy lift incidents there will be questions as to who said/did what during the operation. There may also be investigations by relevant authorities, especially if harm has been caused to people, which will need to be managed.

Legal issues
Lawyers will invariably be needed to advise on numerous legal issues that often arise in these cases, such as the following.

Contractual arrangements, defences and recourse
The article in the previous edition of Gard News included some commentary on various standard form contracts in use today. The arrangements may not be straightforward, especially where numerous parties are involved. The incident may occur before a bill of lading has been issued. Any knock-for-knock regime will need to be considered carefully to determine to what claims and in what circumstances it applies. Otherwise, it will be necessary to determine which party is responsible for the particular operation that caused the incident. Consideration will need to be given to any applicable defences, for example, under the Hague/Hague-Visby Rules the carrier may be able to rely on the "inherent vice", "error in management" or "act or omission of the shipper" defences. Depending on the capacity in which the Member acts, there may be a recourse against the charterer or the shipowner. There may also be a potential recourse against the shipper or the manufacturer of failed equipment.

These issues are inter-related and there may be an element of "forum shopping" by the parties. One of the most potentially significant issues is the carrier's/shipowner's limitation of liability. The "package limit", as provided for under relevant carriage of goods by sea rules, is based on either the number of packages or the weight of the cargo unit.  What is often referred to as the "global limit", as provided for in a relevant convention on limitation of liability for maritime claims, is based on the tonnage of the vessel. Different levels of limitation apply in different countries, as does the test for breaking limitation and the claims to which limitation applies, and so the potential impact of limitation issues can be significant. This is especially so in relation to "global limitation" since the tonnage of a heavy lift vessel is often relatively small compared to more conventional vessels. In a recent multi-million dollar case, the gross registered tonnage of the vessel was 2,368 MT, equating to a tonnage limit for property claims of USD 770,000 under the 1976 Limitation Convention or USD 1.8m under the 1996 Protocol to the 1976 Limitation Convention.

Heavy lift incidents can often result in rather complex multi-million dollar claims.

To contrast two recent cases in which Gard was involved, as examples of the significance of the legal issues in discussion, the first concerned a gas turbine which was dropped during loading due to the ship's crane wire parting. The French courts held that the carrier's negligent conduct in maintaining the wire and awareness that damage would result constituted gross negligence, taking the carrier outside the scope of a USD 330,000 package (weight) limit; making the carrier liable for a USD 3 million claim. Of some consolation in the same case, steps had been taken by Gard to limit the carrier's global limit to USD 2.2m in Denmark. In the other case, which involved the US courts, two pieces of heavy lift cargo were extensively damaged with an estimated combined value of USD 20 million. Cargo interests challenged the carrier's right to rely on the US COGSA USD 500 package limit by arguing that they were not afforded a fair opportunity to declare a higher value.7 The court held that there did not have to be a specific space provided on the bill of lading for a shipper to declare a higher value and that a notification in the bill that that the US COGSA USD 500 package limitation is part of the contract of carriage would suffice.The carrier's liability was therefore limited to USD 1,000.

Demands for security for potentially high value claims are not uncommon and these can give rise to complexities, not just in view of the legal issues mentioned above, but also if the value of the vessel arrested or exposed to arrest is lower than the amount of security demanded. The picture may be further complicated by the need for counter-security for potential recourse claims.

What Members can do to limit their claims exposure
It goes without saying that the best way to limit claims exposure is to avoid incidents occurring in the first place. Careful planning is key and a proper risk assessment will be a sound investment. If something does go wrong, immediate notice to the Club is essential, not just to assist the Member with initial response measures but also to quickly address investigation and legal issues. In terms of evidence, it will often help if the lifting operation has been captured by photography or video. In terms of the legal issues, it is the contractual arrangements that Members enter into that will often be key. A careful check should be made before such arrangements are finalised and Gard can be contacted in cases of doubt. Members who have standard contractual terms can also approach Gard for advice on how these may be improved to limit exposure. Given the potential exposure to high value claims, Members should exercise particular care with regard to the financial standing of their contractual counterparts (and their insurers). Recourse claims can be rendered worthless if a contractual counterpart does not have the finances, assets or reliable insurance to meet such claims.

The complexity and exposure, not just in monetary terms, but in the various claims that may arise in connection with heavy lift incidents, calls for a certain level of claims handling expertise. Gard has gained considerable experience in working with Members and service providers in handling the numerous issues involved. As this article serves to demonstrate, the issues can have a significant bearing on the financial outcome of a case, but the initial response will be just as important in terms of protecting a Member's business and reputation.

1"Heavy lift cargoes - Contractual issues and risk allocation" in Gard News issue No. 203.
2Loss Prevention Circular No. 06-10 - The dangers of hot work on cargo securings.
3"US Law - Forum non conveniens explained" in Gard News issue No. 188 and "Heavy lift cargoes - The bigger they are, the harder they fall" in Gard News issue No. 196.
4 Rule 35.
5 Rule 39.
6 Rule 41.
7 See also "US law - The fair opportunity doctrine" in Gard News issue No. 184.


Any comments on this article can be e-mailed to the Gard News Editorial Team.