If a buyer has recovered from their seller already, can they also sue the carrier for full damages? The rule of "res inter alios acta" in cargo claims re-examined in light of Swynson v Lowick.
In most international trade transactions, two contracts normally lie very close to each other: (1) the underlying sale contract, which in turn spawns (2) the carriage contract needed to get the goods to destination. Each of those contracts can come in various shapes and sizes: the sale contract can be on CIF or FOB terms, among others; the carriage contract can take the form of a charterparty, a bill of lading, or neither. But whatever the form of each contract, they lie contiguous to each other, the one existing, commercially and on the ground, because of and/or in relation to the other. One would have thought, therefore, that recovery of a loss under the one might factor in recovery of damages under the other. For cargo claims lawyers, however, who normally work on the same floor as or across the hall from their commodity law colleagues, cargo claims are normally recovered quite independently from, and unaffected by, recoveries under sale contracts, despite having the same subject matter – the goods. Sale contracts are, it is said, res inter alios acta to a claim under a carriage contract: in other words the cargo claim is quite separate from what has gone on under the sale contract.
For cargo claims lawyers who normally work on the same floor as or across the hall from their commodity law colleagues, cargo claims are normally recovered quite independently from, and unaffected by, recoveries under sale contracts, despite have the same subject matter – the goods.
It is difficult to justify this to a carrier, who frequently sees (or simply just suspects) that the successful cargo claimant has just walked off with a hefty award in damages where the “loss” has already been compensated, in full or at least in part, by recovery under the sale contract. Does this make commercial sense? Is it reasonable and just? Should the Clubs and lawyers defending carriers be complaining loud and hard about this opportunity for what is, in effect, double-recovery? And, above all, does the current state of English law actually allow this rather perverse state of affairs?
The Practical Context
The question arises in the following practical context. The carrier is in breach of the contract of carriage. The cargo-interest, whether shipper or receiver, suffers a loss because of that breach. On the facts, the carrier has no hope of success on liability. At the quantum stage, however, the carrier wishes to argue that the cargo-interest has actually not suffered any loss, or at any rate the full loss for which recovery is claimed, because the cargo-claimant has in fact already recovered from its counterparty under the sale contract, whether through a decision, an award or a settlement. The carrier finds that this commercially perfectly reasonable quantum defence is unceremoniously ruled out as legally untenable, the sale contract being a res inter alios acta, the Latin tag raising what is, absent special circumstances, an impregnable argument allowing full recovery of the carriage “loss” from the aggrieved carrier.
The Traditional Analysis
“The carriage tribunal proceeds from breach to quantum, bypassing proof of loss questions."
The traditional analysis is as simple as the logical line is short. After establishing breach, the carriage court or tribunal proceeds straight to a quantum assessment (measured often by reference to spot market prices), with scant regard to what, in other contractual disputes would be considered as fundamental: what was the actual loss suffered? What caused it? Was any amount recovered under the sale contract factored in so that the cargo claim comes within the compensatory principle? And finally, from a commercial perspective, how alios acta is the res, when the claimant making full recovery from the carrier is the same party as the cargo-interest who has recovered under the sale contract? These questions, major signposts in normal contractual analysis for recovery for breach of contract, are completely by-passed – because, under the current state of English law, carriage is carriage, and sales is sales.
The carriage tribunal, then, proceeds from breach to quantum, bypassing proof of loss questions, instead assessing the carriage loss through one of several well-worn formulae:
(1) in cases of non-delivery the value of buying replacement goods at the time they were supposed to be delivered;
(2) in cases of late delivery, the difference between the market value of the goods at the time of supposed delivery and their value at the time of actual delivery; and/or
(3) in cases of defective delivery, the difference between the sound arrived market value of goods and the actual arrived value of the goods.
Does This Make Sense in Principle?
Passing those monochromic formulae through the prism of routine principles of compensation for breach of contract, what if in any of the above circumstances, the cargo-claimant has in fact suffered no actual loss? What if, for instance: (1) in a case of late delivery, the buyer under a sale contract does not complain about the lateness of delivery and pays the seller, the cargo-claimant, the full amount anyway; or (2) in the case of defective delivery the buyer takes the goods without complaint despite the damage caused in transit, again paying the seller the price in full? In both cases, the seller has suffered no expectation loss under the sale contract; and, although the carrier has breached its obligations under the carriage contract, the perfectly legitimate question arises: to what effect, with what result – or, put plainly, so what? Applying the normal principles of the assessment of loss based on the compensatory principle, surely the cargo-claimant should only be able to recover from the carrier what the claimant actually lost – and that must take account of what it recovered from the sales counterparty. Oddly, however, as already explained, judicial orthodoxy in the carriage cases states that the sale contract is irrelevant to the assessment of loss under the carriage contract – it is res inter alios acta.
We suggest that not only should this be wrong: it is wrong in that what we might call the carriage “res inter” rule has been overtaken by two authorities, one a shipping case in the House of Lords; and the other a more general contract case in the Supreme Court. The cases are, respectively, The Golden Victory [2007] UKHL 12 and Swynson v Lowick [2017] UKSC. The first, shed modern light on the basic compensatory principle in a (non-cargo-claim) shipping case: a claimant only recovers for actual loss. The second follows the same principle in the particular context of a res inter claim (in a non-shipping case), awarding a nil recovery to a claimant flying the res inter banner. We argue that, if the principles of these cases are applied to cargo claims, a cargo claimant cannot make full recovery from its carrier where that claimant has recovered all or part of its loss from its sale counterparty. To argue the opposite in effect segregates cargo claims in a sui generis dark corner, untouched by basic principles of the law of contract (in much the same way as the deviation rule is said to have survived the death of the doctrine of fundamental breach – but that is a story for another day).
The Non-Shipping Authorities
We shall start at the end, with the more recent judgment in a suitably industry-neutral case, the recent Supreme Court decision in Swynson v Lowick [2017] UKSC 32. As we shall see, practically this case would in practice, if applied to cargo claims, severely limit the res inter rule, except insofar as recovery is made pursuant to an insurance pay-out.
The analysis in Swynson starts from the older authority Parry v Cleaver [1970] A.C.1. In that House of Lords case, Lord Reid explained that, 'whether a plaintiff was bound to bring into account insurance payments, charitable payments, pension payments and the like, which were payable owing to the injury suffered as a result of the defendant’s tort… the answer should depend on “justice, reasonableness and public policy”.' In other words, whether a payment from a third party that negates or reduces the claimant’s actual loss should be taken into account, or whether it should not, it being a res inter alios acta, depends on justice reasonableness and public policy. Res inter was not, therefore, a blanket principle to be applied in every case, allowing a claimant to seek recovery under one contract irrespective of recoveries made under others.
Forty years on from Parry v Cleaver, the Supreme Court had a further opportunity to re-state and fine-tune the principle, identifying where the res inter rule falls to be applied - and, from the perspective of this article, where it does not. In Swynson, [2017] UKSC 32 at [98], Lord Neuberger, referring to Parry v Cleaver, said that:
[the considerations of justice, reasonableness and public policy]… should not be treated by judges as a green light for doing whatever seems fair on the facts of the particular case…the types of payments to a claimant which are not [emphasis added] to be taken into account when assessing damages, are either those which are effectively paid out of his own pocket (such as insurance which he has taken out, whether through his employer, an insurance company or the government), or which are the result of benevolence (whether from the government, a charity, or family and friends), all of which can be characterised as essentially collateral in nature.
In other words, the two types of payment to the claimant described by Lord Neuberger are ‘res inter’ which ought therefore to be discounted in assessing the quantum of the recoverable claim; other types of payment are not ‘res inter’ – and should therefore be factored into the quantum of the recoverable claim. The examples of res inter payments given by Lord Neuberger were:
(1) where the payment was actually paid out of the claimant’s own pocket (e.g. by paying insurance premiums); or
(2) where the payment was received as the result of a benevolent act putting the claimant back in pocket.
What made these payments res inter was not their source but their nature. At [99], Lord Neuberger explained, again citing Parry’s case:
‘the question whether such a transaction should be ignored should depend on its “intrinsic nature” rather than on the identity of the source of the payment.’
In Swynson itself, a company, Swynson, had lent £15 million to a borrower, EMSL on the basis of Lowick’s negligent advice. Swynson sued Lowick in negligence. However, before the trial was over, and before assessment of damages, the CEO of Swynson, in his personal capacity, lent EMSL sums sufficient for them to discharge their loans to Swynson. In view, of this Lowick argued that Swynson had suffered no loss and that damages should be assessed as nil.
Swynson and its CEO resisted that contention on the basis that the CEO’s payments to EMSL were res inter alios acta and ought therefore to be discounted in assessing the claim, which would lead to recovery of their full “loss”. The argument succeeded in the High Court and in the Court of Appeal; the Supreme Court, however, held that the payment by the CEO did render the company’s loss nugatory and returned a nil recovery decision.
The Supreme Court held that:
(1) the money paid to EMSL was not a gift – the CEO had entered into a commercial loan with EMSL of his own accord (albeit a loan that was interest free);
(2) the money was paid for the specific purpose of enabling EMSL to pay off its indebtedness to Swynson; and
(3) if the money had been paid by someone else it would plainly not be res inter alios acta, and thus, since the question of res inter alios acta depends on the nature of the payment not its source, the fact that the money was lent to EMSL by Swynson’s CEO was irrelevant.
Accordingly, the appeal was allowed and damages were assessed at nil.
The Shipping Authorities
By contrast, one rarely, if ever, sees such analysis in cargo claim authorities. Instead, as we have seen, the courts go from proven breach to quantum on the basis of three simple formulae assessing the damages, but, with respect, without asking whether there was an actual loss.
For instance, in The Sanix Ace [1987] 1 Lloyd’s Rep 465, Lord Hobhouse explained that he found it a “surprising contention” [468 col.1] that the carrier of goods should attempt to argue that the terms of the underlying sale contract between a buyer and seller was not res inter alios acta:
[T]he provisions of contracts of sale and purchase to which the goods owner is a party are, in the absence of special circumstances, res inter alios acta, which are not to be taken into account in assessing damages to be paid to the goods owner.
Lord Hobhouse justified his position on the basis that: (1) “In contract…the right to recover substantial damages can be proved by proving possession or ownership of the relevant goods” [468 col. 1]; and that (2) “As soon as the goods are damaged the owner suffers loss.” In essence, as long as the claimant can demonstrate title to sue and can prove breach/damage at the relevant time, the claimant can recover, with loss being assumed and only damages assessed. The logical faux pas lies in ignoring what should come first (loss) and assessing what should only come second (damages). With respect to Lord Hobhouse, his Lordship’s justification for the res inter rule in cargo claims is misconceived because:
(1) it elides the requirements of (a) title to sue and physical damage to cargo/breach with (b) proof of financial loss; and
(2) it does not trouble itself (as one should) with asking whether there has been any recovery (or conversely complaint) under the underlying sale contract, and the nature of that recovery.
In 1987, the year in which the Sanix Ace was decided, Lord Hobhouse did not, of course, have the benefit of the judgment in Swynson. After Swynson, it is difficult to see how his Lordship’s analysis of the Sanix Ace can be sustainable or safe.
The Sanix Ace itself is part of a broader canon of case-law that has variously held:
(1) in cases of non-delivery where a shipper had already on-sold the goods at a price lower than the market price, that is irrelevant to an assessment of loss;
(2) in cases of delayed delivery, the difference in price between the price at which the shipper actually sells the goods is irrelevant to the assessment of loss; and
(3) in cases of defective delivery, recovery of the full amount from a buyer is irrelevant to the assessment of loss.
The general principle that sales recovery does not affect cargo recovery, the res inter rule, continues to this day to be followed in the shipping industry. For instance, in the 2018 case The Baltic Strait, arbitrators held that a payment by way of settlement by the seller to the buyer of damaged goods was res inter alios acta. The cargo claimant consequently made full recovery in the cargo claim despite the fact, applying Swynson reasoning, that the payment was: (1) neither made out of the claimant’s pocket; nor (2) was the consequence of a benevolent act (since it was a commercial settlement). When the Baltic Strait made its way to the High Court, the court reiterated the established position that recovery is predicated on title to sue and damage, thus by-passing entirely the need for the proof of actual financial loss:
Assuming title to sue in contract, the carrier is liable to full damages if sued by the receiver who, by reason of the carrier’s breach, receives damaged, rather than sound goods, or by a claimant who did not receive the damaged goods but who owned the goods when they were damaged by the carrier’s breach…
Again, as with The Sanix Ace, we see an elision leading to a non sequitur. The Baltic Strait elides title to sue/breach/physical damage with actual financial loss, bypassing entirely the proof of loss. The judgment is, again, unresponsive to – and in our view therefore necessarily superseded by – a modern judicial analysis that is much more in keeping with reasonable commercial expectations.
To be fair to tribunals deciding cargo claim disputes, their steadfast attachment to the res inter rule is not surprising. If one looks at McGregor on Damages itself, the seminal practitioner work on damages, there is even now far more emphasis on quantification of damages than there is on the requirement of the proof of loss, with the latter being the subject of only a few short paragraphs. Moreover, one can see the same reluctance to limit loss under one contract by reference to gain under another within sales law itself, quite independently of the link between a cargo claim and sales recovery. Thus, in Bence Graphics v Fasson [1998] QB 87, Auld LJ held that a sub-sale is not normally taken into account because, unless the parties actually knew about the sub-sale, then it would be wrong to award damages on the basis of a difference in price between the actual contract and the market price. His Lordship’s reasoning was based on the logic underpinning the two limbs in Hadley v Baxendale: a party can only recover for losses that are not ordinarily foreseeable if the party in breach has special [i.e. actual] knowledge of such circumstances. However, the question of remoteness in Hadley v Baxendale addresses whether losses were beyond the reasonable contemplation of the parties (which is inapplicable) not whether gains negate or limit reasonably contemplated (i.e. first limb) losses. Hadley restrictions, therefore, simply fail to address the point here being examined: the principles in Hadley are, to put it simply, irrelevant to the res inter rule.
There is some authority supporting the views we have put forward in this article. In Oxus Gold v Templeton [2007] EWHC 770 (Comm), Landley J remarked that he was, unfortunately, bound by the dictates of the highest authority favouring the res inter rule, despite having “the irrelevant and presumptuous thought that there is not much to be said for a law of damages as absolutist as” [80] that carved out by Agius and Rodocanachi, from which the res inter rule in cargo claims stems. Similarly, the recent decision in the The Fehr Heaven does (at least indirectly) question whether title to sue plus breach/damage is sufficient to establish recoverable loss. In that case, the question arose as to whether the claimant’s right to sue arose by virtue of an assignment of rights, or by virtue of s.2(4) of the Carriage of Goods by Sea Act 1992. Having established that the claimant did have the right to sue under s.2(4), the arbitrators determined that the claimant could recover, irrespective of whether they could also claim against the buyer or seller. On appeal, the court criticised the arbitrators’ award on the basis that, “the tribunal does not appear to have distinguished between the issue of title to sue and the issue of whether [the claimant] suffered a loss.”
This distinction, as we have tried to establish here, is fundamental and has been lost sight of in most cargo claim cases. If courts elide the question of title to sue and/or breach/damage with proof of loss (thereby dismissing the relevance of the sale contract out of hand) this ignores two principles that would otherwise seem unremarkable. First, the carriage cases ignore the principles of “justice, reasonableness and public policy” upon which Lord Reid based the res inter rule back in 1970 in Parry v Cleaver, as subsequently limited and refined in Swynson by the Supreme Court. Secondly, allowing double-recovery for the same “loss” as it so obviously does, the res inter rule in cargo claims flies flagrantly in the face of the compensatory principle so carefully stated by the House of Lords in the Golden Victory, a case, it is repeated with more than a sense of irony, is a carriage case regarded as fundamental in general contract law. A claimant should not recover more than its actual loss: to do so would be to put the claimant not in the same position as it would have been had the contract been performed properly (the compensatory principle) but in a better position – and the law should not allow windfalls.
Conclusion
Applying Swynson v Lowick, there can be no principled commercial reason why a carrier should be liable to a cargo claimant who has been compensated under a sale contract where recovery under that contract has, to use Swynson language not been paid out of its own pocket or through a benevolent act. Recovery under a sale contract falls into neither of those Swynson examples of a proper application of the res inter rule. Recovery under a sale contract is therefore, in our view, not ‘res inter’ and should be factored into any recovery from the carrier in the cargo claim. To separate sales recovery from the cargo claim offends in the most egregious manner against the compensatory principle: it allows the cargo claimant to recover more than it lost.
If this is right – and we think it must be - those acting for carriers and their Clubs in the future should raise the following questions in preparing their defence, the next time they defend their interests in a cargo claim: (1) has the cargo-claimant already recovered under the sale contract; and (2) what was the nature of that recovery? If the answers to those questions are that the payment was the result of an insurance payout for which the claimant had in any event paid through its premium or of a benevolence, then that payment would indeed be res inter and ought not to be factored into the cargo claim. In all other cases, though, payments that were received would not be res inter and should therefore be factored into the cargo claim. This would not only bring cargo claims into alignment with general principles of compensation for losses caused by breaches of contract; it would also doubtless reassure carriers and their Clubs that they are not providing cargo-interests with an unjustified windfall.
Driving this argument home is likely to be a hard and long battle, given the longevity of the res inter rule in cargo claims. For the right case, however, it may well be worth taking the question with which we started this article to the Supreme Court.
Professor Charles Debattista
Francis Hornyold-Strickland