Marc Rich & Co AG v Bishop Rock Marine Co Ltd [1995] UKHL 4

House of Lords

Between

Marc Rich & Co AGAppellant

Bishop Rock Marine Co LtdRespondent

Before

Lord Keith of Kinkel

Date 6 July 1995

It is Ordered and Adjudged. by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal of the 3rd day of February 1994 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered. That the Appellants do pay or cause to be paid to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.

Cler: Parliamentor

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

MARC RICH & CO. A.G. (BODY CORPORATE) AND OTHERS (APPELLANTS)

BISHOP ROCK MARINE CO. LTD. (BODY CORPORATE)

AND OTHERS (RESPONDENTS)

ON 6 JULY 1995

Lord Keith of Kinkel Lord Jauncey of Tullichettle Lord Browne-Wilkinson Lord Lloyd of Berwick Lord Steyn

LORD KEITH OF KINKEL

My Lords,

For the reasons given in the speech to be delivered by my noble and learned friend Lord Steyn, which I have read in draft and with which I agree, would dismiss this appeal.

LORD JAUNCEY OF TUlLLICHETTLE

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Steyn. For the reasons he gives I too would dismiss the appeal.

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LORD BROWNE-WILKINSON

My Lords,

For the reasons to be given in the speech of my noble and learned friend Lord Steyn I would dismiss the appeal.

LORD LLOYD OF BERWICK

My Lords.

On 20 February 1986 the Nicholas H was in the course of a loaded voyage from South America to Italy when a crack appeared in the vessel's hull. On 22 February she anchored off San Juan, Puerto Rico, where further cracks developed. On 25 February Mr. J. Ducat, a non-exclusive surveyor employed by Nippon Kaiji Kyokai ("N.K.K.") was called in by the master, at the instigation of the United States Coastguards. He recommended permanent repairs, for which, as it happened, facilities were available locally. But the owners baulked at this. It would have involved dry docking, with consequential discharge and reloading of the cargo. Mr. Ducat must have been persuaded to change his mind. For on 2 March 1986 he pronounced that the vessel was fit to proceed on her intended voyage after completing some temporary repairs to the shell plating. She sailed the same day. On 3 March the welding in way of the temporary repairs cracked. On 9 March the vessel sank. Fortunately there was no loss of life.

For present purposes we are asked to assume that the loss of the ship and cargo was the result of Mr. Ducat's negligence in altering his initial recommendation, and permitting the vessel to continue on her voyage without effecting permanent repairs. We are also asked to assume(1) that the damage which the plaintiff cargo owners have suffered is physical damage to their cargo, and

(2) that this damage should have been foreseen as the likely consequence of Mr. Ducat's negligence. Nevertheless, the Court of Appeal has held that N.K.K. are not liable for Mr. Ducat's negligence, on the ground that he owed no duty of care to the owners of the cargo. On the face of it this would seem a strange result, unless classification societies are entitled to claim immunity in tort on policy grounds, like the barrister in Rondel v. Worsley

[1969] 1 AC 191

, or the police officer in Hill v. Chief Constable of West Yorkshire

[1989] AC 53

. But Mr. Aikens Q.C. for N.K.K., specifically disclaimed any such general immunity. He invited the House to approach the appeal on the facts of this particular case, as Hirst J. had done at first instance, and apply ordinary, well established principles of law. Other claims might be brought against classification societies hereafter, which would have to be decided on their own facts; they were, he said, of no assistance in

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deciding the present case. I am for my part well content to accept Mr. Aikens' invitation. I start, therefore, with the judgment of Hirst J.

The judgment of Hirst J.

Mr. Aikens' basic argument before the judge was that shipowners are under a non-delegable duty to take care of the cargo on board, and that there was, therefore, no need for, or even room for, the imposition of a further duty on classification societies: (see [1992] 2 Lloyd's Rep. 481.) Mr. Aikens relied on Riverstone Meat Co. Pty. Ltd. v. Lancashire Shipping Co. Ltd. [1961] A.C. 807. In that case cargo was damaged in the course of a voyage by the failure of a fitter employed by ship repairers to secure the inspection cover on a storm valve. The cargo owner sued the shipowner in contract, and recovered. It was held to be no defence that the repairs had been carried out by a reputable independent contractor. Mr. Aikens makes the point that it was never even suggested in this House that the owners of the cargo might have had a claim against the ship repairers in tort.

Hirst J. was unable to see the relevance of this consideration; and I am bound to say that I share his difficulty. The existence of an alternative remedy in tort would not have influenced the result in any way. Why, then, should it have been mentioned?

The judge went on to quote extensively from the many recent decisions in the modern law of negligence in the Court of Appeal, Privy Council and House of Lords. Some, like Grant v. Australian Knitting Mills Ltd. [1936] A.C. 85 and Mobil Oil Hong Kong Ltd. v. Hong Kong United Docklands Ltd. (the "Hua Lien") [1991] 1 Lloyd's Rep. 309, were cases of physical damage to person or property. Others, like Caparo Industries Plc. v. Dickman [1990] 2 A.C. 605 and Murphy v. Brentwood District Council

[1991] 1 AC 398

, were cases of pure economic loss.

The judge held, correctly, that in addition to the assumed foreseeability of physical damage, it was necessary for the plaintiffs to establish the necessary close relationship between the parties, or degree of proximity, in order to establish a duty of care. As to this, the judge said ([1992] 2 Lloyd's Rep. 481, 499):

"On the assumed facts of the present case, for the reasons given by Mr. Gross, it seems to me that there was a very close degree of proximity between Mr. Ducat and the plaintiffs. Having first recommended that the vessel should not leave port without having undergone permanent repairs, knowing that she was fully loaded and therefore knowing that, if it was dangerous for her to go to sea in that condition, the goods were just as likely to be damaged or lost as the vessel itself, he later recommended that she sail after only temporary repairs had been done. Although it is true, as Mr. Aikens submits, that Mr. Ducat had no actual direct physical control over the vessel in

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the sense that he could bar her sailing, the sanction imposed by his first report rendered it highly probable that the shipowner would not sail (as, in fact, occurred) in view of the dire effects that this would have on his insurance and on other common commercial arrangements such as a ship mortgage.

"Conversely, the withdrawal of this sanction in the second report would, as Mr. Ducat must have appreciated, almost certainly have the opposite effect, since the shipowner would almost inevitably accept the recommendation that he should set sail, which was fully in accord with the commercial object of his voyage. The defects recurred almost immediately after the vessel had sailed from San Juan, and the vessel sank in the very early stages of her voyage to Europe."

For reasons which I will develop later, I find myself in complete agreement with the judge that the degree of proximity in this case was very close indeed.

The judge then turned to consider whether it was "fair, just and reasonable" to impose on Mr. Ducat a duty of care. He did not consider that there were any considerations of public policy which militated against such a duty. As I have already said, Mr. Aikens does not suggest that the judge was wrong in that respect. He accepts that whatever might be the position of classification societies in other cases N.K.K. were not entitled to rely on any immunity on the facts of this case.

The judge then considered the other circumstances of the case, and in particular the absence of any means of limiting N.K.K.'s liability in tort. He held that this might be a relevant factor if he were imposing on classification societies some generalised duty of care towards cargo owners and other parties across the board. But that was not this case. The judge was careful to limit his decision to the assumed facts. So limited, he could see nothing unfair or unreasonable or unjust in making N.K.K. liable in full for the damage caused by Mr. Ducat's negligence. I quote a paragraph from his judgment to illustrate his approach ([1992] 2 Lloyd's Rep. 481, 500):

"Finally, so far as the 'floodgates' argument is concerned, I do not accept, since this is a 'one-off decision, that it will open the way, as Mr. Aikens suggests, to the imposition of a general duty of care to owners of cargo, however long after the offending survey on the following voyage or on subsequent voyages. On the contrary, in my judgment the proximity test will act as an adequate safeguard against any such extravagant consequences."

Hirst J. concluded his judgment with a particularly apt quotation from the judgment of Lord Wright in Grant's case

[1936] AC 85

, 107:

"Mr. Greene further contended on behalf of the manufacturers that if the decision in Donoghue's case [1932] AC 562 , 591, were extended

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even a hair's-breadth, no line could be drawn, and a manufacturer's liability would be extended indefinitely. He put as an illustration the case of a foundry which had cast a rudder to be fitted on a liner: he assumed that it was fitted and the steamer sailed the seas for some years: but the rudder had a latent defect due to faulty and negligent casting, and one day it broke, with the result that the vessel was wrecked, with great loss of life and damage to property. He argued that if Donoghue's case were extended beyond its precise facts, the maker of the rudder would be held liable for damages of an indefinite amount, after an indefinite time, and to claimants indeterminate until the event. But it is clear that such a state of things would involve many considerations far removed from the simple facts of this case. So many contingencies must have intervened between the lack of care on the part of the makers and the casualty that it may be that the law would apply, as it does in proper cases, not always according to strict logic, the rule that cause and effect must not be too remote: in any case the element of directness would obviously be lacking. Lord Atkin deals with that sort of question in Donoghue's case where he refers to Earl v. Lubbock

[1905] 1 KB 253

, 259: he quotes the commonsense opinion of Mathew L.J.:

'It is impossible to accept such a wide proposition, and, indeed, it is difficult to see how, if it were the law, trade could be carried on.'

"In their Lordships' opinion it is enough for them to decide this case on its actual facts."

Once again, I find myself in agreement with the judge. His reasoning is clear, and the good sense of his conclusion is, to my mind, transparent.

The judgments of the Court of Appeal - "fair, just and reasonable"

The leading judgment was given by Saville L.J. There were two grounds for his decision. The main ground was that the bill of lading contract under which the cargo was being carried incorporated the Hague Rules. The Hague Rules "create an intricate blend of responsibility and liabilities, rights and immunities . . . indemnities and liberties". It would not be fair and just to impose on a classification society an identical duty to that imposed on shipowners "but without any of the balancing factors, which are internationally recognised and accepted:" [1994] 1 W.L.R. 1071, 1089. Since the primary responsibility for looking after the cargo lay on the shipowners under the contract of carriage, there was no need to impose a like duty in tort on N.K.K. I quote the concluding sentence of Saville L.J.'s judgment, at p. 1082:

"The balance of rights and duties between the principal parties (cargo owners and shipowners) has been settled on an internationally acceptable basis and I can see no justice or good reason for adding to or altering this by imposing on the society a like duty to that owed by

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the shipowners, but without any of the checks and balances which exist in the present regime."

The second ground for Saville L.J.'s decision was that the relationship between the cargo owners and N.K.K. was not sufficiently close to support a duty of care.

Balcombe L.J. doubted whether "fair, just and reasonable" added anything to the test of proximity. But if it did he agreed with Saville L.J. on both grounds: [1994] 1 W.L.R. 1071, 1088-1089.

Mann LJ. held, at p. 1087, that it was unfair, unjust and unreasonable that the plaintiffs should have an unlimited claim in tort against N.K.K., when they had a contractual claim against the shipowners for breach of a non- delegable duty. In his view, the judge fell into error by failing to take account of the shipowner's position.

As to the first of Saville L.J.'s grounds, I have to say that in my opinion the Hague Rules have little if anything to do with the case. It is true that the cargo happened to be carried under bills of lading which incorporated the Hague Rules, and that much of the world's seaborne traffic, especially in the liner trades (which this was not), is carried on similar terms. But the cargo might just as well have been carried under a charterparty, in common with much of the world's bulk trade. If it had been, then "the intricate blend of liabilities and responsibilities, rights and immunities" contained in the Hague Rules would have had nothing to say on the matter, for the simple reason that the Hague Rules do not apply to charterparties: see Article V.

It is of course true that Articles III and IV of the Hague Rules, are frequently incorporated into voyage charterparties by a clause paramount, or otherwise. But this is by agreement between the parties, and not by force of any international convention. In this very case the voyage charterparty dated 20 January 1986 (Stemmor Charter Party (1983)) between the plaintiffs Marc Rich and Co. A.G. and the second defendants does not incorporate the Hague Rules. It provides, by typed insertion, that bills of lading issued under the charterparty should incorporate the Hague Rules - a very different thing. If therefore the relevant contract of carriage in this case had been contained in the charterparty, and not the bills of lading, as would have been the case if Marc Rich had been the receivers as well as the shippers of the cargo, the irrelevance of the Hague Rules would have been apparent.

It would make nonsense of the law if a surveyor in the position of Mr. Ducat owed a duty of care towards cargo if the contract of carriage were contained in a charterparty, which does not incorporate the Hague Rules, but not if it were contained in a bill of lading which does.

But even if one assumes that all carriage of goods by sea were subject to the Hague Rules, I have difficulty in seeing why the balance of rights and

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liabilities between shipowners and cargo would be upset by holding the defendants liable for the consequence of Mr Ducat's negligence. As Mr Aikens correctly says in paragraph 18 of his written submissions:

"The Hague Rules have nothing to say on the issue of a duty of care on parties other than cargo owners and carriers: why should they?"

. There could be no question of the defendants claiming an indemnity from the shipowners on the assumed facts of this case, any more than the negligent architect could claim an indemnity from the building owners in Clay v. A.J. Crump & Sons Ltd. [1964] 1 Q.B. 533; and even if a claim for an indemnity could be got on its feet, it would not have increased the shipowners total liability unless the circumstances were such as to deprive the shipowners of their right to limit.

Then it was said that if claims such as the present became at all frequent, the classification societies might seek to pass on the cost of insurance to shipowners. I return later to the question of insurance in another context. Here it is enough to say that there was no evidence one way or the other as to the cost of the insurance, or whether it would be passed on. It is mere guess work. But having regard to the prevailing competition among classification societies, it by no means follows that the cost of insurance would be passed on to shipowners; and even if it was, I doubt if it would be a significant factor in upsetting the balance of rights and liabilities under the Hague Rules.

With great respect, therefore, the "intricate regime" of the Hague Rules to which all three judges in the Court of Appeal referred, has nothing to do with whether it is fair, just and reasonable that Mr. Ducat and his employers should be liable to cargo for their assumed negligence. The irrelevance of the Hague Rules is underlined by the further consideration that the limitation provisions on which the shipowners relied to limit their liability, and which is said to contrast with the unlimited liability sought to be imposed on the N.K.K., is not derived from the Hague Rules at all, but from section 503 of the Merchant Shipping Act 1894, shortly to be re-enacted as section 185 of and Schedule 7 to the Merchant Shipping Act 1995.

If therefore, as I think, the incorporation of the Hague Rules in this particular contract of carriage must be left out of account, the Court of Appeal's judgment on this part of the case can only be supported if the mere existence of a contract of carriage under which the shipowners can limit their liability, is inconsistent with, or militates against, the imposition of unlimited liability on a third party in tort.

But why should this be so? This was surely the very error which was exposed in Donoghue v. Stevenson

[1932] AC 562

, and Grant v. Australian Knitting Mills Ltd.

[1936] AC 85

. Mr. Aikens sought to distinguish Grant's case on the grounds that

"there was no internationally recognised code ... for regulating the rights and duties of the party primarily responsible for taking care,

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which in that case the House of Lords clearly considered was the manufacturer himself": see, per Saville L.J., at p. 1081B.

I accept, of course, that there is no internationally recognised code governing the manufacture of underpants. But for the reasons already mentioned, I do not regard this as a relevant consideration in the case of shipowners. More important, I am not sure what is meant by saying that the shipowners are "primarily" responsible for taking care, and that this militates against the need to impose a similar duty on N.K.K. Of course the shipowners are primarily - indeed solely - responsible for getting the cargo to its destination; and of course the shipowners must take proper care of the cargo as bailees, subject to the terms of any contract of carriage between the parties. But I am unable to see why the existence of the contract of carriage should "militate against" a duty of care being owed by a third party in tort. The function of the law of tort is not limited to filling in gaps left by the law of contract, as this House has recently re-affirmed in Henderson v. Merrett Syndicates Ltd. [1994] 3 W.L.R. 761, 787, per Lord Goff of Chieveley. The House rejected an approach which treated the law of tort as supplementary to the law of contract, i.e. as providing for a tortious remedy only where their is no contract. On the contrary: the law of tort is the general law, out of which the parties may, if they can, contract.

In Adler v. Dickson

[1955] 1 QB 158

, the plaintiff was injured when boarding a ship due to the negligence of the master and boatswain. Her ticket excluded all liability on the part of the company. So she sued the master and boatswain in tort. It was held by the Court of Appeal that she could recover. Jenkins L.J. said, at p. 186:

"If the contract with the company had contained no exempting provisions, the plaintiff would, as I understand the law, have had separate and distinct rights of action (a) against the company for breach of contract or, alternatively, in tort, on the principle of 'respondeat superior,' and (b) against the defendants as the persons actually guilty of the tortious acts or omissions which caused the damage. The plaintiffs right of action against the company is clearly taken away by the exempting provisions of the contract, but I fail to see how that can have the effect of depriving her also of her separate and distinct right of action against the defendants as the actual tortfeasors."

The judgment of Jenkins L.J. was adopted and approved by the High Court of Australia in Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. [1956] 1 Lloyd's Rep. 346. In that case the tortfeasor was not the servant of the shipowners, as in Adler v. Dickson, but an independent contractor. The facts were that the plaintiffs' goods were in course of carriage under a bill of lading which incorporated the Hague Rules. After

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discharge, but before delivery, they were damaged by the negligence of a stevedore. Fullagar J. said, p. 364:

"The stevedore is a complete stranger to the contract of carriage, and it is no concern of his whether there is a bill of lading or not, or, if there is, what are its terms. . . . If the stevedore negligently soaks cargo with water and ruins it, I can find neither rule of law nor contract to save him from the normal consequences of his tort."

Midland Silicones Ltd. v. Scruttons Ltd.

[1962] AC 446

, is another case involving stevedores. The facts were in all respects similar. Viscount Simonds said at p. 472, that he agreed with Fullagar J.'s judgment, and with every line and every word of it. It is true that in Midland Silicones v. Scruttons Ltd. and Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd., the damage occurred after the discharge of the cargo. But can it be supposed that the result would have been different if the damage had occurred in the course of discharge? Clearly not. The stevedores would have been under the same duty of care, notwithstanding the "primary" responsibility of the shipowners under the Hague Rules to carry and discharge the cargo with due care. It would have been hopeless to argue that the stevedores should not be liable on the ground that it would not be "just, fair and reasonable" to impose on them a duty of care in tort with unlimited liability, having regard to the shipowners' limited liability under the Hague Rules or the Brussels Convention of 1957 or the London Convention of 1976.

Mr. Aikens argued that Adler v. Dickson, Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. and Midland Silicones Ltd. v. Scrutton Ltd. can all be distinguished on the ground that they are cases of direct physical or personal injury. But what does this mean? Take the case of shiprepairers. Mr. Aikens was at first hesitant to concede that shiprepairers called in by the shipowners to make the ship seaworthy owed any duty of care to the cargo on board. But in the end he accepted that this must be so. If a fitter employed by shiprepairers negligently leaves a tap on, and the cargo is soaked, presumably the damage is direct, and his employers would be liable. But if instead he negligently fails to secure an inspection cover, and a week later sea water enters the hold, and damages the cargo, and the vessel sinks with loss of life, is it to be said that the damage is indirect, and that the shiprepairers escape liability because the "primary" responsibility to make the ship seaworthy is on the shipowners? If a delay of a week means that the damage is indirect, then presumably the injury suffered by the pursuer in Donoghue v. Stevenson

[1932] AC 562

was also indirect, and the defenders should have succeeded. The question in every case must surely be not whether the physical damage is direct or indirect, but whether the negligence of the manufacturer or the stevedores or the shiprepairers caused the damage.

How then does the position of a surveyor, called in by shipowners because the vessel is leaking, differ from that of the shiprepairer ? The answer

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is that it differs not at all. If it is fair, just and reasonable to hold a shiprepairer liable to an unlimited extent for damage to cargo on board caused by his negligence, even though the damage does not occur until after the vessel has sailed, why should it not be fair, just and reasonable in the case of a surveyor? Suppose in the case of the inspection cover, the surveyor negligently tells the fitter that four bolts are sufficient to secure the cover, instead of the usual six, how could it be fair, just and reasonable that the surveyor should not be liable? On what principle would the fitter be liable in such circumstances, when he acts unadvised, but not the surveyor who advises him? No "coherent system of law" to use the language of Sir Donald Nicholls V.-C. in White v. Jones [1993] 3 W.L.R. 730, 740, should permit such a result.

It follows that I cannot share the view of the Court of Appeal that the existence of a contract of carriage between the cargo owners and the shipowners "militates against" the liability of the surveyor in tort. To my mind the existence of the contract is as irrelevant as is the fact that in this particular case it happened to incorporate the Hague Rules.

The judgments of the Court of Appeal - proximity

I now aim to the second of the two grounds on which Saville L.J. based his decision, namely, that the relationship between N.K.K. and the cargo was not sufficiently close to support a duty of care. It is said that the cargo owners were not even aware that Mr. Ducat had been called in, and could not therefore have relied on anything which he did or failed to do.

In considering proximity, it is convenient to start with a Guidance Note prepared by N.K.K. for the use of their surveyors. The opening sentence reads:

"N.K.K. was founded in 1899 with the purpose of promoting the safeguard of life and property at sea."

One would find a similar statement in the rules of most classification societies. So far as safeguarding life is concerned, it would seem almost self-evident that Mr. Ducat owed a duty of care towards the members of the crew. He knew that their lives would be at risk if he allowed the ship to sail in an unseaworthy condition. It is true that he had no legal right to stop the ship sailing. But his de facto control was absolute. If he had maintained his original recommendation, and not changed his mind, it is inconceivable that in practice the vessel would have sailed. Mr. Aikens argued that de facto control was not sufficient to found the necessary proximity. I disagree. I find it difficult to imagine a closer, or more direct relationship, than that which existed between Mr. Ducat and the crew. It calls to mind the example of the negligent garage mechanic given by Lord Devlin in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, 516:

"A defendant who is given a car to overhaul and repair if necessary is liable to the injured driver (a) if he overhauls it and repairs it negligently and tells the driver it is safe when it is not; (b) if he

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overhauls it and negligently finds it not to be in need of repair and tells the driver it is safe when it is not and (c) if he negligently omits to overhaul it at all and tells the driver that it is safe when it is not. It would be absurd in any of these cases to argue that the proximate cause of the driver's injury was not what the defendant did or failed to do but his negligent statement on the faith of which the driver drove the car and for which he could not recover."

Mr. Aikens was inclined to accept that Mr. Ducat owed a duty of care to the crew, although he made no formal concession to that effect.

What about the cargo? In some ways the relationship between Mr. Ducat and the cargo was even closer. For it is a universal rule of maritime law - certainly it is the law of England - that ship and cargo are regarded as taking part in a joint venture. This is the basis on which the whole law of general average rests. This is why, if the temporary repairs at San Juan had been successful, and if the voyage had been completed in safety, the cargo would have had to contribute to the cost of the temporary repairs under Rule XIV of the York Antwerp Rules. In Morrison Steamship Co. Ltd. v. Greystoke Castle (Cargo Owners) [1947] A.C. 265, the facts were that the Cheldale and the Greystoke Castle were in collision off the coast of South Africa. The Cheldale sank, and the Greystoke Castle put into Durban as a port of refuge. There she incurred general average expenditure amounting to $33,127, of which cargo's proportion was $22,802. In proceedings between the two vessels the Cheldale was held one-quarter to blame, and the Greystoke Castle three-quarters. The owners of the cargo on board the Greystoke Castle then commenced proceedings against the owners of the Cheldale claiming, inter alia, the amount which they had had to contribute in general average. The claim succeeded. It was submitted on behalf of the defendants that the plaintiffs' only right was to stand in the shoes of the carrying ship, and that they had no right of direct recovery against the owners of the colliding ship to recover their general average contribution. This argument was emphatically rejected. Lord Porter said, at p. 294:

"Crews' wages, pilotage fees and the cost of feeding the crew [the subject of the general average expenditure] are no doubt primarily ship's liability and it does not seem possible to assert that all the interests concerned are directly liable to pay the crew or pilot once the general average act has been done and general average expenditure is incurred. It is more consistent with the realities of the case to hold that the shipowner is directly liable to pay those whom he employs, but nevertheless in incurring the debt and making payment is acting not only for the ship but also on behalf of all the interests concerned. ... So in the present case in my view the owners of the Greystoke Castle pledged their own credit as principals to answer for the general average expenditure but yet acted as agents for the contributories including the respondents in incurring the expense. The expense being

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thus incurred for the respondents, they can claim against the wrongdoer to make good their loss which to the extent of one-quarter flows from the wrongful act of the Cheldale ..." [my emphasis]

There are repeated references in Lord Porter's speech to ship and cargo being engaged on a joint venture. At p. 297, he said:

"A further example of the fact that, because of their close connection, ship and cargo are dealt with on the same principle is to be found in the fact that innocent cargo carried on the ship which shares the blame for a collision can recover against the other ship not its whole damages but only that proportion which the carrying ship can recover against the other ... In the case of carriage of goods by sea a general average act is one undertaken to preserve the various interests engaged in the joint adventure and to enable it to be carried to a successful conclusion. Expenditure so incurred is in that sense incurred to preserve those interests, viz., the ship's safety and carrying capacity, the cargo's preservation and safe arrival, and the earning of the freight." [my emphasis]

The principle established in Greystoke Castle is thus directly relevant to the present case. When the Master called in Mr. Ducat, and thereafter incurred expenditure for the common safety, he was acting as much in the interests and on behalf of the cargo as of the ship. It seems almost impossible to say, therefore, that while Mr. Ducat owed a duty of care to the ship, he owed no duty of care to the cargo on the ground that the relationship between the parties was insufficiently close. The fact that the cargo owners were unaware that Mr. Ducat had been called in is quite beside the point.

So, with great respect, I find that I cannot agree with the second ground of decision in the Court of Appeal. To my mind the necessary element of proximity was not only present, but established beyond any peradventure. I would only add at this point that if concern is felt that a decision in favour of the cargo owners would open a wide field of liability, I would reply "not so". There is an obvious, sensible and readily defensible line between the surveyor in the present case, where the cargo was on board, and the joint venture was in peril, and a surveyor called in to carry out a periodic survey. Hirst J. confined his decision to the facts of the case. He was right to do so. Mr. Aikens did not suggest otherwise.

Other considerations

I now come back to "fair, just and reasonable" and consider various other points made in argument before your Lordships.

First, we were informed that there has never yet been a successful claim against a classification society in tort. I do not regard this as significant. A similar argument was advanced in Owners of the Motor Vessel

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Tojo Maru v. N.V. Bureau Wijsmuller [1972] A.C. 243, where it was held by this House for the first time that salvors were liable for damage caused by the negligence of their employees, even though the salvage operation was successful. The point was described by Lord Morris of Borth-y-Gest at p. 272, as having far reaching consequences for salvors and shipowners alike. But the novelty of the point was brushed aside.

Next it was said that it would not be fair, just and reasonable as between shipowners and the classification society that the classification society should incur unlimited liability in tort, in contrast to shipowners who are entitled to limit under the equivalent of section 503 of the Merchant Shipping Act 1894. I have already touched on this point. A similar point arose in the Tojo Maru. One of the questions in that case was whether salvors were entitled to limit their liability under section 503. It was held that they were not. Lord Reid said, at p. 270:

"I am bound to say that I have some sympathy with the respondents on the issue of limitation of liability. But a court must go by the provisions which have been agreed and enacted. If the special position of salvors was unforeseen, then we must await alteration of those provisions if those concerned see fit to make some alteration."

Four years later, in 1976, the limitation provisions were extended to cover salvors. It was never suggested in the Tojo Maru that the inability of salvors to limit their liability was a ground for holding them immune from the consequences of their negligence. Nor was any such suggestion made in Adler v. Dickson

[1955] 1 QB 158

or Midland Silicones Ltd. v. Scruttons Ltd.

[1962] AC 446

Then it was pointed out that classification societies are charitable non- profit making organisations, promoting the collective welfare and fulfilling a public role. But why should this make any difference? Remedies in the law of tort are not discretionary. Hospitals also are charitable non-profit making organisations. But they are subject to the same common duty of care under the Occupier's Liability Acts 1957 and 1984 as betting shops or brothels. Take again the position of salvors. They also fulfil an important public role. It was argued in the Tojo Maru that salvors should receive every proper inducement on grounds of public policy, and that to hold them liable for the negligence of their servants in the course of salvage operations would only serve to discourage their beneficial activities. This is very similar to the argument advanced in the present case. It did not succeed in the Tojo Maru, and should not, I think, succeed here. It is not as if N.K.K. are unable to afford the cost of insurance. It is the third largest classification society. A.B.S., another non-profit making classification society, had a net income of $11m. in 1990 on operating revenues of $122m: see Lux, Classification Societies, (1993), p. 53. In paragraph 21(c) of his statement, Mr. Mitsuo Abe, Executive Vice-President of N.K.K., doubts whether N.K.K. would be

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able to survive if they were held liable for claims such as the present. I have to say that I view this assertion with a good deal of scepticism.

Lastly, it is said (although this was not reflected in Mr. Aikens' written submission or his oral argument) that to impose liability on classification societies would involve an extra layer of insurance, and that this would be wasteful and inconvenient. There was no evidence that classification societies do not already insure. The point is simply not mentioned in Mr. Mitsuo Abe's statement. Traditionally the courts have regarded the availability of insurance as irrelevant to the question whether a duty of care should be imposed: see Markesinis and Deakin Tort Law, 3rd ed., p. 114. Even if this traditional view is gradually being displaced, it cannot be right that the courts should reach conclusions on the availability of insurance, or the impact of imposing a fresh liability on the insurance market generally, without proper material. In Caparo Industries Plc. v. Dickman [1989] Q.B. 653, it was argued in the Court of Appeal that auditors, if held liable in negligence to an individual shareholder would find it difficult to obtain professional indemnity cover, and that the cost, which would be high, would have to be passed on. Bingham L.J., at p. 689, found it hard to assess this argument in the absence of any evidence or inquiry. Taylor L.J. said, at p. 703:

"It is contended that auditors would find it difficult and cripplingly expensive to obtain insurance cover. It is even suggested accountants might decline to be appointed as auditors. No evidence was adduced on this aspect of the case and if I am right about the difficulties and disincentives affecting possible claimants the insurance problem should not be insurmountable."

I agree with Bingham L.J. and Taylor L.J. that the court should be wary of expressing any view on the insurance position without any evidence on the point, and should not speculate as to the effect, if any, of an extra layer of insurance on the cost of settling claims. For what it may be worth, I would for my part doubt whether it would make much difference. More generally, I suspect that a decision in favour of the cargo owners would be welcomed by members of the shipping community at large, who are increasingly concerned by the proliferation of sub-standard classification societies; see Lux op. cit. page viii.

Conclusion

The overriding consideration in the present case is that the cargo owners, as we are asked to assume, have suffered physical damage to their cargo, and such damage was caused by Mr. Ducat's negligence, for which N.K.K. are responsible on ordinary principles of respondeat superior. Since the celebrated formulation of Lord Wilberforce in Anns v. Merton London Borough Council

[1978] AC 728

, 751, a series of important cases in the Court of Appeal and House of Lords have signalled the "retreat from Anns", culminating in the decision of the House in Murphy v. Brentwood District

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Council

[1991] 1 AC 398

. Almost all these decisions have concerned claims to recover damages for economic loss, unassociated with physical damage or personal injury. The most important exception was the Hua Lien [1991] 1 Lloyd's Rep. 309. In that case Lord Brandon of Oakbrook said, at p. 328:

"In their Lordships' view, however, the essential feature of the present case is that the damage sued for is not purely economic loss but ordinary physical damage to property. It follows that the decisions relating to claims for purely economic loss to which their Lordships have referred have no relevance to the present case."

The concept of proximity, and the requirement that it should be fair, just and reasonable to impose a duty of care on the defendant in the particular circumstances of the case, have been developed as a means of containing liability for pure economic loss under the principles stated in Donoghue v. Stevenson

[1932] AC 562

. At the same time, and by a parallel movement in the opposite direction, the House has in two recent decisions reaffirmed liability for economic loss based on the principle of assumption of responsibility as expounded by the House in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.

[1964] AC 465

, and going back beyond that decision to Nocton v. Lord Ashburton

[1914] AC 932

. None of these difficulties arise in the present case. We are not here asked to extend the law of negligence into a new field. We are not even asked to make an incremental advance. All that is required is a straightforward application of Donoghue v. Stevenson. The ground is already marked out by cases such as Haseldine v. C.A. Daw & Son Ltd. [1941] 2 K.B. 343, Clay v. A.J. Crump & Sons Ltd. [1964] 1 Q.B. 533, Voli v. Inglewood Shire Council (1963) 110 C.L.R. 74 and Muirhead v. Industrial Tank Specialities Ltd.

[1986] QB 507

, 532. In physical damage cases proximity very often goes without saying. Where the facts cry out for the imposition of a duty of care between the parties, as they do here, it would require an exceptional case to refuse to impose a duty on the ground that it would not be fair, just and reasonable. Otherwise there is a risk that the law of negligence will disintegrate into a series of isolated decisions without any coherent principles at all, and the retreat from Anns will turn into a rout. Having given Mr. Aikens' arguments my best consideration, I can see no good reason why, on the facts of this case, ordinary well established principles of the law of negligence should not be allowed to take effect. Accordingly, I would for my part allow the appeal, and restore the order of Hirst J.

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LORD STEYN

My Lords,

For more than a hundred and fifty years classification societies have classified merchant ships in the interests of safeguarding life and ships at sea. For this purpose classification societies attend to the building of ships in order to determine whether the ships merit classification in accordance with their standards. Classification societies also conduct periodic surveys of ships to ascertain whether the ships are entitled to retain classification. Moreover, if ships sustain damage, classification societies are called in to survey the damage and to determine what repairs must be done, and when, for the ship to retain her classification. Such surveys are called occasional surveys. Typically, the repairs may fall into one of two groups:

(a) those repairs which would prejudice the maintenance of classification if not dealt with within a specified time;

(b) those repairs which, since they do not affect seaworthiness, may be left to the owner's convenience.

While classification societies are available to render technical assistance to other parties, and sometimes do so, instructions for the survey of a vessel are given by owners. Owners are under irresistible commercial pressure to obtain and maintain a classification of their vessel. The insurance of an unclassed vessel and her cargo would not be feasible at economically justifiable rates of premium. No sensible charterer would charter such a ship. Owners are therefore in practice compelled to ensure that their vessels remain in class. For that purpose owners must enter into a contractual engagement with a classification society. The classification society will grant and maintain classification of the ship if the requirements of its own rules and regulations are met. And the classification society has in practice control over the question whether a damaged vessel, without permanent repairs, will be allowed to complete her intended voyage.

Owners have apparently never successfully sued a classification society in England or elsewhere for breach of a contractual or tortious duty in and about the performance their contractual engagement for a survey of a damaged vessel. The perceived obstacle to such a claim by owners in a case of patent damage to the hull of the vessel may be that the seaworthiness of the vessel is the primary responsibility of the owners. There may also be formidable problems of causation. See Sundance Cruises Corporation v. American Bureau of Shipping, 7 F. 3d 1077 (2nd Cir. 1993), at 1084; [1994] 1 Lloyd's Rep. 183, 211-212; International Ore & Fertilizer Corporation v. SGS Control Services Inc. 38 F. 3d 1279 (2nd Cir. 1994). That is, however, not the issue in this case and it is not necessary to express any view on it.

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In this case the question is whether a classification society owed a duty of care to a third party, the owners of cargo laden on a vessel, arising from the careless performance of a survey of a damaged vessel by the surveyor of the classification society which resulted in the vessel being allowed to sail and subsequently sinking. It is a novel question. In England no classification society, engaged by owners to perform a survey, has ever been held liable to cargo owners on the ground of a careless conduct of any survey. Your Lordships have also been informed that there is apparently no reported case in which such a duty has been recognised in any foreign court. Given the fact that surveyors of classification societies have regularly performed occasional surveys of laden vessels for over a century and a half the novel nature of the problem may not be entirely without significance. Ultimately, however, the problem must be considered in accordance with our tort law as it now stands without any a priori disposition for or against the legal sustainability of such a claim.

The casualty

In early 1986 the bulk carrier the Nicholas H loaded cargoes of lead and zinc concentrate at South American ports. The vessel loaded the cargo under bills of lading which incorporated the Hague Rules. Under two bills of lading dated 29 January 1986 the vessel loaded a cargo at Callao in Peru for carriage to a Black Sea port. Under a bill of lading dated 6 February 1986 the vessel loaded a cargo at Antofagasta in Chile for carriage to an Italian port. The vessel proceeded on her voyage. She developed a crack in her hull. The master of the vessel reported this damage to the United States Coast Guard. There was concern as to the vessel's fitness for the voyage. The U.S. Coastguard persuaded the owners of the vessel to request their classification society, Nippon Kaiji Kyokai ("N.K.K."), to perform a survey of the damage. For this purpose the vessel anchored three miles off San Juan in Puerto Rico. A surveyor acting on behalf of N.K.K. inspected the damage to the vessel while she was at anchor. On 25 March 1986 the surveyor issued a recommendation that the vessel should proceed to the port of San Juan, and undergo permanent repairs in dry-dock. That would have required the unloading of the cargo. It would have been very expensive. The owners of the vessel objected to the idea of carrying out permanent repairs at San Juan. Instead they instructed the vessel to proceed to the port of San Juan for temporary repairs. The owners sent an engineer and welder to the vessel. With the assistance of local divers they apparently carried out temporary repairs. On 3 March 1986 the surveyor of the classification society reversed his initial recommendation. Subject to the temporary repairs being further examined and dealt with to the satisfaction of an attending surveyor at the earliest opportunity after the vessel discharged her cargoes, and no later than May 1986, the surveyor recommended that the vessel be retained in class for her original voyage. That meant that the vessel could sail. On 2 March 1986 the vessel sailed. Shortly afterwards the vessel reported that the welding of the temporary repairs had cracked. Despite attempted repairs at sea the vessel

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sank a few days later. The cargo was totally lost. The value of the cargo was in excess of US$6 million.

The cargo owners sued the shipowners, the head charterers and N.K.K. in the Commercial Court. The cargo owners abandoned the claim against the charterers. They settled the claim against the owners for about US$500,000 which was the extent of the shipowners' liability having regard to the tonnage limitation applicable to the vessel: compare the Brussels Convention 1957, given the force of law in the United Kingdom by section 503 of the Merchant Shipping Act 1894 (57 & 58 vict. c. 60); now replaced by the Merchant Shipping Act 1979, section 14, giving the force of law in the United Kingdom to

article 2 of the Convention

relating to the Carriage of Passengers and their Luggage by Sea ("the London Convention"). The cargo owners pursued N.K.K. for the balance of their claim, namely a sum of the order of US$5.7 million.

The role of the classification society (N.K.K.)

While it is realistic to accept that classification societies by and large are constituted on a similar basis, and perform similar functions, it is right to describe the state of evidence as to the position and role of N.K.K. in the maritime trade. N.K.K. was founded in 1899. Its headquarters are in Tokyo. Ir is the third largest classification society in the world. It is an international ship classification society. It is a non-governmental and non-profit-making entity which is registered under Japanese law as an association or foundation "which is related to ... public interests and is not aimed at making a profit. ..." The particular purpose for which N.K.K. exists is described in its founding instrument (the Act of Endowment) as follows:

"Article 2 ... to promote the improvement and development of various matters relating to ships ... so as to safeguard the safety of life and property at sea ..."

The role of N.K.K. is therefore to promote safety of life and ships at sea in the public interest.

N.K.K. has various statutory functions. The present case does not involve the exercise of a statutory function by N.K.K.. That dimension of N.K.K.'s functions can be put to one side. N.K.K. classifies ships of any nationality. An owner who is desirous of having his ship classified by N.K.K. submits an application for N.K.K. to carry out a survey in accordance with the Rules and Regulations of N.K.K.. Ships classified by N.K.K. are entered into the published Register of Ships.

Apart from classification surveys in order to obtain initial classification, N.K.K. conducts various periodic surveys. But the present case is concerned with an occasional survey which is required inter alia when a ship has sustained damage to her hull, machinery or equipment to such an

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extent that her classification may be affected. Owners are obliged to notify N.K.K. if the vessel sustains such damage. Rule 1.1.3 of the Rules for the Survey and Construction of Steel Ships provides:

"Where any damages to hull, machinery or equipment, which affect or may affect classification (e.g. seaworthiness, stability) were sustained, the application for examination of the Surveyors is to be made by the Owners or their representatives. All repairs which may be required in order that a ship may retain her class are to be carried out under the inspection of, and to the satisfaction of, the Surveyors.

Rule 1.1.10 states:

"Where repairs are deemed necessary as a result of the survey, the Surveyor will notify his recommendations to the Owner or its representative. Upon this notification, the repair is to be made to the satisfaction of the Surveyor."

The sanction is spelt out in regulation 3.1 of the Regulations for the Classification and Registry of Ships. So far as it is material it reads as follows:

"The maintenance of class of any ship is conditional upon compliance with the requirements of the Rules for periodical, damage and other surveys. The Committee reserve the right to suspend or cancel the class of any ship or its machinery when:

The ship is not subjected to surveys for compliance with the Rules at their due date;

The ship has not been rectified in accordance with the Surveyor's recommendation;

Repair, conversion or alteration which may affect classification has been done without approval of the Committee; . . . '

There is an appeal procedure which enables an owner, who considers that a recommendation made by a surveyor is unnecessary or unreasonable, to challenge the recommendation. Subject to this qualification, a failure to deal with a recommendation will result in the suspension or cancellation of the classification of the ship.

The shape of the proceedings

The case came before the Commercial Court by way of a preliminary issue which was in the following terms:

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"Whether on the facts pleaded in the points of claim [N.K.K.] owed a duty of care to [the cargo owners] capable of giving rise to a liability in damages."

It is not necessary to examine the pleadings. In the Commercial Court, in the Court of Appeal and before your Lordships' House the outline of facts, as well as the description of the position and role of N.K.K., which I have given, were uncontroversial for the purpose of the determination of the preliminary issue. Moreover, in the Court of Appeal and on appeal to your Lordships' House, four further assumptions of fact were expressly agreed for the purpose of the determination of the preliminary issue. First, it was agreed that by reason of their proprietary interest in the cargo the plaintiffs had title to sue if the classification society otherwise owed them a duty of care. Secondly, it was agreed that it was foreseeable that lack of care by the classification surveyor was likely to expose the cargo to danger of physical damage. Thirdly, it was agreed the damage in fact suffered by the plaintiffs by reason of the loss of the vessel was physical damage to their goods. Fourthly, it was agreed that the loss of the vessel and cargo was the result of the carelessness of the N.K.K. surveyor in(a) reversing the initial recommendation in favour of immediate permanent repairs and permitting the vessel to continue on her voyage when only temporary repairs had been carried out and

(b) in failing to ensure that the repairs in fact carried out were suitable to ensure that the strength of the vessel was adequate for the voyage. In other words, on the assumption that the carelessness of the surveyor caused the loss of the cargo the question is whether in law that carelessness amounted to actionable negligence. In short, the question is simply whether in law the classification society owed a duty of care to the owners of the cargo.

The judgments at first instance and in the Court of Appeal

At first instance Hirst J. (now Hirst L.J.) concluded that on the assumed facts N.K.K. did owe the cargo owners a duty of care capable of giving rise to a liability in damages: The Nicholas H

[1992] 2 Lloyd's Reports 481

. At the risk of doing an injustice to the careful judgment of Hirst J. I would summarise it by saying that the closeness of the relationship between the N.K.K. surveyor and the owners of the cargo led him to conclude that a duty of care did arise. N.K.K. appealed. The Court of Appeal reversed the decision of Hirst J: Marc Rich & Co. A.G. v. Bishop Rock Marine Co. Ltd. [1994] 1 W.L.R. 1071. Each member of the court gave a separate judgment. Contrary to the submission on behalf of the cargo owners, each member of the court held that in tort claims for physical damage a plaintiff needs to satisfy the requirements of foreseeability and proximity as well as the requirement that the imposition of tort liability is fair, just and reasonable. But Balcombe L.J. added that he doubted whether the words "fair, just and reasonable" impose a test additional to that of "proximity."

The leading judgment was given by Saville L.J. Relying on the international code constituted by the Hague Rules, he concluded, at pp.

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1081F-1082D, it was not fair, just , and reasonable to require N.K.K. to shoulder a duty which by the Hague Rules primarily lies on shipowners. Secondly, Saville L.J. concluded that, absent any dealing between cargo interests and N.K.K., the relationship between the parties does not support the existence of care. Balcombe L.J., at p. 1089A-B, agreed with the conclusions and reasons of Saville L.J. Mann L.J., at p. 1087D, confined himself to the question whether the imposition of a duty of care on N.K.K. was fair, just and reasonable. For substantially the reasons given by Saville L.J. he concluded that N.K.K. owed no duty of care to cargo interests. The present appeal calls into question the conclusions of the Court of Appeal.

The issues

Mr. Gross Q.C., who appeared on behalf of the cargo owners, divided his attack on the reasoning of the Court of Appeal in three parts. First, he submitted that, since the claim involved foreseeable physical damage to the cargo owners' property, the additional requirements of proximity and that it is fair, just and reasonable to impose a duty of care are inapplicable. Secondly, and assuming that those requirements are applicable, he submitted that those requirements are fulfilled. He described this way of putting the case as being squarely based on the principles laid down in Donoghue v. Stevenson

[1932] AC 562

. Thirdly, and very much as a subsidiary part of his case, he submitted that N.K.K. are liable on the ground of the doctrine of voluntary assumption of responsibility as explained in Henderson v. Merrett Syndicates Ltd. [1994] 3 W.L.R. 761, per Lord Goff of Chieveley at 773D-H and 789C-791B.

The requirements in physical damage cases

Counsel for the cargo owners submitted that in cases of physical damage to property in which the plaintiff has a proprietary or possessory interest the only requirement is proof of reasonable foreseeability. For this proposition he relied on observations of Lord Oliver of Aylmerton in Caparo Industries Plc. v. Dickman

[1990] 2 AC 605

, 632C-633D. Those observations, seen in context, do not support his argument. They merely underline the qualitative difference between cases of direct physical damage and indirect economic loss. The materiality of that distinction is plain. But since the decision in Dorset Yacht Co. Ltd. v. Home Office

[1970] AC 1004

it has been settled law that the elements of foreseeability and proximity as well as considerations of fairness, justice and reasonableness are relevant to all cases whatever the nature of the harm sustained by the plaintiff. Saville L.J. explained (at 1077D-E):

"... whatever the nature of the harm sustained by the plaintiff, it is necessary to consider the matter not only by inquiring about foreseeability but also by considering the nature of the relationship between the parties; and to be satisfied that in all the circumstances it is fair, just and reasonable to impose a duty of care. Of course, . . . ,

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these three matters overlap with each other and are really facets of the same thing. For example, the relationship between the parties may be such that it is obvious that a lack of care will create a risk of harm and that as a matter of common sense and justice a duty should be imposed. . . . Again in most cases of the direct infliction of physical loss or injury through carelessness, it is self-evident that a civilised system of law should hold that a duty of care has been broken, whereas the infliction of financial harm may well pose a more difficult problem. Thus the three so-called requirements for a duty of care are not to be treated as wholly separate and distinct requirements but rather as convenient and helpful approaches to the pragmatic question whether a duty should be imposed in any given case. In the end whether the law does impose a duty in any particular circumstances depends upon those circumstances, ..."

That seems to me a correct summary of the law as it now stands. It follows that I would reject the first argument of counsel for the cargo owners.

The duty of care deriving from Donoghue v. Stevenson

In the course of their submissions counsel took your Lordships on a tour of many of the landmark cases on negligence from Donoghue v. Stevenson

[1932] AC 562

to White v. Jones

[1995] 2 WLR 187

. In this area the common law develops incrementally on the basis of a consideration of analogous cases where a duty has been recognized or desired. But none of the cases cited provided any realistic analogy to be used a springboard for a decision one way or the other in this case. The present case can only be decided on the basis of an intense and particular focus on all its distinctive features, and then applying established legal principles to it. No doubt those principles are capable of further development but, for present purposes, the applicable principles can readily be identified and require no re-examination.

The factors pointing towards the existence of a duty of care

Not surprisingly, there are substantial factors pointing in favour and against the recognition of a duty of care. Counsel for the cargo owners emphasized that except for the legal question whether a duty of care exists every element of the cargo owners' cause of action must be assumed to be satisfied. Specifically, he emphasised that it is assumed that it was foreseeable that carelessness of the surveyor in conducting the survey of the damaged vessel, or in the making of recommendations, was likely to expose the cargo actually on board the vessel to the danger of physical damage. The surveyor was brought in because there was concern for the safety of the vessel on the intended voyage. But exactly the same dangers would affect the hull and cargo on that voyage. Counsel for the cargo owners argued that in the circumstances, and in particularly in the light of the fact that the cargo was on board when the surveyor carelessly performed his professional services, the element of proximity was satisfied. Turning to the question whether it is

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fair, just and reasonable to impose a duty of care on the classification society against the cargo owners, he said that neither the contract of carriage between owners of the vessel and the cargo owners nor the contract between the owners and the classification society militated against the recognition of a legal duty of care. Given that third parties, such as cargo owners, are known in practice to rely on the recommendations of classification societies, he submitted that it is fair, just and reasonable to recognise a legal duty of care in this case. Alternatively, he argued that the reliance placed on recommendations of classification societies by third parties in maritime trade warranted an inference of an assumption of responsibility by classification societies as against owners of cargo in cases when the survey work is performed while the cargo is on board. Lastly, he said that a recognition of a duty of care in such cases would promote the safety of life, ships and cargo at sea. All these factors and arguments are relevant and must be taken into account in the eventual decision.

Other material factors

It is now necessary to examine a number of other factors in order to put the case in its right perspective, and to consider whether some of those factors militate against the recognition of a duty of care. For convenience these factors can be considered under six headings, namely

Did the surveyor's carelessness cause direct physical loss?

Did the cargo owners rely on the surveyor's recommendations?

The impact of the contract between the classification society and the shipowners.

The position and role of N.K.K..

Policy factors arguably tending to militate against the recognition of a duty of care.

Only after an examination of these features will it be possible to address directly the element of proximity and the question whether it is fair, just and reasonable to impose a duty of care.

(a) Direct physical loss?

Counsel for the cargo owners argued that the present case involved the infliction of direct physical loss. At first glance the issue of directness may seem a matter of terminology rather than substance. In truth it is a material factor. The law more readily attaches the consequences of actionable

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negligence to directly inflicted physical loss than to indirectly inflicted physical loss. For example, if the N.K.K. surveyor had carelessly dropped a lighted cigarette into a cargo hold known to contain a combustible cargo, thereby causing an explosion and the loss of the vessel and cargo, the assertion that the classification society was in breach of a duty of care might have been a strong one. That would be a paradigm case of directly inflicted physical loss. Counsel for the cargo owners referred your Lordships to Clay v. A.J. Crump & Sons Ltd. [1964] 1 Q.B. 533 by way of support for the proposition that, in this case, there was a direct infliction of loss in the relevant sense. In that case an architect assured a demolition contractor that he could safely leave a wall standing. The demolition contractor acted on this advice. The wall collapsed on a workman. The workman sued the architect in tort. It was held that the architect owed a duty of care to the workman. The architect was primarily responsible for leaving the wall in a dangerous condition. In the present case the shipowner was primarily responsible for the vessel sailing in a seaworthy condition. The role of the N.K.K. was a subsidiary one. In my view the carelessness of the N.K.K. surveyor did not involve the direct infliction of physical damage in the relevant sense. That by no means concludes the answer to the general question. But it does introduce the right perspective on one aspect of this case.

(b) Reliance

It is possible to visualise direct exchanges between cargo owners and a classification society, in the context of a survey on behalf of owners of a vessel laden with cargo, which might give rise to an assumption of responsibility in the sense explained by Lord Goff in Henderson v. Merrett Syndicates Ltd. [1994] 3 W.L.R. 761, 773, 789-791, in the passages previously identified. In the present case there was no contact whatever between the cargo owners and the classification society. Moreover, as Saville L.J. pointed out in this case it is not even suggested that the cargo owners were aware that N.K.K. had been brought in to survey the vessel: see [1994] 1 W.L.R. 1071, 1082B. The cargo owners simply relied on the owners of the vessel to keep the vessel seaworthy and to look after the cargo. Saville L.J., at p. 1082C and Balcombe L.J., at p. 1089A, regarded this feature as sufficient to demonstrate that the necessary element of proximity was absent. I would approach the matter differently. In my view this feature is not necessarily decisive but it also contributes to placing the claim in the correct perspective.

(c) The bill of lading contracts

The first and principal ground of the decision of Saville L.J. was the impact of the terms of the bill of lading contracts. He said (at p. 1080 E-G):

"The Hague Rules (and their successor the Hague-Visby Rules) form an internationally recognised code adjusting the rights and duties existing between shipowners and those shipping goods under bills of

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lading. As Sir John Donaldson M.R. said in Leigh and Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1985] Q.B. 350, 368, the rules create an intricate blend of responsibilities and liabilities, rights and immunities, limitations on the amount of damages recoverable, time bars, evidential provisions, indemnities and liberties, all in relation to the carriage of goods under bills of lading. The proposition advanced by Mr. Gross would add an identical or virtually identical duty owed by the classification society to that owed by the shipowners, but without any of these balancing factors, which are internationally recognised and accepted. I do not regard that as a just, fair or reasonable proposition.'

Saville L.J. ended this part of his judgment by explicitly stating (at p. 1081H):

"The question is not whether the classification society is covered by the Rules, but whether in all the circumstances it is just, fair and reasonable to require them to shoulder a duty which by the Rules primarily lies on the shipowners, without the benefits of those Rules or other international conventions."

That question Saville L.J. (and, by adoption, Balcombe L.J.) answered in the negative. And Mann L.J. was in substantial agreement on this point.

It was the principal task of counsel for the cargo owners to try to dismantle the reasoning of Saville L.J. He pointed out that Saville L.J. apparently assumed that the limitation of the claim of cargo owners against the shipowners arose under the Hague Rules. In truth the limitation arose by reason of tonnage limitation as already explained. This is not a point of substance. Tonnage limitation is a part of the international code which governs the claims under consideration. It is as relevant as any limitation under the Hague Rules.

Moving on to more substantial matters, counsel for the cargo owners submitted that the allocation of risks in the Hague Rules between shipowners and the owners of cargo is irrelevant to the question whether N.K.K. owed a duty of care to the owners of the cargo. He said the bill of lading contract on Hague Rules terms, and the international character of those Rules, is only a piece of history, which explains the positions in which N.K.K. and the owners of the cargo found themselves. In the course of these submissions Mr. Gross referred your Lordships to a valuable article by Mr. P.F. Cane, "The liability of classification societies" [1994] L.M.C.L.Q. 363. Mr. Cane observed trenchantly (at p. 373):

"But why should an allocation of risks between shipowners and cargo owners be enforced as between cargo owners and classification societies? Whatever good reasons there may be to do so, the mere existence of the Hague Rules is surely not one of them."

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That is a cogent argument against the reasoning of the Court of Appeal. There is, however, a further dimension of the problem that must be considered.

The dealings between shipowners and cargo owners are based on a contractual structure, the Hague Rules, and tonnage limitation, on which the insurance of international trade depends: Dr. Malcolm Clarke, "Misdelivery and Time Bars" [1990] L.M.C.L.Q. 314. Underlying it is the system of double or overlapping insurance of cargo. Cargo owners take out direct insurance in respect of the cargo. Shipowners take out liability risks insurance in respect of breaches of their duties of care in respect of the cargo. The insurance system is structured on the basis that the potential liability of shipowners to cargo owners is limited under the Hague Rules and by virtue of tonnage limitation provisions. And insurance premiums payable by owners obviously reflect such limitations on the shipowners' exposure.

If a duty of care by classification societies to cargo owners is recognised in this case, it must have a substantial impact on international trade. In his article Mr. Cane described the likely effect of imposing such duty of care as follows [1994] L.M.C.L.Q. 363, 375:

"Societies would be forced to buy appropriate liability insurance unless they could bargain with shipowners for an indemnity. To the extent that societies were successful in securing indemnities from shipowners in respect of loss suffered by cargo owners, the limitation of the liability of shipowners to cargo owners under the Hague(-Visby) Rules would effectively be destroyed. Shipowners would need to increase their insurance cover in respect of losses suffered by cargo owners; but at the same time, cargo owners would still need to insure against losses above the Hague-Visby recovery limit which did not result from actionable negligence on the part of a classification society. At least if classification societies are immune from non-contractual liability, they can confidently go without insurance in respect of third-party losses, leaving third parties to insure themselves in respect of losses for which they could not recover from shipowners."

Counsel for the cargo owners challenged this analysis. On instructions he said that classification societies already carry liability risks insurance. That is no doubt right since classification societies do not have a blanket immunity from all tortious liability. On the other hand, if a duty of care is held to exist in this case, the potential exposure of classification societies to claims by cargo owners will be large. That greater exposure is likely to lead to an increase in the cost to classification societies of obtaining appropriate liability risks insurance. Given their role in maritime trade classification societies are likely to seek to pass on the higher cost to owners. Moreover, it is readily predicable that classification societies will require owners to give appropriate indemnities. Ultimately, shipowners will pay.

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The result of a recognition of a duty of care in this case will be to enable cargo owners, or rather their insurers, to disturb the balance created by the Hague Rules and Hague-Visby Rules as well as by tonnage limitation provisions, by enabling cargo owners to recover in tort against a peripheral party to the prejudice of the protection of shipowners under the existing system. For these reasons I would hold that the international trade system tends to militate against the recognition of the claim in tort put forward by the cargo owners against the classification society.

(d) The contract between the classification society and shipowners.

Mr Aikens, QC, who appears for N.K.K., argued that the contract between the shipowners and the classification society must be a factor against the recognition of the suggested duty of care. He referred to Pacific Associates Ltd. v. Baxter [1990] 1 Q.B. 993. That was a case where the Court of Appeal held that the network of contracts between a building owner, the head contractor, subcontractors and even suppliers militated against imposing duties in tort on peripheral parties. In the present case the classification society was not involved in such a web of contracts.

(e) The position and role of N.K.K.

The fact that a defendant acts for the collective welfare is a matter to be taken into consideration when considering whether it is fair, just and reasonable to impose a duty of care: Hill v. Chief Constable of West Yorkshire

[1989] AC 53

; Elguzouli-Daf v. Commissioner of Police of the Metropolis [1995] 2 W.L.R. 173. Even if such a body has no general immunity from liability in tort, the question may arise whether it owes a duty of care to aggrieved persons, and, if so, in what classes of case, e.g. only in cases involving the direct infliction of physical harm or on a wider basis.

In W. Angliss and Co. (Australia) Proprietary Ltd. v. Peninsular and Oriental Steam Navigation Co. [1927] 2 K.B. 456, 462, Wright J. (later to become Lord Wright) - a great judge with special expertise in maritime law and practice - described classification societies, such as Lloyd's, as occupying "a public and quasi-judicial position." There is a refrain of this idea to be found in Singh and Colinvaux, Shipowners (British Shipping Laves), vol. 13 (1967), pp. 167-169, paras. 391-394, where the editors describe a classification society as an impartial critic and arbiter (as opposed to arbitrator). These observations are helpful but not definitive. Nowadays one would not describe classification societies as carrying on quasi-judicial functions. But it is still the case that (apart from their statutory duties) they act in the public interest. The reality is simply that N.K.K. and I am deliberately reverting to the evidence about N.K.K. - is an independent and non-profit-making entity, created and operating for the sole purpose of promoting the collective welfare, namely the safety of lives and ships at sea. In common with other classification societies N.K.K. fulfils a role which in

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its absence would have to be fulfilled by states. And the question is whether N.K.K., and other classification sometimes, would be able to carry out their functions as efficiently if they become the ready alternative target of cargo owners, who already have contractual claims against shipowners. In my judgment there must be some apprehension that the classification societies would adopt, to the detriment of their traditional role, a more defensive position.

(f) Policy factors.

Counsel for the cargo owners argued that a decision that a duty of care existed in this case would not involve wide ranging exposure for N.K.K. and other classification societies to claims in tort. That is an unrealistic position. If a duty is recognised in this case there is no reason why it should not extend to annual surveys, docking surveys, intermediate surveys, special surveys, boiler surveys, and so forth. And the scale of N.K.K.'s potential liability is shown by the fact that N.K.K. conducted an average of 14,500 surveys per year over the last five years.

At present the system of settling cargo claims against shipowners is a relatively simple one. The claims are settled between the two sets of insurers. If the claims are not settled, they are resolved in arbitration or court proceedings. If a duty is held to exist in this case as between the classification society and cargo owners, classification societies would become potential defendants in many cases. An extra layer of insurance would become involved. The settlement process would inevitably become more complicated and expensive. Arbitration proceedings and court proceedings would often involve an additional party. And often similar issues would have to be canvassed in separate proceedings since the classification societies would not be bound by arbitration clauses in the contracts of carriage. If such a duty is recognised, there is a risk that classification societies might be unwilling from time to time to survey the very vessels which most urgently require independent examination. It will also divert men and resources from the prime function of classification societies, namely to save life and ships at sea. These factors are, by themselves, far from decisive. But in an overall assessment of the case they merit consideration.

Is the imposition of a duty of care fair, just and reasonable?

Like Mann L.J. in the Court of Appeal [1994] 1 W.L.R. 1071, 1085H, I am willing to assume (without deciding) that there was a sufficient degree of proximity in this case to fulfil that requirement for the existence of a duty of care. The critical question is therefore whether it would be fair, just and reasonable to impose such a duty. For my part I am satisfied that the factors and arguments advanced on behalf of cargo owners are decisively outweighed by the cumulative effect, if a duty is recognised, of the matters discussed in paragraphs (c), (e) and (f), i.e. the outflanking of the bargain between

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shipowners and cargo owners; the negative effect on the public role of N.K.K.; and the other considerations of policy. By way of summary, I look at the matter from the point of view of the three parties concerned. I conclude that the recognition of a duty would be unfair, unjust and unreasonable as against the shipowners who would ultimately have to bear the cost of holding classification societies liable, such consequence being at variance with the bargain between shipowners and cargo owners based on an internationally agreed contractual structure. It would also be unfair, unjust and unreasonable towards classification societies, notably because they act for the collective welfare and unlike shipowners they would not have the benefit of any limitation provisions. Looking at the matter from the point of view of cargo owners, the existing system provides them with the protection of the Hague Rules or Hague-Visby Rules. But that protection is limited under such Rules and by tonnage limitation provisions. Under the existing system any shortfall is readily insurable. In my judgment the lesser injustice is done by not recognising a duty of care. It follows that I would reject the primary way in which counsel for the cargo owners put his case.

Assumption of responsibility

Given that the cargo owners were not even aware of N.K.K.'s examination of the ship, and that the cargo owners simply relied on the undertakings of the shipowners, it is in my view impossible to force the present set of facts into even the most expansive view of the doctrine of voluntary assumption of responsibility.

Conclusion For the reasons already given I would dismiss the appeal.

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Cited in 24 later judgments

and 15 more of the most senior