China: Foreseeability and tort compensation in FFO cases

FFO claims

Published: 3 February 2014

Where a ship collides, allides or otherwise contacts with marine loading arms, loading machines for bulk grain/coal etc., or shore cranes in the terminal, it may cause, to different extents, loss of use or loss of profits. Recently, our law firm successfully helped a shipowner to defend a significant loss of use claim (exceeding RMB27 million) basing on the doctrine of foreseeability in tort compensation. The circumstances of the matter are set out below.

Facts of this case

On 25 September 2006, when the Liberian flagged vessel MV XXX was temporarily calling Tianjin port, the said vessel allided with the coal chute tube of a ship loader standing in front of the terminal, which would be installed by A (an engineering company) for B (the terminal owner). It was provided in the project contract between A and B for installing of the ship loading system that A should purchase the ship loading system from C and finish the installing project within 22 months. In case of delay, A shall pay B a penalty (liquidated damages) at no more than 10% of the total contract price.

Due to the ship allision incident the said installation project was delayed and A paid corresponding liquidated damages to B of RMB27 million. A then claimed compensation against the vessel's owner for the cost of replacement of all the components to the coal chute tube, related service fees, and the liquidated damages it paid to B.

First instance trial by Tianjin Maritime Court

In terms of the issue of the said RMB27 million loss of use claim, the Tianjin Maritime Court held that due to the accident, the coal chute tube could not be put into production as scheduled and it caused loss of use and such kind of loss of use should be upheld.

However, A itself was not the terminal owner and it had no evidence to prove that A itself suffered loss of use wherefrom. It also could not prove that the liquidated damages paid to B were equivalent to the loss of use that may be caused during the stoppage of use. As such, Tianjin Maritime Court dismissed A's claim for the RMB27 million loss of use.

Appeal and appeal defence of the parties

A appealed to the appeal court Tianjin High People's Court that: according to articles 1 and 6 of the Provisions of the Supreme People's Court on Property Damage Compensation Concerning Trial of Cases of Ship Collisions (hereafter referred to as Ship Collision Provisions), consequential costs and losses caused by the ship collision accident to third party's properties should be compensated.

In tort compensation cases, the doctrine of restitution should be followed and all the losses of A, including the RMB27 million liquidated damages it compensated to B should be compensated in full.

The owners raised an appeal defence that the most important connecting factor for awarding the losses in tort cases is the causation relationship. That is the reason why there is a qualifying word "consequential" and that word is used to emphasize the "causation relationship". Meanwhile, the causation relationship should not be too remote.

The involved liquidated damages to third parties were generated basing on the parties' agreement, but it had nothing to do with the actual loss of use that might be caused due to the stoppage of using the loading system in the terminal. From the perspective of foreseeability, the involved liquidated damages should not be covered in the scope of compensation, because it could not be foreseen by any third party which was uninvolved with the project contract.

Appeal judgment of Tianjin High People's Court

The Tianjin High People's Court held that:

  1. as per article 5 of the Ship Collision Provisions, A can claim for the repair fee of the coal chute tube of the ship loader as well as the reasonable loss of profit incurred due to stoppage of production before repair;
  2. but in assessing the damages, two principles would have to be observed. First of all, the said loss of profit shall be reasonable, and shall be the loss which is reasonably foreseeable by the tortfeasor. Secondly, the said loss of profit shall be the loss of income in production or commercial activity of the injured party in the ship collision accident.

In this case, A claimed for the loss of damages/penalties based on the agreement between A and B. However, the said loss was neither reasonably foreseeable by the shipowner and it was also not the loss of income of A itself. Consequently, the said claim for liquidated damages of A to B lacked factual and legal basis and the appeal court did not uphold it.

Our observation on this case and comment

The doctrine of foreseeability is an important restriction on the scope of compensation in tort cases. In ship collision cases, especially where large scale of loss of use may be claimed, such doctrine may be a useful defence available to the responsible vessel.

Although China is not a case law country, such as may be the case in "Common Law" jurisdictions, the reasoning of Tianjin High People's Court in this case should be a welcome guide for Chinese courts in trying other similar cases.

The Association is grateful to Philip Peng, of Hai Tong & Partners in Beijing (www.haitonglawyer.comfor preparing this legal summary for Member's benefit.