Turning principle into practice

Roger Pearson reports on a ruling over classification societies which could impact shipping law

A recent House of Lords decision on classification societies and their legal liability has pushed the subject to the top of agenda in shipping and commercial circles.

The ruling came on a preliminary issue over classification society liability which had never been before the courts. Although only a preliminary issue, the Law Lords' decision has effectively ended a multi-million dollar shipping claim, and is viewed by Nabarro Nathansons Lloyd's-based shipping litigation unit (SLU) as a major victory on behalf of the firm's Japanese clients.

Although Nabarros can slap itself on the back for potentially saving its clients up to $10 million, the case has far wider ranging significance in shipping circles.

Russell Gardner, partner in Nabarros' SLU, who charted the course to the House of Lords four-to-one victory says: "The case was very much fought on its particular merits and I was naturally delighted that my clients prevailed; however, this is one of those cases where it can genuinely be said that the result does have important implications in the wider context."

Classification societies are the organisations responsible for setting standards that the world's merchant ships have to comply with as far as original build and on-going maintenance is concerned. Lloyd's Register is probably the best known of the societies.

Traditionally, they have been regarded as liability-free as far as claims over cargo losses caused by vessels they have passed as fit.

Now that traditional liability exemption has been upheld by the Law Lords. They backed the argument advanced by Nabarros on behalf of its clients, the Japanese classification society Nippon Kaiji Kyokai (NKK), that the society could not be held liable in tort to the owners of a cargo of lead and zinc concentrates lost when a vessel called the Nicholas H went down off Puerto Rico in 1986. The sinking was blamed on the failure of repairs to the Nicholas H which had been approved by NKK prior to the sinking.

The legal fight over the crucial preliminary issue of whether NKK owed a duty of care to the cargo owners began in 1991 and Gardner says that NKK was advised from the outset that it had every chance of defeating the claim.

Gardner says a major task for counsel Richard Aikens QC, Jonathan Harvie QC and, latterly, David Edward, was to get the courts to understand what classification societies actually do as opposed to what many people think they should do.

"Once that had been done, it was a question of applying what are by now fairly well established principles in the law of tort to the given set of circumstances, albeit that the facts were admittedly somewhat distinctive," he adds.

"Leaving aside the potential damages, there are some cases which simply have to be fought on principle, and my clients, to their enormous credit, remained solid throughout," he says.

In addition to the precedent now established in the UK, where several cases are pending awaiting the outcome of the Nicholas H case, it is also expected to be quoted extensively in the US courts where a great deal of classification society litigation is currently under way. While not a binding ruling on the US courts the decision of the Law Lords is anticipated to carry a good deal of weight.