Cargo Loss in Krekshino, or on Attachment of Risk of Cargo Missing on a Carrier

Commentary to the Ruling dd. 29 April 2022 No. F07-3562/2022 on Case No. A56-102792/2020 of the Commercial Court of North-West District (SAO “VSK” v LLC “Balt Sky”)

Facts: LLC “Iteko Russia” was the freight forwarder and organized transportation of cargo for JSC “Sony Electronics”. The liability of LLC “Iteko Russia” was insured by SAO “VSK”. The carriage of goods was carried out by LLC “Balt Sky” which was involved by LLC “Iteko Russia”.

Part of the cargo was lost while transporting a container of equipment belonging to JSC “Sony Electronics”. The container was found to have arrived at its destination (the village Krekshino in Novomsovsky district) with broken seals.

The insurer recognised this event as an insured event and paid the insured (LLC “Iteko Russia”) insurance compensation in the amount of RUB 1 224 444.06. It is the value of the cargo lost proved by the bill of lading and delivery and acceptance order with a declared value. In its turn, LLC “Iteko Russia” voluntarily reimbursed JSC “Sony Electronics” (the customer under the logistic contract) the losses.

Natalya Romanova,

Saint Petersburg State University

SAO “VSK” took the place of the LLC “Iteko Russia” by way of subrogation after payment of the insurance compensation and filed a claim against the carrier (LLC “Balt Sky”) for damages.

Claimant’s arguments: 1. The cargo was lost due to the actions of the carrier (LLC “Balt Sky”). 2. The shortage/loss of the goods under dispute was proved by a certificate signed by the carrier’s driver among others.

3. LLC “Balt Sky” is responsible for the actions of the driver it has involved.

Defendant’s arguments: 1. There is no causal link between the carrier’s actions (omissions) and the loss of the cargo. 2. The subject of the carriage was the container, not electronics in a certain quantity which had been lost.

3. The Defects Certificate was drawn up 4 days after it was discovered that the seal was da maged. It also does not contain the signature of the consignor’s representative.

Rulings of courts: the case went through three rounds of hearings. Under the judgement of the Commercial Court of Saint Petersburg and Leningradskaya Oblast dated 01 October 2021 and the judgement of the Thirteenth Commercial court dated 29 December 2021, the courts found in favour of the Claimant. After that, the Defendant filed the cassation appeal to the Commercial Court of Northwest District requesting the first instance court judgement and appellate court rulings be overturned and that a new judgement shall be adopted rejecting the claim. However, the cassation court found no grounds for reversal of the above rulings.

Commentary:

The dispute arose out of the cargo loss in road transport. However, if the carriage had been by sea, the essence of the dispute would remain the same: the concept of fault as a condition of the carrier’s liability and subrogation. Liability issues are relevant to any type of carriage, so the commentary is included in the journal on maritime law.

The carrier’s liability for loss of cargo is set out in Art. 796 if the Russian Civil Code. It is accepted that the carrier is liable if it is at fault. In other words, the carrier is not liable for accidental damage to the cargo. However, in practice, things are more complicated. The case under comment is an illustration of this problem.

We shall analyse two main points of law relevant to the dispute: the concept of fault as a condition of the carrier’s liability and subrogation.

1. The concept of fault: does the loss of sealed cargo make the carrier liable strictly?

Liability in the law of contracts follows from two grounds. The first ground is the non-performance of the contract. This is a so-called contractual liability, the conditions of which are set out in Art. 401 of the Russian Civil Code. The second ground is the liability for torts. This is a tort liability, conditions of which are set out in Art. 1064 of the Russian Civil Code.

The principle of strict liability (para. 3 of Art. 401 of the Russian Civil Code) applies in entrepreneurial contract relations as a general rule. By contrast, tort liability, as a general rule, is fault-based, regardless of whether the tort was caused by a citizen or an entrepreneur (para. 2 of Art. 1064 of the Russian Civil Code).

The field of carriage is an exception to the principle of the entrepreneur’s contractual strict liability. It is generally accepted that the carrier is liable fault-based, namely unless it proves that the loss or damage to the cargo was caused by circumstances which it could not prevent and which it was not responsible for eliminating (para. 1 of Art. 796 of the Russian Civil Code). The emphasis on fault as a condition of the carrier’s liability follows from the dependence of that liability on the carrier’s actions. The carrier is liable for the losses unless it proves that these losses were beyond its control.

The fault in Civil law is always presumed and the defendant shall prove otherwise in order to be released from the liability, so the wording, which is used everywhere, places the burden of proving no fault on the carrier.

Fault-based liability implies that losses shall be recovered from the tortfeasor if it is shown that it failed to exercise the care and diligence degree which is required of it by the nature of the contract and the business circumstances.¹

At the same time, fault in Civil law does not involve the assessment of the subjective attitudes of the tortfeasor towards the tort. It is the determination of the proper behaviour of the debtor and the degree of deviation from it. The degree of deviation of the proper behaviour is the fault in Civil law. Determining fault involves a significant extent of judicial discretion.²

An interesting trend in Russian judicial practice is currently being seen. The courts recover damages from the carrier if there has been established that it has accepted the goods for carriage. Everything else is irrelevant.

This is the situation in the case commented upon. The carrier accepted the sealed container for carriage. However, the container arrived at its destination with a seal damaged and cargo lost partially. From the courts’ point of view, this was sufficient to recover damages from the carrier arising out of the non-performance of the contract. The courts considered it unnecessary to inquire into the reasons for damage to the seal, the carrier’s means of protecting the cargo, or whether the loss or damage of the cargo was due to the carrier’s actions. The fact that the cargo has been accepted for the carriage is sufficient. This approach essentially means that the carrier is liable strictly, i.e., regardless of fault. Only force majeure may release the carrier from liability.

Apart from the case commented upon, a similar trend has been seen not only in the practice of the Supreme Commercial Court of Russia and district courts but also in the practice of the nowadays Supreme Court of Russia. The Judgment of the Supreme Court of Russia dated 15 December 2020 in case No. 45-KG20- 18-K7 which is related to the liability of the freight forwarder liable under the same rules as the carrier (para. 2 of Art. 803 of the Russian Civil Code) expresses the same position. The Supreme Court of Russia explicitly notes that “freight forwarder who has failed to fulfil or improperly fulfilled an obligation as an entrepreneur is liable irrespective of the presence or absence of its fault”.

Therefore, in this case, it was the carrier who was liable for loss of or damage to the goods per se irrespective of fault. The court pointed out that the carrier bears the risk of loss of the cargo after it has been accepted for the carriage. In other words, the reality of the Russian judicial practice is that the carrier bears the risk rather than the fault-based liability for loss or damage to the cargo.

At the same time, the Russian judicial practice has not yet tried to reconsider the nature of the carrier’s liability limited to actual damages.

The rather broad interpretation of the laws by Russian courts means for carriers that the conditions and extent of their liability shall be clearly defined in the contract of carriage. Art. 4 and 5 of the International Convention for Unification of Certain Rules of the Bill of Lading³ may be used as a guideline to determine and specify the condition and scope of the carrier’s liability. In this regard, Art. 4 of the Convention details the carrier’s fault-based liability, and Art. 5 introduces the carrier’s right to waive the liability limits on the condition that this shall be indicated in the bill of lading.

In the case commented upon, the court relied on the terms of the carriage contract which referred to the carrier’s liability for losses incurred by the customer as a result of the driver’s non-performance or improper performance of its duties, in particular for total or partial damage, loss, or shortage of the cargo transported regardless of any circumstances whatsoever.

The case commented upon shows how imperative and probably not fully justified rule on the carrier’s fault-based liability is transformed into the carrier’s strict liability by judicial interpretation and comparison with the terms of the contract.

2. Subrogation and Recourse⁴

In this case, the insurer paid indemnity to the insured and was legally entitled to recover the losses from the tortfeasor. The transfer of the rights towards the insurer after the payment of the indemnity is called “Subrogation”. In this case, no one questioned the insurer’s right to the action.

However, in Russian practice, Subrogation and Recourse are often confused. Thus, it seems important to draw attention to the differences between these institutions.

Subrogation is applied in insurance (Art. 965 of the Russian Civil Code and Art. 281 of the Russian Merchant Shipping Code for marine perils insurance) and suretyship (Art. 387 of the Russian Civil Code). Subrogation is a type of change of creditors an obligation, a kind of assignment by operation of law.

Recourse applies in torts in cases of compensation for damages by one person for another (Art. 1081 of the Russian Civil Code), and in cases of the subsidiary or joint and several liabilities (Art. 325, 399 of the Russian Civil Code). What these legal constructions have in common is only that they both provide recourse to the person who satisfied the creditor for the debtor. The division into Recourse and Subrogation are based on the fate of an obligation performed by a third party.

If the obligation is terminated after the performance of a third party, a new Recourse obligation arises. It consists of the right of the performer to claim compensation from the original debtor.

In cases where the debtor’s obligation is not terminated by the performance of a third party, Subrogation occurs and the state of the creditor in the already existing obligation is taken by the performer.

Why in some cases the debtor’s obligation is terminated by the performance of a third party on its behalf and in others it is not? This is a question that has no clear answer. It may be assumed that where it is a prior agreement between the parties that a third party will perform, the debtor’s duties will not end, and the creditor will be replaced by someone who will perform the obligation. This performance agreement is a kind of a conditional assignment. This may be seen in insurance and suretyship. The parties initially agree that the debtor’s obligation will be fulfilled by the insurance company or the surety, and once the obligation has been fulfilled it takes the place of the creditor.

Since no new obligation will arise as a result of the performance of the obligation by the third party and the performer will take the place of the creditor, its claim will remain subject to the previous limitation period; the debtor will have arguments against its claim as against the original creditor; the security provided by the debtor will also remain in place.

In cases where there is no prior agreement between the creditor and a third party, but the debtor’s duties are performed by that third party, the debtor’s obligation is deemed to be terminated. However, a new recourse obligation with its own limitation period arises. Although this conclusion is not irreproachable since joint and several and subsidiary liability may arise not only by virtue of law but also by contract.

It is difficult to see the logic of dividing the consequences of third-party performance to a Recourse and Subrogation. An agreement with a creditor appears to be a weak argument and is partially defeated by the grounds of joint and several and subsidiary liability.

In the course of the reform of the Russian Civil Code, a general rule on the performance of obligations by third parties has appeared (Art. 313 of the Russian Civil Code). At the same time, in this Article, the emphasis is placed on the situation of the performance of obligations without prior agreement with the creditor. If there is a general rule on the performance of obligations by a third party, it is logical to have the same consequences under either the Subrogation or the Recourse models.

* * *

In addition to the issues raised, the case commented upon illustrates the carrier’s liability for the drive it has involved. The issue does not seem complicated since if the driver works under an employment contract and damages the cargo, the employer is liable for the employee’s actions under the clear provision of Art. 1068 of the Russian Civil Code. In cases where the driver is employed under a Civil law contract, the situation does not change, the carrier is liable for its actions pursuant to Art. 403 of the Russian Civil Code. However, in this event, a distinction may be made between the contractual carrier, i.e., the one who has promised to deliver the goods to their destination, and the actual carrier, i.e., the one who performed the carriage directly. This division is of no practical relevance in the case commented upon since LLC “Balt Sky” has assumed the obligation of carriage and is therefore liable both for its own employees and for third parties involved.

Conclusion

The practical significance of the commented case comes down to illustrating the per se strict liability of the carrier. The theoretical significance of the case is that it raises the question on the distinction between recourse and subrogation and the legal meaning of this distinction. ■

Notes