Samuel Son & Co. Ltd. v. Kapitonas Gudin (The), 2002 FCT 101

                                                                                     Date: 20020129

                                                                              Docket: T-1597-95

                                                    Neutral Citation: 2002 FCT 101

ACTION IN REM AND IN PERSONAM AGAINST THE VESSEL

       "KAPITONAS GUDIN AND ALL THOSE PERSONS

                                    INTERESTED IN HER

BETWEEN:

                          SAMUEL, SON & CO. LIMITED

                                                                                                     Plaintiff

                                                   - and -

                      LITHUANIAN SHIPPING COMPANY

             AND M.V. "KAPITONAS GUDIN" AND HER

                          OWNERS AND CHARTERERS

                                                                                           Defendants

                              REASONS FOR JUDGMENT

LEMIEUX J.:

BACKGROUND

[1]    This action concerns a maritime cargo claim to 266 cold rolled galvanized steel coils out of a shipment of 279, governed by the Hague-Visby Rules incorporated in the Carriage of Goods by Water Act. This action was heard at the same time as Action T-958-95 which involved damage to a shipment of hot rolled steel coils. Both shipments were carried from the Latvian ports of Ventspils and Riga to Montreal in January/February 1995 onboard the vessel KAPITONAS GUDIN (the "Captain Gudin"). Reasons for judgment are being released concurrently in both actions. Both sets of reasons should be read together.

[2]    The applicable law has been set out in the reasons for judgment in court file T-958-95 (the "Nova Steel reasons") and I do not propose to repeat this law here.

[3]    Samuel, Son & Co., a Canadian steel distributor and processor, purchased the cargo from Unibros Steel Co. of Limassol in Cyprus at a cost of US $546.96 per metric ton for a total cost of $1,635,470.56, the total weight being 2990.110 metric tons.

[4]    The cargo, manufactured in Russia and railed to port, was loaded onboard the Captain Gudin at the port of Ventspils in Latvia between January 18 to January 23, 1995. The vessel then made its way to Riga, Latvia, where the hot rolled steel coils were loaded onboard. The cargo was discharged in Montreal commencing February 20, 1995 and placed in a covered shed in the Port of Montreal.

[5]                 The bill of lading issued by the ship's Master to the plaintiff had the following notations: "Rust stained. Wet before shipment". The application for the letter of credit called for a clean bill of lading with no remarks about wetness or rusting. However, Kevin Woodfine from Unibros Canada, at trial, produced the contract between Unibros/Samuel, Son & Co. which allowed for a claused bill of lading "rusty, wet". The plaintiff's letter of credit was honoured and Unibros Steel Co. was paid.

[6]                 As noted, in the Nova Steel reasons, when the cargo holds were opened for discharge in Montreal, two surveyors were present: Captain William Morrison, acting for Unibros and Anthony Steggerda, acting for the vessel's charterer. Kevin Woodfine of Unibros Canada was also present as was Mr. Philip Hornak, then a manager with the plaintiff in charge of sourcing offshore products.

[7]                 They were present because, on February 20, 1995, the stevedoring firm in charge of the unloading, Federal Marine Terminals, on behalf of Unibros, wrote to the Master of the Captain Gudin informing him all coils were wet and the tank tops held some quantity of water of as yet unknown origin but it had not been determined if this was due to sea water ingress. Federal Marine Terminals advised that surveyors appointed were aware of the situation.

[8]                 The Master of the Captain Gudin, Captain Pozela, replied on February 21, 1995, taking the position the water found in the holds was not sea water but resulted from loading wet coils and from condensation during the voyage due to large temperature differences.

[9]                 Cold rolled galvanized steel coils are not transported without being packaged because they need protection. Each coil has an inner and outer protective liner. The inner liner consists of water resistant paper plus a plastic covering. The outer protection consists of a galvanized sheet wrapped around each coil. Each coil is "canned" to borrow an expression used by the surveyors.

SAMUEL , SON & CO.'s CASE

(1)        On liability

[10]            Kevin Woodfine of Unibros Canada testified he was at the Captain Gudin when its hatches were opened for discharge after being advised by the stevedores the cargo was wet. So was Captain Morrison, who was there at his request and conducted, on behalf of Unibros, silver nitrate tests on the coils and the water in the tank tops which prima facie suggested the cargo had been contaminated by sea water but such tests do not tell anything about how such contamination took place.

[11]            Mr. Woodfine, talking with Captain Morrison, told of his observing the hatch covers and said they showed signs of leakage because of rust stains present on the sides of the hatch coamings.

[12]            He testified thereafter he put everyone concerned on notice.

[13]            He stated the plaintiff rejected the cargo because of salt water damage. He confirmed other evidence at trial of the running of the coils at the plaintiff's Laval plant to determine the extent of the damage. He observed staining damage which he said was caused by sea water.

[14]            He testified he was involved with the salvage sale of some galvanized coils to Argo Steel in Montreal which was initiated by him when he had 21 coils shipped to Argo Steel for evaluation in August 1995.

[15]            Philip Hornak testified the cargo was identified as a potential problem requiring a surveyor to inspect it because of what was thought to be salt water contamination. That is why he was there on the discharge. He said the initial indications, through Captain Morrison's survey report, was salt water contamination.

[16]            Coils were taken to the plaintiff's Laval facility where they were unwrapped (de-canned) and unwound, slit and cut to length to determine their condition. There was some delay in moving the coils off the docks because of a labour strike.

[17]            He testified the galvanized zinc coating exhibited a white staining condition (white rust), an indication of salt water penetration and damage.

[18]            He added the plaintiff did some other testing with some of the Canadian mills and they confirmed it was salt water damage.

[19]            He referred and commented upon a spread sheet (exhibit P-93) which traced coil by coil from the producing mill's packing list to salvage sale and what happened to them based on an inspection through unwinding and running. That spreadsheet was also used to calculate damages to the coils.

[20]            Mr. Hornak testified being involved with Unibros and the insurers in putting together a contract for the sale of some of the damaged coils to Argo Steel. He concluded his testimony by stating there were no mill problems with the galvanized coils unlike the cold rolled non-galvanized steel shipment also carried on that voyage by the Captain Gudin, a shipment which was not the subject of a legal action but was treated essentially as a deficient product because of metallurgical problems.

[21]            Captain Morrison, on February 20, 1995, when the hatches of the Captain Gudin were opened, inspected each hold, except hold No. 1, and noticed, in two holds, evidence of water entry forward and after end under the hatch coamings. He noted water on the tank tops. He conducted silver nitrate tests which proved positive in all holds observed (except for hold No. 1 which had no cargo and hold No. 5 where all of the coils in the hatch square were rusted to varying degrees, a type of rusting typical to that caused by heavy condensation). He observed rust streaks on the sides of some hatch coamings which lead him to conclude the hatches leaked.

[22]            Captain Morrison's survey report indicates the cold-rolled coils when discharged were directly placed under cover in harbour sheds. An inspection was performed on those coils with silver nitrate tests carried out at random. His tests proved positive on a number of coils but, however, a number of them proved negative. Captain Morrison indicated the full extent of any damage could not be established until the coils had been delivered to ultimate consignees and had been de-canned and properly inspected.

[23]            In June of 1995, Captain Morrison was mandated to do a further report by cargo underwriters to determine the cause of the damage and assist on the salvage.

[24]            He attended the plaintiff's warehouse in Laval on June 27 and 28, 1995, and surveyed the cargo at various other times. He produced a report dated June 11, 1996.

[25]            Captain Morrison referred to his previous survey report when he surveyed the cargo about to be discharged. He wrote:

. . . During the course of our initial survey, we established by silver nitrate tests that water on the tank top of each compartment and on the outer cover of numerous coils was salt water. We also formed the opinion that salt water entered the hatches from the top. This because of salt water reaction noted on the top of coils and on the tank top. There were also heavy rust stains on the inside of the hatch coamings.

This survey was carried out jointly with Mr. A. Steggerda, surveyor acting on behalf of Owner's P & I. After considerable discussion during the course of our survey, Mr. Steggerda agreed with our opinions.

[26]            At Samuel, Son & Co. he inspected the sheets which had been cut and the coils which had the outer cover removed (de-canned) and noted considerable rust staining of both. He performed silver nitrate tests on the coils and concluded contact with salt water. He reported a portion of the cargo had been sent by Samuel, Son & Co. to Argo Steel.

[27]            He attended Argo Steel's warehouse at various times in order to inspect the coils as they were being unwound. The purpose of his visit to Argo Steel was to attempt to establish the extent of damage to the cold rolled galvanized steel coils as a percentage. He reported a total of 26 coils were inspected between Samuel, Son & Co. and Argo Steel and a percentage of damage was calculated to be 33.6% cautioning, however, that this was not to say that 66.4% of them were sound and could have been sold at full value.

[28]            He reported another problem for the plaintiff was the uneven distribution of rust stains through the coils.

[29]            He cut samples of rust from the coils and had them analysed by Technitrol.Echo Inc. The chemical analysis was performed by Dr. Steve Bodsay who, on November 10, 1995, reported to Captain Morrison his conclusion the results of the ion analysis he conducted were consistent with sea water contamination. There is strong evidence of sea water damage he wrote.

[30]            In his June 11, 1996 report, Captain Morrison relates his attempts to have the damage jointly verified by the representatives of the owners of the Captain Gudin. He was advised by Mr. Peter Rosen of Shipowners' Assurance Management that Captain Raj Khanna had been appointed to act on behalf of the P & I and that Captain Khanna apparently had inspected the consignment in the shed after discharge and no further attendance was required.

[31]            Captain Morrison reported telling Mr. Rosen that inspection in the shed could not possibly establish the damage because, in order to do so, the coil had to be unwound after de-canning. He wrote in his report Mr. Rosen took no further steps.

[32]            In its case on liability, the plaintiff also relies on the testimony of (1) Violeta Davoliute who translated the deck log of the Captain Gudin during the relevant periods; and (2) Captain Melvin Fernandez. Their testimony has been referred to in the Nova Steel reasons.

(2)        On damages

[33]            The plaintiff's case on damages was led through the testimony of Captain Morrison and that of Philip Hornak.

[34]            Captain Morrison was involved in obtaining salvage bids for some of the damaged cargo. He reported three bids were received with the highest bid made by Argo Steel at $23.00 Cnd. per CWT (compared to its purchase price of $35.00 Cdn. per CWT).

[35]            Captain Morrison calculated the plaintiff's loss of 266 damaged coils and sheets in U.S. dollars accounting for the salvage proceeds and adding transportation costs. He reported a loss of US $526,441.07.

[36]            As noted, Philip Hornak tendered in evidence exhibit P-93 which is a spreadsheet accounting coil by coil the disposition of the cargo and the loss incurred by the plaintiff in that respect.

[37]            Most of the coils were sold as salvage to Argo Steel at $23.00 per CWT.

[38]            He explained after running the coils, a small quantity of them showed better value than the bid it attracted from Argo. Those better coils were valued at $27.00 per CWT each. They were sold by the plaintiff yielding $88,718.33.

[39]            Mr. Hornak also explained the coils which had been cut into sheets were less valuable than the coils themselves. Those sheets were valued at $15.00 per CWT, sold by the plaintiff who obtained $44,459.72 for those sheets.

[40]            He testified thirteen coils were not damaged and were not the subject of any claim.

[41]            In summary, the claim by Samuel, Son & Co. is:

(1)        $737,645.42 as the loss to it based on a FOB dock price of $35.36 per CWT;

(2)        $5,544.65 in surveyor's expenses;

(3)        6.58% as prejudgment interest;

(4)        costs;

(5)        post-judgment interest.

THE CASE FOR THE DEFENDANTS

(1)        On liability

[42]            Mr. Steggerda, on February 20 and 21, 1995, surveyed the entire cargo onboard the Captain Gudin when it arrived in Montreal. His evidence has been summarized in the Nova Steel reasons. His evidence equally applies to the present action. The same can be said of the evidence of AMR Rouchdy who conducted tests in 2001 on water and sponge collected by the crew of the Captain Gudin in the presence of Mr. Steggerda and kept by Mr. Steggerda in the garage of his home and only recently found (in March 2001).

[43]            Captain Khanna did not survey the galvanized cold rolled steel coils purchased by the plaintiff in this action and he did not offer any opinion on the cause of damage.

[44]            The Master of the Captain Gudin's testimony has also been summarized in the Nova Steel reasons. So has the opinion of the two professors at Klapedia University and the laboratory tests performed by the Laboratory of Hygienic Investigations at the Ministry of Welfare of the Republic of Latvia on the waters of the Rivers Venta and Daugava in Latvia.

[45]            The defendants relied upon the expert evidence of Frans Cooper who provided an opinion in both actions.

[46]            Reference should be had to a summary of Mr. Coppers' testimony in the Nova Steel reasons where he said, in connection with the hot rolled steel coils, the white substance observed was not salt from sea water but was either potassium or calcium. He was also firm, in his view, that no sea water had entered the Captain Gudin during its voyage to Montreal.

[47]            In his testimony, he addressed issues specific to galvanized coils which he characterized as a finished product which needed no further processing (except cutting to size) in order to be used to make, for example, refrigerators, unlike the case of hot rolled steel coils, a semi-finished product, which must be further processed by removing the mill scale before use.

[48]            He said it was acceptable for hot rolled coils to be wet but that cold rolled galvanized steel coils must always be kept dry and this is why such coils were packaged the way they were. He said galvanized coils exposed to fresh water inside the package will show white oxidation and will be the subject of a claim.

[49]            He testified he was shocked to find the cargo was loaded wet onboard the Captain Gudin when she was docked in Ventspils. He had never seen galvanized coils loaded wet; these coils, in his opinion, should never have been loaded and shipped to Montreal.

[50]            In addition, in his view, this cargo got another shot in the arm when it was unloaded in Montreal in rain.

[51]            He examined Captain Morrison's photos (exhibit P-43) and said the white oxidation revealed was typically condensation from cargo sweat; it was not salt water rust.

[52]            After reviewing the underlying documents in this case consisting of surveys, chemical tests, underlying photographs and data, Mr. Coppers came to the following conclusion contained in his initial expert report of August 28, 2001, in this action:

The coils galvanized steel sheets were loaded in a wet condition. Part of the coils galvanized steel were stowed in the same compartment as wet hot rolled steel coils aboard the vessel. The coils were discharged during rain and snow prior to storage inside the warehouse at Montreal. Exposure of galvanized steel to water or humidity will cause oxidation, which would make the steel subject to a claim or rejection, irrelevant of whether the wetting is of fresh water or salt water nature. From the above, it is obvious that the wetting which ultimately caused oxidation, had already occurred prior to loading, continued during the sea voyage and received an "extra shot-in-the-arm" during the discharge, immediately prior to storage at Montreal. Consequently, it is my considered opinion that the receivers of these coils should not be allowed any depreciation on the material for wetting which occurred whilst the coils were in the vessel's custody.

(2)        On damages

[53]            The evidentiary basis for the defendants' case on damages was developed essentially in the same way as in the Nova Steel case: through cross-examination and through submissions of counsel.

[54]            Counsel for the defendants did, however, draw a significant distinction and heavy consequences from the fact the galvanized coils were carried under a claused bill of lading evidencing they were rust stained and wet before shipment. He argued the galvanized coils were damaged goods before they were loaded onboard the Captain Gudin and such coils did not deteriorate by any action of the carrier.

[55]            Counsel for the defendants challenged the plaintiff's damage calculations more narrowly however than he did in the Nova Steel case. He limited his challenge on damages to allowances the insurers granted the plaintiff arguing such allowances are not proof of loss to the plaintiff.

ANALYSIS

(1)        The plaintiff's initial burden

[56]            As discussed in the Nova Steel reasons, the plaintiff, under the case law (see Kruger Inc. v. Baltic Shipping Co., [1988] 1 F.C. 262 and Francosteel Corp. v. Fednav Ltd. (1990), 37 F.T.R. 184), had the initial burden to demonstrate the goods were tendered for delivery in good condition. A clean bill of lading is generally accepted as establishing prima facie proof of this. In this case, the bill of lading was claused "Rust stained. Wet before shipment".

[57]            In Francosteel, supra, Justice Rouleau stated the Court may consider all evidence tendered as to the pre-shipment condition of the goods. He went on to say a clean bill of lading, in some circumstances, has been held to be insufficient to establish a prima facie case where goods are shipped in packages preventing any observation of the pre-shipment condition of the goods.

[58]            In Francosteel, supra, the cargo consisted of cold rolled steel coils and zincrometal steel coils. The fact the bills of lading noted the envelopes were either partially rust stained or white oxidized weighed heavily in Justice Rouleau's mind and was one of the factors he took into account to determine in that case the cargo owner had not established prima facie the cargo was tendered for delivery in good condition because the moisture may have penetrated the coils prior to shipping which could subsequently have condensed and be the primary cause of the rust damage eventually discovered.

[59]            I apply Justice Rouleau's reasoning in Francosteel, supra, to the case at hand. The plaintiff has not discharged his initial burden of establishing prima facie the cargo was tendered to the Captain Gudin in good condition.

[60]            Moreover, unlike in Francosteel, there is no evidence how the cargo was stored at the producing mill, how it was carried in its long journey from the producing mill to the loading port in Ventspils although I am prepared to conclude the coils were placed in a covered warehouse on arrival there. I reach this conclusion not on the basis of a pre-shipment inspection report by SGS Latvia Ltd. but on the basis of Kevin Woodfine's testimony who said, in his experience, galvanized cold rolled steel coils were shipped to Ventspils rather than Riga because the port in Ventspils was equipped with covered warehouses.

[61]            In the circumstances, I need not resolve whether the plaintiff's attempt to place in evidence the SGS pre-shipment report as a business record under section 30 of the Canada Evidence Act was permissible. The plaintiff relied upon MacFarland J.'s decision in Nuvo Electronics Inc. v. London Assurance et al., [2000] O.J. No. 2241 for its admissibility as a business record.

[62]            The plaintiff's action does not stop because it has not established prima facie the good condition of the cargo on delivery to the carrier. The plaintiff may succeed in establishing the Captain Gudin's negligence or unseaworthiness was the proximate cause of the damage sustained.

[63]            The damage to the cargo was rust stain damage. If Samuel, Son & Co. establishes sea water or sea salt was present in the holds of the Captain Gudin during the voyage, liability would be made out because the evidence is clear sea water causes such staining.

[64]            There is convincing evidence the cargo was damaged by rust staining. Kevin Woodfine said he observed that damage on the cargo at the plaintiff's Laval facility. Philip Hornak gave evidence to the same effect. Captain Morrison's survey report of his attendance at the plaintiff's Laval warehouse on June 27 and 28, 1995, with supporting photographs, leads to the same conclusion. Dr. Bodsay's rust analysis lead him to conclude it was sea water rust.

[65]            In the Nova Steel reasons, I found the cargo owner had made out the presence of sea water or sea salt in the holds of the Captain Gudin during the voyage. Much of the evidence there applies to the cargo of galvanized cold rolled steel coils. That is so in respect of Captain Morrison's evidence when he surveyed the Captain Gudin when the hatches were opened to discharge the cargo. That conclusion was also supported by Amir Rouchdy's analysis of the water from the tank tops which had been gathered with a sponge. That conclusion is supported by Captain Pozela's evidence of cleaning the holds with salt water without rinsing with fresh water.

[66]            The only survey evidence by the defendants of this cargo was that of Anthony Steggerda whose survey report has been summarized in the Nova Steel reasons. As noted, on cross-examination, Mr. Steggerda:

(1)        acknowledged perhaps he did not see the rust streaks on hatch coamings (evidence of leakage) because they were wet. He said he did not know whether the hatches had leaked;

(2)        based on Mr. Rouchdy's analysis of the water collected from the tank tops, he agreed that water was a combination of salt and fresh water which also corroborates Miss Davoliute's translation of the Captain Gudin's deck log entry that sea water was entering hold No. 3;

(3)        he could do only a limited survey of the mechanisms of the hatches which ensured water tightness;

(4)        he said the practice of cleaning the holds of the Captain Gudin with salt water and not flushing them after with fresh water could, through drying and condensation, cause serious damage to the cargo.

[67]            As I did in the Nova Steel reasons, I cannot accept Frans Coppers' view there was no evidence of sea water entry inside the holds. He needed to see proof of rust streaks on the hatch coamings in photographs showing rust streaks on the hatch coamings. Since he saw no such photographs, he had no proof he said. I cannot assess the evidence with such a narrow perspective. I must assess the whole of the evidence and reach a conclusion on the balance of probabilities.

[68]            His view of chloride contamination from salt spray at the port of loading was contradicted by Dr. Bodsay's analysis of the waters in the rivers at both ports and is not supported by Kevin Woodfine's evidence the Port of Ventspils has covered sheds and that is why such cargo type was loaded there.

[69]            The balance of probabilities supports the conclusion sea water entered the hatches during the severe storm. Captain Khanna acknowledged the storm's pushing waves on top of the hatches could cause leakage. Captain Morrison said it was an old ship and water could have entered through the ventilators.

[70]            All of this evidence leads to the conclusion of negligence and unseaworthiness on the part of the Captain Gudin. It was certainly negligent to clean the ship's holds with salt water without rinsing with fresh water. Unseaworthiness is demonstrated by the leakage of sea water into the holds.

[71]            The defendants have provided no evidence of due diligence which would overcome this finding of lack of seaworthiness.

[72]            Counsel for the defendants pressed the theory the cargo was damaged goods when loaded on board at Ventspils and, even if I made a finding the defendants breached their duty of care, no damages would arise because no further deterioration or loss of value would take place. Counsel for the defendants conceded if I should find sea water was a cause or the cause of the damage, his argument was not valid.

[73]            Assuming the defendants had made out a case of damaged goods at Ventspils, it was appropriate for counsel for the defendants to make the concession he did.

[74]            William Tetley, in Marine Cargo Claims, at page 328, writes:

Where the damage is caused in part by an act or fault for which the carrier is responsible and in part by an act or fault for which the carrier is not responsible, the carrier must be able to make proof sufficient to separate the damage resulting from one cause from the damage resulting from the other, or in the alternative be held responsible for the whole claim.

[75]            Professor Tetley quotes from Hobhouse's J. in The Torenia, [1983] 2 Lloyd's Rep. 210 at 218 as follows:

Where the facts disclose that the loss was caused by the concurrent causative effects of an excepted and a non-excepted peril, the carrier remains liable. He only escapes liability to the extent that he can prove that the loss or damage was caused by the excepted peril alone.

[76]            In my view, the Captain Gudin is entirely responsible as the defendants made no proof to separate damage.

[77]            I briefly touch upon the other defences or shields put forward by the defendants.

[78]            Unlike in the Nova Steel case, no evidence of any mill defects were advanced by the defendants.

[79]            Counsel for the defendants argued defective packaging but led no evidence on the point and as a result it fails.

[80]            Lastly, I do not see in this case any scope for the application of the principle established by Justice Nadon in Union Carbide Corp. v. Fednav et al. (1997), 131 F.T.R. 241.

[81]            In that case, Justice Nadon held an agreed allowance between a cargo owner and its insurers was not proof of loss suffered by the plaintiff.

[82]            The evidence in this case is different. The coils or sheets were damaged. The coils obtained $27.00 per CWT because they were in better condition than those sold at salvage. The sheets obtained less because they were less valuable having been cut. They were sold by the plaintiff. This is proof of its loss.

DISPOSITION

[83]            For all of these reasons, the plaintiff's action succeeds with costs. It is entitled to judgment in the amount of $737,745.42 as damages and $5,544.65 for surveyor's expenses. Pre-judgment interest is fixed at 6.58%. The plaintiff is also entitled to post-judgment interest.

                                                                                                                           "François Lemieux"   

                                                                                                                                          J U D G E         

OTTAWA, ONTARIO

JANUARY 29, 2002