KEY WORDS
Port Safekeeping Contract; Burden of Proof; Limitation Period of Action; Insurance Subrogation
DISPUTED ISSUES
1. Under the open policy, the insurers covered the marine cargo insurance, extending the cover of risks for the land warehousing at the port of destination. When the cargo loss occurred during the warehousing period, how to determine the limitation period of action in terms of insurers’ right of subrogation.
2. When the insurance contract is in violation of the mandatory provisions of the law, it is inevitably invalid?
3. In the disputes of the port safekeeping contract, how to determine the distribution of burden of proof concerning the causes of the cargo loss if the depositor failed to retrieve the cargo within the agreed period?
KEY POINTS OF JUDGMENT
1. The court distinguished the marine insurance contract from the general insurance contract according to Article 216 of the Maritime Code of the People's Republic of China (hereinafter referred as to ‘CMC’) in the case.
The provisions regarding the limitation period for the insurer exercising the right of subrogation in the ‘Official Reply of the Supreme People's Court on the Starting Date of the Limitation of Action in Which the Insurer of a Marine Insurance Contract Exercises the Right of Subrogation to Claim for Compensation’ (hereinafter referred as to ‘Official Reply’) shall apply to the marine insurance contract.
The provisions regarding the limitation period for the insurer exercising the right of subrogation in the ‘Interpretation II of the Supreme People's Court on Several Issues concerning the Application of the Insurance Law of the People's Republic of China’ (hereinafter referred as to ‘Interpretation of Insurance Law’) shall apply to general insurance contracts.
2. The contract is not inevitably invalid when it is in violation of the mandatory provisions of the law.
3. The court shall carefully distinguish mandatory provisions on validity from mandatory provisions on administration. When violating the former, the contracts shall be deemed invalid. However, the contracts which violate the latter shall not be regarded as void in a ‘one size fits all’ manner.
4. The burden of proof for the cause of loss which occurred after the expiry of the warehousing period at port shall be attributed to the depositor.
TABLE OF LEGISLATION /// REFERENCED ARTICLES
1. Article 394 of the Contract Law of the People’s Republic of China (hereinafter referred as to ‘Contract Law’);
2. Article 216 of the Maritime Code of the People's Republic of China (hereinafter referred as to ‘CMC’) ;
3. Article 64 of the Civil Procedure Law of the People's Republic of China (hereinafter referred as to ‘Civil Procedure Law’);
4. Article 108 of the Interpretations of the Supreme People’s Court on Certain issues Concerning Application of the Civil Procedure Law of the People's Republic of China;
5. Article 16 of the Interpretation II of the Supreme People's Court on Several Issues concerning the Application of the Insurance Law of the People's Republic of China (hereinafter referred as to ‘Interpretation of Insurance Law’);
6. Official Reply of the Supreme People's Court on the Starting Date of the Statute of Limitations in Which the Insurer of a Marine Insurance Contract Exercises the Right of Subrogation to Claim for Compensation (hereinafter referred as to ‘Official Reply’).
CASE INDEX
First Instance: Dalian Maritime Court (2015) MC 1st instance No.376 Civil judgment
BASIC FACTS
Claimant: Eight overseas insurance companies, including Brit UWLtd.
Defendant: Grain Branch of Yingkou Port Co. Ltd. (hereinafter referred as ‘Yingkou Port Grain Branch’)
Defendant: Yingkou Port Co. Ltd. (hereinafter referred as ‘Yingkou Port Ltd.’)
Dalian Columbia Ltd. bought 59010.605 tons of soybeans from Brazil, transported to Yingkou Port of China.
On June 10th, 2011, Dalian Columbia Ltd. signed the port safekeeping contract with Yingkou Port Ltd., agreeing that:
1. Yingkou Port Grain Branch is responsible for warehousing, safekeeping and controlling of the 59010.605 tons of soybeans imported by Dalian Columbia Ltd., and carried by the MV ‘Beilun Whale’.
2. The cargo owner shall retrieve the cargo from the port within 30 days after discharge. If the cargo is not retrieved after the period, the risks of cargo loss and the expenses of exchanging, ventilation and warehousing shall be borne by cargo owner.
From June 30th, 2011 to July 1st, 2011, Dalian Columbia Ltd. proposed insurance for the involved cargo to the claimant. The policy provides that: the policy is valid from June 27th, 2011 to June 26th, 2012; transaction terms include 180 days of storage in the silo/warehouse at destination; the policy includes heat and moisture clause.
From June 30thto July 28th, 2011, the underwriters issued six endorsements.
In the Endorsement No.004, the underwriters agreed to undertake the risks of the 59010.605 tons of soybeans kept in Yingkou Port from July 14th, 2011.
On June 22nd, the ‘Beilun Whale’ arrived at Yingkou Port.
During the unloading operation, Yingkou Port Grain Branch found the cargo was seriously damaged by heat and required the cargo owner to retrieve the cargo within 30 days after discharge. However the cargo owners failed to do so.
In October of the same year, the heat loss of the soybeans was quite severe, so as that it could not be processed into standard oil.
Dalian Columbia Ltd. reported the case to and claimed the loss against the eight insurance companies, including Brit UW Ltd. The eight insurance companies paid the loss under settlement in 2014. After compensation, the insurers raised the action concerning port safekeeping contract, claiming that the Yingkou Port Grain Branch (the branch of the Yingkou Port Co. Ltd., no independent legal personality) and the Yingkou Port Co. Ltd. failed to perform their duties of safekeeping.
The defendants argued that:
1. This case was a dispute over a marine insurance contract, and the limitation period for the insurer's subrogation right had expired;
2. The claimant shall take the consequences of failure if they cannot provide effective evidence to prove the cause of the cargo loss;
3. The claimants shall bear the loss of cargo that retrieved after the expiry of ‘30 days’.
DECISION
Based on the Article 394 of Contract Law, Article 64 of Civil Procedure Law, Article 108 of the Interpretations of the Supreme People’s Court on Certain issues Concerning Application of the Civil Procedure Law of the People's Republic of China, the Dalian Maritime Court held that the claims of claimants, eight overseas insurance companies, against the defendants, the Yingkou Port Grain Branch and Yingkou Port Ltd., were rejected.
REASONING OF JUDGEMENT
There are three issues in this case.
One of which is whether the claimants obtain the right of subrogation by law.
The Article 7 of Insurance Law of the People’s Republic of China(hereinafter referred as to ‘Insurance Law’) provides that, ‘legal persons and other organizations within the territory of the People’s Republic of China which need domestic insurance shall take out insurance from insurance companies within the territory of the People’s Republic of China’.
In this case, Dalian Columbia Ltd. is a legal person within the territory of the People’s Republic of China and took out the insurance within the territory of the People’s Republic of China. The eight claimants were not located within the territory of the People’s Republic of China.
Article 7 of the Insurance Law regulates the qualification of the market access into the insurance market, rather than the mandatory provisions on contract types or the validity of behaviors of entering into the contract, which shall be deemed as the mandatory provisions on administration.
The insurers undertook the domestic warehousing risks of the imported cargo after importation, which was foreign-related and not purely domestic. Meanwhile, the relative rights and obligations of the contractual parties had been performed and, the conclusion and performance of the contract did not prejudice the interests of the State and the general public or the lawful rights and interest of others. In order to secure the safety of transaction, the Endorsement No.004 under the open policy shall be ascertained to be valid.
On the condition of valid Endorsement No.004, the claimants had paid the insurance indemnity, hence they had acquired the right of subrogation.
Secondly, the issue is whether the limitation period of claimants’ subrogation has expired. The policy in this case was an open policy, providing that any loss occurred within insurance period would be undertaken in accordance with the clauses included in the policy.
On the transportation and warehousing of the cargo in conformity with the conditions of the policy, such policy will be fixed as the way of endorsement, where the subject matter insured cannot be identified under the open policy.
Therefore, the nature and validity of the policy shall be ascertained by the agreed content of the endorsement.
The insurance of the soybeans in this case was the Endorsement No. 004. According to the content of the Endorsement No.004, the insurers had acknowledged and agreed to cover the goods landed at port by the way of land warehousing insurance.
Article 216 of CMC provides that ‘A contract of marine insurance is a contract whereby the insurer undertakes, as agreed, to indemnify the loss to the subject matter insured and the liability of the insured caused by perils covered by the insurance against the payment of an insurance premium by the insured. The covered perils referred to in the preceding paragraph mean any maritime perils agreed upon between the insurer and the insured, including perils occurring in inland rivers or on land which is related to a maritime adventure.’
According to this Article, the insured incidents agreed by both parties of the insurance contract were not the perils at sea and did not relate to sea voyage. So the legal relations under the Endorsement No.004 were not the relationship of marine insurance.
In addition, the primary legal relationship in this case was a legal relationship of the port safekeeping contract between Dalian Columbia Ltd. and Yingkou Port Grain Branch, which shall not be governed by the CMC.
Overall, the insurance contract in this case was not a marine insurance contract, and the limitation period for the action of the claimants’ subrogation shall not be governed by the Official Reply, but governed by the provisions of Insurance Law and relevant judicial interpretations, and General Principles of the Civil Law of the People’s Republic of China.
Article 16 of the Interpretation of Insurance Law provides that the limitation of action regarding insurer’s subrogation shall count from the day on which the insurer acquires the right of subrogation.
The Article 135 of General Principles of the Civil Law of the People’s Republic of China provides that the limitation of action is two years. Hence the claims of the eight insurance companies including Brit UW Ltd., were not time bared.
The third issue is the allocation of liability for cargo damages. Dalian Columbia Ltd. and Yingkou Port Grain Branch had agreed in the port warehousing contract that the cargo owner shall retrieve the cargo out of port within 30 days after discharge.
It is necessary to discuss the meaning, nature and legal consequences of the agreed ‘30 days’.
Based on literal understanding, the ‘30 days’ is an agreement of period for taking delivery of the goods, namely, the cargo owner has a duty to take delivery of the goods out of the port within 30 days after discharge. Meanwhile it has provided the legal consequences when the cargo owner breaches this duty, namely, the cargo owner should assume the expenses of warehouse shifting and ventilation, and the risk of damage to the cargo.
The ambiguity of this article lies in whether the cargo owner shall be liable for any possible loss of the cargo if it fails to take the cargo out of the port within 30 days.
Article 394 of the Contract Law under Chapter 20 Warehousing contracts provides that ‘Where the goods are damaged or lost during the warehousing period due to improper safekeeping by the safekeeping party, it shall be liable for damages. If the goods are deteriorated or damaged due to unconformity of the nature of the warehoused goods or of the packing with the terms of contract, or the fact that the goods exceed the valid storage period, the safekeeping party is not liable for damages.’
Although according to this provision, the imputation principle of the depositor is the presumed-default liability, that is, during the warehousing period, the depositor is presumed to be in fault once the cargo damage occurs, the depositor has the obligation to prove the exemptions, otherwise he shall bear liability for cargo damages. However, the period when the principle of liability applies shall be the period in the warehouse. The parties had not agreed the warehousing period after the agreed ‘30 days’.
Article 391 of the Contract Law provides that ‘where the warehousing period is not agreed or the agreement is not clear, the depositor or holder of the warehouse receipt may retrieve the goods at any time, and the safekeeping party may require the depositor or holder of the warehouse receipt to retrieve the goods at any time, provided that the other party shall be given the time required for preparation’.
Article 392 holds that ‘At the expiry of the warehousing period, the depositor or holder of the warehouse receipt shall retrieve the goods by presenting the warehouse receipt to the safekeeping party. Where the depositor or holder of the warehouse receipt fails to claim the goods, additional warehousing fee shallbe charged; where the goods are retrieved before the expiry of the warehousing period, the warehousing fee shall not be reduced.’
Article 393 states that, at the expiry of the warehousing period, if the depositor or holder of the warehouse receipt fails to retrieve the goods, the safekeeping party may demand retrieval within a reasonable period, and if the goods are not retrieved at the expiry of such period, the safekeeping party may place the goods in escrow.
It could be inferred from the afore-mentioned provisions that the actual meaning of warehousing period includes that the depositor shall retrieve the goods within such period. Hence the agreed ‘30 days’ in fact is the agreement about the warehousing period, or at least the ‘necessary preparation time’.
Therefore, within such ‘30 days’, the principle of presumed-default liability shall be applied in this case to the issue whether the defendant will be liable for the cargo damages. However, there is no express provision by law for the cargo damage occurred after the warehousing period.
The court held that the claimant shall take the burden of proof when the cargo damages occurred exceeding the ‘30 days’. The reasons are as follows:
1. The both parties had agreed that the cargo owner shall bear the risks for the cargo damages if he fails to take the goods within the agreed period.
2. It is agreed in the Port Safekeeping Contract that ‘during the proper safekeeping of the cargo by the Party B (Yingkou Grain Branch), if abnormal changes endangering the safety of grain storage are found, Party B shall inform his agent who shall inform Party A (Dalian Columbia Ltd.) afterwards. Party A shall make effective treatments timely after receiving Party B’s notice.’
As for the bulk grain in this case, the defendants had taken the normal and proper safekeeping measures, such as ventilation and warehouse transferring, and the obligations of notice. The claimants did not provide evidence proving that the defendants did not take measures properly or sufficiently.
3. As mentioned above, in accordance with the Article 393 of the Contract Law, at the expiry of the warehousing period, if the depositor fails to retrieve the goods, the safekeeping party may terminate the contract by placing the goods in escrow in order to discharge his obligations.
In this case, although the defendants did not terminate the contract by the way of placing the goods in escrow and still bore the obligations of safekeeping, it would be unfair to apply the principle of presumed-default liability to decide whether the defendants performed his obligations, because it will be harmful to the economic interests and inconvenient for actual performance if the defendants were required to place the goods in escrow after the expiry of the warehousing period.
4. As a matter of fact, it was found that the soybeans were certainly self-heated under high temperature on discharge which was beyond the normal requirements of safekeeping the goods. Dalian Columbia Ltd and Yingkou Grain Branch had reached the period of ‘30 days’. The defendant Yingkou Grain Branch, on this basis, demanded Dalian Columbia Ltd. to retrieve the goods directly out of the port as soon as possible.
However, Dalian Columbia Ltd. did not take the goods but decided to keep the goods in the silos. The temperature continued to arise after entering into the silos and many times ventilation and changing the silos did not work. The defendant Yingkou Grain Branch repeatedly sent letters to Dalian Columbia Ltd. in order to demand retrieval. Nevertheless, Dalian Columbia Ltd. started to retrieve the goods forty days after the arrival at port. There were still 47,000 tons of soybeans remained in port forth month after the arrival at port and the remaining goods were impossible to be processed normally due to the damage caused by self-heating.
The court held that the damage to the cargo, namely the soybeans which could not be processed normally occurred 30 days after entering into the warehouse, and the claimant did not prove that the mentioned cargo damages were caused by any other reasons rather than the quality of the goods. It is highly possibly that the damage to the cargo in this case was caused by the quality and nature of the cargo itself.
Overall, the claimants shall prove that the damage to the cargo in this case was caused by the failure of the defendants in safekeeping the cargo properly. The claimants failed to satisfy this burden of proof and thus bore the adverse legal consequences.
CASE COMMENTARY
1. Limitation period for insurer’s subrogation claim
Chapter 20 of the CMC establishes a series of systems different from the Insurance Law on account of the uniqueness and internationalism of marine insurance, where the relationship between the provisions on marine insurance under the CMC and under the Insurance Law belong to the relations between the special law and the general law.
In terms of the subrogation rule, the starting time of limitation period regarding the insurer’s subrogation under the marine insurance contract and general insurance contract is different.
For marine insurance contracts, according to the Official Reply, ‘the starting time of the limitation period in which the insurer of a marine insurance contract exercises the rights of subrogation to claim for compensation shall be determined by the relevant provisions regarding the limitation periods for claims in the Chapter 13 of the CMC.’
Therefore, the limitation period for subrogation in the marine insurance contract shall be ascertained by the starting time for limitation period of insured’s claim in the relationship between the insured and the third parties in which the peril insured against occurred.
There are two preconditions on the application of the Official Reply. First, the legal relation of insurance shall be that of marine insurance. Second, the primary legal relationship shall be governed by the CMC. The two preconditions shall be met at the same time, otherwise the Official Reply shall not apply if one of them is not met.
As for general insurance contract, Article 16 of the Interpretation of Insurance Law stipulates that ‘the limitation period for insurer’s subrogation shall count from the day on which he obtains the right of subrogation’. In addition, the General Principles of the Civil Law of the People’s Republic of China provides that the limitation of action for protection of civil rights shall be two years.
The primary legal relationship in this case is the port safekeeping contract which shall not be governed by the CMC. Meanwhile the legal relationship of insurance under the Endorsement No. 004 of the open policy was not a relationship of marine insurance.
Overall, the insurance contract in this case was not a marine insurance contract but a general insurance contract. The provisions under the Interpretation of Insurance Law regarding the limitation period for subrogation claim shall apply in this case.
2. The issue is when the insurance contract is in violation of the mandatory provisions of the law, it is inevitably invalid?
A void contract refers to a contract which violates the prohibition provisions of laws and administrative regulations, or the public orders and good customs.
Article 52 of the Contract Law stipulates that a contract shall be null and void under any of the following circumstances: (1) a contract is concluded through the use of fraud or coercion by one party to damage the interests of the State; (2) malicious collusion is concluded to damage the interests of the State, a collective or a third party; (3) an illegitimate purpose is concealed under the guise of legitimate acts; (4) damaging the public interests; (5) violating the mandatory provisions of law and administrative regulations.
On the one hand, (5) requires that the contract shall be void and null only in violation of the mandatory provisions of laws and administrative regulations; on the other hand, it excludes the rules.
In the trial practice, the courts shall examine whether the contract violates the mandatory provisions of laws and administrative regulations from the perspective of encouraging the trade and regulating the market order, so as to determine whether the contract is null and void.
Article 14 of the Interpretation of Insurance Law regulates that ‘the mandatory provisions in Article 52 (5) of the Contract Law refers to the mandatory provisions on effectiveness.’
Therefore, the contract shall be deemed void and null when violating the mandatory provisions on effectiveness; the contracts which violate the mandatory provisions on administration shall not be regarded as void in a ‘one size fits all’ manner. However, the current law does not clearly set up the boundary between the mandatory provisions on effectiveness and the mandatory provisions on administration.
The Supreme People’s Court pointed out in Article 16 of ‘Guiding Opinions of the Supreme People’s Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation’ that, the people’s court shall synthesize the purposes of the laws and administrative regulations and balance the conflicting interests, such as the types of rights and interests, security of transaction and its objects regulated by the laws and administrative regulations, so as to determine the types of the mandatory provisions.
The courts shall hold the contract void if the contractual performance regulated by the mandatory provisions will damage the interests of the State and the public.
If such mandatory provisions regulate the ‘market access’ qualification of the parties, rather than certain types of contract behavior, or regulate the performance of certain contracts rather than certain kinds of contract behaviors, the courts shall carefully verify the validity of contract, especially they ought to solicit the opinions of the relevant legislative department or ask for instructions from the superior courts if necessary.
3. The distribution of the burden of proof when the cargo owner fails to retrieve the goods after the expiry of warehousing period
According to Article 394 of the Contract Law, the imputation principle for the safekeeping party is the principle of presumed-default liability, which means that the safekeeping party shall be liable for damages, where the goods are damaged or lost during the warehousing period due to improper safekeeping by the safekeeping party. The safekeeping party has the burden to prove the exemptions, otherwise he shall bear the liability for the damages.
Meanwhile, Article 394 provides the exemption upon which the safekeeping party is not liable for damages if the goods are deteriorated or damaged due to unconformity of the nature of the warehoused goods, or the fact that the goods exceed the valid storage period. Hence the safekeeping party shall not be liable for compensation if exemptions exist, unless the depositor can provide evidences to the contrary.
In this case both parties had reached an agreement on the warehousing period, namely ‘retrieval the goods out of the port within 30 days’. This agreement precluded the application of the principle of legal imputation. When the damage of heat loss became aggravated to the extent that the goods cannot be processed normally, it shall be presumed that the cargo loss is caused by the special condition of the goods when they were stored in the port. Accordingly, the loss thus caused should be initially borne by Dalian Columbia Ltd.
Unless the claimants can prove that the damages were caused by any other reasons, rather than that the improper safekeeping by the safekeeping party, they shall be liable for the damages. Under such an agreement, the burden of proof on whether the safekeeping party exercises his obligations of proper safekeeping is on the claimants.
Author: Le Ju, Judge of Bayuquan dispatched tribunal, Dalian Maritime Court
Editor: Jing Wang, Judge Assistant of Research Office, Dalian Maritime Court