Fordeco Sdn Bhd v PK Fertilizers Sdn Bhd [2019] MLJU 596

Federal Court (Putrajaya)  

The Legal Standing on Salvage Operation of a Cargo Vessel 

1. On 2 February 2006, the vessel Thor Traveller ran aground on coral reefs off the northeast coast of Sabah near Kudat, during rough weather with strong winds and rain. The vessel was carrying about 22,000 metric tonnes of bulk rock phosphate for PK Fertilizers Sdn Bhd on a voyage from Egypt to Lahad Datu. Because the vessel was stuck on the coral, both the ship and the cargo were in danger and could not remain stranded indefinitely.
2. To refloat the vessel, part of the cargo needed to be removed. Dumping the cargo was not an option due to pollution risks, so the master notified the owners, who declared general average and arranged for the cargo to be offloaded onto other vessels. Their agents, Barwil Agencies Sdn Bhd, contacted Sapu Lasi Enterprise on 6 February 2006 for assistance. Two barges were available: the Woodman 32 and the Hathaway, the latter owned by Fordeco Sdn Bhd.
3. The Woodman 32 was deployed first but was too small to offload enough cargo to lighten the stranded vessel. As a result, Fordeco agreed on 8 February 2006 to provide the Hathaway and tug Fordeco 37 for RM300,000. The agreement included a clause excluding Fordeco from liability for any loss or damage to the cargo. These terms were accepted by the vessel owners, but there is no evidence that PK Fertilizers was informed.
4. PK Fertilizers became aware of the grounding through email with the vessel owners’ agents on 6 February 2006. They expressed concern that cargo was being discharged at sea without notice and requested their surveyors to attend any cargo-handling operations. This communication was not shared with Fordeco.
5. Approximately 3,355 metric tonnes of cargo were transferred onto the Hathaway, and about 656 metric tonnes onto the Woodman 32. Once sufficiently lightened, the Thor Traveller was successfully refloated and continued to Lahad Datu. The majority of the cargo onboard the vessel arrived safely.
6. However, when the cargo on the Hathaway was discharged at Lahad Datu, it was found to be wet and mixed with debris. PK Fertilizers’ surveyors observed the discharge. Fordeco argued that the cargo owners failed to separate the wet from the dry cargo and allowed it to be further damaged by rain at their warehouse.
7. On 19 February 2006, PK Fertilizers lodged a protest with the vessel owners. While they later paid their general average contribution, they claimed a loss of RM550,387.75 for the damaged cargo, which was ultimately sold for RM288,475.50. The cargo owners’ insurers compensated them and sued Fordeco in negligence and bailment, alleging Fordeco, as a sub-bailee, owed a duty to return the cargo in its original condition.
8. Fordeco denied liability, maintaining that the operation was a salvage effort carried out during an emergency, not a normal contract for the carriage of goods. They argued that the legal standards for salvage, which are more lenient due to the urgent circumstances and public policy considerations, should apply.
9. Accordingly, the High Court Judge found Fordeco liable for the cargo owner’s loss and damage on the grounds of both bailment and negligence.
10. The Court of Appeal affirmed the High Court’s decision. Aggrieved, Fordeco appealed to the Federal Court.

1. Whether the offloading and rescue efforts carried out by hired barges to save the stranded vessel’s cargo, after the vessel ran aground and general average was declared, should be legally treated as a salvage operation under maritime law.
2. Whether the duty of care over the safety of individual cargo on board a vessel that has run into distress has to be evaluated differently and in relation to the perils facing various parties engaged in the operation?

1. Whether the offloading and rescue efforts carried out by hired barges to save the stranded vessel’s cargo, after the vessel ran aground and general average was declared, should be legally treated as a salvage operation under maritime law.

1. The Federal Court emphasised that the declaration of general average was a critical factual backdrop. A general average act, as defined in Birkley v Presgrave (1801) 1 East 220 and reflected in the York–Antwerp Rules, involves voluntary and extraordinary expenditure undertaken for the common safety of ship and cargo. Here, both vessel and cargo were imperilled when the “Thor Traveller” grounded on coral reefs in rough seas. The owners’ decision to hire barges and tugs to lighten the ship constituted an extraordinary expense beyond the usual obligations under the contract of affreightment. The cargo owners’ acceptance of the general average contribution confirmed the existence of a shared maritime peril.
2. The Federal Court held that the learned Judge did not apply the correct legal test from The Aldora [1975] 1 Lloyd’s Rep 617 to determine whether the contract was for towage and carriage of goods or for salvage. The Court noted that the vessel faced danger from circumstances that the parties could not have reasonably anticipated, including running aground on coral and becoming stranded.
3. The Federal Court further observed that the actions taken, such as refloating the vessel and hiring barges and tugboats, went beyond what would normally be expected under a towage or carriage contract. The salvage situation continued until the vessel and cargo were safely delivered to Lahad Datu, with the carriage of cargo forming an essential part of the salvage operation.
4. Accordingly, the Federal Court concluded that the contract between the vessel owners and Fordeco was a salvage contract, not a standard towage or carriage agreement. The learned Judge erred in treating the case as a normal carriage of goods scenario and in considering Fordeco a sub-bailee, rather than recognizing its role in rescuing the imperilled vessel and cargo.
5. Consequently, the Federal Court held that the High Court erred by disregarding both the general average declaration and the surrounding circumstances, which clearly indicated a rescue operation rather than routine towage or carriage. The exclusion clause in the hire agreement also aligned more naturally with a salvage setting than an ordinary carriage contract.
6. On the question of whether the cargo owners were bound by the terms of the salvage agreement, the Federal Court applied the doctrine of agency of necessity. Under common law, a master may bind cargo interests where emergency conditions demand immediate action, as affirmed in The Choko Star [1990] 1 Lloyd’s Rep 516 (CA), The Unique Mariner [1978] 1 Lloyd’s Rep 438, and The Pa Mar [1999] 1 Lloyd’s Rep 338. The Court found that the elements required for necessity were met: salvage assistance was urgently required; it was impracticable to obtain timely instructions from cargo owners; the master acted in good faith; and entering the salvage contract was objectively reasonable. Therefore, the cargo owners were legally bound by the agreement’s terms, including the exclusion clause.
7. Therefore, the Federal Court determined that the operation was a salvage service and that the cargo interests were bound by the terms agreed by the vessel owners acting as agents of necessity in an emergency.

2. Whether the duty of care over the safety of individual cargo on board a vessel that has run into distress has to be evaluated differently and in relation to the perils facing various parties engaged in the operation?

1. The Federal Court held that the High Court applied the wrong legal standard when assessing Fordeco’s alleged negligence. The key error was treating the situation as an ordinary carriage-of-goods case, where strict bailment principles under section 104 of the Contracts Act 1950 would ordinarily govern. Instead, the Court clarified that because the agreement between the vessel owners and Fordeco was a salvage contract, not a standard towage or transport arrangement, the applicable standard of care is fundamentally different.
2. The Federal Court emphasised that salvage law recognises the unique circumstances under which salvors operate typically responding to vessels in distress, in hazardous conditions, and in emergencies requiring immediate action. Because of this, Courts traditionally adopt a lenient and flexible approach when judging salvor negligence. This long-standing policy was recognised in early cases such as The Phantom [1866] LR 1 A & E 58 and The Charlotte (1848) 3 W Rob 68, and reaffirmed in The St Blane [1974] 1 Lloyd’s Rep 557, where Brandon J stressed that salvors who act in good faith to save life or property should not be readily condemned for errors of judgment. The objective is to encourage, not deter, salvage efforts.
3. The modern position, as confirmed by the House of Lords in The Tojo Maru [1972] AC 242, is that salvors may be liable in negligence, but liability must be assessed with recognition of the emergency environment and public policy considerations. Salvors are not held to the same strict standard as professional carriers or bailees in routine commercial operations. Only negligence that is separable or independent from the salvage effort, or conduct that falls outside the exigencies of rescue, will give rise to compensable fault.
4. The Federal Court concluded that the damage affected only a small portion of the cargo, while the salvage as a whole was successful in saving the ship and the bulk of the cargo. This outcome, viewed in totality, did not amount to actionable negligence under the more forgiving salvage standard.
5. Therefore, the Federal Court held that the High Court erred by imposing the ordinary “reasonable bailee” standard, which assumes commercial transport conditions rather than an emergency rescue context. Applying the correct principles of maritime salvage, as reflected in The Tojo Maru [1972] AC 242, The St Blane [1974] 1 Lloyd’s Rep 557, and Anglo-Saxon Petroleum Co Ltd v Admiralty (The Delphinula) [1947] KB 794, Fordeco could not be said to have breached its duty of care. The damage was incidental to a legitimate salvage effort and did not justify liability.
6. Accordingly, the Federal Court found that the duty of care toward cargo during a salvage operation must be evaluated in light of the emergency, dangers, and practical constraints faced by the salvor, not by applying strict standards appropriate only to ordinary carriage of goods.

The Federal Court overturned the High Court’s decision entirely. The Respondent’s claim against the Appellant was dismissed with costs. The Federal Court ordered the Respondent to return the sum of RM849,590.82 previously paid by the Appellant. In addition, the Appellant was awarded RM100,000 in costs, subject to allocatur, and the deposit paid was directed to be refunded.

Courts must evaluate salvage operations holistically, considering the urgency, perils, practicality, and purpose of the actions taken. The Federal Court made clear that applying ordinary carriage-of-goods principles without appreciating the realities of salvage would unfairly penalize salvors and undermine maritime public policy. Consequently, Fordeco was not liable for the cargo damage, and the appeal succeeded.