Redefining the cargo loss/theft balance

On Christmas Eve in 2010, the Valle di Cordoba was attacked by pirates in the territorial waters of Benin while awaiting discharge orders for Nigeria. About 16% of the Bill of Lading quantity (5,300 mt) of the cargo of premium motor oil was transferred onto a lightering vessel and stolen.

Cargo interests presented a claim to the shipowner for $5.8m, which represented the value of the stolen cargo, plus costs.

The underlying charter party was a Beepeevoy 3 (BP3) with additional Trafigura terms. The relevant clause reads as follows:

IN-TRANSIT LOSS CLAUSE: In addition to any other rights which Charterers may have, Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.5% and Charterers shall have the right to claim an amount equal to the FOB port of loading value of such lost cargo plus freight and insurance due with respect thereto. In-transit loss is defined as the difference between net total calculated vessel volumes after loading at the loading port and before unloading at the discharge port.

It is noteworthy that the clause had been amended through the recap to read “claim” instead of “deduct from freight”.

The case was referred to the High Court of Justice in London pursuant to the jurisdiction clause in the charter party, and subsequently to the Court of Appeal. The main questions to be decided upon were whether cargo interests could rely on the In-Transit Loss (ITL) clause to claim the value of the cargo which was stolen by the pirates, and, if so whether this would exclude the application of the Hague-Visby Rules and the exceptions to owners’ liability therein.

Theft question

A literal reading of the clause might suggest that the owners have accepted strict liability for any loss in-transit in excess of 0.5%, including cargo lost as a result of theft. The main argument was that the clause was drafted so broadly that it must by necessity include all forms of loss arising on the basis of the “difference between net total calculated vessel volumes after loading at the loading port and before unloading at the discharge port”.

The owner argued that the clause was intended only to apply to shortages caused by the physical characteristics of the cargo as a direct result of the transit, e.g. caused by evaporation or other normal events of transportation.

Nevertheless, even if the clause were to apply to this case it would remain unclear whether the clause would exclude the application of the Hague-Visby Rules (which were incorporated into the charter party, potentially providing owners with exceptions of liability found in article IV.2 (c), (r) or (q)). The charterer submitted that negotiated terms should weigh heavier than “standard” terms.

The charterer maintained that the ITL clause imposes a strict liability on the owner, and thus defences under the charter party would no longer be available to the owners. The express clause would supersede other charter party terms and therefore the defences under Hague-Visby. However, the counter-arguments were that it is not unusual for express clauses merely to replicate rights that are otherwise available. Further, even if the ITL clause confers extra rights, there is a perfectly natural interpretation which allows the clauses to be construed sensibly together. Moreover, it would not make commercial sense for owners to agree to a clause which would potentially make the shipowner insurer of the cargo.

Broad interpretation

The charterer submitted to the court that the in-transit loss clause must be interpreted broadly, to impose strict liability on owners for any cargo loss above 0.5%. It further maintained that an express provision would supersede other potential defences found in the charter party, including the Hague-Visby Rules, as the clause would otherwise not add any value to the charterer´s rights that they would have in any event.

The owner on the other hand adopted the opposite opinion on both issues, but it needed to succeed on only one issue to defeat the claim.

As a starting point and in relation to the first issue – the interpretation of the wording of the clause -the judge evaluated possible commercial considerations. He concluded that there are two main in-transit losses generally accepted by the industry to fall within the meaning of the clause: First, a difference of volume at measuring-points and second, physical loss due to internal handling of the cargo during the voyage. The clause was designed to reflect a maximum (i.e. 0,5%) amount at which stage any potential loss could no longer be explained as naturally occurring during a voyage. Further, in his view the ITL clause defines how the amount of in-transit loss is determined rather than specifying the kinds of loss that are covered by the clause.

The judge also stated that if the parties’ intentions were to put all risk on the owner – which is an unusual distribution of risks in charter parties (essentially making the owner an insurer of the cargo) – then they would have needed to make the wording and thus their intention abundantly clear.

With these considerations in mind, the judge concluded that in-transit loss can only a mean loss which is incidental to the carriage of oil products, such as in the abovementioned two examples. It therefore does not extend to losses which occurred because of the action of pirates. The judge additionally referred to an anomaly that would appear if the charterer were to succeed, i.e. that the owner would be strictly liable for loss but not for damage to the cargo.

Carriage convention

The judge proceeded to the second issue in the alternative, i.e. whether the ITL clause should prevail over other defences, such as these found in the Hague-Visby Rules. As a starting point, the judge opines that clause 46. is not a standard “clause paramount”, but had been given obvious consideration during the foundation of the contract. Moreover, he states that the ITL applies “in addition to any other rights which the charterer may have” and does not contradict with these “other rights”.

The clause confers additional rights in that the charterer would be able to recover any in-transit loss over 0,5% caused by difference in measurement, and that further, it can reclaim the FOB value – rather than the market value – which would normally be the point of reference. As such this clause did indeed add to charterers´ other rights under the contract and would therefore not contradict with any other rights found elsewhere.

Summarising, the judge laid down the decision that, firstly, the ITL clause did not apply to this kind of loss (piracy theft) at all, and secondly, that even if it were to apply, the Hague-Visby Rules apply (by way of incorporation into the contract of carriage), and the “public enemies” exception (or other exceptions) of the Hague-Visby Rules will exempt owners from liability.

The charterer decided to have the decision reviewed by the Court of Appeal – and were granted leave to appeal by that court – where the burden was on the appellant to convince the court to overturn the trial court on both points.

The charterer submitted again its previous arguments including its opinion that it had already been decided by binding authority that an owner could not rely on the Hague-Visby Rules to claim back freight which had been rightly deducted in respect of an unexplained losses which fell within an “In-Transit Loss” clause.

The owner in the meantime maintained its position and pointed out that authority relied on only applied to deductions from freight – not to claims made by the charterer.

The Court of Appeal held for the owner on both points.

Incidental loss

Lord Justice Longmore in writing on the application of the ITL clause to piracy theft, disagreed with the charterer’s submissions, and maintained that the ITL clause would cover only loss that is “incidental to the carriage of cargo”, or “loss of a kind encounter on a normal voyage”. Further, that if owner and charterer wanted to agree to make the owner an insurer of the cargo for any kind of loss in transit then they would have drafted a clearer clause to that extend.

On the second issue, the Court of Appeal agreed with owner’s interpretation of the case authority, i.e. that the Hague Visby Rules only deal “with the carrier´s liability and not in any way with his entitlement to freight”. On this issue the decisive point was that the ITL clause was amended to read “claim” instead of “deduction from freight” and as such the Hague-Visby Rules can be applied. He further maintained the High Court’s arguments on the application of the Hague Visby defences.

By upholding the owner’s contentions on both issues this judgement will add to the legal certainty as to the interpretation of in-transit loss clauses. There may be existing charter fixtures where similar provisions are incorporated. The introduction of this claim brought some uncertainty to the market. This decision does not clarify what losses exactly fall within the scope of ITL clauses, but does give an indication that these losses may have to be a “natural” and direct result of an ordinary, “normal” voyage.

Finally, it may be suggested that if owners consider including ITL clauses in their charters, they should always ensure that the words “deduct from freight” are changed to “claim”, and that the language in the clause incorporating the Hague-Visby Rules must make it abundantly clear that it applies without exception. The law established in this case ensures at the very least that the Hague-Visby defences shall remain intact, in such instances.

Niklas Sonnenschein is a claims executive at Skuld’s Oslo office. This article refers to Trafigura Beheer BV v. Navigazione Montanari Spa (Valle di Cordoba) [2014] EWHC 129 (COMM),[2015] EWCA Civ 91