China: Cargo Shortage Claims – Soybean Cases

Last Updated: 30 May 2014
Article by CAO Yanghui and Wilson Wang

Background

China, the world's biggest soy buyer, imported a record volume of soybeans in 2013 as the crushing industry continued to expand capacity to meet rising domestic demand for food oil and protein. According to General Administration of Customs, China imported 63.38 million tons of soy in 2013, a rise of 8.6 percent from 2012.

United States is China's biggest soy supplier followed by Brazil and Argentina. The soy trade across the Pacific creates huge logistic demand. It needs more than 1,000 Handysize and Handymax ships, the most widely used bulk carrier with a DWT range from 35,000 to 60,000 tons, to carry those cargos from America to Chinese coast.

In the past decades, we have handled many cases where the cargo receivers claim for short delivery. And Chinese maritime courts have developed different opinions regarding how to decide upon those claims.

Soybean Shortage Claim Cases

Data Source: Wang Jing & Co

Year & Vessel

Fact & Claim

2003
Talisman

Brazil Soy
Claim shortage 329.6 MT [0.523%]
Claim dismissed by GMC

2007
Red Tulip

Argentine Soy
Claim shortage 181.3 MT [0.312%]
Claim dismissed by the Courts

2009
Avra

Argentina Soy,
Claim Shortage 319.4 MT [0.485%]
Settlement reached

2011
MV DP

Argentina Soy,
Claim Shortage 649 MT [0.983%]
Settlement reached

2012
MV AS

Argentina Soy,
Claim Shortage 416 MT [0.630%]
Settlement reached

2012
MV CO

US Soy,
Claim Shortage 326 MT [0.560%]

Settlement reached

2012
Maritime Hareshino

US Soy,
Claim Shortage 299.2 MT
[0.503%]
Claim upheld by the Courts

2012
MV NF

Uruguay/Argentina Soy,
Claim Shortage 710.33 MT [1.057%]
Settlement reached

2012
Guangzhou Green Oil vs BOC Insurance

Argentina Soy,
Claim Shortage 294 MT [0.446%]

Judgment

2013
PICC Beijing vs Tianjin Port No.5 Stevedoring Co., Ltd.

This is a recent non-soy case.
South Africa Concentrate
Claim Shortage 5306 MT [6.928%] Judgment

2013
MV G

Brazil Soybean,
Claim shortage 338.62 MT [0.535%]
On going

2013
MV IK

Brazil Soybean,
Claim shortage 1035.1 MT [1.568%]
On going

Issues

Shortage claims are normally based on a comparison of CIQ draft survey/shore scales figure and bill of lading figure, which was usually ascertained by shore scales at the port of loading.

The difficulty starts at the port of loading. It is widely known by the shipping industry that in some areas, such as Argentina and Brazil and Certain notorious ports, like Constantza in Romania, shippers and/or customs would insist on bills of lading and sometimes mate's receipt being issued based on the shore figures. For instance, under Argentine law, the shippers are entitled to choose whether to use shore scales or a draft survey to ascertain outturn quantities of import cargoes. In practice, Masters would be in a dilemma when shippers pressed to insert in the bill of lading shore scale figures and these are higher than the figures ascertained by draft survey. If he accepted the shore figure, it would be likely the owner will encounter cargo shortage claims and vessel detainment at the port of discharge. If he refused, it was highly likely her vessel would be detained immediately detained at the port of loading. Therefore, as a compromise, the master usually will accept the shore figure and issue letter of protest at the same time. And sometimes in order to settle the issue, the ship and cargo interests may jointly invite an independent surveyor to conduct an additional draft survey at the port of loading.

Upon vessels' arrival at Chinese port, the discharged quantity would be ascertained by China Entry-Exit Inspection and Quarantine Bureau (CIQ) surveyors either through draft survey or shore scales. Cargo shortage claims would arise when the bill of lading figure was higher than the CIQ figure which bears heavy evidential effect in the eyes of Chinese Maritime Courts. Some courts, such as Guangdong Courts, has held owners liable for 0.5% shortage of bill of lading figure, which can be reasonably recognized as unavoidable inaccuracy of the draft survey while Shanghai Maritime Court and other courts generally accept the owner's 0.5% inaccuracy defense

Claim, defense and the Court's position

Claim and evidence

As before mentioned, the shortage claim is based on that CIQ draft survey figure is less than the bill of lading figure. The claim would be the difference between the two figures which ranges from 0.312% to 1.568% of the bill of lading quantity according to the case summary table above. Therefore, with respect to the carriage of 60,000 MT's soybean at the price of about 600 USD per ton, a normal claim amount would be about 0.11 to 0.56 million USD.

Usually, consignee/bill of lading holder may adduce evidences as follows:

1. Trade Documents

1.1 Sales Contract

1.2 Commercial Invoice

1.3 Bank Notice of Payment/Acceptance of the Letter of Credit

1.4 Original Bills of Lading

1.5 Custom Declaration Slip

2. Cargo Documents

2.1 Weight Certificate at the Port of Loading

2.2 Certificate of Quality at the Port of Loading

2.3 CIQ Weight Certificate

2.4 CIQ Quality Certificate

3. Others

3.1 LOU issued by P&I Clubs

Sales Contract

Cargo Quantity Clause

Usually, it is agreed as "60,000 metric tons, 10% more or less at seller's option and at contract premium" and "Weight to be final as per certificates issued by FOSFA/GAFTA approved independent surveyor at buyer's option at the port of loading, to be final and strictly binding on both parties".

Cargo Quality Clause

Usually it is agreed as "quality to be final as per certificates issued by Cotecna or Schutter (or other FOSFA Approved Surveyors) at port of loading, to be final and strictly binding on both parties"

Payment Clause

The payment is usually effected through Letter of Credit and the final amount payable under the L/C is often interrelated with the bill of lading quantity, CBOT future price, cargo quality tested by FOSFA approved laboratory and Interest rate agreed by the parties.

Weight Certificate

At port of loading, soybeans are usually loaded by conveyor belts and normally cargo quantity would be ascertained by weighing of the cargo on automatic scales. Weight certificates would be issued proving that the weighing process was superintended by the FOSFA/GAFTA approved surveyor as agreed.

Certificate of Quality

Cargo would also be sampled by the agreed FOSFA/GAFTA approved surveyor for testing quality. The items of tests include protein, oil content, moisture, etc. The certificates of quality normally show the sampling method and seal number of samples, test items, method and result. The moisture content is usually tested according to AOCS. Ac 2-41.

Defense and Evidence

Owners would usually rebut the shortage claim for four defenses.

Firstly, CIQ's figure is inaccurate because the ship constant is abnormal in comparison with other datum of previous and after voyages.

Secondly, the cargo is not short discharged because the accuracy of draft survey is 0.5% and the "shortage" is actually difference in measurement.

Thirdly, the cargo is short loaded at the port of loading according to draft survey conducted by the ship-side and/or independent surveyor.

Fourthly, the "shortage" is resulting from inherent vice of the cargo that moisture would evaporate and dry content would reduce during the voyage.

Normally, evidence can be adduced by the owners as follows:

1. Survey Report Issued by the P&I surveyor

2. Documents collected on board by the P&I surveyor

2.1 Mate's Receipts

2.2 Cargo Manifest

2.3 Stowage Plan

2.4 Draft Survey Report issued by independent surveyor at the port of loading

2.5 Ship's Particulars

2.6 Letter of Protest

2.7 Draft Survey Report issued by P&I surveyor at the port of discharge

2.8 Tally Receipt at the port of discharge

2.9 Draft survey sheet conducted by crew members at the port of discharge

3. Expert Appraisal Report (if applicable)

4. Statement of the Master (if applicable)

5. Draft survey records in other voyages before and after the material voyage (if applicable)

Court's position on owner's defenses

According to the current legal practice, it is extremely hard to challenge the CIQ's draft survey report and establish a case in favor of the owners. Following, we would explore owners' four defenses in more details and summarize the difficulties may encounter in the court.

Challenge CIQ Weight Certificate

Generally, Chinese courts are reluctant to find fact which would be different or against the conclusion made by government bodies such as CIQ. If the judgment showed fact different from CIQ Certificate, it would mean CIQ was wrong and certain personnel would be punished. Thus, only in some rare and extreme cases, the court did finally rule differently.

To further explain, we cite the case MV NF which was handled by us in 2012. In this case, it can be said that there is significant deficiency regarding the draft survey conducted by the CIQ surveyors. However, the court is still reluctant to find the actual discharged cargo quantity which is likely to be different from the number revealed in the CIQ Weight Certificate.

In the NF, the problem is regarding the calculation of the ballast water in cargo hold No. 4 at final draft survey. When the two CIQ surveyors came on board NS, the vessel was still pumping sea water into Cargo Hold No.4. To accurately read the depth of ballast water and ascertain the quantity of ballast water, one way is to make sounding through sounding pipes or wait until ballast water filled the whole Cargo Hold. However, the CIQ surveyors refused to take those two methods despite the Master's strong protest. Instead, the surveyors ascertained ballast water through reading the meter ruler printed on the bulkhead. Afterwards, the cargo receiver claimed short delivery of 710.33 MT's cargo amounting to 1.057% of bill of lading quantity.

The cargo receiver suited the owner in front of Guangzhou Maritime Court. The claimant relied on CIQ Weight Certificate to prove the quantity discharged from the vessel. However, according to the Weight Certificate, the quantity of cargo was ascertained through shore scales despite CIQ had conducted the draft survey.

We addressed to the court the deficiency of CIQ draft survey and submitted that the Shore Scale Weight Certificate cannot prove shortage occurred within the carrier's period of responsibility as prescribed in Chinese Maritime Code. The court expressed that CIQ was government body, and their Weight Certificate was persuasive. The court furthered it was difficult for them to find the fact which would be different from CIQ's Weight Certificate. The case was finally settled after court mediation.

Inaccuracy Defense

Regarding the defense of 0.5% accuracy of draft survey, the recent two cases show that there were different opinions within the maritime courts. Guangzhou Maritime Court and Guangdong Higher Court currently refuse to accept 0.5% defense while the same is generally accepted by other maritime courts such as Shanghai Maritime Court and Tianjin Maritime Court. To clarify, it is useful to have more detailed analysis regarding two recent cases as follows.

Case 1: Guangzhou Green Oil vs BOC Insurance

Fact

The plaintiff Guangzhou Green Oil was the buyer and receiver of a cargo of Argentina Soybeans. The defendant BOC Insurance was the marine cargo insurer of the shipment.

When the cargo arrived at Guangzhou, the quantity discharged was only 65,636 MT according to CIQ Weight Certificate while the bill of lading recorded that 65,930 MT's cargo had been loaded on board. At the port of loading, the moisture rate of the cargo was 11.57% according to the FOSFA approved surveyor. At Huangpu, the moisture rate was 10.7% according to the CIQ quality test. The cargo receiver claim shortage of 294 MT against the insurer under the cargo insurance policy. However, the insurer refused the claim, and the case was lodged in front of Guangzhou Maritime Court.

Defense and the Courts' Position

The cargo insurer raised two defenses, i.e. 0.5% inaccuracy defense and moisture evaporation defense. However, both defenses were refused by Guangzhou Maritime Court and Guangdong Higher Court.

The courts' reasoning can be summarized as follows. Regarding the finding of facts with respect to shortage, the courts held that although inaccuracy of measurement always exists and is unavoidable, the quantity evidenced by CIQ Weight Certificate shall be held as the "true quantity discharged" subject to that the CIQ has carried out the survey as per the regulation.

Regarding the 0.5% inaccuracy defense, the courts rejected the defense as it was agreed in the cargo insurance policy that "the policy covers shortage liability till the port of discharge, weight discharged to be final as per CIQ weight certificate".

The court further expressed its opinion with respect to whether the carrier/insurer shall be granted 0.5% allowance. The court's principle was that the carrier/insurer shall always pay and only in some exceptional circumstances will be illegible for exemption from liability. The courts stated that considering China was the top importer of major cargo such as grain, iron ore and coal it is more advisable to protect the interest of the cargo receiver.

Regarding the moisture evaporation defense, the courts held that the defense should not be upheld due to the moisture rate was tested according to different standards, in Argentina as per FOSFA standard and in China as per Chinese statutory standard.

Case 2: PICC Beijing vs Tianjin Port No.5 Stevedoring Co., Ltd.

Fact

The plaintiff PICC Beijing was the marine cargo insurer of a shipment of South African Concentrates. The defendant Tianjin Port No.5 Stevedoring Co., Ltd., following referred as Tianjin No.5 Stevedore, was the stevedore who unloaded and transfer the cargo from the vessel to the warehouse of Tianjin Port.

On 25 April 2011, MV "E. R. Brandenburg" arrived Tianjin with her cargo of South African Concentrate. The bill of lading recorded 76,614 MT's cargo had been loaded. According to the CIQ Weight Certificate, 76,586 MT's cargo (-28 MT, -0.03%) was discharged from the vessel. According to the shore scale weighting, the quantity discharged was 71,392.52 MT (-5,221.48 MT, -6.815%). According to the warehouse scale weighting, the quantity entered into the warehouse was 71,279.96 MT (-5,5334.04 MT, -6.962%). The cargo insurer paid the insurance claim and filed the subrogation claim against the Tianjin No.5 Stevedore in front of the Tianjin Maritime Court.

The cargo insurer submitted that the difference between CIQ figure and warehouse scale figures showed that the cargo was short delivered. The stevedore rebutted the claim by adducing the port CCTV records, trucks GPS records, police investigation report and other evidence to prove that there was no shortage occurred during the unloading operation and transit to warehouse. The court held that Tianjing No.5 Stevedore should not be liable for the alleged shortage because the defendant's evidence was stronger than the plaintiff's.

The court reasoned that various factors would influence the accuracy of draft survey such as vessel's data accuracy, errors in reading vessel's draft, errors in testing the density of sea water etc. The court furthered that evidence showed that Tianjing No.5 Stevedore had kept a proper management and supervision system over the whole operation and the police concluded that there was no pilferage occurred after investigation. Therefore, the court finally concluded that there was no shortage occurred and Tianjing No.5 Stevedore was not liable.

Short loading and moisture evaporation defenses

Chinese courts generally hold "quantity unknown" clause as ineffective against third party bill of lading holder or cargo receiver and insist owners to deliver cargo as per bill of lading quantity. Thus, there is little prospect for the short loading defense to be upheld by Chinese courts.

Regarding the moisture evaporation defense, the courts accepted the defense in the old case Talisman and Red Tulip. However, as mentioned before in the case Guangzhou Green Oil vs BOC Insurance, recently the courts would not accept such defense because it was held as inappropriate to compare the moisture rate tested as per different standards at the port of loading and discharge.

Summary and Comments

It is widely accepted by the maritime courts that inaccuracy exists and is inevitable technically in the draft survey.

According to recent cases, Guangzhou maritime court would hold the carrier liable for shortage less than 0.5%, which can be reasonably held as resulting from draft survey inaccuracy. However, other maritime courts such as Shanghai and Tianjin Maritime court have different view regarding the same issue. According to Guangzhou Maritime Court, while inaccuracy was inevitable, it was advisable to hold the CIQ Weight Certificate figure amounting to true quantity. It was further held by the Guangzhou Maritime Court that carrier should be liable for shortage less than 0.5% considering protection of cargo interests.

To minimize the risk of shortage claim, the key issue is regarding CIQ Weight Certificate which is extremely hard to challenge in front of Chinese Maritime Courts. Carrier shall fully cooperate with the CIQ surveyors in order to obtain the most accurate draft survey result.

In defending the shortage claim in the future, it seems that traditional defenses are useless in front of Guangzhou Maritime Court. It may be advisable to raise the de minimis rule, which means that the law does not concern itself with trifles to defend the future cases. Regarding the court's decision between cargo and ship interests, it may be useful to address to the court the indemnity clause in the charter party proving that the court was apportioning liability between cargo seller and buyer rather than between carrier and cargo receiver. And if owners can acquire a cargo quality report in which the moisture rate was tested according to Chinese statutory standard, it can help to persuade the courts to believe the shortage was actually caused by moisture evaporation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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