Worldwide: Loss And Liability

Vessel hijackings for fuel theft are on the rise – particularly in Southeast Asia. Against this background, Tom Gorrard-Smith and Sam Sidkin of Clyde & Co review a recent UK Court of Appeal ruling which confirmed that shipowners are not liable for loss of cargo stolen by pirates

Despite the general decline in the price of oil, fuel theft is driving a rise in global ship hijackings by pirates, with it becoming increasingly prevalent in Southeast Asia, a trend evidenced in early May by the hijacking of the Ocean Energy in the Malacca Straits.

According to data from the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia (ReCAAP), there were 183 reported piracy incidents in 2014 – a 10-year high – many of which related to fuel theft with pirates targeting small, low freeboard tankers, boarding vessels and siphoning off their fuel cargos.

Fuel theft has also been big business in West African waters for some time, in particular in the Gulf of Guinea. A legal dispute arising from an attack on the Valle di Cordoba, a tanker carrying a cargo of premium motor spirit from Abidjan to Lagos, in December 2010 has recently been determined by the Court of Appeal (CA)1 in London. Trafigura (the charterers) claimed against Navigazione (shipowners) in respect of the oil stolen in the incident.

In rejecting the charterers' appeal against the Commercial Court's earlier ruling, the CA clarified what constitutes an 'in transit-loss' for the purposes of a voyage charterparty. The in-transit loss clause (ITL clause) in question covered 'loss of a kind encountered on a normal voyage'. The CA confirmed that it did not therefore permit charterers to recover from the shipowners.

Background

The terms of the charterparty between the parties contained the following ITL clause:

'...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 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 vessel volumes after loading at the loading port and before unloading at the discharge port.'

The Hague-Visby Rules (the Rules) were incorporated into the charterparty. Article IV of the Rules provides exceptions to the carrier's liability for loss of, or damage to, the cargo. Significantly, loss resulting from piracy is excluded by these provisions.

On Christmas Eve 2010, pirates boarded the Valle di Cordoba off the coast of West Africa. They transferred 5,291 metric tonnes (mt) of oil, out of a total of 33,460 mt, to an unknown lightering vessel and made off with the stolen cargo. The charterers claimed against the shipowner for the loss of the oil.

Commercial Court

In order to succeed with their claim, the charterers needed to persuade the Commercial Court of two things. Firstly, that the loss of oil constituted in-transit loss for the purposes of the ITL clause; and secondly, that the ITL clause made the shipowner 'strictly liable' – in other words, that the shipowner was precluded from relying on the exceptions contained in the Rules to defend the claim. Mr Justice Smith held that:

1. On a true construction of the ITL clause, the lost cargo was not in-transit loss; and

2. In any event, the Rules exempted the shipowner from liability.

Accordingly, the charterer's claim failed. It obtained leave to appeal.

Court of Appeal

The appeal failed at the first hurdle, the majority of the CA agreeing with Mr Justice Smith that the lost cargo was not 'in-transit loss'. Mr Justice Smith had observed that as the clause did not specify the kinds of loss qualifying as 'in-transit loss', the Court was compelled to give the expression its natural business sense and have regard to the commercial background of provisions of this kind. In view of the frequency of short delivery claims but difficulty in determining them, ITL clauses are included in charterparties to define the point at which a charterer will be entitled to claim against a shipowner for an unexplained difference in volume, as measured on loading and unloading – in this case, over 0.5%.

The CA followed the lead of the Commercial Court, holding that in-transit loss therefore connotes loss of a kind encountered on a normal voyage. Clearly this did not include loss by piracy. It rejected the charterers' contention that an in-transit loss encompassed all loss in transit, however such loss occurs. The CA ruled that such an interpretation had three obvious flaws:

1. A shipowner who had agreed to an ITL clause of this type would be liable to a greater extent than a common carrier (who at common law is excused for loss caused by the Queen's enemies, i.e. pirates). That cannot have been the parties' intention.

2. A shipowner would be liable for all loss however it occurs, but not for any damage or contamination however it occurs. This would be an irrational distinction.

3. The ITL clause in question would effectively make a shipowner an insurer of the cargo. It lacked sufficient clarity to achieve that outcome.

Contrary to the majority's view, Briggs LJ declared that the ITL clause appeared to impose liability for in-transit loss regardless of the cause of that loss (provided it exceeded 0.5%). Nevertheless, all three members of the CA agreed that even if the loss by piracy constituted in-transit loss for the purposes of the ITL clause, the Rules excused the shipowner from liability.

The CA had been referred to a single authority: Lakeport Navigation Company Panama S.A. v Anonima Petroli Italiana S.p.A. (The 'Olympic Brilliance') [1982] 2 Lloyd's Rep 205. At issue in that case was an ITL clause which provided that where there was a shortage of oil exceeding 0.5%, the charterers could make a deduction from freight. It was decided that this was a permanent deduction and as such, it was irrelevant whether or not the shipowner was liable under the charterparty. Trafigura argued that this supported its case that the Rules did not apply to its claim for loss of cargo. Its contention was rejected. It was clear from the judgment in The Olympic Brilliance case that had the ITL clause referred to a claim for loss – as opposed to a deduction from freight – the shipowner would not have been liable where the loss fell within the exceptions.

In the CA's view, the ITL clause and the clause incorporating the Rules' exceptions (Clause 46) were compatible – neither made the other otiose. Losses of a kind encountered on a normal voyage were covered by the ITL clause but a shipowner would not be liable for other kinds of loss provided they fell within the exceptions.

Comment

Whilst the charterers' arguments to persuade the CA that the ITL clause applied to all loss in transit, regardless of the cause of that loss, were inventive, the CA was not convinced. In our view, the CA's judgment is a sensible reflection of the commercial reality underpinning ITL clauses and the parties' allocation of risk. Shipowners who have concluded charterparties containing ITL clauses of this nature will be relieved; the CA's decision confirms that they have not unwittingly assumed liability for loss by piracy.

As the CA observed, if in fact the parties' intention is to make a shipowner responsible for any short delivered cargo, whatever the circumstances of the loss, such a clause needs to be clearly drafted to that effect. Yet the CA's decision also highlights that, even if the parties expressly provide that such losses are covered by an ITL clause, such a clause could still be defeated by the exceptions contained in the Rules subject to the circumstances of the loss.

Footnote

1 Trafigura Beheer BV v Navigazione Montanari SpA [2015] EWCA Civ 91

Originally published in Bunkerspot Volume 12 Number 3 June/July 2015

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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