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Web alert: In Transit Loss (ITL) clauses: do they apply to ALL cargo shortage claims? It seems not....

29 May 2015

The Valle di Cordoba was chartered out on a BVOY3 form, with additional and amended terms. On the 24 December 2010, 15 armed pirates boarded the ship and seized control near Lagos, Nigeria. During the seize they transferred 5,291mt (around 16% of the bill of lading quantity) of its oil cargo to a lightering ship before vanishing.

This case [1] pivoted on the charterer’s attempt to minimise their losses. Under the amended charterparty terms there was an In-Transit Loss Clause (ITL) which read as follows (our emphasis):

‘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 the net vessel volumes after loading at the loading port and before unloading at the discharge port.’

The charterer alleged that the clause had a wide ambit and meant the owner was responsible for any loss of cargo which occurred in between the loading port and discharge port, which resulted in over 0.5% loss. The charterer therefore claimed this loss, incurred by pirates, could be claimed back from the owner. The owner, on the other hand, was of the opinion that the clause was drafted solely in order to cover shortages caused by the physical characteristics of the cargo and as a direct result of the transit. Even if this wasn’t the case, they argued that the Hague / Hague-Visby Rules, incorporated by virtue of another clause in the charter, would give them defences to the claim - due to the loss being caused by an act of piracy.

The questions put before the English court were:

  1. On a true construction if the [ITL] clause, did the transferred cargo discharged from the ship … constitute an ‘in-transit loss’ for the purpose of that clause?
  2. On a true construction of the charterparty as a whole, did the [ITL] clause impose strict liability upon the owner in respect of such a loss, or were the exceptions under other clauses in the charter available, so as to exclude that liability?

The Court of Appeal followed the decision held by the English High Court, in rejecting the charterer’s claim. The judges held that the ITL clause was designed, due to it being notoriously difficult to determine oil shortages, to cover loss ‘incidental to the carriage of such cargo’ or ‘loss of a kind encountered on a normal voyage’ over and above a certain (agreed) percentage. It was held that the ITL clause in this charter would not cover the deliberate act of pirates in stealing cargo. The judges also held that the defences under the Hague-Visby Rules would be applicable and would allow a successful defence to this cargo claim anyway.

The outcome is certainly a welcome one for owners, as it protects them from bearing an unfair amount of liability for acts (and cargo loss) beyond their fault/control. Essentially this case is authority that, when a similar ITL clause is used, an owner will only be liable for an unexplained, incidental, loss of cargo incurred whilst in transit, over and above any agreed set percentage.

However, there is nothing stopping a charterer from attempting to impose more onerous or stringent terms on an owner in the future. So, when negotiating such ITL clauses into future contracts, owners need to be extra vigilant as to their precise wording and always try to ensure a higher percentage of leeway is granted and to have the chosen method of cargo calculation to be the ship figures (rather than shore side).

The case also neatly highlights the importance of having the Hague / Hague-Visby Rules incorporated into charterparties, time and/or voyage. In this case, had the court decided that the charterer had a right to make such a claim under the ITL clause, the Hague / Hague-Visby Rules would still have provided a successful defence for the owner.

It is always, therefore, worth looking to implement a clause paramount into any charter; and the club deals with this issue further in their earlier web alert on clause paramount’s which can be found here. An example of such is clause 24 NYPE 1946 form:

‘It is further subject to the following clauses… the Carriage of Goods by Sea Act of the United States, approved April 16, 1936, which shall be deemed to be incorporated herein…’

This article intends to provide general guidance on the issues arising as a matter of English law. It is not intended to provide legal advice in relation to any specific query. Members requiring further information on this topic should direct their enquiries to either their usual contact at the club, or to the authors of this article.

Defence cover is, by its very nature, discretionary in that the club must be satisfied as to the merits and quantum of the claim in question and the likelihood of achieving a successful outcome, if it is to lend support.

[1] Trafigure Beheer BV v Navigazione Montanari S.p.A. (2015] EWCA Civ 91