LOSS PREVENTION
P&I Legal: The scope of in-transit loss clauses
and the application of Hague-Visby defences
Line connected to a vessel (Source: Skuld )
BACKGROUND FACTS
On Christmas Eve in 2010, the M/T VALLE DI CORDOBA was attacked by pirates in the territorial waters
of Benin while awaiting discharge orders for Nigeria. About 16% of the B/L 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 in the amount of USD 5.8 M, 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.
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SCOPE OF THE IN-TRANSIT LOSS CLAUSE
A literal reading of the clause might suggest that the owners have accepted strict liability for any loss intransit 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”.
Owners´ 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.
APPLICATION OF HAGUE-VISBY EXCEPTIONS OF LIABILITY
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)). Charterers
submitted that negotiated terms should weigh heavier than “standard” terms.
Charterers 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.
THE JUDGEMENT IN FIRST INSTANCE
Charterers 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%. They 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 charterers´ rights that they would have in any event.
The owners on the other hand adopted the opposite opinion on both issues, but they 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.
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The judge also stated that if the parties’ intentions were to put all risk on owners – 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 charterers were to succeed, i.e. that owners would be strictly liable for loss
but not for damage to the cargo.
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
charterers 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, they 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, 1. the ITL clause did not apply to this kind of loss
(piracy theft) at all, and 2. 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 APPEAL
The charterers 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.
Charterers´ submitted again their previous arguments including their 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.
Owners in the meantime maintained their 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 owners on both points.
Lord Justice Longmore in writing on the application of the ITL clause to piracy theft, disagreed with the
charterers’ 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 owners and charterers
wanted to agree to make the owners 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 owners’ 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
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“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.
CONCLUSIONS
By upholding owners’ 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 charterers, 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.
Trafigura Beheer BV v. Navigazione Montanari Spa (Valle di Cordoba)
[2014] EWHC 129 (COMM),[2015] EWCA Civ 91
CREDITS
By: Niklas Sonnenschein, Claims Executive, Skuld Oslo 1
For more information about Loss Prevention at Skuld please visit Skuld.com: Skuld Loss Prevention
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