Tanker disputes – Plain sailing?

Authors: John Liberopoulos, Peter Glover Publication | October 2018

According to the US Energy Information Administration, about 61 percent of the world’s petroleum and other liquids production, or about 58.9 million barrels per day, moved on maritime routes in 2015. The transport of crude and petroleum products by sea is, accordingly, both a major driver and a facilitator of international trade, of which some 90 percent is carried by sea.

As with any transport system, the transport of petroleum by sea presents a number of difficulties, both legal and factual. Issues may arise in three principal areas: (i) quantity and quality prior to loading and after discharge, (ii) the chartering arrangements agreed for the carriage of oil by sea and (iii) issues associated with the physical carriage of oil by sea. While it may be convenient to divide and discuss the three as separate and distinct fields, both in practice and as a matter of claim and dispute management, such division is rarely achievable.

In addition, factors such as the high value of petroleum products, the timelines for investigating loss and/or damage and the cost of delay while doing so add to the pressures associated with tanker disputes. The consequence of the foregoing dictate that the threshold for disputes is frequently low, even if only for issue protection purposes.

In the overwhelming majority of cases, the parties’ dispute resolution mechanism of choice is arbitration. Typically, the contract will provide that disputes are to be resolved under English law by arbitration seated in London and conducted under the London Maritime Arbitration Association (LMAA) Terms.

Tanker disputes

From the three areas in which issues may arise, it is possible to distill the types of potential disputes into two main categories: shortage and contamination disputes. This is not to ignore the significance of other disputes that may and do arise as a result of shipping tanker operations, including collisions, groundings, equipment failure, offhire, demurrage or constructive and total losses. Rather, the frequency and likelihood of these two categories determine their practical significance in the day to day management of trade and dispute management.

In common with shortage and contamination disputes, the overwhelming majority of tanker disputes will be resolved through charterparty and/or bill of lading dispute resolution clauses which provide for arbitration under LMAA Terms. The exception to this is collision cases, where it is more common for the parties to found jurisdiction by way of in rem arrest proceedings or through agreement to a collision jurisdiction agreement, which typically provides for the parties’ claims to be determined exclusively by the English courts under English law.

In the event that a tanker casualty requires salvage assistance, the majority of salvage services are provided on the Lloyd’s Open Form (LOF), which provides for incorporation of the Lloyd’s Standard Salvage and Arbitration Clauses, which in turn provide for the seat of arbitration to be London (unless otherwise agreed) and for the arbitration to be conducted in accordance with the Lloyd’s Procedural Rules. In casualty cases, is not uncommon for the costs of shortage and contamination disputes to be caught in the LOF arbitration.

Shortage disputes

It is trite law that the legal burden rests upon the claimant. If the claimant alleges a shortage dispute (and any consequential loss), they must prove that claim. The evidential burden may swing between the parties throughout the duration of a hearing, yet in the context of a claim for short delivery, the owner of the cargo must prove such short delivery if they are to succeed in that claim. Against this, it is up to the ship owner, or the carrier, to prevent them from doing so, or to prove affirmatively that such short delivery occurred in circumstances for which they were not responsible.

It is important to note that the LMAA Terms do not address questions of evidence, so the fall back is the Arbitration Act which gives wide latitude to tribunals in regard to evidence.

In most instances, the contractual responsibility for carriage is governed by the Hague-Visby Rules, Article 1(e) of which provides:

“Carriage of goods” covers the period from the time when the goods are loaded on to the time they are discharged from the ship.

This is frequently referred to as the tackle to tackle, or manifold to manifold rule.

It is common to find representations in the carriage documents, such as the bill of lading, describing the goods as shipped in good order and condition. Such statements are prima facie evidence in favour of the shipper of the goods, but they can be rebutted (save for a conclusive evidence clause) and become conclusive when in the hands of a bona fide purchaser for value.

Once the oil has been loaded, there is judicial recognition that the ascertainment of any short delivery after a normal voyage is notoriously difficult. The precise determination of shortages depends on complex calculations comparing the quantity apparently loaded with the quantity apparently discharged, with due allowance for undischargeable quantities of sediment, oil remaining in the ship’s lines and the potential for apparent losses due to evaporation.

Factors effecting quantification of cargo and/or contributing to cargo gain or loss

There are a number of factors contributing to the quantification of cargo that may generate disputes. These include, inter alia, incorrect ullage reading (tank gauging and/or table reading), incorrect temperature determination, incorrect application of VCF, incorrect density correction, use of un-calibrated or defective equipment, poor gauging procedures and ship construction and the tank arrangement.

One particular feature, both of contractual and of practical consequence, is the effect of evaporative loss of light ends during ocean transit, which can be as much as 0.25 percent of the cargo. In order to assist in avoiding potential disputes on each shipment, in light of the notorious difficulty of determining oil shortage claims, and to aid commercial certainty, the industry has developed in-transit loss clauses, which frequently provide that:

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

It is important to understand the specific language of the clause and to note, nevertheless, that in-transit loss clauses only provide protection for losses incurred in normal voyages. Losses occasioned by, for example, piracy and theft, are not covered.

Ship’s tanks or shore tanks?

There are a number of factors that may sway any determinative preference for a ship’s tanker or shore tanks in the event of a shortage dispute. The principal reason for preferring ship measurements include the advantage of measuring the quantity of oil at the beginning and end of a voyage in the same tanks, thereby eliminating idiosyncrasies which might exist between different containers, such as shore tanks at the load port and discharge port.

Against this, there are notable reasons for not preferring ship measurements. These include the fact that the ship does not provide a platform for measurement as stable as shore lines and shore tanks. The ship’s measurements require allowance to be made for trim and list of the vessel, and for the remains of oil, water or sediment on board the vessel before loading and after discharge. In addition, due consideration must be given to the challenge involved in calculating the capacity of ship’s tanks and of changes in their configuration during the life of the vessel.

Theft

Marine transport is not isolated from the orbit of criminal activity and theft does, from time to time, occur. It is trite law that a bailee does not properly and carefully carry, keep and care for goods if he consumes them (for example, in the ship’s boilers) or delivers them to an unauthorized recipient during the voyage. A bailee does not properly nor carefully discharge goods if, whether negligently or intentionally, he fails to discharge them and so converts them to his own use. Similarly, any suggestion of deliberate diversion must be considered with caution, as it would probably involve crime.

Contamination disputes

Contamination disputes arguably represent the second largest category of tanker disputes. From a contractual position, it is necessary to consider, inter alia, the charterers’ orders, previous cargo (tanks, lines, pumps, pump wells, manifold, goosenecks etc.) and what preparation and tank washing schedules are required.

From the carrier’s perspective, in the absence of express stipulation, Article III(1) of the Hague-Visby rules states that:

The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to:

(c) Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage and preservation.

As a matter of law, want of due diligence is negligence.

Failure to properly prepare the ship’s tanks for the carriage of oil can, in addition to a contamination claim, have far reaching consequences. In the matter of Mediterranean Freight Services Ltd v BP Oil International Ltd [1993] 1 Lloyd’s Rep. 257, it was held that the failure to remove condensate residues from the vessel, and in particular the failure to carry out a proper line and duct wash at the load port and before loading commenced, constituted a breach by the owners of their obligations under Article III(1) to make the ship seaworthy. Failure to be seaworthy at the commencement of a voyage can materially affect claims in contribution for salvage and general average.

Conclusion

The transport of crude and petroleum products by sea is a major facet and driver of international trade. Compared to other transport regimes, the transport of petroleum by sea presents both logistical and legal problems, which on occasion materialize as tanker disputes. Notwithstanding the propensity for shortage and contamination claims, sound awareness of the legal regimes and the factors which give rise to such claims can serve either, in the first instance, as a shield to claims or, in the event of a claim, as a tool to mitigate against liability and direct and consequential losses.


Contacts

Peter Glover

Peter Glover

Hong Kong