Voyage Charters. In-Transit Loss (ITL) Clause Last updated 30-Jun-2015

I recognise that the limits of "in-transit loss" that I have described are not precisely defined: it is easy to imagine uncertainties about whether particular losses would fall within the expression.
In Trafigura Beheer BV v Navigazione Montanari Spa [2014] EWHC 129 (Comm) per Smith J at para 16.

Absolute undertakings by owners are unusual in charterparties, but parties are entitled to agree to them

Short delivery of cargo is not a novelty for sea transportation of oil, no wonder that tanker charters usually expressly provide for remedies available to the charterers in such instances. One of these remedies stipulated in Cargo Retention Clause is a direct deduction from freight of amount equal to the FOB port of loading (or the CIF) value of liquid and pumpable cargo remaining on board. The Court of Appeal in The Olympic Brilliance case particularised on complexity of the ascertainment of short delivery after a voyage being subjected to complex calculations comparing the quantity apparently loaded with the quantity apparently discharged, with some additional allowances for undischargeable quantities of sediment and for oil remaining in the ship’s lines, and also possibly for apparent losses due to evaporation.

Another option to deal with above difficulties is so-called In-transit Loss clauses (ITL). In Trafigura Beheer BV v Navigazione Montanari Spa [2014] EWHC 129 (Comm) Smith J said that such clauses set to stipulate a cut-off point above which the owners may not explain or excuse differences in volumetric measures simply on the basis that they reflect such incidents of carriage (or transit) that are not attributable to fault on their part. The wording in question which the Commercial court was to examine stipulated as follows:

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 0.3% 0.5% and Charterers shall have the right to deduct from freight 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.

The charterers contended that this clause imposes strict liability on the owners and thus thought to recover from them value of cargo stolen from the vessel by pirates when she was waiting for discharging orders. The judge held that ITL clause connotes loss that is incidental to the carriage of oil products, and does not extend to losses such as those that occurred because of the action of the pirates. Accordingly the Charterers’ argument about strict liability failed, partly owing to the fact that it would put the owners under strict liability for losses very different from those generally understood by the expression.

ITL claims should arise only from a normal voyage and is subject to the Hague Rules exceptions

In the Court of Appeal (Trafigura Beheer BV v Navigazione Montanari SPA [2015] EWCA Civ 91, 18 February 2015) the charterers appealed against decision of Smith J in the commercial court arguing that the ITL clause makes the carrier liable for loss of cargo in transit regardless of the cause of that loss. The law lords not without some hesitation dismissed appeal. Longmore LJ underlined that following decision in The Olympic Brilliance the ITL clause serves to provide a simple solution in notoriously difficult oil shortage claims, albeit such claims should arise only from a normal voyage and when there is no doubt that the loss is otherwise unexplained. His Lordship said at para 18:

In those circumstances it is sensible for the parties to agree that an unexplained difference between volumes measured on board the vessel after loading (or figures contained in the bill of lading as agreed in The Olympic Brilliance) and volumes measured on board the vessel before unloading of less that x% should not be recoverable by the charterer but that a difference of more than x% should be recoverable by the charterer from the owner. … The fact that “in transit loss” is defined for the purposes of the clause as the difference between the volumes after loading and before unloading seems to me to support the conclusion that the clause is looking only to a short delivery loss of a kind encountered in a normal voyage. It can hardly be supposed for example that, if the vessel was ordered by the charterer to effect part discharge into lighters before arriving at a discharge port and arrangements could not be made to take measurements until arrival at the discharge port, the owner could be liable for the difference between measurements taken at the loading port after loading and measurements taken before unloading at the discharge port; …

As charterers argued the owner who agrees to this clause become liable for losses to a greater extent even than that of a common carrier since, because unlike the common carrier they lose a benefit of the Queen’s (or King’s) enemies exception. That would make an owner an insurer of the cargo, which was held could hardly have been the intention of the parties.

But even if the charterer were right about the construction of the ITL clause, it was nonetheless found by the Court of Appeal that loss by piracy is excluded by one or other of the Hague-Visby Rules which were incorporated into the charterparty by clause 46 of Beepeevoy 3.

Clause 46 of Beepeevoy 3 provided:

The provisions of Article III (other than Rule 8), IV, IV bis and VIII of the Schedule to the Carriage of Goods by Sea Act, 1971 of the United Kingdom shall apply to this Charter and shall be deemed to be inserted in extenso herein. This Charter shall be deemed to be a contract for the carriage of goods by sea to which the said Articles apply, and Owners shall be entitled to the protection of the said Articles in respect of any claim made hereunder.

The charterers again related on decision in The Olympic Brilliance arguing that so far as the true construction of the ITL clause in that case was that the deduction from freight was a permanent deduction not depending on showing that the owner was liable for the shortage under the charterparty, it must follow that, if the clause allows the charterer to claim the entirety of a shortage or loss, the Hague Rules exceptions do not apply to such a claim.

Longmore LJ stressed that The Olympic Brilliance decision was related to the charterers’ right of deduction from freight irrespective whether they had a good claim for the loss of cargo, while in present case the ITL clause does not give to the charterers any right of deduction but only "right to deduct from freight claim an amount equal to the FOB port of loading value of such lost cargo." As the court made it clear in The Olympic Brilliance, the Hague Rules provision "only deals with the carrier’s liabilities and not in any way with his entitlement to freight", whereas claim for the loss of the cargo would be a different claim and subject to the Hague Rules. However, such claim would fall outside of clause 46 scope if the loss were unexplained, it is unlikely that the owner could avail itself of the Hague-Visby exceptions.

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