Introduction
“In-transit loss” clauses (“ITL” clauses) have been more commonly seen in voyages charterparties for transportation of oil cargoes. Such clauses expressly provide for remedies available to the charterers in the instance of short delivery of oil cargoes in the course of shipment (e.g. due to some quantities being undischargable sediment and some quantities being lost by evaporation). 

The question is, do such clauses cover unusual events that happen in voyages? For example, would they apply if the oil cargoes are lost in the course of shipment because they are stolen by pirates? The English Court of Appeal confirmed in the case of Trafigura Beheer BV v Navigazione Montanari SpA (The Valle di Cordoba) [2015] EWCA Civ 91 that loss of oil cargoes as a result of pirate activities is not considered as an “in-transit loss” and is not covered by the ITL clauses. The Court found that they are intended to deal with loss that is incidental to the carriage of oil cargoes. 

Background
This case concerns a voyage charterparty (the “Charterparty”) entered into between the Charterers and the Owners of vessel “Valle di Cordoba” (the “Vessel”). On 14 December 2010, the Charterers loaded on the Vessel 33,460 metric tonnes of oil on board of the Vessel at Abidjan, Cote d’Ivoire. On 24 December 2010, while shipping the oil on its way to Lagos, Nigeria, pirates took control of the Vessel and stole 5,291 metric tonnes of the oil away from the Vessel. One of the issues here is whether the Charterers can claim against the Owners for such loss in quantity of oil by an ITL clause in the Charterparty (the “ITL Clause”).

The ITL Clause
“In-transit loss” is defined in the ITL Clause as “the difference between net vessel volumes after loading at the loading port and before unloading at the discharge port”. The Clause provides that “…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 values of such lost cargo plus freight and insurance due with respect thereto”.

The main issue in dispute between the Charterers and the Owners is whether the quantity of oil being stolen by pirates came within the definition of “in-transit loss”. If it does, the Charterers alleged the Owners are strictly liable for the substantial (15.8%) “in-transit loss” of oil.

The Court’s Decision
On this issue, the Court took into account the commercial purpose of having the ITL Clause and decided in favour of the Owners. The Court observed that short delivery of oil is commonplace in the bulk carriage of oil. The result is that there is often apparent but inexplicable short delivery. The commercial reason of having in-transit loss clauses in charterparties is to deal with this kind of oil shortage claims which are notoriously difficult to determine. By such clauses, parties to a charterparty agree that the unexplained difference between volumes of oil on board the vessel after loading and volumes measured on board the vessel before unloading of less than a certain percentage should not be recoverable by the charterers, but the same is recoverable if the difference exceeds the said percentage, without the charterers having to prove fault on the owners.

In the Court’s view, “in-transit loss” in an ITL clause connotes loss incidental to the carriage of the cargo and the clause only applies to short delivery loss of a kind encountered in a normal voyage. Loss as a result of pirate activities in this case is not a loss encountered in a normal voyage and therefore it is not covered by the ITL Clause. The Charterers’ interpretation to the ITL Clause would be equivalent to making the Owners the insurer to the oil cargoes, which could not have been the case.

Making explicit provisions to protect the Charterers?
The decision is important because the Court did not construe the ITL Clause by its literal meaning. On a literal reading of the ITL Clause, any short delivery of oil in the course of shipment would be considered as an in-transit loss, whether the loss is of a kind encountered in a normal voyage or not. However, the Court in this case took into account the commercial reason of the Parties agreeing to the ITL Clause and in effect suggested that short delivery as a result of pirate activities is not intended and understood by the Parties to be an in-transit loss when they executed the Charterparty.

The implication from this case is that parties should explicitly provide terms which govern short delivery of cargoes in unusual circumstances. If the Charterparty in this case had clearly spelled out in the definition of in-transit loss that in-transit loss shall mean “the difference between net vessel volumes after loading at the loading port and before unloading at the discharge port, without limitation as to whether such loss is incidental to the carriage of the cargo, and whether such loss is a loss of a kind encountered on a normal voyage”, the Charterers’ case could have been more arguable. In fact, the Court held that if, as alleged by the Charterers, the Parties really want to make the Owners strictly liable for such loss as an insurer of the oil cargo, it would have been easy enough to draft a clause to that effect.

It is also worth noting that, whether or not the loss caused by piracy was covered by the ITL Clause, the Court unanimously held in this case that the Charterers’ claim against the Owners would have been excluded by virtue of the Hague-Visby Rules which is expressly incorporated into the terms of the Charterparty. As Article IV(2)(f) of the Hague-Visby Rules states that neither the carrier nor the ship shall be responsible for the loss and damage arising from acts of public enemies, the Owners here cannot be responsible for the loss and damage caused by the pirates. Therefore, in the future, if the charterers so intend, they may persuade the owners to exclude the Hague-Visby Rules’ application on loss resulting from acts of public enemies by inserting explicit wordings in the terms of the Charterparty.  However, it is unlikely that the owners would agree.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.