In rejecting charterers’ appeal against the Commercial Court’s earlier ruling, the Court of Appeal (CA)1 clarified what constitutes an “in-transit loss” for the purposes of a voyage charterparty. The in-transit loss clause (ITL clause) in question covered “loss of a kind encountered on a normal voyage”. The CA confirmed that it did not, therefore, allow a charterer who had suffered a loss by piracy to recover from the shipowner.

Charterparty

The terms of the charterparty between Trafigura, (charterers), and Navigazione Montanari SpA (shipowner), contained the following ITL clause:

“Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.5% …. 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 Hague-Visby Rules (the Rules) were incorporated into the charterparty. Article IV of the Rules lists the exceptions to the carrier’s liability for loss of, or damage to the cargo, which include loss resulting from piracy.

Facts

On Christmas Eve 2010, pirates boarded the “VALLE DI CORDOBA” off the coast of West Africa. They transferred 5,291 metric tonnes of oil, out of a total of 33,460 metric tonnes, to an unknown lightering vessel and made off with the stolen cargo. The charterers claimed against the shipowner for the loss of the oil.

Commercial Court

In order to succeed with their claim, charterers needed to persuade the Commercial Court of two things. Firstly, that the loss of oil constituted in-transit loss for the purposes of the ITL clause; and secondly, that the ITL clause imposed strict liability on the shipowner, such that it could not avail itself of the exceptions contained in the Rules.

Mr Justice Smith held that:

  1. On a true construction of the ITL clause, the lost cargo was not in-transit loss
  2. In any event, the Rules exempted the shipowner from liability

Court of Appeal

The appeal failed at the first hurdle, the majority of the Court agreeing with Mr Justice Smith. For commercial reasons, parties include ITL clauses in charterparties to define the point at which a charterer will be entitled to  claim against a shipowner for an unexplained difference in volume, as measured on loading and unloading (in this case, over 0.5%).

In view of this, the CA, following the lead of the Commercial Court, held that in-transit loss connotes loss of a kind encountered on a normal voyage. Clearly this did not include loss by piracy. It rejected the charterers’ contention that an in-transit loss encompassed all loss in transit, however such loss occurs. The CA ruled that such an interpretation had three obvious flaws:

  1. A shipowner who had agreed to an ITL clause of this type would be liable to a greater extent than a common carrier (who at common law is excused for loss caused by piracy) 
  2. A shipowner would be liable for all loss however it occurs, but not for any damage or contamination however it occurs
  3. The ITL clause in question would effectively make a shipowner an insurer of the cargo

Contrary to the majority’s view, Briggs LJ declared that the ITL clause appeared to impose liability for in-transit loss regardless of the cause of that loss (provided it exceeded 0.5%). Nevertheless, all three members of the CA agreed that even if the loss by piracy constituted in-transit loss for the purposes of the ITL clause, the Rules excused the shipowner from liability.

The CA had been referred to the decision in Lakeport Navigation Company Panama S.A. v Anonima Petroli Italiana S.p.A (The “ OLYMPIC BRILLIANCE”) [1982] 2 Lloyd’s Rep 205. The ITL clause in that case provided that where there was a shortage of oil exceeding 0.5%, the charterers could make a deduction from freight. It was held that this was  a permanent deduction, and it was therefore irrelevant whether or not the shipowner was liable under the charterparty. However, it did not follow, as a result, that this case supported Trafigura’s argument that the Rules did not apply to their claim for loss of cargo. It was, clear from the judgement in The “OLYMPIC BRILLIANCE” that had the ITL clause referred to a claim for loss - as opposed to a deduction from freight - the shipowner would not have been liable where the loss fell within the exceptions.

In the CA’s view, the ITL clause and Clause 46 (incorporating the exceptions) were compatible – neither made the other otiose. Losses of a kind encountered on a normal voyage were covered by the ITL clause but a shipowner would not be liable for other kinds of loss provided they fell within the exceptions.

Comment

The CA’s decision reflects the commercial reality underpinning ITL clauses. If the parties’ intention is, in fact, to make a shipowner the insurer of any short delivered cargo whatever the circumstances of the loss, such a clause needs to be clearly drafted to that effect