In-Transit Loss Clause – A Double-Edged Sword for Ship Owners
Owners in the liquid bulk cargo trade are often asked by charterers to include an In-Transit Loss (ITL) clause into the charterparty during negotiations. Amid the numerous terms discussed before finalising a charterparty, such a request might be taken lightly by owners. While the ITL clause can potentially protect owners against in-transit losses arising from paper shortages and/or physical shortages within an acceptable allowance, a poorly worded ITL clause could inadvertently exclude or override clauses that incorporate the Hague/Hague-Visby Rules, such as the clause paramount. Prudent owners should therefore exercise caution before agreeing to a charterer’s request to include an ITL clause into a charterparty.
ITL clause
An in-transit loss refers to the difference between the ship’s recorded cargo volumes after loading at the load port and before unloading at the discharge port.
Paper losses may arise in circumstances such as:
(i) Temperature changes, which cause variations in cargo volume at the load and discharge ports despite the mass remaining unchanged;
(ii) Difference in free water detection at the load and discharge ports;
(iii) Measurement errors.
Physical losses occur during the voyage and may result from the physical characteristics of the cargo, such as evaporation.
The ITL clause in a charterparty allocates responsibility for these in-transit losses. Typically, the clause defines in-transit loss and specifies an acceptable allowance as an agreed percentage (e.g., 0.3-0.5%). Losses within this allowance are usually borne by the charterer, protecting owners from minor losses attributable to standard cargo handling and transportation conditions.
Concerns regarding ITL clauses
A clause paramount generally incorporates the Hague/Hague-Visby Rules into a contract (e.g. charterparty, bill of lading). If an ITL clause is worded in a way that it overrides the clause paramount, owners may lose their ability to rely on the defences within the Hague/Hague-Visby Rules.
Should this occur, there is a risk that owners’ P&I cover could be prejudiced. For this reason, owners must ensure the ITL clause is carefully drafted to avoid this unintended consequence.
The Valle Di Cordoba
The leading case on ITL clauses is Trafigura Beheer v Navigazione Montanari SPA [2015] EWCA Civ 91, commonly known as The Valle Di Cordoba.
On 24 December 2010, The Valle Di Cordoba was seized by pirates whilst on a voyage from Abidjan, Cote D'Ivoire to Lagos, Nigeria. The pirates stole 5,000 tonnes of oil, approximately 16% of the total quantity loaded. The charterparty included both an ITL clause and a clause paramount, incorporating the Hague-Visby Rules. Relying on the ITL clause, the charterer sought to recover the value of the lost cargo from the owner.
In the Court of Appeal, two key issues arose:
- Whether a loss caused by piracy fell within the scope of the ITL clause.
- Whether the ITL clause took precedence over the clause paramount, precluding the owner from relying on the Hague-Visby Rules’ defences, including piracy.
On the first issue, the clause stated (emphasis added):
"…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…".
The Court interpreted the ITL clause narrowly. It rejected the Charterer’s argument that all losses during transit, no matter how they occur, fell within the scope of the clause. The Court held that such an interpretation would effectively transform the ship owner into an insurer of the cargo, and that it did not align with the commercial context for the inclusion of ITL clauses in charterparties; namely, to address routine losses on a ‘normal voyage’ (i.e. resulting from internal mishandling of the cargo), or that which is ‘incidental to the carriage of cargo’ (i.e. due to evaporation).
On the second issue, the Court found no conflict between the ITL clause and the clause paramount. It ruled that the ITL clause did not exclude the application of the Hague-Visby rules and that the owner could benefit from the various exceptions to liability as stated therein. The Court found there to be no mutual exclusivity between the clause incorporating the Hague-Visby rules and the ITL clause. Meaning the operation of one clause did not negate the other. Therefore, instead of excluding other rights derived under the charterparty, the ITL clause simply gave the parties additional rights.
It is important to note that the owner-friendly ruling in Valle Di Cordoba only applies in the event a charterer makes a claim for compensation or damages in respect of lost cargo. If the ITL clause had provided that the charterers could make a deduction from freight in the event of a loss, then the Hague-Visby Rules may not be relied on by the owners to exclude their liability.
Practical guidance for owners
To safeguard their positions, owners should consider:
- Ensuring the ITL clause only permits charterers to bring a claim for in-transit losses, rather than deducting amounts from freight;
- Avoid agreeing to clauses with language that might override the clause paramount (e.g. phases like ‘notwithstanding anything else in this charter…’);
- Working with legal experts to carefully draft and review ITL clauses to ensure they align with the charterparty’s overall terms and do not prejudice owners’ defences under the Hague/Hague-Visby Rules.
Conclusion
The ITL clause is a double-edged sword for owners. While it may protect them from claims for minor losses within an agreed allowance, poorly drafted clauses can undermine owners’ ability to rely on the Hague/Hague-Visby Rules, potentially prejudicing their P&I cover. Owners should carefully consider whether to include an ITL clause in their charterparties and, if deemed appropriate, pay close attention to its wording to avoid unintended consequences.