CARGO RETENTION CLAUSES CREATE A TANGLE OF LEGAL COMPLEXITIES

Over the past 10 years there have been numerous maritime arbitration dealing with the interpretation of cargo retention clauses in tanker voyage charter parties.

These clauses are designed to enable charterers to deduct from freight the value of cargoes retained on board tankers after discharge, provided the cargoes are pumpable as determined by an “independent surveyor.”

The legal effect of the retention clause is to qualify the owner’s common-law right to payment of freight without discount upon completion of the voyage. The clause also is intended to ensure that the vessel performs a proper discharge.

The retention clause concept was first introduced to the tanker market in 1977 by a major oil concern a cost saving measure.

When crude oil sold at $3 a barrel, there as little demand that all pumpable oil be discharged. It was more economical to permit vessels to sail from discharge ports with some oil remaining onboard than to pay demurrage for additional stripping time.

However, when crude prices escalated to over $33 a barrel, payment of demurrage became a secondary concern. Charterers wanted every drop of their oil. Furthermore, because of the tanker glut, charterers were able to demand that retention clauses be incorporated into voyage charterers.

The typical retention clause reads as follows:

“In the event that nay cargo remains onboard the vessel upon completion of discharge, charterer shall have the right to deduct from freight an amount equal to the f.o.b. port of loading value of such cargo plus freight due with respect thereto, provided that the volume of cargo remaining onboard is pumpable as determined by an independent surveyor . . . ”

The clause has been subjected to numerous interpretations. Of primary concern is the meaning of the word “pumpable.” The recent arbitration award of the Sanko Ambassador (S.M.A. No. 2568) addressed this issue and is illustrative of the numerous factors that are considered in interpreting the clause.

The Sanko Ambassador involved a claim for cargo remaining onboard (r.o.b.) a vessel after discharge. The charterer made a claim for 1,260 barrels r.o.b. and deducted $40,756 from freight. At discharge the vessel was attended by an independent surveyor for the purpose of measuring, sampling and analyzing the cargo.

Unfortunately, the surveyor failed to make any determination as to whether the cargo remaining onboard was pumpable.

The surveyor first measured an r.o.b. of 1,497 barrels. Additional stripping reduced the r.o.b. to 1,260 barrels. There was no evidence that the vessels’ pumps or equipment were in any way defective. The r.o.b. was evenly distributed among the cargo tanks. Soundings indicated more cargo in the forward ends of the tanks even though the vessel had considerable trim by the stern.

There was testimony that this particular cargo had a tendency to curdle, which caused limber, or drain, holes to clog and prevented the cargo from flowing aft to the vessel’s pumps.

The panel’s majority held that the term “pumpable” must bear some relationship to the pumps and lines of the vessel.

The majority determined that this r.o.b. was unpumpable despite evidence that it was liquid and ran off the cargo sounding bob. The reason the r.o.b. could not be discharged was due to the partial solidification of the cargo.

As the Carriage of Goods By Sea Act was incorporated in the charter, this was considered a loss arising from the inherent vice of the cargo. There was no evidence that the vessel was unseaworthy or that it was improperly manned, equipped or negligently operated.

Accordingly, the charterer’s claim was denied.

The majority made some interesting observations and conclusions with respect to the difficulties associated with the application of the clause including:

Why is it that agreement in a joint survey seems impossible in this field? Why is it that large, independent inspectors back away from the responsibility the clause seems intended to give them? Perhaps it is the difficulty of establishing any scientific basis upon which to determine whether cargo remains in an oil tanker is “pumpable.”

A review of other arbitration awards indicate that there is no simple solution to the difficulties associated with interpreting the cargo retention clause. There is a multitude of variables to be considered, and each interpretation must be on a case-by-case basis.


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