Sea Law Volume 2

Peter D. Clark
August 29, 1991

The recent Marathon case (1991 U.S. Dist. LEXIS 7851) in the New York federal court highlights many problems associated with the sale and transportation of crude oils loaded aboard ships. The case also addresses liability concerns when crude cargoes have high water content resulting from improper inspection procedures performed during loading.

Crude oil cargoes loaded on tankers usually contain quantities of water having no commercial value. Water exists either as “free water” or in “BS&W,” base sediment and water. Free water settles out over time and is identifiable by paste soundings, or thieving. BS&W contains emulsified water in suspension which is identifiable after sample collecting and laboratory analysis. The amounts of water are deducted from the overall volume of cargo to determine the net quantity of merchantable crude.

Under maritime law, ocean carriers are required to properly load, carry, care for and discharge cargoes. However, carriers are not responsible for losses resulting from acts or omissions of shippers or cargo owners, or losses arising from inherent cargo vices.

In the Marathon case a crude oil purchaser contracted with a supplier for semi-monthly sales of crude to be carried from Mexico to the United States aboard vessels nominated by the purchaser. The quantity of the crude was to be determined by an independent cargo inspector appointed and paid for by both parties. The crude inspection was to be performed after loading, which is standard industry practice.

The supplier, however, unilaterally promulgated regulations requiring cargo inspections to be performed at least two hours prior to the completion of loadings. The purchaser was aware of these inspection modifications.

In 1986 the tanker Ruth M was chartered to carry the purchaser’s crude. During loading, the cargo inspector, accompanied by the vessel’s chief officer, sampled all but two cargo tanks. These two tanks were the last to receive cargo. The inspector and chief officer subsequently found large quantities of free water in these tanks. However, neither took further steps to determine the exact amounts, nor to advise the purchaser of their finds. After loading, the master issued a letter of protest to the supplier and the purchaser, stating the crude contained water when loaded. At the discharge port, large amounts of free water and BS&W were found in these two tanks.

The purchaser voluntarily paid the supplier for the water adulterated cargo, even though he was not required to do so under the sales contract and under the provisions of the Uniform Commercial Code which apply to the sale of goods. The purchaser then sued the shipowners and the inspection company for the #110,000 cargo loss.

The court found no liability on the part of the vessel. The loss was caused solely by the failure of the cargo surveyor to inspect the cargo properly. Neither the charter party, nor the vessel’s sailing orders contained instructions for the vessel to advise the purchaser if tanks were improplerly inspected.

The court also found that any negligence on the part of the cargo inspector did not result in liability because the inspector was following the improper instruction of the supplier.

The Marathon case illustrates that shipowners will not be held liable for the improper surveying practices of cargo interests’ surveyors. The case also illustrates that voluntarily relinquishing a claim against a liable party (the supplier) can be a costly mistake.