The recent M.T. Argonaftis arbitration at New York (S.M.A. 3291) is the latest maritime arbitration to discuss the applicability of the so-called “trade allowance” to cargo losses sustained on tanker vessels.

The purpose of the trade allowance is to release the shipowner from liability for unexplained and inevitable cargo loss due to the inherent nature of the product carried and the physical conditions of carriage.

In the past, arbitrators and courts accepted a trade allowance of 0.5 percent on crude oil shipments. Today, courts reject the trade allowance concept, absent a reference to it in the contract of carriage.

Most arbitrators, however, still permit the allowance. The 0.5 percent allowance has been reduced to fit the facts of each case.

Loss of crude oil cargoes may occur when oil escapes from, or inadvertently remains in vessel cargo tanks and pipe lines. These losses result from leakage, spillage, clingage and evaporation.

Measurement losses frequently apply to oil
Shipowners are usually liable for significant physical “in-Transit losses.”

Measurement losses frequently apply to oil cargoes. These losses involve errors associated with quantifying oil volumes in cargo tanks.

Measurement factors may include clerical errors, fluctuating cargo temperatures and incorrect ullage and trim correction tables.

Measurement losses are paper losses, as the liquid cargo weight remains constant.

Public factors include: court administrative difficulties, crowded dockets, overburdening jury systems, local interests of having controversies decided at home, conflict of law problems, and the relationship of the forum to the events giving rise to the litigation.

Measurements differ on ship and shore
When tankers load and discharge cargo, volumes may differ from shore tank figures because of measurement losses. If ship-to-shore volume differentials are significant, cargo claims for in-transit losses may occur.

Arbitrators and courts will rely on ship ullage measurement figures, rather than shore side tank data, to evaluate claims, unless there is strong evidence that the ship’s ullages are unreliable.

In the Argonaftis arbitration the vessel loaded 1,023,915 barrels of Brent crude at Sullom Voe, Shetland Islands, for discharge at charterer’s refinery at Pennsylvania.

Free water in the cargo amounted to 1,998 barrels. A composite cargo sample indicated a suspended water and sediment reading of 0.32 percent.

The vessel arrived at the discharge port with an unexplained 15-inch fracture in a cargo tank approximately five meters below the cargo level initially loaded in the tank.

Charterer later determined that during the voyage 78,993 barrels of cargo had been shifted in ten cargo tanks without its knowledge or consent.

Arrival ullages indicated 4,063 barrels of free water in the cargo.

The charterer then claimed for cargo loss against the shipowner based upon the ullage reports and the free water increase in the cargo.

Damage discovery at center of dispute
The charterer argued that the vessel concealed knowledge of the fracture and the shipowner should not be entitled to a loss allowance, as the allowance is usually applied to account for unexplained losses.

The shipowner argued that the small hairline fracture was only noticed after the vessel arrived at the discharge port.

It further argued that the cargo transfer was necessitated in order to compensate for bunker burn-off and to achieve an even keel.

Charterer entitled to loss compensation
The arbitration panel held that the charterer was entitled to compensation for the unexplained in-transit increase in free water and cargo loss:

“Under normal circumstances, the Panel would consider applying a trade allowance based on evidence presented by charterer… However, in view of the fact that the vessel acted in less then open fashion with (charterer), that it breached (the charter) by not advising (charterer) that it had to shift cargo and did not conform to voyage instructions by not reporting ‘anything unusual,’ the Panel rules that Owner is not entitled to the benefit of any in-transit or trade allowance.”

The Argonaftis arbitration makes it clear that arbitrators will permit tanker owners to utilize the trade allowance to avoid liability for unexplained cargo losses.

However, the arbitration also suggests that evasive or unexplained conduct on the part of the shipowner will void the trade allowance.