Beware the in-transit cargo loss clause

These clauses often define an in-transit loss as the difference between the vessel’s gross observed volume (GOV) on completion of loading and before unloading at the discharge port. While this may seem like a simple comparison, in reality, it is a fundamentally flawed approach. The result is a paper shortage rather than any physical loss.

One of the main problems with such clauses is that Owners may not have the usual defences that would otherwise be available for an alleged shortage if the claim had been, for instance, assessed with reference to the Hague/Hague-Visby Rules. Not only does this put Owners in a difficult position when trying to defend claims made by Charterers referencing these clauses, but it may also adversely impact upon the scope of club cover available in respect of the claim.

Paper shortages

During measurement, the gross observed volume is established by subtracting any free water and sediment from the total volume of fluids in the tank. This provides the quantity of oil at the given temperature upon loading.

On the voyage to the discharge port, two factors can result in changes to the gross observed volume:

• Cargo temperature

During the voyage, the temperature of the cargo is likely to cool. When the cargo cools, its density will increase, so the volume will reduce despite the mass of the cargo remaining the same. Even when cargo heating is employed, it is unlikely that the cargo tank temperatures at discharge port will be identical to the same temperatures as they were at the load port during the tank survey. When the two gross volumes are compared – as required by in-transit loss clauses – this reduction in cargo volume will indicate a paper shortage.

• Increase of free water

The production process consists of separating fluids from an oil well into crude oil, gas and water/sediment. While this can be a very efficient process, crude oil cargoes usually contain a small amount of water and some solids. This is known as the cargo’s ‘base sediment and water content’ or BS&W.

To put this in context, if a vessel loads 1 million barrels of crude oil with a BS&W of 0.3%, 997,000 barrels of the cargo will be crude oil and 3,000 barrels will be made up of water and some sediment. Free water is the term used to describe any water that has separated out of the crude oil at the bottom of the cargo tank.

This can result in a difference in the reported amount of free water detected on completion of loading and at arrival at the discharge port. Typically, the tank survey at the load port will commence as soon as is practicable after completion of loading. Therefore, there is minimal time for any water in the cargo to separate out and the survey may detect only trace amounts of free water. Consequently, the gross observed volume will be calculated as the entire volume of the cargo tank contents, despite it likely containing an amount of water and sediment.

During the passage, water and sediment contained in the cargo will have the opportunity to separate out.  When the tank is then sampled during discharge survey, free water can be detected more readily. This is done by establishing the interface between the water and oil. While the amount of sediment will not be accounted for directly, it will be included in the free water figure as the sediment will settle below the water.

When the gross observed volume is re-calculated, free water and sediment will be subtracted from the total contents of the tank. When the gross observed volumes are compared, the difference between the volume of free water and sediment detected at the load and discharge port will indicate a paper shortage.

Performing correct calculations

To account for variations in cargo temperature between the load and discharge ports, the cargo needs to be compared at a standard temperature. This is achieved by applying a volume correction factor to calculate the quantity of cargo at standard temperature of 15^o C or 60^o F depending on the unit of measurement. The term gross standard volume (GSV) is used when the gross observed volume has been calculated at a standard temperature.

To ensure that any free water and sediment is accurately accounted for during the tank surveys, the total calculated volume (TCV) of the cargo should be established. This is achieved by adding any free water and sediment to the gross standard volume.

Checking cargo documents

The cargo documentation should provide details of the total volume of water and sediment for the cargo. This can be established by subtracting the gross and net quantities listed on the bill of lading or by the BS&W as stated on the Certificate of Quality.

Loss prevention

From an Owners’ perspective, it is better to try and avoid any ‘in-transit loss’ clauses which may override clauses that incorporate the Hague/Hague Visby Rules such as the Clause Paramount.

The standard pre-printed charterparty clauses are preferable from an Owners perspective. For example, Asbatankvoy has a Clause Paramount (clause 20(b)(i)) which incorporates the Hague Rules. There is also the BIMCO Clause Paramount, which incorporates the Hague/Hague Visby Rules.

Find out more

Recommended clauses can be found on our website North – Recommended Clauses (2021-2022)

North Members get free access to our loss prevention guide Shipboard Petroleum Surveys: A Guide to Good Practice