Several cases where entered ships are detained at Pakistan ports for cargo shortage, primarily liquid cargo (palm oil) and solid bulk cargo (wheat, fertilizer and seed), have been reported to the Club. Claims were made on different value through different means, but generally claimants would threat owners for a settlement with detention of the ship without accepting Club warranties. Difficulties arise in the handling of such claims and this article is therefore prepared as a reminder to Members when arranging discharge of cargo at local ports.

I.    Analyzing liquid cargo shortage

Liquid cargo shortage claims, especially palm oil shortage, persist to be a problem in Pakistan. Local correspondent has reported a probability of claim on as many as 1/3 of all liquid cargo carriers. Typically, a ship is required to discharge her liquid cargo into customs-bonded shore tanks when she arrives. The various consignees will then take delivery of the cargo from there, and if the quantity of cargo received is less than the quantity stated in the bill of lading, they will be notified and claims for shortage may arise. Although individual claims are generally of low value, the total claim value can be substantial as there may be multiple claims and dealing with multiple claimants can be tough as well.

l Inevitable losses

For the unavoidable losses of liquid cargo, different standards are implemented on fuel oil and edible oil in Pakistan:

-    For loss of fuel oil product exceeding 0.5%, customs fines will be imposed.

-    For loss of edible oil (such as palm oil) less than 0.25%, no fines or claims will arise and for loss exceeding 0.25%, defense based on tolerable margin will not be accepted by the local court. The carriers will have to take all the responsibilities and the discrepancies won’t be deducted, as stated in case studies on Pakistan’s commercial law (2000).

l Reasons for shortage

The reason for frequent occurrence of liquid cargo shortage at Pakistan ports is that quantity of the cargo is calculated at shore tanks instead of the ship’s tanks. It’s commonly recognized that the carrier’s liability commences at the point where the cargo passes through the vessel’s permanent manifold connections and terminates when the cargo passes out through the manifold connections at the port of discharge. In such cases, to verify that it has fulfilled the obligation to deliver, the carrier need only to provide a ship’s measurement that conforms to what stated in the bill of lading and a dry tank certificated issued on completion of discharge by commodity inspectors.

However, judgements by Pakistan local courts are usually made in accordance with the measurement stated on the custom release certificate, which is issued by the customs-bonded shore tank operators. The carrier’s liability is extended to the period when cargo is discharged to shore tanks and at that point, the carrier has lost control of the cargo when it passes through the end of the manifold connections. They are then subject to a large number of cargo shortage claims for not being able to maintain the ship-to-shore or the shore volume.

Discrepancies in density is another reason for such claims. The density of the shore tank sample taken by the surveyor, measured at the lab, is sometimes different from the value of the sample provided at loading ports. The amount of cargo measured may differ and factors like temperature may also contribute to errors, giving rise to large discrepancies between the final quantity delivered and the quantity stated in the bill of lading. Based on incorrect calculations shortage claims then arise.

II.    Handling liquid cargo shortage

Shipowners have the following options when such claims are raised:

l Do nothing

l Lawsuit

l Amicable settlement

First, owners may ignore or reject the claims as they are generally of low value and it is unusual to hold owners liable for shortage of cargo from shore tanks. However, this may bring the claimant to pursuing legal proceedings against the owner. If all named defendants continue to ignore the suit, a judgment in default of appearance will eventually be obtained, which will probably lead to detention of the ship on her return to Pakistan. Detention of other relevant ships may be claimable as well on connecting ground. In a recent case handled by the Club, both entered ship A and B are registered under a subsidiary to a lease finance company but are managed by different Members, and the claimant turned out to enforce the judgement on ship B against ship A.

Second, owners will have to defend the claims if the claimant files a lawsuit in Pakistan courts. The legal costs incurred and additional correspondent fees over the life of the suit are not recoverable even if the shipowner successfully obtains a judgement in its favor. Therefore, some owners may prefer to take a commercial view on such claims.

Third, an option at lower expense and time cost for owners, that is to negotiate amicable settlements of such claims with the assistance of correspondent or a local lawyer. Most claimants are prepared to settle in the region of 30% of the claim value.

III.    Preventing liquid cargo shortage

Shipowners should anticipate that shortage claims will be raised against them when trading to Pakistan. While the owners cannot expect the practice to change or the claimants to not put forward claims, what they can do may include:

l incorporate a term into the charterparty that requires the charterer to issue a LOI and be responsible for cargo shortage claims. However, the owners are unlikely to obtain immediate benefits of such terms as they will have to first take the responsibility for shortage as provided in the bill of lading and then recover from the charterer based on charterparty or LOI;

l for charterer of a particular voyage that is also the seller of the deal or a business partner with the buyer, negotiate with the buyer directly for a lower claim value or settlement in acceptable ways;

l have the surveyor monitor the measurement of ullage gauge and the cargo volume at shore tanks to prevent conspiracy and ensure an accurate figure; and

l specify in the bill of lading that the consignee shall refer to the ullage report for the cargo quantity and for shortage claims raised against the owner based on shore tank quantity, the owner is not responsible. Even if the term is not supported by the local court, it can be a bargaining chip for shipowners.

IV.   Analyzing solid bulk cargo shortage

With the change of international trade policies, there has been a significant increase on the import of solid bulk cargos in Pakistan in recent years, and consequently more vessels trading at Pakistani ports. Apart from the liquid cargo shortage claims, the Club has also been handling some shortage claims on solid bulk cargos, mainly on wheat, fertilizers (DAP), coal and seeds. Such claims are normally based on the so-called “paper loss”, which is caused by different methods of measurement or errors in calculation. Carriers/owners are put at a disadvantage, according to local correspondent, as it has been an established practice in Pakistan for consignees to raise shortage claims against owners and threaten them with detention of the ship.

l The historically accepted 0.5% trade allowance applied to in-transit losses of solid bulk cargos may not be supported by the local court and it decides whether cargos are short landed by referring to the final draught survey at the discharge ports.

l The Club has seen in previous cases that the consignee/agent would detain the ship and force the owner to immediate settlement based on shore-side figures, even though the draught survey report agrees with the bill of lading. More commonly, receivers may question the accuracy of results when draught surveys are undertaken 2-3 times, and further require reliance on shore-side figures, which can be easily manipulated by stevedores.

l There is a restrictive number of solid bulk cargo (especially DAP fertilizer) importers in Pakistan, all supported by their own teams of surveyors and agents, who are specialized in filing claims and negotiations.

l Owners may be pressured into immediate settlement with considerations on ship’s schedule if the receiver threatens to detain the ship until a satisfying result is obtained. Although the owner can delegate a lawyer for the issuance of a legal notice that may reduce the consignee to an amicable settlement, the consignee may still pursue formal proceedings against the owner. Members should also beware that they shall pay first before recovering from the Club and the amount of compensation varies depending on the survey report.

V.       Preventing solid bulk cargo shortage

l Surveyors appointed by the cargo interest may tamper with the draught readings or water density measurement so that the result is favorable to them. It’s therefore advisable for owners to delegate an independent surveyor of repute to assist the master and chief officer on the draught survey, and when necessary, appoint a professional team to supervise discharge of cargo and the accuracy of shore scale.

l Ensure that the hatches are sealed and opened in strict accordance with standard operations and retain complete records of the procedure followed.

l If the carrier has sufficient bargaining strength, it may consider clausing the bill of lading with “weight and quantity unknown” or “said to contain” which could reduce the prima facie evidential value as to the statement of quantity and thereby afford some protection to the carrier.

l Notify the charterer immediately to deal with the shortage claim together. If settlement is obtained onsite and the Inter-Club agreement is incorporated, the owner is entitled to claim the same from the other party to the charterparty.

For more information, please contact your manager at the Club.