LP 24/2022 Filing a Liquid Bulk Contamination Claim

Examining a recent case where shipowners have successfully defended themselves in a liquid bulk contamination case.

A member of the Association, as the result of joint efforts, has recently won a court case of liquid bulk cargo claim. The case went through court proceedings of the first and second instance and a retrial application was filed, and eventually the Supreme People’s Court of the People’s Republic of China (SPC) dismissed the retrial request and ruled in favour of shipowners the defendant. The judgment has confirmed the carrier’s period of responsibility and clarified the correct approach in which the calculation of chemical cargo damage was to be made. As the facts and focus of disputes in this case are complicated, this article is meant to construe the judgement from the perspective of the carrier, with a view to offering reference to member shipowners.

I. Facts

In May 2018, the entered ship first loaded 2,000 tonnes of ethylene glycol and then 1,000 tonnes of styrene in Mai-Liao, Taiwan to the port of Quanzhou for discharge. Separate pipelines and cargo pumps were used for the two cargoes. From 6 to 9 May, the ship discharged first 1,000 tonnes of styrene and then 2,000 tonnes of ethylene glycol at the destination port. Prior to discharge, samples of the ethylene glycol cargo were taken from the vessel’s tanks and no abnormalities were found. On 18 May, the consignee found a strong pungent odour when transferring the glycol from the shore tank to factory by tanker truck. The cargo was sampled again from the shore tank for laboratory test and its ultraviolet transmission was found off specification. Following joint inspection and special testing, the laboratory concluded that the off specification was due to mixture of styrene in the sample and suspected that the original cargo was contaminated by the other cargo loaded on board.

In May 2019, the cargo insurer filed a claim against the owner and the manager of the entered ship and alleged that there was a cargo damage due to negligence of the defendants who should be jointly liable. In addition, judicial authentication was applied as the cargo insurer was unable to determine the actual loss and the appropriate way of handling the damaged cargo.

II. Main issues in dispute

1. Whether the carrier is responsible for the contamination

The SPC has confirmed in its letter of reply that the carrier’s period of responsibility for the transportation of bulk liquid cargo begins the moment the ship’s manifold is connected to the flange of the shore pipeline at the loading port, and ends when the ship’s manifold is connected to the flange of the shore pipeline at the discharging port. The cargo is under the carrier’s control throughout this period.

Specifically in this case, from ship to shore, the cargo may be contaminated when: 1) loaded in the ship’s pipeline; 2) the flange of the ship pipeline is connected to shore pipeline; 3) loaded in the shore pipeline with cargo remaining; 4) loaded in the shore pipeline with other intervening factors. Only contamination occurred under the first circumstance is deemed the carrier’s responsibility. Therefore, in defining whether the carrier was liable for the cargo damage in this case, the court held that sample should be taken at the flange of the ship pipeline as critical evidence, and the cargo insurer who failed to provide such evidence should accept the unfavourable result arising from it.

Although the Court of Second Instance in this case held that the damage was caused by the failure of the valve of the air compression line on board the ship, which led to the infiltration of styrene into the glycol during the unloading process, the Supreme Court supported the Court of First Instance that the ship was able to provide evidence to exclude the possibility of contamination during the course of transportation which constitutes prima facie evidence that the goods were in good condition during the period of the carrier’s liability. Yet the cargo insurer was unable to prove and reasonably exclude the possibility of other contamination during the unloading process, such as by taking sample at the flange of the ship pipeline or by proving that the shore tank was not contaminated. Therefore, the cargo insurer should be held accountable for not being able to provide evidence.

2. Whether the amount of compensation is reasonably calculated

The cargo insurer claimed that the amount of compensation for damage to the goods should be calculated on the basis of the depreciation rate (15% to 20%) of the goods with overall considerations on the actual damage, the production usage and the subsequent disposal. The ship argued that the plaintiff failed to provide justification for the disposal plan and relevant costs or to prove the amount of compensation was reasonably paid under cargo insurance contract. The court clarified that the depreciation rate should be “the market value of the goods in good condition at the port of destination minus the sales yield value of the damaged goods, and then divided by the market value of the goods in good condition”. However, application of the depreciation rate requires clarified disposal plan, which in this case, was not provided by the plaintiff along with other evidence.

III. Advice to Members

Liquid bulk cargo damage claims are often to the disadvantage of shipowners. The judgment and decision in this case, however, reinforced the idea that liquid bulk shipowners should hold on to the defence strategy with respect to the carrier’s period of responsibility. The ship’s consistent strategy and the fact that the consignee failed to take sample at the flange of the ship pipeline prior to discharge of cargo was exactly the key point in winning the case.

Second, the amount of claims for damage to chemicals cannot be simply calculated based on some apply-to-all depreciation rate. But it was necessary to first determine the approach to disposal of the goods, and if the goods were restored to their original purpose of use after being disposed of in an appropriate manner, the reasonable amount of loss should be assessed in accordance with the disposal costs. Only when sale/auction is involved may the depreciation rate calculation be applied to assess the reasonable amount of loss.

Still, member shipowners are recommended to strengthen safety management to avoid being forced to that place. Shipowners should urge the crews to maintain various pipelines, including valves, as required by the management system, and to conduct regular pressure tests and keep proper records. In addition, standard process of tank cleaning and sampling at loading and unloading ports are always essential in liquid bulk cargo claims.

The case above is explained only as a reference for Members and by no means can be used as legal basis in a similar situation. Members are encouraged to contact Managers of the Association should there be any request for further information.