Implications Of LPG Cargoes` Deterioration During Transportation By Sea

The LPG cargoes delivered on board the buyers` ships in FOB sale transactions must be free from any harmful contaminants which might cause their deterioration during the transportation by sea. The most common contaminants in LPG cargoes are the Sulphur Compounds: i.e. Hydrogen Sulphide, Elemental Sulphur, Mercaptans, Carbonyl Sulphide, Carbon Di-Sulphide, Sulphur Dioxide, Dimethyl Sulphide, Dimethyl Di-Sulphide and Dimethyl Poly-Sulphide.
Polysulphides formed along with Disulphides during the production process of propane are separated from the propane and disposed of. Nonetheless, traces of such sulphur compounds may be found in the final propane product. The investigations made in SGS laboratories have shown that Polysulphides are highly unstable even in small concentrations in the presence of Hydrogen Sulphide. They might decompose in lower Polysulphides and Elemental Sulphur. Hydrogen Sulphide and Elemental Sulphur are the most corrosive Sulphur Compounds in LPG cargoes. The failure to detect and remove such contaminants before the liquefaction could have as consequence a quality deterioration of LPG cargoes during the transportation by sea and the corrosion of the cargo tanks of the carrying ships.
In October and November 1993 five consecutive shipments of propane sold by Saudi Aramco on FOB terms from Yanbu terminal in Saudi Arabia turned out to be off-specification upon arrival at the discharge ports after failing the Copper Corrosion test. After the propane cargoes were discharged from the carrying ships, the cargo tanks were inspected by SGS surveyors and CWA`s chemical experts. The surveyors discovered on the cargo tank walls a layer of rust that contained Elemental Sulphur which meant that the corrosion of the cargo tank walls was caused by Elemental Sulphur.
SGS surveyors who investigated 1993 contamination cases, Gerrit Vermeiren and Dirk Beernaert, presented at GASTECH Conference from 1996 a study about the cause of the instability of LPG cargoes during the transportation by sea¹, based on their findings during the investigation of 1993 contamination cases. Acording to that study, the Sulphur Compounds that played a key role in the deterioration process of LPG cargoes in 1993 were: Hydrogen Sulphide, Elemental Sulphur and Polysulphides. The samples of contaminated cargoes contained Sulphur Compounds in the following concentrations:
- Hydrogen Sulphide in concentrations up to 0.5 ppmw;
- Dimethyl Di-Sulphide in concentrations up to 5 ppmw;
- Elemental Sulphur in concentrations up to 0.7 ppmw.
SGS surveyors and CWA`s chemical experts found that the procedures used for testing the LPG cargoes` quality prior to and during loading at Yanbu terminal at the time gave no indication about the presence of these contaminants and thereby they were inadequate and insufficient to predict the subsequent deterioration of cargoes` quality.
The contaminated propane cargoes were sold along a chain of sellers and buyers. The unknown origin of the contaminations led to legal disputes between the buyers, shipowners and shippers over the liability for the deterioration of cargoes` quality occurred in the course of transportation by sea.

Could The Sellers Be Held Liable By The Buyers Under The Terms Of The Sale Contract In Case Of Deterioration Of The Cargo After Shipment On Board The Vessel ?

When a cargo is found off-specification upon arrival at the port of discharge, the cargo underwriters, upon being notified by the cargo owners, will appoint surveyors to determine the proximate cause of deterioration of cargo. If the surveyors appointed by the cargo underwriters are able to prove that the deterioration of cargo was caused by an inherent vice or a defect of the cargo existing prior to the time when insurance cover attached, the buyers cannot recover the financial loss from the cargo underwriters and carriers because the International Conventions for the transport of goods by sea exempt the carriers from liability in case of loss of or damage to the goods caused by their inherent vice and therefore, the risk of cargo instability is not covered by the marine insurers. In such cases, the question is whether the buyers could have a legal remedy against the sellers.
That would depend on the contract provisions. The contractual conditions of LPG suppliers for FOB sales provide that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence.
In the sale contracts that are subject to English law, there is an implied term, pursuant to section 14(2) of the Sale of Goods Act of the United Kingdom, that the goods supplied to the buyer are of satisfactory quality. The section 14(2B) stipulates further that the satisfactory quality of the goods includes the requirements that the goods be fit for all purposes for which the goods of the kind in question are commonly supplied and that the goods be free from minor defects and durable.
The statutory condition of satisfactory quality was in the past called a condition of merchantable quality. In the English law case Mash & Murrell Limited v. Joseph I. Emanuel Limited², the Court held that in a CIF or CFR sale contract such statutory condition required the goods to be capable of standing a normal voyage and to be of merchantable quality at the time of arrival at the port of discharge.
The English Courts distinguish between the sellers` position in CIF and CFR sale contracts and the sellers` position in FOB sale contracts when it comes to the implication of the statutory condition of satisfactory quality. The English Courts held that the implication of a term as to suitability of the goods should be made only in sale contracts that stipulate the destination of the goods.
In Navigas Ltd. of Gibraltar v. Enron Liquid Fuels Inc.³, one of the cases related to the propane cargoes shipped from Yanbu terminal in 1993 that were contaminated with sulphur compounds undetected at the time of shipment, the FOB buyers claimed that there was an implied term that the propane cargo had to be at the time of shipment fit to endure the normal incidents of the intended voyage so as to comply with the contractual specifications and remain merchantable upon discharge. The sale contract was a FOB contract with free destination. The English Commercial Court held that if a FOB sale contract does not mention where the goods are to be transported, the implication of a term as to suitability of the goods to withstand a voyage should not be made. The judge said that:

"whatever may be the position under a CIF or C&F contract the implication of such a term under a FOB contract is a very different matter. In the case of a classic FOB contract the seller may well not know the destination of the goods or therefore the duration of the voyage. It may be days or it may be weeks. Unless something in the contract tells him, it is of no concern whatever to him. It is not his duty to know. What the buyer does with the goods after loading on the vessel at the delivery port is entirely a matter for the buyer. He can change his mind about the destination. In these circumstances, I would consider it extremely difficult to imply into such a contract any term as to suitability of the goods to withstand a voyage."

In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG⁴, a cargo of gasoil sold on FOB basis with free destination that met the quality specifications at the time of shipment turned out to be off-specification as to sediment upon arrival at the port of discharge. The FOB buyer made a claim in English Courts against the sellers for breach of an implied term of the sale contract, pursuant to section 14(2) of the Sale of Goods Act of the United Kingdom, that the cargo would be of satisfactory quality and in accordance with the contractual specifications following a normal voyage and for breach of a term implied at common law that the cargo had to remain within the contractual specifications after delivery on the vessel for a reasonable period, on the grounds that the reason for the sediment content on arrival was the inherent instability of the cargo at the time of loading.
The English Court of Appeal held that if an alleged vice of the cargo is something for which the contract quality specifications and conclusive determination clauses provide, then the buyers cannot claim a breach of the statutory implied term as to satisfactory quality or any similar term to be implied at common law. In a sale contract providing that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence, the statutory implied condition of satisfactory quality stated in section 14(2) of the Sale of Goods Act of the United Kingdom applies only at the time of delivery. If the goods are of satisfactory quality at the time of delivery at loading port, the implied condition of satisfactory quality is fulfilled. But if a latent inherent vice of the cargo, such as the sediment in that case, could not have been picked up by the cargo surveyors with the tests required in the contract quality specifications, then the surveyors` determination of the cargo quality characteristics at the time of delivery at loading port is not conclusive and the buyers may claim in such case a breach of an implied term as to satisfactory quality in case of cargo deterioration due to such inherent vice.
Lord Justice Rix of the English Court of Appeal said that:

"If […] expert testimony were to show that gasoil may suffer the inherent vice of instability such that it can, within a few days, change the content of its sediment substantially, then the question would arise whether the nature of the test for sediment and/or any other of the specification tests, was intended finally to determine the question of such possible instability, or whether this was a truly latent and separate vice which the specification tests would leave untouched and undiscovered. In such a case […] it would still be open to show that the instability and/or the sediment which it would produce [...] made the gasoil as at delivery of unsatisfactory quality."

In the absence of expert evidence to explain the circumstances in which the sediment specification of the gasoil changed during the sea voyage of four days, the implication of the statutory condition of satisfactory quality was not helpful in the buyer`s claim.
The FOB sale contracts for bulk commodities such as gasoil or LPG commonly incorporate the contractual conditions of the sellers or major oil companies that include a clause excluding the seller`s liability for breach of conditions implied by statute and common law. Examples of such clause are the Sub-Clause 28.1.2 of Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition, and the Sub-Clause 59.1.1 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition which stipulate that:

"[S]ave to the extent that exclusion thereof is not permitted or is ineffective by operation of law, all statutory or other conditions or warranties, express or implied, with respect to the description or satisfactory quality of the Crude Oil or Product or its fitness for any particular purpose or otherwise are hereby excluded."

In order to be able to hold the sellers liable in case of cargo deterioration in the course of transportation by sea, the FOB buyers should agree with the sellers to incorporate the sellers` contractual conditions into their sale contracts without such exclusion clauses.

Could The Shippers And Commodity Buyers Be Held Liable By The Carriers Under The Bill Of Lading Contract Terms For Damage Caused To Ship`s Tanks By A Contaminated Cargo ?

A potential liability in international commodity trade is the liability for the shipment of dangerous goods. Given that the Bill of Lading forms used in the commodity trade contain or incorporate charter party clauses providing for the settlement of disputes based on the English law⁵, the shippers and buyers of commodities may become liable under the Bill of Lading contract of carriage if their cargoes cause damage to or loss of the ships. The intermediate holders of the Bills of Lading do not remain liable under the contract of carriage after they endorsed over the Bills of Lading to the next buyers in the chain, but the shippers remain liable as the original party to the Bill of Lading contract of carriage, because the shippers` liability under the Bill of Lading does not pass by endorsement to the subsequent holders. The section 3(3) of the UK COGSA 1992 has the following provisions:

"This section, so far as it imposes liabilities under any contract on any person, shall be without prejudice to the liabilities under the contract of any person as an original party to the contract."

The provisions of section 3(3) of UK COGSA 1992 are similar to the provisions of section 1 of the Bills of Lading Act 1855. Based on this similarity, in the English law case Effort Shipping Company Ltd. v. Linden Management S.A. and Others (The "Giannis N.K.")⁶, Lord Lloyd of Berwick made the following comments:

"Whereas the rights under the contract of carriage were to be transferred, the liabilities were not. The shippers were to remain liable, but the holder of the bill of lading was to come under the same liability as the shippers. His liability was to be by way of addition, not substitution. […] [T]he shippers have not been divested of their liability for shipping dangerous goods by the operation of the Act of 1855.
It is satisfactory that this conclusion accords with the recommendations of the Joint Law Commissions⁷, and that the result would have been the same under section 3(3) of the Carriage of Goods by Sea Act 1992."

Lord Hobhouse of Woodborough made a similar interpretation in The "Berge Sisar"⁸ case:

"How did endorsement affect the liabilities of the shipper? The answer was given in Fox v. Nott (1861) 6 H&N 630 and Smurthwaite v. Wilkins (1862) 11 CB (ns) 842. The endorser is not liable after he has endorsed over the bill of lading to another who is; the shipper remains liable as an original party to the contract. Two considerations seem to have weighed with the courts in these and the later cases. The words "subject to the same liabilities" were to be contrasted with the words "have transferred to him." The liability of the endorsee was to be additional to that of the original contracting party."

In the sales of bulk commodities the buyers at the end of the chain can become subject to liabilities under the Bill of Lading contract of carriage only if they become the lawful holders of the Bills of Lading and exercise their rights thereunder either by demanding delivery of the goods transported under the Bills of Lading or by making a claim against the carriers. If the buyers do not become the lawful holders of the Bills of Lading and do not exercise their rights thereunder either by demanding delivery of the goods transported under the Bills of Lading or by making a claim against the carriers, they cannot be held liable under the Bills of Lading.
As regards the possibility that the buyers may become liable as Bill of Lading holders for loss or damage caused to ships by the dangerous cargoes, the drafters of the UK COGSA 1992 had made in their Joint Report⁹ the following comments:

"3.22 It was also suggested to us that special provision should be made so that the consignee or indorsee should never be liable in respect of loss or damage caused by the shipper`s breach of warranty in respect of the shipment of dangerous cargo. This is said to be a particularly unfair example of a retrospective liability in respect of something for which the consignee/indorsee is not responsible. However, we have decided against such a special provision. We do not think that liability in respect of dangerous goods is necessarily more unfair than liability in respect of a range of other matters over which the holder of the bill of lading has no control and for which he is not responsible, as for instance liability for loadport demurrage and deadfreight. Also, it may be unfair to exempt the indorsee from dangerous goods` liability in those cases where he may have been the prime mover behind the shipment. Furthermore, it is unfair that the carrier should be denied redress against the indorsee of the bill of lading who seeks to take the benefit of the contract of carriage without the corresponding burdens."

The shippers and lawful holders of Bills of Lading (CIF or CFR buyers) can become liable for the ship`s damage caused by the shipment of dangerous goods if the cargo that caused the damage to the ship had unusual characteristics. If the cargo possesses hazardous characteristics of a different kind from what the carrier would anticipate from such cargo, then the cargo has unusual characteristics<sup>10</sup>. If the carrier proves that the cargo`s unusual characteristics caused damage to the ship or that the cargo created risks which he did not contract to bear, he can succeed in a legal action against the shipper under the Bill of Lading contract of carriage and possibly even against the consignee, as lawful holder of the Bills of Lading.
In the propane contamination cases from 1993, the FOB buyers who chartered the carrying ships made claims under charterparty against the shipowners for delivery of a contaminated cargo.
After SGS surveyors who investigated the 1993 contamination cases discovered that the propane cargoes had been contaminated with Sulphur Compounds undetected at the time of shipment and the Sulphur Compounds caused corrosion to the cargo tanks of the carrying ships, the shipowners counterclaimed against the charterers for the shipment of dangerous goods to recover the expenses incurred to remove the rust scale from the cargo tanks.
In The "Baltic Flame"¹¹ and The "Berge Sisar"¹² cases, the shipowners brought claims under the Bill of Lading contracts against the shippers, Saudi Aramco and intended receivers, CFR buyers to whom the FOB buyers on-sold the propane cargoes.
The shipowners` claims were based on the allegations that apart from the voyages with propane cargoes shipped by Saudi Aramco their vessels had regularly carried propane without any problem or complaint and that the propane cargoes shipped by Saudi Aramco had damaged the carrying vessels` tanks due to their unknown propensity to corrode, reason for which those propane cargoes could be considered dangerous.
In The "Berge Sisar"¹³ case the claim against the intended receivers (CFR buyers) failed due to the fact that the intended receivers did not actually exercise the right of control over the cargo by presenting the Bills of Lading and nominating the port of discharge and/or by requesting delivery of the cargo. The Bills of Lading stated the destination as "one or more safe ports Netherlands", but they were issued in paper form and it took more time for the sellers and buyers in the chain to transfer the Bills of Lading from one to another than for the vessel to sail from Yanbu terminal, in Saudi Arabia to Stenungsund terminal, in Sweden, so that Stenungsund terminal was nominated by the voyage charterers (FOB buyers). Upon the ship`s arrival at Stenungsund terminal, the intended receivers, Borealis AB rejected the cargo and re-sold it to Dow Europe in Holland on CIF Terneuzen terms, at a discount price. Following the rejection of cargo by Borealis, the charterers gave instructions to the vessel to carry on the cargo from Stenungsund terminal, in Sweden, to Terneuzen terminal, in Holland and discharge there the cargo against the charterers` letter of indemnity. The cargo was discharged at Terneuzen terminal between 17th and 24th November 1993. The Bills of Lading were endorsed and forwarded to Borealis on 18th January 1994 and then by Borealis to Dow Europe on 20th January 1994, that is, long after delivery of the cargo. The company Borealis AB was just an intermediate holder of the Bills of Lading who endorsed over the Bills of Lading to the next buyers in the chain, Dow Europe. After the endorsement of the Bills of Lading to Dow Europe on 20th January 1994, it was no longer be subject to the liabilities under the contracts of carriage. The only company which would have become liable under the provisions of section 3(1)(c) of COGSA 1992 was Dow Europe which took delivery of the cargo and then became the lawful holders of the Bills of Lading.
In The "Baltic Flame"¹⁴ case Petroleo Brasiliero S.A. (CFR buyers) brought two legal actions as lawful holders of the Bills of Lading against the shipowner Mellitus Shipping Inc. for the cargo contamination. The shipowner counterclaimed for the ship`s tank cleaning costs based on the experts` investigation report which provided evidence that the propane cargoes were contaminated before shipment. The shipowner contended that by making claims under the contracts of carriage as lawful holder of the Bills of Lading, Petroleo Brasiliero S.A., became liable under the contracts of carriage contained therein for the loading of a dangerous cargo. Although the case was ultimately settled by mediation out of Court, it remained a good example of how the shippers` fault can give rise to dangerous goods` liability to the commodity buyers.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Oil Trade Review Edition No. 4.

Endnotes:

1. The study was entitled "Copper Corrosion Contamination In LPG Transportation".
2. [1961] 1 Lloyd`s Rep. 46
3. [1997] 2 Lloyd`s Rep. 759
4. [2010] EWCA Civ. 1145
5. There are also Bill of Lading forms providing for the settlement of disputes in Singapore based on the Singapore law but since the Singapore Bills of Lading Act is based on English COGSA 1992 the issues are equally applicable whether English COGSA or  Singapore Bills of Lading Act apply.
6. [1998] UKHL 1
7. See the paragraph 3.24 of the Joint Report of the Law Commission and the Scottish Law Commission, "Rights of Suit in respect of Carriage of Goods by Sea" (Law Com No. 196; Scot Law Com No. 130), HC 250, 1991.
8. See Borealis AB v. Stargas Ltd. & Ors, [1998] EWCA Civ. 1337, [1998] 4 All ER 821; See Borealis AB v. Stargas Limited and Others and Bergesen D.Y. A/S [2001] UKHL 17; [2001] 2 All ER 193; [2001] 1 Lloyd`s Rep. 663.
9. The Joint Report of the Law Commission and the Scottish Law Commission, "Rights of Suit in respect of Carriage of Goods by Sea" (Law Com No. 196; Scot Law Com No. 130), HC 250, 1991.
10. See The "Athanasia Comninos", [1990] 1 Lloyd`s Rep. 277
11. Petroleo Brasiliero S.A. and Others v. Mellitus Shipping Inc. (The "Baltic Flame"), [2001] EWCA Civ 418; [2001] 2 Lloyd`s Rep. 203.
12. Borealis AB v. Stargas Ltd. & Ors, [1998] EWCA Civ. 1337, [1998] 4 All ER 821; Borealis AB v. Stargas Limited and Others and Bergesen D.Y. A/S [2001] UKHL 17; [2001] 2 All ER 193; [2001] 1 Lloyd`s Rep. 663.
13. Borealis AB v. Stargas Ltd. & Ors, [1998] EWCA Civ. 1337, [1998] 4 All ER 821; Borealis AB v. Stargas Limited and Others and Bergesen D.Y. A/S [2001] UKHL 17; [2001] 2 All ER 193; [2001] 1 Lloyd`s Rep. 663.
14. Petroleo Brasiliero S.A. and Others v. Mellitus Shipping Inc. (The "Baltic Flame"), [2001] EWCA Civ 418; [2001] 2 Lloyd`s Rep. 203.