The compensation that has to be paid by the carrier in case of delivery of a contaminated cargo is in function of whether the cargo owners had the possibility to recondition the contaminated cargo or not.
If the cargo owner has this possibility and attempts to recondition the contaminated cargo, the cargo`s quality characteristics must be ascertained by an independent survey report after the completion of the reconditioning process1.
If the cargo has been restored to its original quality characteristics, the cargo owner shall be entitled to recover from the cargo insurers and carrier only the expenses incurred for reconditioning the cargo, subject to the available documentary evidence for such expenses2.
If the cargo could not be restored to its original quality characteristics, the cargo owner shall be entitled to recover from the cargo insurers and carrier the expenses incurred for reconditioning the cargo and the difference between the market value of the cargo in sound condition at the date of discharge and the salvage price received for the cargo after the reconditioning attempt3.
If the reconditioning process cannot eliminate the contamination but only reduce the degree of contamination, the cargo owners must be able to ascertain by independent survey the quality characteristics of the cargo after the completion of the reconditioning process. The market value of oil cargo after the reconditioning attempt must be determined based on actual quality characteristics of the reconditioned cargo, and not on estimation.
In US law case Armada Supply Incorporated v. Philip Gaybell Wright, Individually and on behalf of all other underwriters of Lloyd`s and New Hampshire Insurance Co Ltd.4, the cargo owner failed to ascertain by independent survey reports the cargo`s quality characteristics after the completion of the reconditioning process and then sold some portions of cargo that still had a residual contamination based on estimated quality specifications that greatly differed from the actual quality characteristics. The US District Court for the Southern District of New York and Court of Appeals for the Second Circuit held that since the sale prices for those portions of cargo were based on quality specifications that differed from the actual quality characteristics, it did not reflect the market value of the reconditioned cargo and therefore, the respective sale prices did not constitute probative evidence of the oil cargo value (i.e. damaged value of oil cargo). If the cargo owner fails to prove the damaged value of oil cargo, he cannot recover the price difference from the cargo insurers and carrier.
If the cargo owner did not have the possibility to recondition the contaminated cargo and it had to sell it at a salvage price, the Courts apply the market value rule for the calculation of damages payable as compensation. According to this rule, the cargo owner shall be entitled to recover from the carrier the difference between the market value of the cargo in sound condition at the port of destination on the date of discharge and the market value of the contaminated cargo at the date of discharge from the carrying ship or if such value is not available for the date of discharge, the market value established at the date that is the closest in time to the discharge date, provided that the cargo owner is able to provide adequate evidence as to the market price of a sound cargo on the discharge date5 and the market price of contaminated cargo.
In US law case BP North American Petroleum v. SOLAR ST6, a portion of a diesel oil cargo was contaminated with unleaded gasoline during the discharging operation due to the negligence of the ship`s crew. The market price of sound diesel oil on the date of discharge (25 August 1996) was US$ 0.62039 per gallon. The market price of contaminated cargo evidenced by a purchase offer received by the cargo owner from a slop reprocessor on 10 September 1996, that is, two weeks after the date of discharge, was US$ 0.125 per gallon below the market price of sound diesel oil. The cargo owner was unable to sell the contaminated cargo at the time due to unavailability of ships for transportation. By the time the cargo owner found a ship for transportation of contaminated cargo to a slop reprocessor, seven weeks after the date of discharge, the market price of sound diesel oil had risen by twenty percent up to US$ 0.74539 per gallon. Due to the market price increase, the price at which the cargo owner sold the contaminated cargo, US$ 0.62 per gallon, was almost equal to the market price of sound diesel oil at the date of discharge, US$ 0.62039 per gallon.
The question in dispute was whether the carrier had to pay compensation based on the difference between the market price of sound diesel oil at the discharge date and the price the cargo owner received seven weeks after the discharge date or based on the difference between the market price of sound diesel oil at the discharge date and the price from purchase offer received two weeks after the date of discharge.
The US Court of Appeals for the Fifth Circuit held that the market value rule requires the compensation of cargo owner based on the diminished value of cargo at the date of discharge.
Given the possibility of price fluctuation while the commodity cargo remains in the possession of the cargo owner after the discharge date, the US Courts held that if there is no market price available for the contaminated cargo on the discharge date, the sale price or purchase offer from the date that is the closest in time to the discharge date will be considered sufficient to establish the market value of the contaminated cargo at the time of discharge7.
Any price fluctuations and changes in value beyond the date of discharge are irrelevant to the damages calculation. If the cargo owner delays the sale of contaminated cargo in order to obtain a better price and obtains at a later date a higher price than it could have obtained at the date of discharge, the carrier`s liability is not thereby diminished. If the cargo owner obtains a lower price, the carrier`s liability is not increased.

by Vlad Cioarec, International Trade Consultant

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

Endnotes:

1. See US law case Armada Supply Incorporated v. Philip Gaybell Wright, Individually and on behalf of all other underwriters of Lloyd`s and New Hampshire Insurance Co Ltd., 665 F.Supp. 1047 (SDNY 1987), 858 F.2d 842 (2nd Cir. 1988).
2. See US law cases Armada Supply Incorporated v. Philip Gaybell Wright, Individually and on behalf of all other underwriters of Lloyd`s and New Hampshire Insurance Co Ltd., 665 F.Supp. 1047 (SDNY 1987), 858 F.2d 842 (2nd Cir. 1988); Kanematsu-Gosho Ltd. v. M/T Messiniaki Aigli, 814 F. 2d 115 (2nd Cir. 1987); Texport Oil Co. v. M/V Amolyntos, 816 F. Supp. 825 (EDNY 1993).
3. See US law case Armada Supply Incorporated v. Philip Gaybell Wright, Individually and on behalf of all other underwriters of Lloyd`s and New Hampshire Insurance Co Ltd., 665 F.Supp. 1047 (SDNY 1987), 858 F.2d 842 (2nd Cir. 1988).
4. 665 F.Supp. 1047 (SDNY 1987), 858 F.2d 842 (2nd Cir. 1988)
5. The market price quotations published by Platts and Argus are considered the best evidence of the market value of a sound cargo on the discharge date.
6. 250 F. 3d 307 (5th Cir. 2001)
7. See also Minerais US Inc., Exalmet Div. v. M/V Moslavina, 849 F. Supp. 467 (ED Louisiana 1994).