For crude oil cargoes which lose volume during the sea carriage, the tanker shipping companies and oil trading companies stipulate in charter parties a quantity loss allowance. The extent of quantity loss allowance is in function of the characteristics of the crude oil transported, length of the voyage and data gathered from the previous voyage analysis reports.
There are two types of quantity loss allowance clauses: out-turn loss clauses and in-transit loss clauses.
The out-turn loss clauses stipulate that the cargo quantity difference is to be determined by comparing the Bill of Lading quantity figures with the out-turn report quantity figures ascertained ashore after discharge, thereby avoiding disputes with the cargo insurers who settle the shortage claims on the same basis.
The risk for the carriers is that the shore-ship differences may exceed the agreed quantity loss allowance and the charterer will deduct from freight the value of shortage exceeding the quantity loss allowance without there being any actual quantity loss during the sea carriage.
The effect of out-turn loss clause has been considered in the English law case Lakeport Navigation Company Panama S.A. v. Anonima Petroli Italiana S.p.A. (The "Olympic Brilliance")1.
The out-turn loss clause had the following provisions:

"If there is a difference of more than 0.5% between Bill of Lading figures and delivered cargo as ascertained by Customs Authorities at discharging port, Charterers have the right to deduct from freight the CIF value of the short delivered cargo."

There was a shortage of 2,420 metric tonnes between the Bill of Lading quantity and out-turn quantity stated in the Customs Authority`s certificate. While there was no actual breach of contract of carriage by the carrier to explain that shortage, the English Court of Appeal held that the clause allows the charterer to make a deduction from freight as a final settlement of freight payment.
The in-transit loss clauses stipulate that the cargo quantity difference is to be determined by comparing the quantity figures obtained by ullage measurement of vessel`s tanks after loading and before discharge.
The in-transit loss clauses were initially drafted for oil tanker charter parties following a series of US Court decisions in the early 1980s which declined to accept a trade allowance for in-transit loss in oil trade in the absence of a specific reference in the contract of carriage2. In Kerr-McGee Refining Corporation v. M/V La Libertad3, Amerada Hess Corp. v. S.S. Phillips Oklahoma4 and Sun Oil Company of Pennsylvania v. M/T Carisle5, the US Courts held that the section 1303 (8) of US COGSA6 precludes the implication of a trade allowance for in-transit loss in the contract of carriage. In Kerr-McGee Refining Corporation v. M/V La Libertad7, the US District Court  for the Southern District of New York held that:

"Although there is evidence of an industry practice to accept a 0.5% tolerance, both in the settlement of claims and in arbitration, we decline to mandate acceptance of such a tolerance in this litigated dispute, in which the charter party makes no reference to a 0.5% tolerance."

The US law requirement for express reference in the contract of carriage of the in-transit loss allowance means that an in-transit loss allowance can be opposable to a third party holder of Charter Party Bill of Lading, such as a CFR or CIF buyer, only if the in-transit loss allowance is specified in a charter party clause and the charter party containing the clause is properly incorporated in the Bill of Lading or alternatively, if the Bill of Lading`s Conditions of Carriage include a clause that the carrier shall not be responsible for any in-transit loss that is below the specified tolerance.
If the Bills of Lading incorporate charter parties with in-transit loss clauses, in case of shortage claims the shipowners would only be liable for cargo quantity shortages in excess of contractual loss allowance. Another effect of incorporation into the Bills of Lading of the in-transit loss clauses is that in case of shortage claims the Courts will normally give preference to the evidence provided by vessel`s ullage reports rather than the Bills of Lading and out-turn report.
There are three types of in-transit loss clauses:

- clauses whereby the cargo quantity difference is to be determined by comparing the vessel`s Total Calculated Volume figures after loading and before discharge, as shown in the example below:

"Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.2% as determined by an independent surveyor mutually acceptable and paid 50/50 between Owners and Charterers.
Charterers shall have the right to claim from the Owners an amount equal to the FOB port of loading value of such loss of cargo plus freight due with respect thereto. "In-transit loss" is defined as the difference between Vessel`s Total Calculated Volume figures after loading and before discharge."

- clauses whereby the cargo quantity difference is to be determined by comparing the vessel`s Gross Standard Volume figures after loading and before discharge, as shown in the example below:

"In addition to any other rights which Charterer may have, Owner will be responsible for the full amount of any in-transit loss, exceeding three-tenths of one percent (0.3%), and Charterer has the right to claim an amount equal to the FOB port of loading value of such cargo plus freight due with respect thereto. "In-transit loss" is defined as the difference between Vessel`s GSV figures after loading at the load port and before unloading at the discharge port8."

- clauses whereby the cargo quantity difference is to be determined by comparing the vessel`s Net Standard Volume figures after loading and before discharge, as shown in the example below:

"In addition to any other rights which Charterers may have, Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.3% by volume and Charterers shall have the right to deduct from freight an amount equal to the FOB loading port value of such cargo plus freight and insurance due with respect thereto. "In-transit loss" is defined as the difference between Vessel net standard volumes after loading at the loading port and before unloading at the discharge port. Volume of cargo to be ascertained at loading port and discharge port by independent inspectors appointed by Charterers whose findings are to be final and binding on both parties, save for instances of arithmetical error in calculation9."

The latter are used because of the shipowners` practice of using oil cargoes as bunkers and replacing cargo with water or sea water during the carriage10.
Another feature of in-transit loss clauses used in oil tanker voyage charter parties is that the tanker shipping companies and oil trading companies drafted different provisions for the settlement of freight payment in case the in-transit loss exceeds the contractual loss allowance.
The tanker shipping companies drafted in-transit loss clauses which give the charterer solely a right to claim from the shipowner the value of the shortage exceeding the loss allowance.
In turn, the oil trading companies drafted in-transit loss clauses which give the charterer the right to deduct from freight the value of the shortage exceeding the loss allowance, without bringing a formal claim.
In case of the in-transit loss clause giving the charterer a right to claim the value of shortage, the negative effect of incorporation into the Bills of Lading is that if the cargo shortage exceeds the in-transit loss allowance the shipowner would have to deal with claims from both charterer and Bills of Lading holder.
In case of the in-transit loss clause giving the charterer a right to deduct from freight the value of shortage, the negative effect of incorporation into the Bills of Lading is that it could put the shipowner into a situation where the charterer makes a deduction from freight and then the Bills of Lading holder makes a claim for the same amount. To avoid this kind of situation, the shipowners can amend the in-transit loss clause to include a charterer`s indemnity similarly to indemnity provisions used in Cargo Retention Clause of BPVOY4 tanker charter party form (Sub-clause 33.4) which has the following wording:
   
"Charterers hereby agree to indemnify Owners against any liability to a Bill of Lading holder resulting from non-delivery of any such cargo in respect of which a deduction from freight is made under this Clause 33 provided always that Charterers shall under no circumstances be liable to indemnify Owners in an amount greater than the amount of freight so deducted."

by Vlad Cioarec, International Trade Consultant

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

Endnotes:

1. [1982] 2 Lloyd`s Rep. 205
2. In fact, the real reason behind the legal actions brought by oil companies against the carriers was not the trade allowance but the crude oil price increase since 1973 and even larger ship sizes and by consequence the increasing value of cargo losses. This matter has been explained in US law case Sun Oil Company of Pennsylvania v. M/T Carisle, 771 F.2d 805 (3rd Cir. 1985) in the following passage: "[T]he 0.5% allowance has apparently remained unchallenged until relatively recently. As the district court judges noted, the motivation of shippers "to challenge the trade allowance has increased commensurate with the increase in the price of oil." The brief of the amicus, Koch Industries, Inc., offers the following illustration. "A standard size tanker in the 1960s was 35,000 deadweight tons (DWT) with a capacity of 262,000 barrels. At 1960s prices assuming a tanker of 35,000 DWT, the value of a 0.5 percent loss was $2,500.00. Today, the typical size of a very large crude carrier (VLCC) is 250,000 DWT with a cargo capacity of 1,875,000 barrels of oil. At today`s prices with today`s VLCC the value of a 0.5 percent loss may be $325,000.00."
3. 529 F. Supp. 78 (S.D.N.Y. 1981)
4. 558 F. Supp. 1164 (S.D.N.Y. 1983)
5. 771 F.2d 805 (3rd Cir.1985)
6. Article III Rule 8 of the Hague Rules.
7. 529 F. Supp. 78 (S.D.N.Y. 1981)
8. See Chevron Shipping In-Transit Loss Clause.
9. See BP In-Transit Loss Clause.
10. See Armada Supply, Inc. v. S/T Agios Nikolas, 613 F. Supp. 1459 (S.D.N.Y. 1985); Burmah Oil Tankers Ltd. v. Trisun Tankers Ltd., 687 F. Supp. 897 (S.D.N.Y. 1988); Kerr-McGee Refining Corp. v. M/T Triumph, 924 F. 2d 467 (2nd Cir. 1991); Fal Oil Co. Ltd. v. Petronas Trading Corporation Sdn Bhd (The "Devon"), [2004] EWCA Civ. 822; [2004] 2 Lloyd`s Rep. 282.