In Re (#11 November 2013)

Incorporation of Rules relating to Transportation of Goods that may Liquefy into FOB Contracts

Oleg O. Milchenko

Ukraine is a major exporter of iron ore concentrate and iron ore fines. Export of those goods to remote foreign countries is performed in bulk through Ukrainian sea ports. In 2008, the International Maritime Organization adopted the new International Maritime Solid Bulk Cargoes Code (IMSBC), in which the rules and peculiarities of the shipping of bulk cargoes were set out. In 2011, amendments to SOLAS 74 Convention were made according to which application of the IMSBC to shipments made by vessels flying the flags of members of the mentioned convention became mandatory. Of course, those changes to the rules on transportation of goods in bulk affected Ukrainian consignors as well. In general, Ukrainian exporters comply with conditions of bulk cargoes loading envisaged by the IMSBC. However, recently the attention was paid to commodities being exported from Ukraine and some purchasers of iron ore products tried to protect themselves from additional claims from ship owners by alteration of export contracts with Ukrainian suppliers.

The reason for such actions is circulars that the International Group of P&I Clubs sent to its members in the beginning of summer 2013. The attention of ship owners was drawn to breaches of the IMSBC in the port of Yuzhny. Those breaches regarded to presentation of iron ore concentrate and iron ore fines for loading with excess of the transportable moisture limit which is directly prohibited by the IMSBC. According to the mentioned circulars, details indicated in cargo declarations submitted to ship masters did not correspond to the actual content of moisture of goods being presented for loading.

In those circumstances, some of buyers desired to obtain additional guarantees from exporters that goods will comply with conditions of transportation set by the IMSBC. So, this article examines some alternatives of incorporation of those guarantees into export contracts. And in this regard it is namely FOB contracts are of particular interest, because in these contracts a seller actually does not have any contractual relations with a ship owner.

But first and foremost it is necessary to consider in more detail rules of the IMSBC which relate to transportation of iron ore concentrate and iron ore fines to determine why compliance with those rules is important.

Transportable moisture limit and other rules of transportation of bulk cargoes under the IMSBC

 In accordance with Appendix 1 to the IMSBC, iron ore concentrate is a Group A cargo, that is, it may liquefy if shipped at moisture content in excess of its Transportable moisture limit (TML). TML, in turn, means the maximum moisture content of the cargo which is considered safe for carriage in most ships.

It should be pointed out, that liquefaction of a cargo during a voyage bears serious risks for ships. In 2009 two ships carrying iron ore fines from India sank. Their loss was attributed to excess moisture levels in cargoes. The last disaster took place in 2011 with the bulk carrier Vinalines Queen which shipped more than 54,000 tons of nickel ore from Indonesia to China. The ship had capsized to the left and sank quickly, only one crew member survived. There are strong beliefs that liquefaction of nickel ore led to destabilization of the ship and resulting disaster. That is why ship owners and insurance clubs pay lots of attention attention to issues of liquefaction and try to impose more liability on cargo owners which do not comply with the IMSBC requirements.

Under Para 4.3.2 of Section 4.3 of the IMSBC, when a concentrate or other cargo which may liquefy is carried, the shipper shall provide the ship’s master or his representative with a signed certificate of the TML, and a signed certificate or declaration of the moisture content. The certificate of TML shall contain, or be accompanied by the result of the test for determining the TML. The declaration of moisture content shall contain, or be accompanied by, a statement by the shipper that the moisture content is, to the best of his knowledge and belief, the average moisture content of the cargo at the time the declaration was presented to the master.

The TML may be determined through one of tests, which are contained in Appendix 2 of the IMSBC. The main reason for concerns of International Group of P&I Clubs on cargoes being loaded in Yuzhny was that documents presented to masters contained higher TML than actual figures what was discovered by independent examinations. Under the IMSBC the TML is defined as 90% of the flow moisture point, which is the point where bulk cargoes lose shear strength and begin to move like a liquid.

The IMSBC states that concentrates or other cargoes which may liquefy shall only be accepted for loading when the actual moisture content of the cargo is less than its TML. Cargoes which do not comply with that requirement may be accepted for loading on specially constructed or fitted cargo ships. Features of such specially constructed or fitted ships are contained in Para 7.3.2 of Section 7.3 of the IMSBC.

From the presented brief analysis of the IMSBC rules three basic requirements for parties to a sea carriage contract or a charter party may be outlined: (1) a shipper is obliged to provide a master with appropriate documents proving the TML of a cargo; (2) a cargo may only be carried if its moisture content is less than its TML; or (3) if the moisture content of a cargo is more than its TML it may be carried only by a specially constructed or fitted ship. Those requirements are the basis for balance of liability of parties to a FOB contract, but before moving to assessment of different options of contract parties to include the IMSBC rules into a contract, it is necessary to look at how different maritime organizations struggle to comply with the IMSBC rules.

BIMCO and P&I clubs approach

In September 2011 to ensure that the IMSBC would be complied with during sea carriages, clubs of the International Group of P&I Clubs implemented a so-called TML Clause, which is now included in most charter parties where owners are covered by clubs of the mentioned group. In general, such clause imposes liability on a charterer to ensure that all requirements of the IMSBC are complied with. Moreover, it provides additional options to a master and an owner to inspect a cargo, to refuse from accepting it for loading and even to unload a cargo which is unsafe for a ship or crew.

In particular, under the TML Clause, a charterer becomes responsible for any costs, expenses and liabilities incurred in compliance or as a result of any non-compliance with the IMSBC. This is the interesting provision, as it makes a charterer liable not only for non-compliance with the IMSBC, but also during compliance with it. That is, if ship delay was caused by obtaining appropriate documents in regard to cargo by a charterer, damages incurred from such delay to be recovered by a charterer, notwithstanding such obtaining was made to ensure safety of carriage.

Other interesting provisions of the TML clause are related to the rights of an owner and a master. Thus, a master has the right in his absolute discretion to refuse to accept cargo on board or, after loading, to refuse to sail, where in his reasonable opinion, there is a risk (including the risk of liquefaction of the cargo), which could jeopardize safety of a crew, a vessel or a cargo on a voyage. Also, it is the right of an owner to take samples of a loaded cargo and test those using independent experts. This provision has two contradictions, one of which is attributable only to Ukraine.

Firstly, in such a case taking samples and making tests may delay a ship, and as was mentioned before, any expenses and costs for any compliance or non-compliance with the IMSBC is borne by the charterer. So, the owner may abuse his right to take samples to cause more costs to a charterer in its favor. A charterer, however, may have a defense in this case if a charter party is concluded under English law by using the doctrine of fairness in contractual relations.

Secondly, a cargo loaded on a ship for export is under customs control according to Ukrainian customs rules, which do not allow independent surveyors to take samples for testing. To be preciese, there is no such right of a cargo owner to take samples from a cargo located under the regime of export and then provide tests during which those samples may be destroyed. It may be presumed, however, that for such impossibility to use the right to take samples by an owner a charterer should not be liable, because such impossibility is caused by the peculiarities of national legislation and not by acts or failures to act of a charter.

On 25 July 2012 the BIMCO had implemented its own edition of the TML clause which in fact includes all aforementioned provisions. Its importance lies in popularity of BIMCO charter parties, so at the moment almost all charter parties related to bulk carriers have such a clause which envisages strict rules for charterers.

Taking into account the strictness of the TML clause as to liabilities and obligations of charterers, it is obvious that latter intend to transfer at least a part of their liability to exporters.

Provisions of an export contract regarding the IMSBC rules

In a FOB contract an exporter does not have a ship as nominee and has no contractual relations with a ship owner, and thus the TML clause is not binding on it. An exporter is obliged only to load goods on a ship. However, actually an exporter is responsible for properties of commodities, including moisture content. Therefore, it is fair that an exporter should bear at least a part of the liability of a charterer when goods with moisture content in excess of the TML are procured. There may be two options for parties to a FOB contract to balance their liabilities.

As was already mentioned a cargo with content of moisture in excess of the TML may be shipped only by a specially constructed or fitted ship. So, the parties to a FOB contract may provide that a buyer is obliged to nominee only such types of ships. It is also recommended to indicate all substantial features of those ships in a contract using provisions of the IMSBC. But of course the sum of freight for chartering this type of vessel will be higher and this option is not always preferable for buyers. Taking into account that exporters do not always have enough bargaining power to insist on their own conditions, this option may be used only in exceptional cases.

Another option envisages broader liability for an exporter. In this case an exporter gives a warranty to a buyer that at the moment of loading the content of moisture in a cargo does not exceed its TML. If the TML was actually exceeded, any monetary losses suffered by a buyer as a result of breach of the TML clause may be recovered by damages for breach of the warranty by an exporter.

Moreover it is possible to stipulate a list of documents which confirm the TML of goods to be provided to a buyer as well as a surveyor who will be responsible for accuracy of results of tests on the TML determination and a method of testing based on the IMSBC.

It is important to understand that notwithstanding an exporter is a person which may be responsible for quality of goods it is a buyer who has contractual relations with a ship owner in a FOB contract. That is, an exporter may be responsible for providing goods with the appropriate TML but it looks unfair to make it responsible for changes of moisture content of goods during a voyage. However, depending on relations under a contract, the parties may sometimes find such way affordable for them notwithstanding it completely protecting a buyer from any liability under the TML clause. But usually in a FOB contract it is sufficient to ensure that the quality of goods was in accordance with the IMSBC at the moment of loading, and for this purpose the additional warranty from an exporter accompanied by appropriate documents is even more than enough.

Fortunately, there are few disputes on liabilities incurred from TML clauses nowadays. This means that in most cases the quality of goods being exported is in accordance with IMSBC provisions, or at least breaches of those provisions did not lead to losses. In any case it is always better to prevent further disputes and, as was shown above, in some circumstances it is possible to divide responsibility to a ship owner between the parties to a FOB contract.

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