Cargo Retention Clauses in Oil Charterparties

December 2001

(Sea Venture Volume 20)

Oil tanker charterparties often contain specific clauses relating to the retention of cargo on board a vessel following completion of discharge. The aim of such clauses is, quite simply, to provide for a speedy resolution of disputes which would otherwise arise in relation to the calculation of freight to be paid and also, to some extent, cargo shortages.

Unless there is specific provision within a charterparty, a charterer is not allowed to make a deduction from freight. This rule of law was reinforced most recently in the case of the "Aries"¹.

Cargo Retention Clauses commonly come in two different forms:

1. a clause that allows for determination of cargo Remaining On Board (ROB) by either one or possibly two independent surveyor(s), and then for a deduction from freight for any ROB to be made with each party retaining it’s own rights to claim repayment in arbitration.
   

2. a clause similar in form to that above but with provision that the surveyor(s) decision shall be determinative (final and binding) and with a consequent waiver of rights to pursue claims for repayment.

It is important that an Owner has a full understanding of the ramifications of incorporating such clauses into any charterparty before agreeing to their inclusion. Both types of clause have significant consequences and, from an Owner’s point of view, should be avoided if at all possible.

ROB clauses allow charterers to make deductions from freight simply on the basis of the determination of cargo ROB made by the surveyor. This gives the charterers a large tactical advantage in that they can deduct from freight, regardless of fault or liability on the part of the owner, and then sit back and wait for a claim to be made by the owners. Where the deduction in respect of ROB is for a relatively small sum, Owners may decide that it is uneconomic to pursue the claim through arbitration even if they would be entitled to recover it.

Where the second type of the clause is used, upon the surveyor(s) making the calculation of ROB charterers are able to deduct from freight and such deduction will, except in very limited circumstances, be final and binding on the parties.

The risks of such clauses are self-evident; Charterers may deduct from freight without liability first being proved. The surveyor may quite simply get his calculation wrong leaving owners the problem of reclaiming freight in arbitration. In certain circumstances, Owners may be prejudicing their P&I Club cover by giving up contractual defences.

Reviewing these clauses, various questions arise:

1. What is an independent surveyor?

2. When is a "determination" of ROB made?

3. In what circumstances can an appeal be raised?

Some guidance to these questions has been provided by the English Commercial Court in the case of the "PROTANK ORINOCO" ². In this case the ROB clause in the charterparty provided:

"In the event that any cargo remains on board upon completion of discharge, charterers shall have the right to deduct from freight an amount equal to the FOB port of loading value of such cargo…provided that the volume of cargo remaining on board is liquid pumpable and reachable by vessel'’ pumps (or would have been…but for the fault or negligence of the master vessel or her crew…) as determined by an independent surveyor whose estimate shall be final and binding.

Any action or lack of action in accordance with this provision shall be without prejudice to any rights or obligations of the parties…"

At the discharge port SGS surveyors were appointed by the charterers to measure cargo discharged and on the basis of the SGS survey report charterers made a deduction from freight for ROB. Owners made an application to the Court for repayment of the freight deducted on the grounds that:

1. the SGS surveyor was appointed by charterers and was not, therefore, independent; the appointment of an independent surveyor required a joint appointment by owners and charterers.
   

2. there had been no determination by the surveyor who, in his report, made no determination/declaration whether the cargo ROB was liquid, pumpable and /or reachable by ships pumps.

The Court held that the meaning of "independent" was not satisfied by showing that the surveyor was from a firm or organisation that operated independently of the owner, charterer or receiver alone. Using this test would mean that there could be a number of surveyors at any given port who would be "independent" and if more that one were to be appointed it was clear that unless there was agreement between them there would be no "determination".

The clause provided that the decision of the surveyor would be final and binding and that in the absence of such a determination then the parties common law rights remained.

Insofar as the surveyor’s certificate did not make any determination as to the pumpability and/or reachability of the cargo ROB it was not, in this case, determinative. Therefore Owners were entitled to recover the freight deducted.

Accordingly, where a charterparty contains a clause allowing deduction for any cargo ROB care has to be taken to ensure that any appointment of a surveyor is made jointly (and investigation made to ensure the independence of the surveyor). In addition the surveyor’s certificate must make provision regarding the nature of the cargo ROB, that is whether it is liquid or not, whether it is pumpable or not, whether it can be reached by ship’s pumps or not and addresses any other terms of the clause in relation to the ROB condition.

What if the surveyor gets it wrong - allowing charterers to make a deduction from freight when otherwise such deduction would not be possible? Unfortunately, in the absence of fraud on the part of the surveyor, where the charterparty provides for the surveyor’s decision to be final and binding, challenging the surveyor’s findings will not be possible³.

 

With thanks to Stephen Mackin of Eversheds for preparing this article.

¹ [1977] 1 Lloyd's Rep. 334
² [1997] 2 Lloyd’s Rep. 42
³ Jones and Others -v- Sherwood Computer Services PLC. 1 W.L.R. 277