DOSSIER

 

A Most Dangerous Trade: The Problems of Liquefaction


This article looks at the insurance implications surrounding the carriage of solid bulk cargoes which may liquefy and how claims arising from liquefaction are typically dealt with.

“In a word, what [the master] was being offered was a wet wolf in a dry sheep’s clothing and there was nothing to put him on notice that the cargo was something radically and fundamentally different from that which it appeared to be. In those circumstances it seems to me that the cargo was dangerous beyond all argument.” – 

 

Mr Justice Donaldson, 1968 

So said Mr Justice Donaldson in 1968 when dealing with a case where a master had been misled by shippers about the true moisture content of a cargo of iron ore(1) .  In that case, the cargo, although appearing dry during loading, liquefied during the voyage causing the ship to put into a port of refuge and re-stow.  The charterer was held responsible for the expenses incurred and for the payment of hire throughout, but the situation could have been much more lethal.  It is estimated that more than 100 seafarers have lost their lives following cargo liquefaction.  Delays arising from the discovery of cargo liable to liquefy can cost millions of dollars.  Claims arising from the loss of a vessel due to liquefaction cost tens of millions of dollars and can cause considerable reputational damage.


What is liquefaction?

Liquefaction in the context of carriage of goods by sea describes the phenomenon whereby an apparently solid bulk cargo behaves in a manner similar to a fluid.  Various mechanisms within the cargo mass contribute to liquefaction, including moisture content, degree of saturation, pressure within the particle pore spaces and the loss of inter-particle frictional force. Liquefaction can occur slowly over time or instantaneously without warning.  ‘Dynamic separation’ can occur during a voyage whereby the cargo consolidates at depth, with moisture / fine particles in the cargo forced to the surface, flattening the stow profile and creating a free-surface effect and cargo shift(2) .

The process is typically triggered by the exposure of the cargo to cumulative stress from ship motions during a voyage.  Once a cargo has begun to liquefy or dynamically separate within the ship’s hold, the process is irreversible, and the ship’s intact stability may be adversely affected.  Depending on the cargo and sea conditions, the vessel may capsize.

Typical cargoes affected by liquefaction include nickel ore, iron ore fines, bauxite fines, mineral concentrates and some by-products such as ‘red mud’, although this list is by no means exhaustive and many other solid bulk cargoes are susceptible to the risk of liquefaction.

 

International legal regime

The carriage of solid bulk carriages by sea is regulated by the International Maritime Solid Bulk Cargoes (“IMSBC”) Code.  The Code was first adopted by the International Maritime Organisation on 04 December 2008 and entered into force on 01 January 2011.  It is of mandatory application under the Safety of Life at Sea (“SOLAS”) Convention and is revised every two years.  SOLAS was first adopted in 1914 after the sinking of the Titanic and by the 1960s it was recognised that the IMO should draw up and sponsor an internationally acceptable code of safe practice for the shipment of bulk cargoes.  This led to the publication of the Code of Safe Practice for Solid Bulk Cargoes (the “BC Code”) in 1965, which was subsequently replaced by the IMSBC Code.

The Code divides a number of solid bulk cargoes into three groups and, when it comes to liquefaction, cargoes fall into either Group A, which consists of cargo which may liquefy, or Group C, which should not.  However, a cargo only falls within Group C where it comes within the description, physical properties and characteristics set out in the schedules to the Code.  If not, it should be treated as a Group A cargo.  Before 2020 for instance, bauxite consisting of a defined particle size was identified as a Group C cargo; bauxite falling outside of those parameters could only safely be treated as cargo which had the potential to liquefy.  In the 2020 Edition of the Code, a new schedule was added for bauxite fines (a Group A cargo) where the product contains fine particles such that the moisture in the cargo cannot drain freely.

All IG Clubs require mandatory notification of any intention to load nickel ore from ports in Indonesia and the Philippines so that club managers can provide Members with relevant information to help manage the risks of carriage.


Liquefaction risk identified during loading

Proper compliance with the Code ought to mean that no solid bulk cargo is at risk of liquefaction during a voyage.  However, cargo is often presented by the shippers as safe for shipment, but a risk of liquefaction is subsequently identified during the loading process, often after the crew carry out the complementary test procedure for determining the possibility of liquefaction laid down in the Code (known as a “can test”) or due to the involvement of a cargo surveyor.   Visual observations of cargo during loading, such seeing splatter on the sides of the hold, often give cause for concern.

Cargoes may have been wrongly presented as safe to load for various reasons, ranging from mistakes during the sampling and testing process to outright fraud by the shipper.  Inevitably something has gone wrong on the shore side in such situations since, before presenting a cargo for loading, shippers are under a legal obligation under the Code to correctly identify the proper Bulk Cargo Shipping Name for any solid bulk cargo intended for shipment; determine the properties of that cargo in accordance with approved and suitable sampling and testing procedures; provide the master or his representative with appropriate information in writing sufficiently in advance of loading to enable precautions necessary for safe carriage of the cargo to be put into effect; and, provide a signed declaration in a prescribed form to the effect that the cargo has been fully and accurately described and that the test results are representative of the cargo to be loaded and correct.  For a Group A cargo, the cargo declaration should be accompanied by a signed laboratory certificate stating the moisture content of the cargo and the Transportable Moisture Limit (“TML”).  The TML is determined as a figure 10% in excess of the product’s flow moisture point (“FMP”), FMP being the percentage amount of moisture in the product at which, under certain conditions, the cargo may begin to begin to behave like a liquid, or “flow”.  If the moisture content (“MC”) of the cargo exceeds the TML then it is not safe or suitable for shipment.  The “competent authorities” (port state of departure, port state of arrival and flag state) may authorise an exemption to the Code.

Where a liquefaction risk is only identified during the loading process, it will need to be determined whether loading can continue and whether it is safe for the vessel to sail.  The reliability of the information and cargo documents provided by shippers will need to be checked, often requiring visits to stockpiles ashore, further sampling and testing.  This will lead to delays and increased costs, which one party to the adventure will ultimately have to pay for.  In too many cases, the cargo information and documents were obviously unreliable, for example, if the testing was carried out more than six months prior to the date of loading.  Whilst the lack of diligence on the part of the ship in such situations is less than ideal, it is ultimately the responsibility of the shipper to provide a cargo suitable for shipment and any information necessary to ensure safe carriage.

If a carrier is advised that cargo onboard is not safe for shipment, a choice will need to be made whether to have the dangerous cargo removed from the ship, or to try and remediate the situation.  In many situations there is no way that cargo once onboard a ship can be physically removed or legally reimported to the country of origin.  Remediation may involve waiting for the cargo to dry (sometimes aided by fans) or introducing safe cargo or a drying agent.  Such steps need to be taken under the guidance of an appropriate cargo expert.  The process can take months, often with no guarantee of success.

Depending on the terms of the contract of carriage or charterparty, the charterer and the shipper are likely to face a claim for the owner’s losses arising from the dangerous nature of the cargo – discussed further below.

Cargo experts might disagree as to when suspect cargo has become safe to carry.  In particular, some experts take the cautious view that the ship cannot sail until samples of the cargo have passed one of the tests described in the Code.  Other experts may consider that the testing outlined in the Code is rudimentary and only intended to identify potential liquefaction risks prior to sailing and that, once a liquefaction risk has materialised, assessment outside the scope of the Code is permissible to determine whether cargo will in fact liquefy on the voyage.  A stand-off between experts on the correct approach may be protracted and expensive for the party in the wrong.
Carriers have been known to continue with loading or to sail against the recommendation of cargo experts.  The Club then finds itself in the role of a critical friend, understanding of the commercial need to trade without undue delay or additional cost but fairly warning of the potential implications if the ship is put to sea in a dangerous condition.  If cargo is not safe to carry, this may prejudice Club cover and other forms of insurance, even where cover is not explicitly reserved.  Operational costs arising from ensuring safe loading, even when incurred in anticipation of potential future P&I liabilities, are unlikely to be paid for by the Club.
North has also seen a rise in charterparty terms limiting the carrier’s ability to comply with the Code by, for example, restricting access to stockpiles ashore.  The existence and application of such terms are also likely to prejudice cover and are strongly discouraged.


Liquefaction risk identified during voyage

Liquefaction may only become apparent for the first time during a voyage and the ship may then have to call at a port of refuge.  In some cases, however, the ship will have no better option than to continue to the intended destination.

Cargo experts will be able to advise on the level of risk in continuing the passage and on the steps which can be taken to minimise the danger.  In such situations, the additional expenses incurred by the carrier in dealing with the emergency situation will in principle be recoverable in General Average.  H&M will pay the ship’s share of GA (with discretionary P&I cover for any shortfall due to under-insurance) subject to the terms of the hull policy.

Collection from other interests will depend on the existence of actionable fault on the part of the carrier leading to the incident.  If there is an actionable fault defence then, in principle, the unrecoverable GA will be reimbursed by P&I unless the owner knowingly failed to follow the Code or take other prudent precautions to avoid the risk of liquefaction.


Liquefaction causing the loss of a ship

The loss of a ship with the death of her crew following liquefaction will lead to various costs falling to P&I and other marine insurances.  The loss of the ship itself will fall to H&M.  P&I covers claims arising from the loss of cargo; injury or death claims relating to those onboard; wreck removal; and, pollution.  Owners may pay for extensive search and rescue costs – either using their own assets or paying for state or private S&R efforts – which would not automatically fall to insurers.

Where P&I cover has been prejudiced because the Member failed to follow the Code or in some other way acted imprudently, the Club will not reimburse Members for losses resulting from cargo claims and people claims.  In any event, cargo claims are usually not a major cost arising from a total loss caused by liquefaction.  Typically, those cargoes prone to liquefaction are not very valuable.  The claim is also likely to fail where the cargo itself was the cause of the loss(3).  Cargo interests often only recover where loss results from liquefaction by putting undue pressure on carriers to pay an unmeritorious claim.
In the first instance P&I insurers may have to meet certified liabilities in respect of wreck removal operations or pollution costs up to the applicable limits of liability set out in the various international conventions.  They will also look to support the dependants of those lost in maritime incidents even in the absence of a direct liability.  Clubs will in principle be able to recover such exposures from Members if cover has been compromised.

Owners and their insurers will look to pursue recourse claims against charterers and cargo interests.  Typically those claims arise on the basis of the common law obligation not to ship dangerous cargo, under specific charterparty clauses(4) or other express terms in the bill of lading or charterparty.  Charterers and cargo interests will often seek to defend such claims either by relying on the burden of proof, by invoking technical construction arguments or by seeking to break the chain of causation.

- To discharge its burden of proof, the owner will need to collect evidence showing the cargo liquefied on the voyage. Whilst this can appear daunting at first, it is rarely an insurmountable challenge.  Evidence about the true nature of the cargo can usually be obtained following robust investigations.  The requirement to show that the preponderance of evidence points towards liquefaction is not onerous.  It will be a brave defendant who relies solely on the burden of proof to resist a claim and who therefore declines to put forward any plausible alternative theories to explain the loss of the vessel.  Any competing theories can be tested by the judge or by arbitrators according to the evidence; non-liquefaction theories are frequently implausible.

- Shipper and cargo interests may raise technical defences to the effect that there was no breach of the Code or of an express warranty, but these arguments usually fail to overcome the well-established common law obligation not to ship dangerous cargo without the informed consent of the carrier or the shipper’s explicit responsibility under the Hague-Visby Rules for all damages and expenses resulting from the shipment of dangerous goods which the carrier has not consented to carry with knowledge of their true nature(5).

- Shippers and cargo interests may seek to allege that the ship was unseaworthy, breaking the chain of causation between the charterer/ shipper’s breach in shipping dangerous cargo and the loss. The unseaworthiness complained of often involving an alleged failure of those onboard to detect the liquefaction risk and to prevent carriage.  This is presentationally a challenging argument to run.  Whilst is it permissible to run alternative legal arguments in English arbitration or court proceedings, a party who produces extensive expert evidence to the effect that the cargo was safe for shipment will then struggle to turn around and argue the reverse that, if that cargo was in fact dangerous, then this should have been obvious to the crew at the time of shipment.  It is also a distasteful argument if the crew were killed and are not able to defend their actions.  It is legally a difficult argument: whilst the English courts have decided previously(6) that the chain of causation between a claim under Article IV, rule 6 of the Hague-Visby Rules(7) or for breach of the common law obligation not to ship dangerous cargo will be broken by a concurrent breach of Article III, rule 1(8), this argument is more likely to succeed where the owners’ breach was a direct cause of the loss of the ship, rather than being a failure to sound the alarm bell that cargo may have been mis-declared, and the defence might not apply to a breach of an express term of the bill of lading or charter in any event.  It is unlikely that faults on the part of the vessel falling short of actionable unseaworthiness could ever amount to a defence to a claim(9).

Certain liabilities falling to a charterer as a result of a total loss caused by liquefaction may in principle be covered by charterers P&I cover or by Damage to Hull insurance.  There may be gaps in these covers however, such as for charterer’s own loss of earnings, which will be for the charterer’s account unless specialist insurance has been obtained.  Cargo interests may have insurance for the same liabilities under a ‘cargo owners legal liability insurance’ policy or similar.


The future

Whilst the Code benefits from continual evolution so it can meet new issues, properly followed it sets out a workable regime for ensuring the safe ocean transport of solid bulk cargoes in the majority of cases.  The real challenges in the carriage of cargoes prone to liquefaction are practical, including lack of testing facilities; stockpile access; cargo surveyor availability; intimidation of seafarers and surveyors; fraud; and, a lack of understanding of the dangers inherent in carriage of solid bulk cargo by stakeholders.   Charterers and cargo interests ought to appreciate that the costs arising from a serious incident involving liquefaction are likely to fall on them with only a modest discount to reflect the litigation risk in pursuing a recourse action.


(1) The Agios Nicolas [1968] 2 Lloyd’s Rep. 57
(2)  It is debateable whether dynamic separation and liquefaction are distinct but this article will treat dynamic separation as a type of liquefaction.
(3)  The claim failing due to a lack of breach of duty by the carrier.  Alternatively, to avoid circuity of action where the cargo claimant owned the cargo which liquefied or on the basis that one cannot take advantage of one’s own wrongful conduct.  Article IV, rule 2(m) of the Hague-Visby Rules provides a defence to claims arising from inherent vice of cargo, Article IV, rule 2(q) states a carrier is not liable in the absence of fault or neglect on the part of its agents and Article IV, rule 5(h) provides the carrier is not responsible for loss or damage where goods have been knowingly mis-stated by the shipper in the bill of lading.
(4)  BIMCO’s “Solid Bulk Cargoes that Can Liquefy Clause for Charter Parties” as set out in North’s Recommended Clauses (2021-2022)
(5)  Article IV, rule 6
(6)  The Fiona, The Kapitan Sakharov, The Aconcagua
(7)  The obligation on a shipper not to load dangerous cargo without the carrier’s informed consent
(8)  The obligation on a carrier and its delegates to exercise due diligence ensure a vessel is seaworthy prior to the commencement of a voyage
(9)  Borealis v. Geogas which determined that the not actionable conduct of a claimant’s agents only breaks the chain of causation where that conduct obliterates the wrongdoing of the defendant

 DAVID RICHARDS

 

 

 

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