Short Delivery of Bulk Cargo and Ship Arrest under Turkish Law: A Case Study
In this case study, based on a matter handled by Yusuf Gumus Law Firm, we examine the arrest of a vessel in Turkey in connection with a maritime claim arising from the short delivery of a bulk cargo of urea, as well as the Owners’ defence based on an alleged “2% trade allowance.”
Introduction
The ship arrest proceedings examined in this case study were handled by Yusuf Gumus Law Firm. The proceedings did not involve a determination of the merits of the underlying dispute; rather, they were conducted within the framework of the specific procedural and enforcement rules governing ship arrest under the Turkish Commercial Code (“TCC”) and the Turkish Enforcement and Bankruptcy Code.
Nevertheless, the case raised an important legal issue, particularly in the context of bulk cargo carriage: whether the Owners could rely on trade allowance rates alleged to exist under Turkish law.
Requirements For Ship Arrest Proccedings In Turkey
Let us first provide the basic grounds for any ship arrest to be acceptable under Turkish Law:
1) First of all, in order to apply for a ship arrest under the TCC, cargo owners must first prove that they have a “maritime claim” The term is defined extensively in Art. 1352 of TCC. which are in line with maritime claims listed in Article 1 of the International Convention on the Arrest of Ships 1999.
For the purpose of this article, we are interested in clauses relating to short delivery of bulk cargo claim only.
The below sections shall apply,
(a) loss or damage caused by the operation of the ship
(g) any agreement relating to the carriage of goods or passengers
(h) loss of or damage to or in connection with goods carried on board the ship;
Where the bulk cargo claim is based on either B/L or a charterparty will fulfil these criteria as it did in the present case.
2) The monetary value of the loss must be ascertainable.
Under TCC, ship arrest is a temporary legal measure. It is not a forum to discuss the merits of the case and therefore, it is sufficient to provide evidence upon which the judge can reasonably decide that certain amount of loss is likely to have occurred. The claim does not have to be 100 % proven but the court shall be able to determine on a “prima facie” basis that cargo owners have a claim.
For this reason, proof of the quantity of the shortage plus, a commercial invoice usually will suffice.
3) For a vessel to be detained, Art. 1369 need to be fulfilled. Which means that, the person who was the owner of the vessel (responsible for the loss at the time), shall also be the owner of the vessel, upon which application of ship arrest is brought.
4) Claimant must provide a fixed security for 10.000 SDR.
5) Lastly, Turkish Courts must have jurisdiction for an arrest proceeding. An injunctive order against a foreign-flagged vessels within the jurisdiction of Turkey shall be made only by the court of the place where the ship is moored, vaulted, berthed or slipwayed.
6) The court will not assume jurisdiction unless the port authority confirms to the court that the vessel is within its jurisdiction and also, certificate of ownership of the vessel would have to be obtained from port authority as submitted by agency of the Owner. Therefore, the claimant in most of the cases must bring the request in a very restricted time frame, promptly after the vessel has entered or submitted the documents to the relevant Turkish port authority.
7) It is not relevant whether the claiming party or the owners are resident/ incorporated under Turkish Law [1]
8) The Arrest Decision must be executed within 3 business days! Otherwise, the decision becomes unenforceable.
9) Within one month following the execution of an arrest, the claimant must initiate the conclusive execution proceedings. If the debtor objects, then the claimant must provide a court decision in order to lift the objection which oblige the claimant to file a lawsuit in the appropriate jurisdiction.
10) Owners will still be permitted to object to the ship arrest in terms of procedural law, in addition, they will have the option to provide securety for the release of the vessel.
11) It is important to note that due to restrictions on foreign currency exchanges, even when the maritime receivable is in USD, the courts usually the Owners to deposit cash in Turkish currency to be calculated based on applicable on fx rates. Unfortunely, this practice put the Owners under the risk associated devaluation in Turkish currency.
12) Objection of the Owners based on the merits of the case will not be allowed. They must remain within the limits of; whether there was reasonable cause for the arrest. For example, Owners may try to discredit the evidence on the quantity and amount of loss. We can say that any challenge to the accuracy of the below facts, would enable the Owners to succeed in their objection. In our case, this was not an available for the Owners as we shall see below.
FACTS OF THE CASE
Parties concluded a voyage charter party which provided that that quantity of the cargo shall be determined by joint draft survey at both ends.
The CP included London Arbitration and English Law clause.
Bulk urea was loaded to the vessel and master signed the bill of lading which represented the weight as per draft survey.
Bill of lading included a typical reservation “weight quantity unknown.
At the port of discharge, 3 draft surveys were performed which all confirmed shortage.
The weight bridge figure confirmed even higher shortage.
All draft surveys were counter signed by the Master.
The shortage was less than 1%
THE DISPUTE: Prior to the proceedings, cargo owners requested compensation in line with draft survey figure (not the weight bridge figure which was much higher)
Owners and P&I denied the liability by claiming that there was in effect a 2% trade allowance under Turkish Law.
This defence was supported by 3 Turkish Court of Appeal precedents and websites of different chamber of commerce pages giving effect to the said allowance limit.
PROCEEDINGS:
Cargo Owners followed the vessel’s route and when it approached the Izmir Port in Turkey, applied for a ship arrest in order to obtain security.
The respective İzmir Commercial Court with its capacity Maritime Specialized Division granted the request. The vessel was then detained in Izmir Port. Owners then had to provide cash security. The Execution Court ordered that the security to be provided 150% of the claimed amount as to cover further losses by the cargo owners until the case is decided on its merits. The vessel was then released.
Owner’s filed objection at the Commerical Court and requested the ship arrest decision be reversed.
The Court called the parties for a formal hearing. On the hearing Owners repeated the claim that there was an established trade allowance limit up to 2% under Turkish Law, that since the shortage was below that limit, the ship arrest decision was the breach of law.
The court rejected the objection and issued a very detailed reasoning. There are much to learn from the decision as we shall see below.
DEFENCE OF THE OWNERS
Owners could not challange the facts that are listed above so they did not have an easy case.. The Master had signed all draft surveys to the shortage was within their admission. Owners only objection was limited to the so called "2% trade allowance" under Turkish Law for bulk cargoes, they asserted that the Court could have easily calculated the shortage and ascertain that threshold was not exceeded.
The trade allowance defence was supported with the below surrounding legal background,
Statutory Provisions
Art. 1182 of TCC provide some conditions that enable Owners to escape from liability.
III- Cases in which the carrier benefits from the presumption of perfection and appropriate causal link
ARTICLE 1182- (1) In the event that the damage is caused by the following reasons, and his men are considered free from negligence:
....
f) Natural deduction in terms of volume or scale or hidden defects of the goods or due to their nature inherent in the goods
....
(2) If it is proved that the above events occurred due to carrier fault, then the carrier cannot be relieved of liability.
Custom of Trade
Most of Chamber of Commerce web sites in Turkey provide the following trade allowance limit.
"The maximum shortage rate for fertilizer commodities such as compound, urea, calcium, ammonium nitrate, ammonium sulfate, T.S.P (Triple Super Phosphate), sulfur during carriage by sea is determined as 2%”
In addition, the below grounds provided by reference to Turkish Legal Academics
A certain shortage is unavoidable in the case of specific bulk cargo, due to natural reasons inherent, which result in deficiency during transportation.
Even if the cargo does not have any defects at the beginning, it is possible to be deficient in terms of volume and weight during transportation.
This situation is often caused by the unique natural features of the cargo, such as drying, decreasing the amount of liquid it should have, evaporation etc..
Minor reductions in volume or weight in bulk cargoes are accepted as inevitable in commercial life.
Also, these deficiencies may arise because of spillage or scattering that cannot be prevented despite reasonable care and inevitably result with shortage.
In these cases, the deficiency is not considered as a loss, so that the carrier is not held responsible. The important aspect is that the deficiency is not exclusive to a certain part of the cargo but must be distributed in its entirety and not exceed a certain proportion.
As far as the bulk cargo is concerned, there is always a difference between the measurements made during the loading and unloading phase.
A shortage in the cargo occurs does not mean that it really is a shortage because the difference can sometimes be caused using different measurement or calculation methods.
Even if there is a deficiency on the paper, there is no real reduction in the volume or weight of the load.
RESPONSE OF THE CARGO OWNERS
Cargo Owners response was primarily in the following areas.
1. Any trade allowance in bulk cargo carriage, is a matter of substantial law and can only be determined by the relevant court which have jurisdiction to decide on the merits of case. This was London Arbitration. (Jurisdictional Objection) [2]
2. The dispute was governed by English Law. Under the charterparty, English Law was applicable. Owners objection was related to the substantive law matters, which could only be discussed;
a) Before the relevant court, that is London Arbitration
b) Under English Law.
3. Application of the Turkish Law would be limited to the procedural ship arrest rules and for this reason, Owners should not be allowed to object under any ground other than "whether Turkish Court was provided sufficient evidence as to the loss that is likely to have occurred."
4. Cargo Owners went further to assert that, although it was not the right forum for such discussion, even English Law did recognize an automatically applied trade allowance in favour of Owners.
5. Under English Law, each case will have to be determined on its own facts and there was no "shortage rate" expressed over a percentage threshold in terms of bulk urea. There was neither a provision of law nor an established judicial decision or industry standard in this regard.
6. The present case was brough under specific ship arrest rules of TCC that granted a temporary security right and the file would remain on hold, unless either party provided a final court decision on the merits of the case.
7. Lastly, when hypothetically Turkish Law applied and the Turkish Court had a jurisdiction, even in such case, the trade allowance would not apply automatically as the case would have to be decided by the court in action on merits, which would be a different legal proceedings the the present case.
DECISION OF IZMIR MARITIME SPECIALIZED COURT
In summary, the Court held that,
Although the bill of lading had a reservation as to “weight quantity unknown” where there was an undisputed charterparty with specific clause on how the weight is to be ascertained, such reservation in B/L would not be appliable.
Owners were responsible for the loss under the Charterparty whose terms very clear.
Owners could not prove that there was no short delivery.
The Judge was very careful not make any statement about the appropriate jurisdiction and governing law fo an action in merit case.
Only a reference was made to the statement in the cargo owners submission with regards to English Law and London Arbitration. This was understandable as any further discussion could be taken as the comments reflecting biased approach, directing the parties to one way or another.
This discussion could only be made during the actual lawsuit which the parties were bound to commence before the relevant court.
In our next article, we shall will continue to our discussion as to "whether the Owners (assuming the dispute was subject to Turksih Law and jurisdition of Turkish Courts) could rely on the so-called Turkish trade allowance limits for bulk cargo. "
[1] This is also a mere reflection of Turkey being signatory to The International Convention on Arrest of Ships, Geneva, 1999
[2] Under Law No. 5718 on International Private Law and Procedural Law No. 60 et seq. and the New York Convention on the Recognition and Enforcement of Arbitral Awards of 10 June 1958, to which Turkey is a signatory, Turkish Courts will enforce a decision issue by an Arbitration Court in London which given under English Law