Academic journal article The Review of Litigation

Distant Past or Future Trouble? Redefining Customary Trade Allowance in Maritime Oil Shortage Claims

Academic journal article The Review of Litigation

Distant Past or Future Trouble? Redefining Customary Trade Allowance in Maritime Oil Shortage Claims

Article excerpt

Legal scholarship should promote rather than impede those market changes that will lead to improved technology and the modernization necessary to sustain a vibrant and healthy economy.

1. Introduction

Ship owners and carriers beware. Petroleum prices are on the rise.' Worldwide dependence on natural resources is climbing.' And with the increased costs of a barrel of oil come the watchful eyes of maritime cargo owners. A betting person would say it will not be long before courts and arbitral panels tackle yet another maritime oil shortage claim. Though an explosion of cases regarding the once hotly contested customary trade allowance is not likely to occur, confusion over its terminology will probably bubble to the surface of a future court opinion. Therefore, the legal community is wise to redefine this doctrine governing acceptable maritime oil loss levels.

Fifteen years ago the Third Circuit refused in Sun Oil Co. v. M/T Carlisle; to recognize a carrier's defense of customary trade allowance.4 The concept of customary trade allowance, advocated by the defendant in Sun Oil as an implied contract term, once permitted almost without question a carrier's unaccounted-for loss of one-half of one percent of its bulk cargo (.005 or 0.5%).5 But in Sun Oil, the Third Circuit declared that the customary trade allowance contravened policies outlined under the Carriage of Goods by Sea Act (COGSA).6

Today courts and arbitral panels are slow to apply the customary trade allowance to shield a carrier's liability.' Yet ruling panels continue to get bogged down in the legalese and muddled concepts of previous opinions.8 As history repeats itself, now is an appropriate time for the scholarly lighthouse to provide a beacon of clarification. A quick look at the impact of the customary trade allowance shows the importance of clarifying its terms.

Crude oil imports in the United States average approximately 8.2 million barrels per day (bpd).9 At approximately 24 U.S. dollars per barrel in 1999, corresponding daily contract values for this amount range as high as $196.8 million." Maritime shipping accounts for more than fifty percent of these U.S. crude oil imports." Although any individual maritime shipment is only a small percentage of this total, aggregate transactions play an important role in ensuring economic stability and certainty in business relations. Consequently, the numbers themselves tell the tale. If a 0.5% maritime customary trade allowance was inherent to every maritime contract, as critics of the Sun Oil ruling claimed,"2 it could permit an unaccounted-for loss of more than 20,500 barrels per day-a potential contractual value totaling more than $492,000.

In light of today's sweeping high-tech developments and market awareness, any trade custom that advocates a potential lack of accountability for more than 20,000 barrels per day of U.S. oil imports must be clarified."3 The legal framework governing petroleum transactions should be able to efficiently address the numerous issues arising from economic and technological changes in both the maritime and petrochemical industries. An efficient legal system cannot ambiguously address the terminology and concepts underlying the customary trade allowance.

This Article reflects on the Sun Oil decision and promotes clarity by advocating the replacement of customary trade allowance terminology with a total facts and circumstances test. It clears away the haziness surrounding the customary trade allowance doctrine by examining the historical evolution of the concept, discussing its application in other areas of trade, reviewing the modern developments in maritime cargo measurement, and examining some of the recent judicial and arbitral rulings. Together with a short analysis of contract clauses under contemporary charter party agreements, this Article justifies the reasoning behind the Sun Oil decision and argues that if courts and arbitral panels integrate "total facts and circumstances" terminology in future oil shortage claims, this will underscore the modern trends in oil shortage claims and sweep away the lingering judicial flotsam arising from previous discussions of customary trade allowances. …

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