In this decision, a request by the petitioners—a shipper and its insurance company—to have an arbitration award vacated was unsuccessful.
In this decision, a request by the petitioners—a shipper and its insurance company—to have an arbitration award vacated was unsuccessful. (Zurich American Insurance Co. et ano. v. Team Tankers. S.D.N.Y. No. 13-8404. June 30.)
Vinmar International Ltd. chartered space on Eitzen Chemical’s tanker Siteam Explorer, which is managed by Team Tankers on June 10, 2008. The tanker carried 3,500 tons of acrylonitrile (ACN) from Houston to Ulsan, South Korea, where Vinmar planned to find a buyer. ACN is used to make a variety of plastics and artificial fibers and, ideally, it is colorless.
To prevent ACN from polymerizing during transport, small quantities of an inhibitor, monomethylether of hydroquinone (MEHQ), is added. The manufacturer said the inhibitor would be effective at temperatures up to 90°F and would last 90 days.
A test before loading showed the chemical met specifications and samples were retained. Vinmar’s quality standards required:
- Color measurement of 10 or less on the APHA scale.
- Nonvolatile matter at or below 100 mg/kg.
- MEHQ contents of 35-45 parts per million.
As the ship passed through tropical zones, the 90°F limit was approached, but not reached.
The ship arrived in Ulsan on Aug. 12. The ACN was tested and found to meet specifications, and again samples were retained. The ACN was then discharged into tanks on shore.
On Sept. 26, 2013, the chemical was tested again. This time it showed the ACN had yellowed to an unacceptable 13 on the APHA scale and nonvolatile matter had risen to 491 mg/kg.
Several of the retained samples were tested and a sample of ACN taken from the Siteam Explorer before unloading had yellowed to 10 APHA and nonvolatile material had increased to 125 mg/kg. A sample from the shore tanks in Houston was virtually unchanged from when it was sampled in June.
Vinmar investigated remediating the ACN, but it was not economically viable.
During the voyages and while the chemical was in Korea, the price of ACN fell. Some was sold in October for $1,450 per ton, while the remainder was sold in December for $750 per ton.
Vinmar said it was entitled to damages and the charter-party agreement required disputes to be resolved by the New York-based Society of Maritime Arbitrators.
Zurich and Vinmar chose Louis Sheinbaum as an arbitrator and Team Tankers named Anthony Siciliano. Sheinbaum and Siciliano chose the third arbitrator, Donald Szostak, in April 2011. The arbitration panel held 10 hearings.
Vinmar and Zurich tried to show the ACN was in good order when delivered to the ship, but contaminated when it arrived in Korea. It argued the chemical was contaminated by the previous chemical carried in the tanks, pygas. Team Tankers said there could only have been trivial amounts of pygas remaining in the tanks. It argued tropical temperatures had “pushed the ACN inhibitor to its limit, which in any event was only effective for 90 days.”
On Aug. 26, 2013, the arbitration panel issued a 2-1 decision in favor of Team Tankers, with Siciliano and Szostak ruling in favor of the tanker owner and operator and Sheinbaum dissenting.
All parties agreed the dispute was governed by the Carriage of Goods by Sea Act (COGSA), and the majority said it was “a classic case of well-qualified experts interpreting the results of highly technical test evidence differently.”
In trying to overturn the arbitration decision in U.S. district court, the cargo interests claimed the panel majority manifestly disregarded the law by:
- Requiring them to prove what caused the ACN discoloration.
- Finding that even if the chemical was damaged, Team Tankers’ due diligence in making the ship seaworthy would have resolved it from liability.
- Finding the petitioners suffered no damage from the discoloration.
Under COGSA, a shipper establishes a prima facie case for recovery by proving goods were damaged while in the carrier’s custody and proving this by the preponderance of the evidence. The court said they can do this with “direct evidence”—showing the cargo was in good condition when delivered to the ship and damaged upon arrival, or by the “causation approach”—by showing the characteristics of the damage justify the conclusion that the harm occurred while in the carrier’s custody.
In this case, the cargo interests tried to use direct evidence. They were not required to prove the cause of the damage.
COGSA provides that if the shipper does not give notice of cargo damage within three days, the acceptance of the cargo “shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading.” The court said since the shipper did not give notice until six weeks after delivery it had to overcome the COGSA presumption.
The petitioners said the presumption was overcome if they adduced “any credible evidence tending to show that the cargo was damaged prior to delivery,” while the tanker company cited a decision stating presumption falls only “once the consignee comes forward with sufficient evidence that the cargo was damaged or short prior to delivery.”
The court said that, read in context, the majority of the arbitration panel “appeared to find that the ACN arrived in good order, foreclosing petitioners from establishing a prima facie case under the direct evidence approach.”
The tests on the samples retained in Houston before loading indicated “the cause for increased color took place aboard the ship,” the majority found. The ACN was “subjected to a ‘stressful voyage’ that in terms of duration and temperature brought the cargo to edge of its stated stability.”
The court found the arbitration panel “did not misapply COGSA” and the petitioners would have to show the arbitrators consciously disregarded the law.
The case had another wrinkle. Arbitrator Szostak was diagnosed with an inoperable brain tumor in 2012. In April 2013, he informed other counsel in a separate proceeding of his illness and ultimately resigned from that arbitration panel. In January 2014, Szostak died.
The petitioners argued Szostak’s failure to disclose his condition violated the SMA’s code of ethics because the tumor could “cause profound changes in cognitive function.”
The court disagreed, stating that motion “seeks to transform a personal tragedy into a second chance for parties disappointed with the outcome of their arbitration. The ‘twin goals of arbitration, namely settling disputes efficiently and avoiding long and expensive litigation,’ would not be served by vacating the award here.”
This column was published in the October 2014 issue of American Shipper.