1. On 27 January 2020, a consignment of Ukrainian corn was loaded on board MV “PEACE PEARL”, and the Master issued five clean bills of lading, in which the shipper was a Ukrainian agricultural company; the consignee was “To Order”; the port of loading was Chornomorsk, Ukraine; the port of discharge was Chinese port. The total cargo weight on the five bills of lading was 67,550 tons. On the same day, SGS issued a draft survey report stating that the vessel was loaded with 67,357.280 tons of cargo, which the representative of the vessel confirmed by signing and sealing.

2. Upon arrival at the port of discharge, Zhanjiang port, the draft survey showed the cargo weight was 67,330 tons.

3. The consignee, Xiamen C&D Commodities Limited (hereinafter referred to as “C&D”, the Plaintiff), alleged that the carrier was at fault in issuing the bills of lading at the port of loading based on the cargo weight declared by the shipper when it was known to the carrier that the cargo were 192.72 tons short. C&D thus claimed against the carrier for the cargo shortage at 192.72 tons on the ground that the draft survey figure was 192.72 tons short than the B/L figure.

II. The PEACE PEARLcase opens up a new path for cargo shortage claims

4. Carriers’ liability for shortage of bulk cargo is a contentious issue in maritime cases. However, with the publication of the Concluding Remarks at the National Symposium on Maritime Judicial Practice (16 June 2017) (the “Concluding Remarks”) by Wang Shumei, the Vice Presiding Judge of the Fourth Civil Tribunal of the Supreme People’s Court, the scale of adjudication on this issue in Chinese maritime courts gradually become unified. For carriage of bulk cargo, we make the below summary:

a. Unless otherwise claused by the carrier, the entry in the bill of lading as to the cargo quantity is absolute evidence to a third party other than the shipper, and the carrier shall deliver the cargo at the weight as stated in the bill of lading.

b. Since the carrier has reasonable means to check the weight, a standard “unknown” clause in the bill of lading does not relieve the carrier from its obligation to deliver the weight as stated in the bill of lading.

c. The cargo interests need to prove that the cargo shortage occurred within the period of the responsibility of the carrier. Unless specifically agreed, the carriers’ responsibility for solid bulk cargo ends when the cargo crosses the ship’s rail, and the carriers’ liability for liquid cargo ends when the cargo passes through the flanged end of a ship’s pipeline (i.e., the flange that connects the ship pipeline to the shore pipelines).

d. As to the cargo weight at the port of discharge, the measurement carried out onboard the vessel before the discharge prevails over the shore scale. The measurement carried out on board generally refers to draft survey for solid bulk cargo and ullage measurement for liquid cargo.

e. In view of the fact that any survey method has error, for the determination of the cargo weight by draft survey, if the difference between the cargo weight at the port of discharge and the B/L figure falls within the 5‰ allowance, Chinese courts would consider that no cargo shortage occurred; for the determination of the cargo weight by ullage measurement, if the difference between the cargo weight at the port of discharge and the B/L figure falls within the 3‰ allowance, Chinese courts would consider that no cargo shortage occurred, unless the cargo interests could present other evidence to prove that the cargo shortage actually occurred during the carrier’s responsibility period, as well as the shortage quantity.

f. If the shortage exceeds the above allowance, cargo shortage can be established and the carrier shall be held liable for the cargo shortage (without deduction of the 5‰ or 3‰ allowance), unless the carrier can prove that it can be exempted from liability.

5. In the PEACE PEARL case, the difference between the draft survey figure at the port of discharge and the B/L figure was within 5‰. Instead of following the usual route to claim for the shortage between the draft survey figure at the port of discharge and the B/L figure, C&D claimed against the carrier for the cargo shortage of 192.72 tons on the ground that there was a shortage of 192.72 tons by comparing the draft survey figure at the port of loading with the B/L figure. C&D asserted that the carrier issued the bills of lading based on the cargo weight declared by the shipper when it was known to the carrier that the cargo was 192.72 tons short according to the draft survey report at the port of loading, and that the carrier was at fault for not being in prudent control of the cargo and was not entitled to invoke the defence of 5‰ allowance. This opens a new path for consignees to claim for cargo shortage.

III. Courts’ key findings on the PEACE PEARL case

6. Key findings made by the Guangzhou Maritime Court: the carrier should deliver the cargo to the consignee which is a bona fide transferee of bill of lading in accordance with the weight in the bill of lading. The carrier was at fault in issuing the clean bills of lading when knowing that there was a cargo shortage based on the draft survey report at the port of loading. Even if the shortage was within the 5‰ allowance, the carrier should not be exempted from liability by relying on the defence of 5‰ allowance. The cargo shortage occurred during the period of the carrier’s responsibility, the carrier failed to prove an exculpatory circumstance and therefore shall be liable for the shortage. The shortage shall be 192.72 tons which was calculated based on the draft survey figure at the port of loading and the B/L figure.

7. Key findings made by the Guangdong High Court: the carrier argued that the difference between the draft survey figure at the port of loading and the weight declared by the shipper was 0.285%, which was within 5‰; therefore, the Master had no reasonable grounds to suspect that the cargo weight declared by the shipper was inconsistent with the actual loading weight, and thus was not negligent at issuing the bills of lading according to the weight declared by the shipper. The High Court held that the entries in the bill of lading were absolute evidence for the carrier and the third party, including the consignee, who had been assigned the bill of lading in good faith, and the parties were not allowed to present any contrary evidence to rebut it. Therefore, C&D was entitled to receive the cargo according to the cargo weight in the bill of lading. The draft survey report at the port of discharge showed that the cargo weight received by C&D was less than the B/L figure. Considering the fact that the draft survey figure at the port of loading was less than the B/L figure but more than the draft survey figure at the port of discharge, the High Court found that there was a cargo shortage.

8. The High Court also found that: the carrier shall bear the burden of proof to prove that the cargo shortage was a result of reasonable wear and tear, measurement tolerance and relevant industry standards or practices. The carrier failed to prove that the cargo shortage was attributed to the error in the draft survey, rather than other reasons. Therefore, the carrier shall bear the unfavorable consequence arising from its failure to meet the burden of proof, and was not entitled to exempt from liability on the ground that the cargo shortage was within the measurement tolerance of the draft survey. The 192.72 tons of shortage claimed by C&D was resulted from the Master’s failure to issue the bills of lading in good faith. Therefore, the carrier shall be liable for the 192.72 tons of shortage.

IV. A new adjudication trend in Chinese courts

9. In previous judicial practices, the consignee would normally claim against the carrier for cargo shortage on the ground that the draft survey figure at the port of discharge is short of the B/L figure by more than 5‰, but rarely on the ground that there is a difference between the draft survey figure at the port of loading and the B/L figure and the carrier was negligent for the cargo shortage. Among the published cases, only the Red Tulip case in 2007 and the SPICA case in 2020 involve similar disputes with the PEACE PEAR case.

10. In the Red Tulip case in 2007, both the first instance court (the Guangzhou Maritime Court) and the second instance court (the Guangdong High Court) held that, normally, the carrier would describe the quantity of the cargo based on the quantity declared by the shipper. Although the draft survey figure at the port of loading was less than the B/L figure, the carrier was not at fault and was entitled to the 5‰ allowance for wear and tear and measurement error; as the difference between the draft survey figure at the port of discharge and the B/L figure is within 5‰, the carrier was not required to prove that the shortage was attributed to wear and tear and measurement error.

11. In the SPICA case in 2020, the Tianjin Maritime Court held that the carrier was negligent if the carrier issued the clean bill of lading despite of knowing that the draft survey figure at the port of loading was less than the B/L figure; the carrier was required to prove that the shortage was caused by reasonable wear and tear, measurement error and other exemptions, failing which, it was not entitled to the 5‰ allowance.

12. However, in the SPICA case, the ullage measurement figure at discharge port is short of the B/L figure by more than 5‰, and the Court determined the shortage to be the different weight between the ullage measurement figure at discharge port and the B/L figure. Therefore, the Court’s view that the carrier was negligent in issuing a clean bill of lading when knowing the ullage measure figure or draft survey figure at the port of loading was less than the B/L figure had no necessary bearing on the outcome of the case, nor could it be considered a break with the previous customary view held by Chinese courts.

13. Strictly speaking, the PEACE PEARL case is the first and only case where the Court ascertained the cargo shortage on the ground that the draft survey figure at the port of loading was less than the B/L figure, and it breaks the previous customary view held by Chinese courts. If this case represents a change in Chinese courts’ judgment thinking, this change will have a significant impact on carriers.

V. Analysis by Wang Jing & Co.

14. It should be made clear that the following analysis is made based on the premise that the difference between the draft survey figure at the port of discharge and the B/L figure falls within the 5‰ allowance.

i. When the difference between the draft survey figure at the port of loading and the weight declared by the shipper is within 5‰, and the carrier issues a clean bill of lading based on the cargo weight declared by shipper, whether the carrier breaches contract or is negligent?

15. In the PEACE PEARL case, the difference between the draft survey figure at the port of loading and the B/L figure is 2.85‰. The Guangzhou Maritime Court held that the carrier was negligent in issuing the clean bills of lading when knowing that the cargo was in shortage according to the draft survey at the port of loading. But in the judgment rendered by the Guangdong High Court, the Court avoided the question of whether the carrier was negligent.

16. Article 75 of the Maritime Code provides that “if the bill of lading contains particulars concerning the description, mark, number of packages or pieces, weight or quantity of the goods with respect to which the carrier has the knowledge or reasonable grounds to suspect that such particulars do not accurately represent the goods actually received, or where a shipped bill of lading is issued, loaded or if he has had no reasonable means of checking, the carrier may make a note in the bill of lading specifying those inaccuracies, the grounds for suspicion or the lack or reasonable means of checking”. Article 77 provides that “except for the note made in accordance with the provisions of Article 75, the bill of lading issued by the carrier or the other person acting on his behalf is prima facie evidence of the taking over or loading by the carrier of the goods as describe therein. Proof to the contrary by the carrier shall not be admissible if the bill of lading has been transferred to a third party, including a consignee, who has acted in good faith in reliance on the description of the goods contained therein.”

17. It is commonly believed that a bill of lading has three functions: proof of the contract of carriage of goods by sea, evidence of title in rem and receipt of the cargo. From the above provisions of the Maritime Code, the entry of cargo weight in the bill of lading and whether the carrier has claused the bill of lading demonstrate its function of being a receipt, i.e., a confirmation that the recorded weight of cargo has been loaded on board. In other words, the carrier merely “confirms that the recorded weight of cargo has been loaded on board”. Hence, the entry of cargo weight in a bill of lading is not absolute evidence between the carrier and the shipper; only when the bill of lading is transferred to a third party, the carrier shall no long deny that the cargo weight in the bill of lading has been loaded onboard. It should be noted that, the number or weight of cargo in a bill of lading is usually declared by the shipper and checked by the carrier.

18. In addition, the wording used in Article 75 for the carrier to make a note is “may”, not “shall”. Hence, making a note on a bill of lading is not a legal obligation but a legal right to the carrier (i.e. “the right to make a note in the bill of lading”): it has the right to consider and decide for itself whether to make a note in the bill of lading. If a note is reasonably made, the carrier may submit contrary evidence to rebut the corresponding content in the bill of lading, and relieve itself from being bound by the corresponding content. If the carrier does not make any note in a bill of lading, the bill of lading will become absolute evidence between the carrier and the third party who is a holder of the bill of lading, and the carrier is obliged to deliver the cargo to the holder of the bill of lading strictly in accordance with the cargo condition recorded thereon, and is not allowed to submit contrary evidence. In view of this, although the draft survey figure at the port of loading is somewhat less than the weight declared by the shipper (within 5‰), the weight difference is only a measurement error and not an actual shortage, and thus the carrier is not obliged to make a note as it is not the carrier’s mandatory obligation; the carrier’s not making a note in a bill of lading does not constitute a breach of contract or a negligence in a legal sense, not even a negligence in proper care of the cargo (loading), unless the carrier has a deliberate intention of fraud.

19. The carrier’s right to make a note in a bill of lading does not mean that the carrier can make notes in the bill of lading at its own will. In fact, due to the three important functions of a bill of lading as mentioned above, a note in a bill of lading which is an important instrument in international sale of goods can lead to a significant restriction of its functions, especially its function as a document of title in rem and a receipt. Therefore, the carrier’s right to make notes in a bill of lading is restricted, and only in the presence of the circumstances specified in Article 75, i.e. “if the bill of lading contains particulars concerning the description, mark, number of packages or pieces, weight or quantity of the goods with respect to which the carrier has the knowledge or reasonable grounds to suspect that such particulars do not accurately represent the goods actually received”, or “where a shipped bill of lading is issued, loaded, or if the carrier has had no reasonable means of checking”, can the carrier make a note in the bill of lading, or otherwise the carrier constitutes a breach of contract.

20. As analyzed above, when the shortage between the draft survey figure at the port of loading and the weight declared by the shipper (i.e., the B/L figure) is within 5‰, the carrier may not know and had no reasonable grounds to suspect that the B/L figure did not correspond to the actual weight loaded on board because of a possible 5‰ measurement error. Therefore, the carrier shall not and is not entitled to make a note on cargo weight in a bill of lading. Under such circumstance, the carrier is obliged to issue a clean bill of lading.

21. In summary, we take the view that, when the difference between the draft survey figure at the port of loading and the weight declared by the shipper is within 5‰, and the carrier issues a clean bill of lading based on the cargo weight declared by the shipper, the carrier neither breaches the contract of carriage of goods by sea, nor commits negligence in issuing a clean bill of lading or properly caring for the cargo. In our opinion, the view of the Guangzhou Maritime Court and Guangdong High Court in the Red Tulip case remain to be correct. As pointed out by the judge Wang Shumei in the Concluding Remarks, “As a kind of technology, draft survey result shows a probability, but does not have the rigor and precision of natural science. Measurement error objectively exits, and the measurement result still has error even after reasonable correction and it is only the matter of the extent of error. That is why a reasonable measurement error is allowed and it is also the coming of “measurement allowance”. It is also for this reason that the Concluding Remarks states that “a shortage after discharge which falls within 5‰ could be determined as a reasonable shortage resulted from natural wear and tear and measurement errors etc., unless there is evidence to the contrary which shows that the carrier is at fault.” This is also the possible reason that in the Pearl Peace case, the Guangdong High Court did not uphold the finding of the Guangzhou Maritime Court that the carrier had negligence.

ii. When the draft survey figures at the port of loading and discharging are both less than the B/L figure (even though within 5‰), can it prove a cargo shortage?

22. Cargo shortage cannot be simply established by using the weight difference between the draft survey figure and the B/L figure. Furthermore, even if the draft survey figures at the port of loading and discharging both are less than the B/L figure, it cannot prove the existence of a cargo shortage due to measurement errors at the port of loading and discharging.

23. When the difference between the draft survey figure at the port of discharging and the B/L figure is within 5‰, if such difference can be attributed to measurement error, then the same shall apply when the difference between the draft survey figure at the port of loading and the B/L figure is within 5‰, unless there is evidence to the contrary to prove that the carrier is at fault for the cargo weight difference at the port of loading. In the PEACE PEARL case, C&D did not prove that the carrier was at fault for the cargo weight difference at the port of loading, and hence we believe that there was no cargo shortage at the port of loading and during the period of responsibility of the carrier.

24. In the PEACE PEARL case, the difference between the draft survey figure at the port of loading and the B/L figure, and that between the draft survey figure at port of discharging and the B/L figure, both fell within 5‰. Though the Guangdong High Court did not hold the carrier at fault in issuing clean bills of lading, the Court considered that cargo shortage did occur for the reason that draft survey figures at the loading and discharging port were both less than the B/L figure, which even though fell within 5‰.

25. The Guangdong High Court did not elaborate her reasoning, and appeared to hold the view that if the draft survey figures at loading and discharging port both were less than the B/L figure, it can be considered that the weight difference was caused by actual shortage rather than the measurement error.

26. In our opinion, the above view of the Guangdong High Court is controversial. The combination of the fact that the draft survey figure at the port of loading was less than the B/L figure and the fact that the draft survey figure at the port of discharging was less than the B/L figure cannot lead to the conclusion that the actual cargo weight was less than the B/L figure. An increase in the number of measurements only reduces the random error, but not the systematic error. Even in the case of random errors, although in theory the random error of the average of multiple measurements is smaller than the random error of a single measurement, this is subject to sufficient measurements. The average of the two measurements at the loading and discharging ports cannot be considered to have eliminated the random error. Furthermore, considering the factor of a systematic error, the above average cannot represent the true value. Therefore, when draft survey figures at the port of loading and discharging both are less than the B/L figure, which falls within 5‰, the courts cannot just omit measurement errors and ascertain that cargo shortage occurred.

iii. When the draft survey figure at the port of loading is less than the B/L figure (even though within 5‰), is the burden of proof shifted to the carrier?

27. In the PEACE PEARL case, the Guangdong High Court held that as the draft survey figures at the port of loading and discharging were both less than the B/L figure, C&D had established a prima facie case, and the burden of proof to prove that the shortage was caused by measurement errors was shifted to the carrier.

28. We take the view that the above view of the Guangdong High Court is controversial. As we analyze above, although the draft survey figures at the loading port and discharging port were both less than the B/L figure, it could neither prove that there was no measurement error at the loading or discharging port, nor could it prove that cargo shortage occurred. Under such circumstance, the courts should not have considered that C&D has established a prima facie case and thus required the carrier to prove that such shortage was due to measurement errors. Otherwise, in order to meet the above burden of proof, the carrier not only needs to prove that there was no cargo shortage during the period of carriage, but also that the loading weight was the B/L figure. However, considering the facts that there were measurement errors at the port of loading and that the draft survey figure was less than the B/L figure, it is essentially impossible for the carrier to meet this burden of proof. Therefore, the courts require the carrier to prove that the cargo shortage was due to measurement errors as if the courts order the carrier to be liable for the cargo shortage.

iv.  How to determine the shortage weight?

29. In the PEACE PEARL case, the Guangzhou Maritime Court directly identified the difference between the draft survey figure at the port of loading and the B/L figure (“the shortage at the port of loading”) as the shortage weight during the period of the responsibility of the carrier, but the reasons for the Court to make such finding were not given. The Guangdong High Court differed from the Guangzhou Maritime Court, and it only ruled that shortage claimed by C&D was resulted from the Master’s failure to issue the bills of lading in good faith and therefore the carrier shall be liable for the cargo shortage. But the Guangdong High Court did not directly identify the difference between the draft survey figure at the port of loading and the B/L figure as the short cargo weight.

30. According to the common views of the Guangzhou Maritime Court and the Guangdong High Court, the carrier was in fact unable to rely on the defence of the 5‰ measurement error for draft survey to get away from liability. This case would lead the consignees to claim against the carriers for the difference between the draft survey figure at the port of discharging and the B/L figure (“the shortage at the port of discharge”, which is usually higher than “the shortage at the port of loading”), without considering measurement errors; or even in the absence of a draft survey at the port of discharging, the consignees may claim against the carriers for the difference between the draft survey figure at the port of loading and the B/L figure. The carriers are thus facing greater risks of claims from the consignees.

v.   Possible chain reactions arising from the PEACE PEARL case

31. The PEACE PEARL case has already attracted wide attention and deep concerns from many international P&I Clubs and shipowners, and a certain number of consignees and cargo insurers have already followed this claim pattern. We have received many consultations regarding this issue since the year of 2020. It is foreseeable that with the issuance of the second-instance judgment in the PEACE PEARL case, there will be more and more cases of this kind. In this regard, we have the following concerns:

(a)  Impact on international trade

32. Most of the international traders in modern society adopts L/C settlement, which is a typical type of documentary transaction. Bills of lading, together with trade contracts, commercial invoices, packing lists, weight certificate issued by an independent surveyor appointed by the seller at the port of loading, quality certificates and certificates of origin, are documents usually required under an L/C settlement. According to the Rules for the Examination of Domestic Letters of Credit issued by the Payment & Clearing Association of China and the China Banking Association, the banks shall carefully examine all documents required by the letter of credit and determine whether they are complying presentations.

33. Where the draft survey figure at the port of loading was short than the cargo weight declared by the shipper but within 5‰, and the Chinese courts still ruled that the carrier was negligent in issuing bills of lading or in properly caring for the cargo, and shall be liable for the cargo shortage, there are two options available for the carriers to safeguard their own interests: firstly, they may make a note in the bill of lading regarding the draft survey figure at the port of loading; secondly, they may enter the draft survey figure as the cargo weight in the bill of lading. Under the 1st option, there is no doubt that the bill of lading is unclean and will be rejected by the bank, as a result of which, the L/C settlement fails. Under the 2nd option, since the quantity on weight certificate and commercial invoices are both determined according to the weight certificate issued by an independent surveyor appointed by the seller (this quantity is also the quantity declared by the shipper to the carrier), it would give rise to the issue that the quantity in the bill of lading is not consistent with that in the weight certificate, commercial invoice, customs declaration documents and other documents, which constitutes a “uncomplying presentation” and blocks the settlement under a L/C.

(b)  Impact on international carriage of goods by sea

34.  If the shipper insists that the carrier should issue the bill of lading as per the declared weight so that the bill of lading is clean and meets the requirement of complying presentation in a L/C settlement, the carrier may then require the shipper to provide a letter of guarantee undertaking that the shipper shall indemnity the carrier for the losses sustained by the carrier, including the legal costs, arising from an unfavorable judgment rendered by a Chinese court against the carrier which orders the carrier to be liable for cargo shortage between the draft survey figure at the port of loading and the weight declared by the shipper on the ground that the carrier was negligent in issuing the bill of lading or properly caring for the cargo. The shipper will most likely add this clause into the trade contracts, so as to pass the costs and risks onto the consignee.

35. In the presence of a charter party, the shipowners/charters may also include such a clause in the charter party, agreeing that charterers shall indemnity owners for the losses sustained by owners, including the legal costs, arising from an unfavorable judgment rendered by a Chinese court against owners which orders owners to be liable for cargo shortage between the draft survey figure at the port of loading and the weight declared by the shipper on the ground that owners was negligent in issuing the bill of lading or properly caring for the cargo; charterers may have no choice, but to add the same clause in every charter party of the charter chain, which will eventually pass onto the consignee.