Soybeans are the most important feed grains imported by China, mainly used as protein supply in animal feeding and for extracting edible oil.
Domestic soybeans, albeit their growing areas and production output keep increasing, cannot satisfy the market demand. Moreover, domestic soybeans are mainly for human consumption, whilst imported beans are mostly for oil extraction. Therefore, total amount of soybeans imported by China maintains at a high level in recent years. According to data released by the National Bureau of Statistics of the PRC (NBS), China imported 91.08 million tons of soybeans in 2022, whilst statistics by the General Administration of Customs of the PRC (GACC) shows that importation of soybeans by China in the first ten months of 2023 has amounted to over 80 million tons. It is anticipated that total quantity of soybeans imported by China for 2023 will exceed 100 million tons.
China imports soybeans predominantly from the United States and Brazil. According to GACC’s statistics, in 2022, 54.39 million tons of soybeans were imported from Brazil, accounting for 59.72% of the total soybean importation; 29.53 million tons from the United States, accounting for 32.42%; and 3.64 million tons from Argentina accounting for 4.00%. Due to trade friction between the US and China and raising output of Brazilian soybeans, importation percentage of Brazilian soybeans has further ascended this year.
The experts believe that despite being processed such as drying after harvested, soybeans are still living organisms and can respire. Soybeans are rich in protein and fat, and the surface of soybean kernels is covered by dormant fungal spores. Fungal spores will grow, reproduce, metabolise and generate heat in an environment with suitable moisture and temperature. Particularly, they are more active when there are more impurities and broken kernels in the soybean cargo stow. Meanwhile, soybeans are of strong hygroscopicity and poor thermal conductivity. If the heat generated by respiration and microbial activities cannot be dispersed in time, soybeans will get mildewed, caked, carbonized and eventually heat-damaged. Among the soybean quality parameters, the moisture content will substantially influence the biological stability of soybeans, whilst the percentages of impurities and broken kernels also bear a certain influence on likely heat damage to soybeans. Therefore, professional research on relations among moisture content, temperatures and safe stowage period of soybeans reveals that the lower temperatures and moisture contents of soybeans are, the longer soybeans can be safely stowed for transport. For example, the equilibrium relative humidity (ERH) of the gap air should be maintained below 70%; at temperature of 21 Centigrade, soybeans with moisture content at 13% could be safely stowed and transported for 70 days; if the moisture content increases to 14%, the safe period may be reduced to 45 days. Some experts even believe that the above standards are applicable to grain storage in silos on land where external environment is relatively stable. For ocean carriage under variable conditions, the moisture content of soybeans should be controlled at 11.5% for purpose of safe transport.
Standards given by the Ministry of Agriculture, Livestock and Food Supply of Brazil (hereinafter referred to as “the MAPA Standard”) stipulates the moisture content limit of soybeans to be 14%, whilst National Standards of the PRC states it to be 13%, but maximum moisture content normally specified in sales contracts for soybeans imported to China is within 14%. The sea voyage from Brazil to China is about 40 days. Taking into account the time required for cargo operation and storage prior to loading and after discharge, the soybeans should be stowed in transit for 2 months in total. Brazilian soybeans are harvested during February to April, and the peak export season is from May to August. It is winter in Southern Hemisphere but summer in Northern Hemisphere. The large temperature difference between the loading port and the destination port is not conducive to safe stowage of soybeans. Compared to Brazilian soybeans, US soybeans are harvested in September to October. The sea voyage from the US to China is slightly shorter and there is no substantial temperature difference from Southern to Northern Hemispheres, Besides, the quality control and drying measures of US soybeans are much stricter, so cargo damage disputes over US soybeans are much less than those concerning Brazilian soybeans.
For ocean carriage, soybeans are usually loaded in bulk carriers, generally 50,000-70,000 tons by each vessel. To reduce the heat generated by respiration of soybeans and reproduction of fungi and for moisture evaporation, and to mitigate or prevent cargo damage caused by ship sweat, the carrier should, during sea transit, carry out appropriate ventilation according to actual condition, to introduce dry air and remove the warm moist air in cargo holds. When considering whether to ventilate or not, the carrier should be aware that ventilation is not allowed during fumigation, at night time or under adverse weather and sea conditions. The carrier should monitor air conditions inside and outside ship holds and the dew points, and determine whether ventilation is required in accordance with the “Dew Point Rules” or the simplified “Three Degree Rules”.
Consequently, while China keeps importing large quantities of soybeans, disputes over soybean cargo damage at sea continuously occur. The China Maritime Law Association (CMLA) therefore hosted a seminar on “Disputes Resolution concerning Sea Carriage of Soybeans” in November 2023 and invited cargo insurers, P&I clubs, judges of maritime courts, lawyers, surveyors and experts to participate in discussion. The seminar also widely attracted attention from the public. In the following paragraphs, we will discuss whether the carrier shall be held liable for the soybean cargo damage at sea, which was a hot topic during the seminar.
- Should carrier clause the B/L?
In some soybean cargo damage claims, percentages of impurities, heat-damaged kernels and broken kernels figured out at the discharge ports were found to be higher than the contractual specifications.
There seems to be no internationally applicable definition for “impurities”. In general, impurities include foreign substances sifted out by a sieve with standardised pores and some non-soybean substances left on the sieve, such as grits, etc. It is arguable whether sifted soybean hulls, stems, pods should be regarded as “impurities”. According to MAPA, soybean hulls are not impurities, but the PRC National Standards do not specify in this regard.
Technically, the carrier is entitled to clause the B/L or to reject the cargo if impurities, heat-damaged kernels and broken kernels are found in cargo stow at the loading port. In practice, determination on percentages of impurities and heat-damaged kernels requires professionals with special equipment. The carrier/ship crew can only assess the apparent cargo condition by visual inspection during loading, where is very dusty; hence it is impractical to require the ship crew to assess the proportion of impurities. In one case precedent, the carrier shipped 60,000 tons of Brazilian soybeans to the Chinese port and found impurities, carbonisation and heat-damage in the cargo stow. All parties concerned agreed that the cargo damage might have occurred at the time of loading. The receiver therefore argued that the carrier should have claused the B/L in terms of “a large quantity of” impurities and heat-damaged kernels at the time of loading. The dispute aroused was whether the carrier’s failure to clause the B/L deprived of the receiver’s right to refuse cargo payment under the L/C. The PRC court held that the impurity percentage was an indication of cargo quality and beyond the scope for the carrier to clause the B/L. Remarks by the carrier on a B/L should be precise and appropriate, and no ambiguous quantifiers such as “a large amount”, “a lot”, “a little” should be used to avoid over-clausing. In addition, it was reasonable for the carrier to judge the cargo as in apparent good condition by relying on common sense and normal standards.
In shipping practice, seldom would the carrier clause the B/L in terms of soybean cargo conditions. Presently, for purpose of judicial practice, it has been generally agreed that the carrier should only clause the B/L in respect of the apparent cargo condition; they are not required to identify or remark internal quality indicators such as impurities and heat-damaged kernels; however the carrier should properly and carefully monitor the apparent cargo condition at the time of loading soybeans.
- What resulted in the damage – inherent vice of cargo or carrier’s failure in caring for cargo?
The key issue was whether the heat damage to soybeans was due to nature/inherent vice of cargo, or the carrier’s failure in taking care of cargo. Ocean carriers state that soybeans are active organisms with respiration and fungi can easily reproduce on the surface of soybeans; also some soybeans have a high moisture content and are of strong hygroscopicity but poor thermal conductivity; thus the nature or inherent vice of soybeans were the fundamental cause leading up to heat damage during sea transit. However, the cargo interests argued that the carrier should have taken good care of the cargo and adopted proper ventilation; the carrier’s failure in doing so was the main cause of cargo damage.
Many experts consider that natural ventilation during sea voyage to each hold loaded with 7,000-8,000 tons of soybeans or more is not substantially effective. Sometimes it may be counter-productive to bring into ship holds warm and moist air. However, judicial practice reveals that the PRC courts generally deny “ventilation is useless”. The PRC courts hold that, notwithstanding disputes over effectiveness of ventilation, a prudent carrier should have made every effort to provide proper ventilation and to keep complete and reliable records on cargo temperature, air humidity, dew points and ventilation measures adopted. This is a precondition for the carrier to argue that they have properly and carefully cared for the cargo.
Turning to nature or inherent vice of cargo, Minutes of the 2021 National Conference on Foreign-Related Commercial and Maritime Trial Work of Courts points it out that the “nature or inherent vice of cargo” said in the China Maritime Code (CMC) refers to the essential and inherent attributes and vice of the cargo, manifested in that under similar conditions of sea carriage, the carrier cannot prevent damage to the same kind of cargo even though they have fulfilled obligations as stipulated by Article 48 of the CMC to take reasonable precautionary measures in caring for the cargo. Court case precedents reveal that the carriers are required to prove that damage to the same kind of cargo under the similar conditions of sea carriage is inevitable rather than accidental.
Apparently, the above burden of proof is rather heavy and difficult to accomplish. It is a paradox in logic. When the carriers defend that the cargo damage should be ascribed to the nature or inherent vice of cargo, they do not mean that all cargo of same nature or inherent vice will definitely suffer damage during sea voyage, but conversely it cannot be said that the nature or inherent vice of cargo is not the cause leading up to the damage. In one case precedent, Argentinean soyabeans and Uruguayan soyabeans were loaded into a same ship and when arriving at the Chinese discharging port, Uruguayan beans suffered damage, but Argentinean beans were in sound condition. In conjunction with other evidence, the carrier argued that under similar conditions of sea carriage the damage was directly caused by inherent vice of Uruguayan beans, but the PRC courts rejected it on grounds that Uruguayan beans and Argentinean beans were not same kind of cargo under similar sea carriage conditions and still held the carrier liable for the cargo damage. We view such a court decision as not convincible.
III. Apportioning liability for damage due to delay in delivery by assessing causative potency
The carrier’s period of responsibility for carrying and caring of bulk soybeans is from rail to rail. In judicial practice, if the time duration for carriers to hold the cargo exceeds the normal sea voyage plus time required for cargo loading and discharging, the PRC courts usually distinguish liabilities based on actual circumstances. For instance, a vessel laden with Brazilian soybeans was kept waiting at anchorage per Charterers’ instructions, in the meantime, she was delayed to berth alongside due to failure of the cargo interests to timely obtain the import permit. After berthing, the cargo discharge was further prolonged due to manually picking out beans with seed coating agent. The court then concluded that various elements resulting in cargo damage during the sea voyage, including the cargo nature, the voyage duration, whether ventilation had been conducted, the sea and weather conditions, etc. They thus adjudicated both the carrier and the cargo interests to undertake 50% liability for the damage. In another precedent, the cargo receiver failed to timely acquire original B/L due to trading disputes and thus the ship was kept waiting for quite a long time to discharge the cargo. Although cargo damage occurred during the carrier’s period of responsibility, the PRC court held the cargo interests to undertake major liability according to the actual circumstances.
The above precedents demonstrate that Chinese courts are constantly considering and adjusting the mechanism for apportioning liability for soybean cargo damage. They have now, according to case facts and evidence, allocated the liability for cargo damage by assessing the causative potency. In other words, even though the carrier is deemed as obligated to properly ventilate the onboard cargo, the Chinese courts shall, depending on actual circumstances and respective faults of the carrier and the cargo interests, as well as the cargo nature, to consider liability apportionment or liability exoneration. It may be more reasonable and practicable to apportion liability by assessing the causative potency than to require the carrier to prove the inevitability of damage to same kind of cargoes.
- Absence of Unified Standard for Loss Assessment
According to CMC, compensation for cargo damage is calculated as per the difference between the actual cargo values before and after suffering damage or the restoration costs of cargo. It does not cover any market loss. In fact, it is impossible to restore damaged soybeans, whilst occurrence of disputes over cargo damages is often associated with fluctuation of soybean market price. Therefore, how to ascertain the actual price difference becomes crucial for loss determination. So far no unified or generally accepted methodology for loss assessment has been developed in judicial practice or within the industry. Methods commonly adopted include calculating depreciation rate, calculating price difference between sound and damaged soybeans, calculating difference in values between products processed from sound cargo and those from damaged cargo, direct reduction from the cargo insured amount, and the output percentage of processed products, etc. Each method has its pros and cons and may also be affected by the market. Some experts suggest China voice to advocate a set of fair, reasonable and effective standards for loss assessment. In addition, different standards apply to the current testing of various parameters of soybeans. This is one of the other key reasons leading up to discrepancy in appraisal on cargo conditions and loss assessment.
- Prospect on dispute resolution for soybean damage
Despite the substantial quantity of importation, Chinese buyers seems not in a dominant position in the international soybean trade. In case of soybean cargo damage, Chinese importers and receivers usually first claim against their cargo insurers or the third-party ocean carriers, which leads to continuous disputes over soybean damage. It thus forces some Chinese insurers to reject providing insurance for ocean carriage of soybean cargo. In our views, legal approaches are, after all, the last resort to resolve soybean damage disputes, and the preferrable solution shall first start from commercial arrangements. On the one hand, the survey standards for soybean cargo quality at loading and discharging ports are expected to be unified, so as to reduce or avoid disputes arising from different testing standards. On the other hand, the cargo quality and shipping criteria of soybeans at loading ports shall be improved. Certainly, from the commercial perspective, efficiency and costs of commercial transactions shall also be borne in mind whilst trying to ensure impartiality and justice. Turning to dispute resolution for each specific case, how to reasonably assess the cargo nature and the carrier’s responsibilities, to allocate the burden of proof and to admit reliable evidence, the Chinese courts shall, based on facts and laws, make fair and reasonable judgements.
Authors: CHEN Xiangyong, Wang Jing & Co. Law Firm
Reference
- Statistical Communiqué by National Bureau of Statistics of China on National Economic and Social Development of the PRC for Year 2022
- Quantities and Values of China’s Major Imported Commodities in October 2023 (in CNY) by General Administration of Customs of the PRC;
- Speeches and transcripts by guest speakers at the Seminar on Disputes Resolution concerning Soybeans Carriage hosted by China Maritime Law Association