Newsletter

The Hanjin Debacle - 1

Author: M Jagannath
Date: September 28, 2016

Hanjin’s bankruptcy has been in the limelight for quite some time. The management of Hanjin are making arrangements to discharge the cargo on board the vessels at the nearest port so as to terminate the voyage. However, some Hanjin vessels are still under arrest and we are yet to see how the issues of various interests are resolved. The purpose of this article is to consider the issues arising out of this recent debacle.

  1. This article considers the various interests involved in the adventure and who are the Cargo Interests, Contractual Carriers/Actual Carriers (Freight Forwarders, NVOCC, Feeder Operators, Time Charterers) and Owners. The first article will focus on the Cargo Interests and the next article will focus on the other interests.

  2. Cargo Interests: Cargo Interests are parties who have an interest in the cargo and include the Shipper / Exporter / Seller,  Consignee / Importer / Buyer and the Cargo Insurers.

    1. Contract between the Seller and Buyer: The International Sale of Goods would generally be conducted on the basis of terms which may either provide for the express provision of English Law or the Convention for the International Sale of Goods (hereinafter known as “CISG”). The Sale Contract would generally use Incoterms and which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. We are not commenting on the issue of “incorrect” incoterms being used for containerized cargo as this has been commented aptly in the write up which we chanced to come across in Linkedin. We will comment on the other aspects.

      1. English Law: If the contract expressly provides for the incorporation of English Law, it would then oust the application of CISG. The UK Sale of Goods Act 1979 (hereinafter known as "SOGA 79") apply for contracts which expressly provide for English Law. S 32(2) of SOGA 79 requires the seller to make such contract with the carrier … as may be reasonable having regard to the nature of the goods and the other circumstances of the case, the failure of which will entitle the buyer to decline the delivery to the carrier as delivery to himself and / alternatively entitle the buyer to sue the seller for damages.

      2. The CISG applies to contracts for sale of goods between parties whose places of business are in different Contracting States being parties to the convention or when the rules of private international law lead to the application of the law of a contracting state. Art 32(2) of the CISG deals with carriage of goods and states “If the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by of transportation appropriate in the circumstances and according to the usual terms for such transportation.”

        The issue would be whether contracting with a carrier such as Hanjin to carry the cargo would be considered a reasonable carriage contract. Provided the Shipper was not aware of the impending insolvency, it is submitted that the carriage contract is reasonable. Accordingly,  we submit that it would not be possible for the buyers to deny the the contract and or sue for damages under both English Law and CISG.

    2. Contract between Cargo Interests and Carrier: The Shipper may have either contracted directly with Hanjin or another contractual carrier (and who in turn may have contracted with Hanjin for all or part of the transit - say as a NVOCC or as a slot charterer). We will consider each below:

      1. Directly with Hanjin: Cl 9 (b) of the Hanjin Bills of Lading states "Full freight and all advance charges shall be considered completely earned on receipt of the Goods by the Carrier, whether the Vessel or the Goods be damaged, lost or not lost, or the journey frustrated or abandoned. All freight and charges shall be paid in full without any offset, counterclaim or deduction, and shall be paid in the currency named in this Bill of Lading."  In the circumstances, if the carriage is terminated, cargo interests do not have any right to claim for return of freight. However, cargo interests would be entitled to claim for damages arising from any breach of the contract by Hanjin and could arrest Hanjin vessels to secure their claim. As Hanjin Shipping filed for Court Protection with the Korean Bankruptcy Court and sought to stay proceedings in various jurisdictions (UK courts have granted the relief sought, the US Courts have made an interim provisional order and the Singapore High Courts have granted Hanjin’s application on a temporary basis), cargo interests would be unable to arrest any of Hanjin vessels in these jurisdictions.  The advantage of arresting a vessel is that it would allow the cargo interests to become a preferred creditor for their claim (there would be jurisdictions where it would still be possible to arrest Hanjin vessels. However, given the risks, we do not believe that Hanjin will voluntarily call any of its vessels in these jurisdictions). Otherwise, cargo interests would rank together with the other creditors such that the eventual recovery, if any, would be very little, if not insignificant.

      2. Contractual Carrier who contracted with Hanjin: Provided that the Contractual Carrier is not insolvent, cargo interests can insist that they perform the carriage. While the Contractual Carrier may argue that the voyage has become frustrated, it is submitted that the voyage could still be completed but with an increase in expenses. Cargo interests could also consider arresting vessels of the Contractual Carrier to secure their claim and this would depend on whether the Contractual Carrier had chartered slots with Hanjin and also own or operate vessels as demise charterers.

    3. Cargo Insurance: Cargo Insurance cover is generally provided under the Institute Cargo Clauses wordings (either 1/1/82 or 1/1/09). There are three forms available on these wordings and which are A (“All Risks), B and C (limited named perils). Insolvency is not a named peril either on the B or C Clauses and given that the cover is only provided for perils mentioned in the policy, there would be no cover. In respect of A Clauses (“All Risks”), cover provided is for all risks unless it is expressly excluded by any of the exclusions provided under cl 4,5,6 and 7. The relevant wordings of cover and exclusions in 1/1/82 and 1/1/09 wordings are given below (in no particular order):

      1. Wordings of the clauses are as follows:

        1. Cl 19 Law and Practice in both 1/1/09 and 1/1/82 are same :"This Insurance is subject to English Law and Practice." Hence, the English Marine Insurance Act 1906 would apply.

        2. Cl 2 deals with General Average and Salvage. The 1/1/09 and 1/1/82 wordings have the same effect (minor changes in 1/1/09 to remove surplusages):

          1/1/09: "This insurance covers general average and salvage charges, adjusted or determined according to the contract of affreightment and/or the governing law and practice, incurred to avoid or in connection with the avoidance of loss from any cause except those excluded in Clauses 4,5, 6 and 7 below".

          1/1/82: "This insurance covers general average and salvage charges, adjusted or determined according to the contract of affreightment and/or the governing law and practice, incurred to avoid or in connection with the avoidance of loss from any cause except those excluded in Clauses 4, 5 6 and 7 or elsewhere in this insurance".

        3. Cl 4.5 in both the wordings deals with delay and are similar in wordings and effect:

          1/1/09: "In no case shall this insurance cover loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)."

          1/1/82: "In no case shall this insurance cover loss damage or expense proximately caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)."

        4. Clause 4.6 in both the wordings deals with insolvency. There are significant differences in the wordings  in that there is positive cover available to the innocent assured in the 1/1/09 wordings:

          1/1/09: "In no case shall this insurance cover loss damage or expense caused by insolvency or financial default of the owners managers charterers or operators of the vessel where, at the time of loading of the subject-matter insured on board the vessel, the Assured are aware, or in the ordinary course of business should beaware, that such insolvency or financial default could prevent the normal prosecution of the voyage.

          This exclusion shall not apply where the contract of insurance has been assigned to the party claiming hereunder who has bought or agreed to buy the subject-matter insured in good faith under a binding contract."

          1/1/82: In no case shall this insurance cover loss damage or expense arising from insolvency or financial default of the owners managers charterers or operators of the vessel."

        5. Cl 6.2 is same in both the wordings and states: " In no case shall this insurance cover loss damage or expense caused by capture seizure arrest restraint or detainment (piracy excepted), and the consequences thereof or any attempt thereat."

        6. Cl 12 deals with Forwarding Charges - there are minor differences in the wordings but there is no change in the effect:

          1/1/09: "Where, as a result of the operation of a risk covered by this insurance, the insured transit is terminated at a port or place other than that to which the subject-matter insured is covered under this insurance, the insurers will reimburse the Assured for any extra charges properly and reasonably incurred in unloading storing and forwarding the subject-matter insured to the destination to which it is insured.

          This Clause 12, which does not apply to general average or salvage charges, shall be subject to the exclusions contained in Clauses 4, 5, 6 and 7 above, and shall not include charges arising from the fault negligence insolvency or financial default of the Assured or their employees."

          1/1/82: "Where, as a result of the operation of a risk covered by this insurance, the insured transit is terminated at a port or place other than that to which the subject-matter is covered under this insurance, the Underwriters will reimburse the Assured for any extra charges properly and reasonably incurred in unloading storing and forwarding the subject-matter to the destination to which it is insured hereunder.

          This Clause 12, which does not apply to general average or salvage charges, shall be subject to the exclusions contained in Clauses 4, 5, 6 and 7 above, and shall not include charges arising from the fault negligence insolvency or financial default of the Assured or their servants."

        7. Cl 13 Constructive Total Loss wordings are same for both forms: "No claim for Constructive Total Loss shall be recoverable hereunder unless the subject-matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject-matter insured to the destination to which it is insured would exceed its value on arrival."

        8. Cl 16 on Minimising Losses has minor differences in the wordings:

          1/1/09: "It is the duty of the Assured and their employees and agents in respect of loss recoverable hereunder
          16.1 to take such measures as may be reasonable for the purpose of averting or minimising such loss,"

          1/1/82: "It is the duty of the Assured and their servants and agents in respect of loss recoverable hereunder
          16.1 to take such measures as may be reasonable for the purpose of averting or minimising such loss,"


      2. Commentary:

        1. Any loss due to the delay is excluded under cl 4.5 in both the wordings. However, Susan Hodges in the Law of Marine Insurance (one of the books we would recommend for Marine Insurance) suggests that cover would indeed be available under the All Risks wordings provided the delay was “abnormal” (the abnormal character of the delay rendered the loss to become fortuitous). She suggests that the exclusion under s 55(2)(b) of Marine Insurance Act 1906 (Unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against) and cl 4.5 excepting the insurer from liability for ‘loss damage or expense proximately caused by delay’ applies only to normal, but not unusual and abnormal delay.

          She has also commented in her book Cases and Materials in Marine Insurance Law that “… the same exclusion has to be given a meaning consistent with the fact that the policy is for all risks, with the emphasis on the word ‘risks’. Thus, if the event (the delay) giving rise to the loss is accidental or fortuitous, it would fall within the expression of ‘risk’. And if the delay is expected and normal (as in case of ordinary leakage and wear and tear), then it would be difficult to describe it as a ‘risk’. It is thus suggested that clause 4.5 be given a ‘tampered’ interpretation in line with the general framework of ICC (A). It could be argued that, read in its proper context, only ordinary delay is excluded by cl 4.5 of the ICC (A)”. Accordingly, we submit that while there would be no cover for normal delays, cover may indeed be available for abnormal delays under the "All Risks" provided any of the other exclusions do not limit cover.

        2. With respect to cl 4.6, the exclusion in 1/1/09 wordings has been significantly reduced such that an Innocent Assured or Assignee is protected by the policy in the event of financial default or insolvency bringing the voyage to an end. With respect to the wordings in 4.6 in 1/1/82, even if the assured contracts with a contractual carrier who is not insolvent, given the very wide wordings of the clause, the Insurers are entitled to deny cover for the insolvency of owners, managers, charterers or operators even though they (assured) may not have contracted with them (assured may have contracted with a solvent operator / contractual carrier and who in turn may have contracted with Hanjin). The assured could pursue the contractual counterparty / carrier but this would be for their own account (without any insurance recovery).

        3. Cl 6.2 provides for exclusions arising from arrest. While the intent of this clause is to exclude war-like perils, given that arrest has been mentioned without any qualifications, it is submitted that the effect is wider in that it would exclude such situations where a vessel has been arrested (creditors may arrest Hanjin vessel and any losses arising out of this act)

        4. Cl 12 of both the 1/1/82 and 1/1/09 forms are with respect to Forwarding Charges and have been incorporated so as to encourage the assureds to take steps to minimise their losses. As the policy also contains a Sue and Labour Clause (Cl 16), this clause is merely declaratory and any expenses incurred for forwarding would fall for recovery under the Sue and Labour Clause.

        5. Cl 13 on both the 1/1/82 and 1/1/09 are similar and deal with Constructive Total Loss. In the decision of the House of Lords in British & Foreign Marine Insurance Company Ltd v. Samuel Sanday & Co, it was held that

          … where goods are insured at or from one port to another port the insurance is not confined to an indemnity to be paid in case the goods are injured or destroyed, but extends to an indemnity to be paid in case the goods do not reach their destination. This may be variously described as an insurance of the venture, or an insurance of the voyage, or an insurance of the market, as distinguished from an insurance of the goods simply and solely. Goods delivered at the port of destination may be of value very different from their value at the port of loading. The underwriter’s obligation is to pay money in the event of the goods failing to arrive at their destination uninjured by any of the perils insured against.

          While there is an exclusion for war risks cover (excluded under cl 6 and for which positive cover can be sought under the available War Covers), no such clause exists in the A Clauses and therefore if the adventure is frustrated, the assured is entitled to seek indemnity provided there are no exclusions which override the cover. As mentioned above, Cl 4.6 of both 1/1/09 and 1/1/82 wordings preclude the assured from seeking a recovery for lossess caused by insolvency (however, in the 1/1/09 wordings, an innocent assured would not be caught by this exclusion). It is also submitted that the exclusion in Cl 6.2 would preclude the assured from recovery of costs which may be incurred for releasing the cargo from arrest. Accordingly, the Innocent Assured would be entitled to pursue a CTL Claim for insolvency as long as it is unconnected with any arrest.

        6. Cl 16 of both the forms is for minimizing losses (Sue & Labour). S78(1) of the Marine Insurance Act 1906 states “Where the policy contains a suing and laboring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or the subject-matter may have been warranted free from particular average, either wholly or under a certain percentage.” This being the case, the cover provided by this cl is supplementary to the main cover. However as both wordings make use of the words “in respect of loss recoverable hereunder”, it suggests that the supplementary cover is only available if the main cover is available. Accordingly, there would be no cover under the 1/1/82 wordings but cover would be available to an innocent assured for insolvency risks under the 1/1/09 wordings. With respect to costs incurred or which may be incurred for releasing the cargo from arrest, these would be excluded in both the wordings due to the exclusion provided under Cl 6.2.

        7. Cl 2 in both the wordings deal with General Average and Salvage. Both the wordings provide for exclusions in cl 4,5,6&7 to override any positive cover.

          Rule A of the York Antwerp Rules states “There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure”. Hence, the requirement for a General Average are extra-ordinary sacrifice or expenditure, intentional, reasonably made or incurred, common safety and maritime adventure (some authors suggest that the requirements are 4 instead of 5).

          With respect to Hanjin, barring the vessels which have been arrested or prevented from working, they (Hanjin) have made arrangements to discharge the containers at the nearest port. With respect to Hanjin vessels (owned or chartered), arrested or prevented from working, it is not clear as to whether Hanjin is taking any steps to discharge the cargoes.

          While normal delay is something which is expected, extra-ordinary delay may frustrate the adventure such that it would be reasonable to consider incurring expenses to avoid the same. Expenses which may be incurred are legal costs in approaching the courts, provision of interim guarantee/bonds, port and stevedorage charges etc. It appears to us that provided the five requirements are fulfilled in Rule A of York Antwerp Rules 1994/1974 (or whichever edition of the Rules is incorporated in the contract of carriage), a party to the adventure could undertake to foot the entire expenses and in turn seek contribution under General Average. Although, we have not seen such a General Average being declared, we do not see any objections to the principal behind this act. In this regard, we understand that the courts presently look more to the intent than to the strict practice.

          The issue would be with respect to recovery of the GA charges under Cl 2 of the policy. As these costs may be incurred for releasing the vessel / cargo from arrest, the exclusions under Cl 6.2 would apply such that the assured would not be entitled for any recovery under his insurance policy. However, this does not stop the assured from seeking recovery from other parties to the adventure should he expend sums to assist in discharging the cargo to avoid frustration of the voyage (although this may also be accomplished by way of contractual agreement of all parties).

  3. Conclusion:

    1. Cargo Interests must be aware of the contractual provisions in their sale, carriage and insurance contracts.

    2. With respect to insurance coverage, the 1/1/09 wordings are wider and are helpful in providing coverage to innocent assured’s for insolvency vis-à-vis the 1/1/82 wordings. Barring this, there is no significant difference in the coverage.

    3. While the Hanjin debacle could not have been predicted with certainty, cargo interests must regularly conduct KYC (Know Your Counterparty) to ascertain such counterparty insolvency risks. Further, they must consider contracting with multiple service providers so as to reduce "aggregation" exposure.

    4. Finally, cargo interests may consider taking specialized cover for such contingencies.

Unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against

 

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