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The Hanjin Debacle - 2

Author: M Jagannath
Date: October 23, 2016

This is a continuation of our earlier article “The Hanjin Debacle -1”. By way of an update, we understand that barring a few Hanjin vessels under arrest, containers have been discharged by Hanjin at various ports and they have asked cargo interests to take delivery. This concluding part will consider the interests of the Contractual Carriers / Actual Carriers (Freight Forwarders, Feeder Operators & Time Charterers), Owners and Port / Terminal Operators.

  1. A Freight Forwarder is, by definition, an Agent. Having said that the roles are constantly changing in the transportation industry and it is not uncommon for Freight Forwarders (hereinafter known as “FF”) to issue their own Bills of Lading (as Contractual Carriers) to cargo interests and in which case, they no longer act as FF’s but instead as NVOCC’s. A FF can either be acting as agent of the cargo interests or of the carrier (NVOCC or VOCC). We will consider each role below:

    1. Agents of the Cargo interests:

      1. Duty: A FF owes a duty of skill and care appropriate for the transportation of the goods to the cargo interests instructing them (Shipper or Consignee, as the case may be). The duty includes the proper selection of carriers for the transportation of cargo and once this has been accomplished, the FF is no longer under any duty to supervise or follow through with the Carriers in the performance of their (Carriers) duties. (We would recommend an excellent article in The Forwarder Law on “Stuck in the Middle – Duties and Liabilities as forwarding agent). The issue would be whether the FF can be faulted in choosing an “insolvent carrier” and due to which the cargo interests can pursue them for recovery. The fact is that barring a few, almost all the major container carriers are running on “losses” and therefore it appears to us that this is an “industry normal”. Hence, it would be difficult to pursue the FF unless the FF were personally aware that Hanjin was declaring Bankruptcy and still went ahead and proposed their services to their clients.

      2. Liability: In the unlikely event, the FF is found liable, subject to their trading on Standard Trading Conditions, they would be entitled to exclude and / or limit liability. In this regard, we have reviewed the Standard Trading Conditions of Singapore Logistics Association (“SLA”) and the British International Freight Association (“BIFA”) and which are as follows:

        • SLA: Cl 29 of SLA STC entitles the FF to limit liability to the value of the goods or at SGD 5 / gross Kg (if this is lower) up to a maximum of SGD 100,000 any one Claim. Further, it entitles the FF to limit liability for delay related claims up to the amount of charges billed by the FF for services rendered with respect to the delayed goods.

        • BIFA: Cl 26 of the BIFA STC entitles the FF to limit liability to the lower of the value of goods or SDR 2/gross kg of the goods upto a maximum of SDR 75,000.

        Limitation will therefore be of assistance to limit the exposure to the FF.

    2. Agents of the Carrier: A FF may be acting as the agent of the carrier (who may be a VOCC / NVOCC). in which case, any liability arising should be dealt by their principals. Alternatively, if a liability arises to the FF (depending on the jurisdiction where they are sited) they should seek indemnity from their principals. However, if the FF’s principals do not deal with the liability, then it would be more of an issue of KYC ("Know Your Counterparty") rather than liability to the FF in its own right.

  2. NVOCC/Slot Charterer’s collectively known as “CC” (See B ii of our earlier part where we have touched on the same issue): Containers may be loaded by CC on Hanjin vessels on the basis of Bills of Lading or Slot charter contracts. Given the recent turn of events, Hanjin has either terminated or is unable to continue with the carriage (as the vessels are arrested). As the contract of carriage is between the cargo interests and the CC, cargo interests would be entitled to pursue the CC for completion of carriage. With respect to the containers which have been discharged, the CC have a duty to complete the transit to final destination as a part of their bargain and for which they may have to incur additional expenditure. The issue would arise with respect to containers which are yet to be discharged due to the vessel either being arrested or prevented from berthing. In this case, the CC must make efforts to discharge the containers so that they can continue with the voyage.

    If despite persistent efforts, the CC are unable to discharge the containers, would they be entitled to treat the contract as frustrated? Under the English doctrine of frustration, circumstances which substantially delay the performance of the contract of carriage or render its performance impossible, may discharge the parties to the contract. It is submitted that the doctrine of frustration would not apply in this instance, as the containers could be discharged albeit with higher costs/ assistance from the courts. This being the case, the CC should approach the courts for assistance in dealing with the issue and for which they would have to incur additional costs.

  3. Owners: Some Owners may have chartered their vessels to Hanjin and for which they may not have received payment of some of the outstanding hire. Would Owners be entitled to hold lien on the cargo and containers on board the vessel to secure payment of the outstanding sums? We have, in one of our previous matters, seen an argument being made that Owners are entitled, under English Law, to hold a lien on the cargo for payment of outstanding hire (even though the cargo may be of third parties) on the basis of the privy council decision of “The Pioneer Container” and which deals with sub-bailment on terms. The circumstances of “The Pioneer Container” is with respect to a cargo claim being pursued against the Feeder Operator (the carrier had sub-contracted part of the carriage to the Feeder Operator) and not Owners pursuing cargo interests for recovery and therefore it is submitted that it is not good authority for the present issue at hand.

  4. Terminal Operators: As a consequence of Hanjin seeking bankruptcy protection, some terminals may have out-standings for the services provided earlier to Hanjin. In this regard, would the Terminal Operators be entitled to hold lien on the cargo for payment of the out-standing charges of Hanjin? This would depend on the contractual terms between the Terminal Operators and Hanjin and whether this contract provides for the Terminal to have a wide General lien over 3rd party cargo and containers. In any event, any such right would be tempered with the general provisions of law in the place where the Terminals are sited. Although, we have not been involved in any such activity, we believe that any such lien would be fraught with difficulties considering that they are being imposed on third parties who may not have any knowledge of the contractual terms between Hanjin and Terminal.

  5. Insurance recovery:

    1. FF/Contractual Carrier/Charterers P&I and Owners Protection and Indemnity: Although Liability Insurance may not be compulsory for all parties, invariably, parties will have appropriate cover for the risks arising out of their trading activities. The cover provided is similar for cargo liability in all of these policies (including cover provided by P&I Clubs) and therefore we are dealing with this collectively. Any cover provided by the Risks / Perils clause must be read in conjunction with the Conditions (including Condition Precedent to cover) and Exclusions applicable to the cover. We consider each of these below:

      1. Risks Clause:

        • Your liability for physical loss / damage of cargo and consequential loss arising ..(FF/NVOCC policy)

        • Physical loss or damage to cargo whilst in Transit or during Storage in Transit (FF/NVOCC policy)

        • Through or transshipment bills of lading: Liability for loss, shortage, damage or other responsibility in respect of cargo carried by a means of transport other than the insured vessel, when the liability arises under a through or transshipment bill of lading, or other form of contract approved by the Managers, in writing, which provides for carriage partly to be performed by the insured vessel (P&I policy).

      2. Conditions / Conditions Precedent to the Contract:

        • … insure you only for liabilities under the provisions of a law or convention which apply compulsorily and cannot be avoided by contract (FF/NVOCC/P&I Policy)

        • Standard Trading Conditions as approved (FF/NVOCC Policy)

        • The Insured shall contract under current FIATA terms and conditions, under current terms and conditions of a national forwarding association affliated to FIATA (FF/NVOCC Policy)

        • Where the Insured contracts to carry cargo by sea and/or Bills of Lading are issued by or on behalf of the Insured, such contracts and/or Bills of Lading shall include a Paramount Clause incorporating the Hague Visby Rules as enacted by the Carriage of Goods by Sea Act 1971, or equivalent national legislation under the Hague Visby Rules (in the case of shipments to or from the United States, US COGSA);(FF/NVOCC/P&I Policy)

        • … in respect of liabilities which would not have been incurred or sums which would not have been payable by if the cargo had been carried on terms no less favorable to than those laid down in the Hague or Hague-Visby Rules…(P&I Policy)

      3. Exclusions:

        • Loss arising out of unrecoverable debts or out of the insolvency of any person, including insolvency of agency (broad exclusion)

        • Insolvency or financial default of the Insured or a contracting party with the Insured (narrow exclusion)

        • Your Insolvency (restricted only to the Insured’s insolvency).

      4. Commentary:

        • The cover provided by the Operative / Risk Clause must be read in conjunction with the Conditions (which would impose duties on the Insured failing which Insurers may avoid cover) and Exclusions (Risks which the Insurers are absolutely unable to cover). In variably, all policy conditions require that the Insured must contract on the basis of either approved Standard Trading Conditions (such as the Singapore Logistics Association or British International Freight Association Standard Trading Conditions) or on the basis of compulsorily applicable Cargo Conventions (eg The Hague Visby Rules). 

          • Both the SLA and BIFA STC entitle the Transport Operator to exclude or limit liability for delay (Cl 28(b) of the SLA STC and Cl 26(B) & (C) of the BIFA STC).

          • The Hague Visby Convention does not contain any provision for delay. Invariably, Bills of Lading will have provisions entitling Carriers to either exclude and / or limit liability for claims arising out of delay in performing the contract. Hence, any claim pursued by the cargo interests against CC can either be denied or defended on this basis.

        • With respect to exclusions, they may be broad (in which case, if any party is insolvent, cover will not be available) or narrow (cover is only restricted if the Insured contracts with an insolvent party) or only apply if the Insured becomes insolvent. While most of the policies have a broad “insolvency exclusion”, it is submitted that these policies are not meant to cater to insolvency risks (it would be better covered under "Contingency Cover"). Accordingly, any cover available would be dependent on the particular wordings of the insolvency exclusion in the policy.

    2. Container Insurance: CC may have used their own containers for the carriage and which may be insured either as an extension to their liability policy or separately by way of a standalone policy (we have considered the Institute Container Clauses 1/1/87). We consider the same below:

      1. Operative / Risks Clause:

        • Physical loss / damage of insured carrying equipment arising from an accident (extension of the main policy)

        • This insurance covers all risks of loss of or damage to the subject-matter insured, except as provided in Clauses 4,5,6,7 and 8 below (Institute Container Clauses 1/1/87)

      2. Exclusions:

        • If the cover is on the basis of an extension of the Liability policy, then the Conditions and Exclusions available under the main policy would also apply to the extension (which has been discussed in 4 a iv above).

        • With respect to the Institute Container Clauses 1/1/87, clause 5.6 of these clauses provide an exclusion for “loss, damage or expense arising from insolvency or financial default”.(We had touched on this aspect on our earlier article and which can be viewed at “Clause 5.6 of Institute Container Clauses, Time 1/1/87)".

      3. Commentary: Any cover available under the policy wordings would be tempered by any available exclusion of "insolvency" and which may be either narrow (in which case, cover may be available) or broad (in which case, cover will not be available).

    3. Owners Hull and Machinery Cover: Owners may be covered under various forms including Institute Time Clauses – Hull 1.10.83, Institute Time Clauses – Hulls 1.11.95, International Hull Clauses – 1/11/03, The American Institute Hull Clauses, 1977 or 2009 or the Nordic Plan of 2013. We are focusing on the ITCH 1/10/83 and which provides covers on the basis of “named perils” (the ITCH C 1/10/83 is one of the most commonly used forms).

      1. Clause 6 of the form details various perils and includes perils of the seas, fire, explosion, violent theft..,jettison, piracy, etc.

      2. Clause 23-26 details the exclusions to cover and includes “arrest”(cl 23.2) and which we have commented with respect to cargo cover in our earlier part of this article in 2 C ii c). Accordingly, the policy would exclude any claims caused by arrest.

      3. Commentary: The policy does not have any specific exclusions for “insolvency”. In order to submit a claim under the policy, there must be loss or damage caused by one of the enumerated perils listed in Cl 6. If the loss is caused by insolvency alone, there would be no cover (as it is not one of the enumerated perils) but if the loss is caused by various perils including insolvency, cover would be available if the other perils are part of the perils clauses and do not fall under the exclusions stated in Clause 23-26.

    4. Ports & Terminals: While there are various wordings for cover provided to Ports & Terminals, we have considered the "Wavelength" wordings (which is on a "named perils" cover) which are commonly used by the Lloyds Insurers.

      1. Operative / Risk Clause: Section 1 deals with the Liability wordings and the relevant Insuring Clauses are as follows:

        • Cl 2.1 provides for the Insurers to cover the Assured's legal and contractual (if this has been declared) to third parties for Physical loss or physical damage to the real or personal property of any third party, including resultant loss of use or demurrage, ...

        • Cl 2.4 provides for reimbursement of costs which may be incurred in the defence of any claim arising out of this section.

        • Cl 2.5 provides for reimbursement of costs and expenses which may incurred by the terminal for disposing of the cargo or property of a customer who may not have taken delivery.

      2. Exclusions: Cl 16 of the General Policy Provisions has an exclusion for "Insovency or Bankruptcy" and which states " The insolvency, liquidation, bankruptcy, receivership, administration or the like, or any refusal or inability to pay of the Assured or any Underwriter shall not operate..."

      3. Commentary: As Exclusions always overide the Cover being provided, any claim arising out of Hanjin's bankruptcy would be excluded under the "Wavelength" wordings.

  6. Conclusion:

    1. All parties must be aware of their duties together with their contractual responsibilities and must consider contingency plans to deal with issues arising from any of their counter-parties ceasing operations.

    2. Parties must take active measures to manage their risks and which should optimally include a “Contingency Policy”.

    3. Finally, prudence dictates that parties know their counter-party and regularly conduct "KYC" to manage their counter-party risks.

 

Section 1 deals with the Liability wordings and the relevant Insuring Clauses are as follows:

 

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