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Issues to be considered when Container Operators become Slot Charterers

Author: M Jagannath
Date: July 20, 2014

This article discusses in detail on the issues to be considered when a Container Operator decides to become a slot charterer. While these issues were touched on our earlier articles, "Should a Container Operator become a Slot Charterer?" and "Connecting Carrier Agreement – to sign or not to sign", this article deals more in depth

  1. In our earlier article, Should a Container Operator become a Slot Charterer?, we discussed the advantages available to the Container Operator should they become a slot charterer, one of them being that they (Container Operator) would be entitled to limit liability. However, we also mentioned out that the Container Operators  Insurance policy (a Transport Liability policy) may exclude coverage for their role as a Slot Charterer as it may increase their (Insurer’s) exposure. This article focuses on the increase in exposure due to the Container Operator becoming a slot charterer and discusses ways how this could be ameliorated.

  2. The difference between a charter party and the Bill of Lading contract (although a Bill of Lading may be issued pursuant to a charter party contract but in which case, it would act as a receipt and as a document of title) is that there is freedom of contract available to the parties in a charter party but in the case of a Bill of Lading contract, the freedom of contract is restricted either due to the application of one of the cargo carriage regimes (The Hague Rules, The Hague Visby Rules, The Hamburg Rules and The Rotterdam Rules – which is not in force) which may be applicable compulsorily or by way of incorporation by the Clause Paramount. This being the case, in a charter party contract, it may be possible for the Owners and Charterers (in this case Slot Charterers) to incorporate clauses which may increase / decrease their responsibilities / risks.

  3. The clauses which could considered as restrictive for a slot charterer could be
    • Incorporation of the Inter-Club New York Produce Exchange Agreement generally known as “ICA”
    • Container to be considered as an unit for the purpose of limitation of liability available to the Owners
    • Claims to be dealt by the Charterer in the first instance and / or provision of Indemnity for any claims directly brought by the cargo interests against the Charterers

  4. ICA : The original ICA was formulated in 1970 to provide a simply mechanism where cargo claims arising under New York Produce Exchange Form or Asbatime or any other charter parties, could be swiftly and fairly apportioned between owners and charterers. The purpose behind the ICA was to avoid costs arising due to the litigation between the Owners and Charterers (which is generally funded by their Clubs/Insurers) to decide which party is responsible for the cargo claim. The ICA provides for a relatively simple working formula for the apportionment of liability for cargo claims.

    The ICA has been amended thrice, the first in 1984 (relating to the time limit for making claims), the second in 1996 (to meet the needs of the container trade) and finally in 2011 (Entitlement of security on the basis of reciprocity, once one of the parties to a charter party has put up security in respect of a cargo claim).

    Charterers must be aware of the subsequent amendments of the ICA as it requires them (if they are a party to the contract providing for the ICA) to first settle the claim of the cargo interests in order to pursue an indemnity from the Owners. The ICA also requires the Charterers to provide counter security to Owners should they (Owners) provide security to cargo interests. In view of the changes, various Insurers of the Charterers Risks, while they have supported the earlier wordings, have come out against the incorporation of the latest ICA wordings i.e. 2011 wordings.

  5. Containers as an unit for limitation of liability: The Cargo Conventions (The Hague Rules, The Hague Visby Rules, The Hamburg Rules and The Rotterdam Rules – which is not yet in force) allow a carrier to limit liability on the basis of either packages or weight (The Hague Rules only provide for package limitation), whichever being higher. If the charter party provides for the container to be an unit for the purpose of limitation, there might be a gap between the liability faced by the container operator and the recovery that they may make from the Owners.

  6. Claims to be dealt by the Charterer in the first instance: The charter party may provide for the charterers to deal with all cargo claims in the first instance (as is the case in ICA 2011). It may also provide for an indemnity to be given by the Charterers to the Owners should the claim be pursued directly against the Owners.

  7. As mentioned in our earlier article (Should a Container Operator become a slot Charterer – Pt 6), Transport Liability Insurers may exclude coverage for Container Operators acting as Charterers due to the increased liabilities arising out of this role. The exclusion clauses used by the Transport Liability Insurers are “any Vessel or aircraft which is owned, chartered or leased by the Insured or on the Insured’s behalf” or some similar such clause. Given the advantages of acting as a slot charterer (in particular, entitlement to Limitation of Liability as available under the Global Limitation Conventions and which would also accrue to their Insurers), the Container Operator should ask for their Insurers to consider amending this clause by adding “provided there are no additional liabilities or terms which are more adverse than the Hague-Visby Rules or any compulsory applicable transport law or convention and that the role of the Insured is restricted to loading and discharge of containers with the Owners being responsible for the management and operation (including navigation) of the vessel”. This may then allow the Transport Liability Insurers to continue providing cover to the Container Operator even if they were to act as Slot Charrterters as there is no increase in the risks being covered by them.

  8. At the same time, Container Operators should carefully vet their contract with Owners (slot charter parties) to ensure that they do not agree to clauses which may not only impact their operations but also their insurance cover. If it does become necessary to agree to any onerous terms, this should then be factored in their risk management process and in turn should be advised to their Liability Insurers so that they have appropriate cover in place (if necessary, cover for a slot charterer and which is provided as a separate extension by the Transport Liability Insurers).

  9. In conclusion, it is essential for a Container Operator to not only be aware of the various issues arising if they were to become a slot charterer but also that they must consider proper risk management procedures (including appropriate liability insurance) to deal with any increase in risks.

 

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