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ICC Clause 4.6 application for Container Shipments

Author: M Jagannath
Date: November 1, 2014

This article discusses on the exclusions available under Institute Cargo Clauses Cl.4.6, its implications to cargo assureds in the context of shipping cargo in containers.

  1. We understand that some parties engage Container Liner Operators (“CLO”) purely on the basis of competitive freight rates without considering whether they (CLO) are suitable to fulfill the contract or otherwise. During an upturn in the shipping market, rates are generally buoyant with the revenues more than the costs. However, in a down turn, due to increased space availability, sometimes the freights quoted are much below the costs for the complete round trip i.e. the head haul /revenue and the repo leg. In a long down turn as is the case now, it would only lead to losses leading to some of the CLO’s ceasing operations. This article touches on the prevailing practice of freight rates below costs or sometimes negative freight being quoted to cargo interests in some trade lanes. While these freight rates have been quoted for quite some years (generally pegged to the state of demand and supply economics, particularly on the availability of cargo and equipment), the net result is that the CLO’s would bear losses to to try and stay in business. This article does not touch on the business decisions of the CLO’s but tries to co-relate the implications with reference to the exclusions provided in the Institute Cargo Clauses (both 1/1/82 and the latest wordings of 1/1/09). 
  2. Cargo is generally insured under ICC A, B or C either under the earlier wordings i.e. 1/1/82 or the latest wordings 1/1/09. The difference between A, B and C is that A's cover on an “All Risks” basis whereas the cover under B or C Clauses is restricted to “Named Perils”. Clause 4 of the ICC (A, B and C) deals with the exclusions and which override any cover provided. In particular,
    1. Cl 4.6 of the ICC 1/1/82 states “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”.
    2. Cl 4.6 of the ICC 1/1/09 states “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 be aware, 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.”

  3. Although cover under the ICC includes transit by road and rail, Clause 4.6 wordings suggest that it is only the “financial” condition on the sea voyage which would determine whether the exclusion would apply or not. The latest wordings of the ICC have also been amended so as to give benefit to an assignee against the exclusion and allow the assured the benefit of cover provided they are able to deny any knowledge on the financial condition of the owners, managers, charterers or operators. Hence, if the assured contract with a CLO who do not act under any of the above roles including as a slot charterer, then they may not be caught under the above exclusion (as the CLO would not fall under the definition of owners, managers, charterers or operators of the vessel). For example CLO load on their own vessels and together with Non Vessel Operators also load on 3rd Party vessels either by buying space on a committed basis – say by chartering slots, or on use basis. If the bookings are done on use basis, then the CLO do not appear to fall under the definition of owners managers charterers or operators of the vessel referred to in Clause 4.6.
  4. With respect to the earlier wordings (1/1/82), the intention appears to be exclude all claims irrespective as to whether the assured had knowledge of the financial situation of the owners, managers, charterers or operators of the vessel. Representations were made by the trade and the Insurers agreed to amend the wordings in the subsequent form (1/1/09) to take into consideration as to whether the assured had the requisite knowledge. The question is whether this requisite knowledge must be actual knowledge only or could this include imputed knowledge.
  5. Bookings with the CLO are taken directly from the cargo interests or through intermediaries and who may be acting as Freight Forwarders (“FF”). A FF is often engaged due to their knowledge and expertise and may either act as agents (in which case, the contract is between the cargo interests and the CLO) or as Principal and issue their Own of Bills of Lading to the cargo interests (In this case, the FF is no longer acting as an agent but as a contractual carrier). When the FF acts as an agent under his actual or apparent authority, his knowledge will be imputed to his Principals and which would include the financial position of the CLO (The general rule under the Law of Agency is that when an agent acts for its principal and has notice of certain facts, the principal in turn would then be deemed to have imputed notice of the agents knowledge of the certain facts. There are defenses to the general rule but we are not touching on this aspect.) Hence, if the assured or the agent (FF) contracts with a CLO at ridiculously low rates / negative freights, it could be argued that the assured /agent had notice that this would lead to the ruin of the CLO by way of insolvency or financial default and which in turn would entitle cargo insurers to deny the claim on the basis of clause 4.6.
  6. If the claim of the assured fails, the assured can certainly pursue their agent but invariably as agents (FF) would contract on the basis of Standard Trading Conditions, there would be contractual exclusions and limitation’s available to the FF to defend any claims raised (if the FF is Insured for their liability risks, one of the general requirements for seeking cover is that the FF contract on the basis of Standard Trading Conditions which have been seen and approved or deemed approved by their Liability Insurers). This being the case, the assured may be out of pocket in that he may be unable to claim under both the cargo insurance policy and from their agent.
  7. To conclude, we are aware that the circumstances stated above would be few and rare in between and that in normal circumstances, the exclusion would not be a defence available to the Cargo Insurers due to the CLO not being one of the ‘defined’ parties provided in Clause 4.6 or due to the difficulty in proving that the Agent of the Assured or the Assured had knowledge (including imputed knowledge). However, the risk would always remain and therefore we would suggest to both the Agent of the Assured (FF) and the Assured that they must make reasonable enquiries on the parties they are contracting with so as to avoid any issues arising at a later date, particularly when insurance cover is really of essence.

 

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