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Indian Logistics Operators – Set Off


Jagan - July 29, 2020 - 0 comments

We recently participated in two webinars conducted by AMTOI on Bills of Lading and Cargo and Errors & Ommissions Claims (the second webinar was conducted jointly with Consolidators Association of India). One of the issues raised was with respect to options available to forwarders / consolidators (henceforth known as Logistics Operators or “LO” in short) should their outstanding charges/freight be held by their clients/ cargo interests to set off say damage or loss to their cargo.Given that the LO’s operate on thin margins, any set off of freights / charges  for actual and alleged damage, irrespective of whether there was any fault or not, would put the LO’s under immense pressure. The purpose of this article is touch on various issues, as we see it, on the basis of Indian Laws.

  1. Relevant Indian Laws:
    1. Indian COGSA 1925 (as modified in 2019): This act applies for the carriage of goods by sea from any port in India to any other port (whether domestic or international – i.e. outward shipments and not inward shipments unless the act is specifically incorporated to govern for inward shipments also). The schedule to this act incorporates the Hague Visby Rules.
    2. The Multimodal Transportation of  Goods Act 1993ii(as amended in 2000) (which we understand is being considered for revision): This act applies for multimodal contracts (two or more modes of transport) out of India.
    3. The Carriage by Air Act 1972: This act applies for carriage of cargo by air and incorporates The Montreal Convention.
    4. Indian Contract Act 1872: The act applies for contracts formed under Indian Law. Section 28 makes any agreement void where any party is restricted from enforcing his rights by the usual legal proceedings in the ordinary tribunals or limits the time which they may enforce their rights. 
    5. Indian Limitation Act 1963: This act prescribes for the time of three years for initiating a suit from the date of action (Section 3 read in conjunction with the schedule).
    6. Indian Consumer Protection Act 2019: This act permits a consumer (defined in Section 2(7)) to file a consumer dispute (defined in Section 2(8)) to file a complaint at the District Commission and which may in turn be dealt by the State or the National Commission.
    7. Indian Arbitration and Conciliation Act 1996: This act deals with both arbitration and conciliation for the fair and efficient settlement of commercial disputes.
  2. Cargo Loss or Damage: If there is a cargo loss or damage whilst carriage (sea, air or multimodal), one has to first determine if the LO is indeed liable for the loss. In this regard, the first thing we need to ascertain is the LO’s role, and in particular, if they acted as an Agent or a Principal.
    1. As Agents (as Forwardersiii): In this case, the LO facilitates the formation of contract between their clients and a third party, the Carrier. As soon as the contract is formed, the LO steps out and therefore if there is any loss or damage to the cargo, the cargo interests should pursue the correct contractual party i.e. the Carrier. The cargo interests may however pursue the LO if they could establish some negligence or fault on the part of LO say by choosing an incorrect mode of transport or carrier given the requirements advised by their clients.
    2. As Principals: In this case, the LO would be performing the carriage, say either as a contractual or performing carrier. In this regard, we would have to ascertain the terms of the contract and whether any compulsory law applies such that the LO would be entitled to exclude and / or limit liability.
      1. Sea Carriage only: If a Bill of Lading was issued for the subject shipment, the Indian COGSA 1925 would apply such that the LO would be entitled to
        • exclude liability as provided in Art IV R2 (a-q) subject to fulfilling their duty to “exercise due diligence...” (Art III R 1 of the HV Rules) and “continuous care of cargo” (Art III R 2 of the HV Rules).
        • limit liability to a sum of SDR 666.67 (approx. USD 936.53 as on 27th July 2020iv) per package or SDR 2 (USD 2.8096 as on 27th July 2020) per kg of the gross weight of the goods lost or damaged whichever being higher (Art IV Rule 5 of the HV Rules). In most cases, the limitation amount would be much lower than the claimed amounts such that this would indeed be a defence. Limitation can indeed be denied if the cargo interests prove that the LO was reckless (as provided in Art IV R 5 of the HV Rules) but this would be very rare.
        • deny the claim on the basis of time bar if the cargo interests fail to pursue in the proper forum within 1 year of the delivery of the goods or when the goods should have been delivered (Art III R 6 of the HV Rules).
      2. Multimodal Transport:
        • The LO could exclude liability provided they prove that loss occurred without any fault of the LO or of his servants or agents (Section 13).
        • The LO could limit liability to a sum of SDR 666.67 per package or SDR 2 per kg of the gross weight of the goods lost or damaged whichever being higher (Section 14).
        • The Act also provides for the claim to be time barred if action is not initiated within 9 months from the date of delivery or when delivery should have been accomplished (Section 24).
      3. Air Carriage only: If the shipment was by Air, a LO would be entitled to
        • exclude liable if they could prove absence of fault.
        • limit liability to a sum of 22 SDR*** (approx. USD 31.0908 as of 31st July 2020) per kg of the package damaged or lost.
        • deny the claim on the basis of time bar subject to the claim not being pursued within 2 years from the date when the goods arrived or should have arrived (Art 29 of the First schedule).
  3. Standard Trading Conditions (“STC”)v:
    1. Invariably Transport Liability Policies provide for cover on the basis that the Insured contract on the basis of compulsorily applicable cargo laws / conventions and/or STC’s which are seen and approved or deemed approvedvi. If the role of the LO’s is that of a Carrier (Sea / Air / MTO), the relevant acts would apply such that the LO would be entitled to exclude or limit liability. In some circumstances, losses may also arise before or after the carriage such that the LO would not be entitled to any protection available under the carriage acts (e.g. Mis-delivery of cargo at the terminal is arguably outside the carriage such that both the limitation of liability and time bar would not be applicablevii). In such cases, incorporation of STC’s to deal with such claims / losses would be of assistance in limiting liability or providing for a shorter time bar.
    2. The general practice in the International market is for all communications including quotations provided by the LO to expressly mention that they contract on the basis of STC’s which entitle them to exclude and/or limit liability. Invariably, this is accomplished either by incorporating it in the body or footer of the contract. Mr Vishal Sheth, from The Chambers of George Rebello, a fellow panelist suggested that it would be best for LO’s to specifically mention the STC’s in the main body of the contract instead of the footer (see time line 00:33:38 to 00:36:11 at https://youtu.be/vqzfXHAIJnU?t=2018) to ensure that the Courts give effect to the terms. Given that incorporation of STC’s is yet to become an industry standard in India, it would be best to incorporate the STC in the main body of the contract such that clients / cargo interests have express notice of these terms.
    3. Under English Law, unless the provisions of the STC fall foul of the Unfair Contract Terms Act 1977 (“UCTA 1977”) and/or the Unfair Terms in Consumer Contracts Regulations 1999 (“UCCR 1999”), they would generally apply. However, Indian Law do not have any similar provisions except that the Indian Contract Act 1872 does provide for some barriers. Construing the provisions of the Limitation Act 1963 in conjunction with the Contract Act 1872, it appears to us that any provision in the STC’s which provides for a time bar below 3 years would be voidviii. With respect to limitation of liability, we do not see provisions under the Indian Contract Act which oust them.
    4. The Federation of Freight Forwarders Association of India (“FFFAI”) STC provides for a 9 month time bar (clause 13). As mentioned in 3 c above, it appears to us that this provision under Indian law would be voidix. Clause 11.3 of the FFFAI STC provides for a monetary limitation of liability. We do not see any barriers provided under the Indian Contract Act 1872 and therefore submit that limitation of liability provisions of the FFFAI would be valid and enforceablex.
    5. In addition to the defences, STC’s also have other provisions such as:
      1. Scope of Services: STC’s would define and distinguish the role of the LO of either acting as an agent or principal together with their responsibilities and liabilities. Accordingly, it would be difficult for cargo interests to argue that they only contracted with the LO to perform the carriage, particularly, when the LO acted as a facilitator / agent only.
      2. Attack provisions in STC’s include the payment of charges, no right of set-off for claims, provisions for interests for unpaid charges and recovery of charges incurred for pursuit.
      3. Law and Jurisdiction clause: STC’s may also provide for the law of the contract together with provisions for dealing with a dispute say by multi-tiered dispute resolution clause (which may provide for the dispute to be initially resolved by negotiation and if it fails by mediation and finally by arbitration).
        • Law: We understand that the choice of two Indian parties to contract out of Indian Law may be considered against Indian Public policy such that it would be preferable to provide for Indian law as the Law of the contract. As and when the law develops to allow party autonomy irrespective of parties nationality, this aspect should be reconsidered.
        • Jurisdiction:
          • Litigation:
            • In the absence of any dispute resolution clause, parties would have to litigate to resolve any differences. Alternatively, the STC’s may provide for the dispute to be heard at a specific court, say the Mumbai High Courts. However, litigation in India is often very slow such that justice, if any, is after many years and often decades. Delayed justice affects business and therefore it is incumbent on the interested parties to work together to find a quicker process for dispute resolution.
            • Costs of pursuit: Costs would be incurred to pursue claims in any form of dispute resolution mechanism. While costs generally follow the event, we understand that the cost awarded to the successful parties in Courts are not significant such that the winning party has to still bear a substantial amount for recovery. We understand that for pursuit of claims by litigation for disputes below INR Ten Lakhs (INR 10,00,000 – approx. USD 13,359 as on 28th July 2020) are not economically viable due to the unrecoverable costs. This being the case, LO’s would certainly face pressure if their clients hold payments to offset cargo claims at and around this figure i.e. INR Ten Lakhs (if the amounts held are in excess of these amounts, the LO would in any event pursue for recovery). If there are similar such claims from other clients, a LO would be looking at a far bigger amount and perhaps this may impact their very survival.
          • Consumer Protection Act: This act was legislated to protect the interests of consumers and also provide another forum to resolve their disputes. The definition of consumer under the Indian Consumer Protection Act is much wider such that an aggrieved client may, in certain circumstances, also pursue the LO in this forum.
          • Alternative Dispute Resolution: Given the obvious issues arising with Litigation (delay and costs), STC’s may instead provide for alternative procedures for settling disputes without litigation such as negotiation, mediation and arbitration. We understand that the FFFAI STC’s has provision for disputes to be resolved by arbitration. The Indian Act (The Arbitration and Conciliation Act 1996) provides for Conciliation to work in tandem with Arbitration. Should Conciliation fail, parties can continue to arbitrate to resolve their disputes.
            • Issues: Although Arbitration was meant to resolve disputes quickly, the actual effect in India appears to be otherwise with growing dis-quiet on the way the practice of arbitration is taking place. In particular, users appear to be against the same practices being followed in arbitration as in the court system. Mr Shabbir Wakhariya of Wakhariya & Wakhariya, in his article in the mondaq suggests that the ills of arbitration in India could be removed by the following:
              • Ex-judges should not be appointed as arbitrators
              • Unless there are specific questions of law, lawyers not be allowed to represent the litigants
              • The supervisory jurisdiction of the local courts should be removed or curtailed, and all interlocutory objections should be reserved for the time when the final award is challenged.
            • During the Webinar on Bills of Lading, Mr Shantanu Bhadkamkar stated that arbitration is not very popular and successful ( see timeline 1:00:40 – 1:02:23 at https://youtu.be/slSbAukTkps?t=3640). Other jurisdictions have reported a rise in the growth and increasing use of Arbitration to resolve commercial disputes. Accordingly, we submit that the users of arbitration in India should work together to tweak the procedures to reap the benefits (as is the case in other jurisdictions).
            • Institutional or Ad-Hoc: While the Institutional Model appears to be preferred in India, this may result in imposition and front loading of costs, particularly when party’s initiate arbitration to ensure that the time is preserved (due to shorter time periods available under cargo laws / conventions). Both models have their advantages and dis-advantages. However, most of the international shipping and commercial disputes generally provide for Ad-Hoc arbitration such as the LMAA, SMANY, SCMA, etc. One advantage of the ad-hoc process is that there is no requirement of front loading of costs and parties after having initiated arbitration, say to preserve time, may continue to negotiate and / or mediate, and if they fail to make headway continue with the arbitration.
            • The other forms of dispute resolution such as negotiation, mediation / conciliation should be first attempted and if this fails, parties should proceed with arbitration. Various arbitration rules also allow parties to initiate mediation during the process subject to the other party’s acceptance.
            • Small Claims and Very Small Claims: Most of the shipping / logistics disputes invariably are not of sizeable amount. Any dispute resolution process should therefore consider the costs for pursuit keeping in the mind the claimed amounts. In this regard, both the LMAA and SCMAxi Rules provide for a Small Claims Procedure and which provides for a quicker procedure together with a cap on costsxiiGiven that the INR Ten Lakhs (INR 10,00,000) is a much smaller sum, it would be appropriate to consider a “Very Small Claims Procedure” with the arbitrators fee’s capped at say INR One Lakh (INR 100,000) and with costs capped to a maximum of INR One and half Lakhs (INR 150,000). This would obviously ensure that the LO’s disputes for unpaid freight  are economically viable to pursue. Accordingly, we would suggest that the various logistics associations together with the Indian Shippers Council (CSLA, MANSA, AMTOI, IPPTA, CAI, FFFAI, CFSAI ) jointly work to establish an Arbitration Clause / Rules which provides for fixed costs / capped fee’s together with appointment authority (say by the President of the Shipping & Logistics Council of India jointly formed by all of the  interested parties should the parties fail to agree on the appointment of the arbitrators to deal with their dispute).
            • The other issue which may arise is when a party initiates say an action in the courts or in the consumer forum instead of arbitrating as may be provided in the contract.
              • Section 8 of Indian Arbitration and Conciliation Act 1996 allows a party to seek a stay of proceedings and instead refer the parties to arbitration should this be accomplished prior to or at the time of filing a defence in the action initiated.
              • With respect to action under the Consumer Protection Act, the Indian Supreme Court in M/s Emaar Mgf Land Limited vs Aftab Singh held that unless there are any special remedies provided by other acts, there is no bar in pursuing the matter through arbitrationxiii.
  4. Moving on to the problem question on the recovery of unpaid charges held by the LO’s customer for cargo claims, we respond as follows:
    1. The first question to be asked is whether the clients / cargo interests are entitled to hold / set off outstanding charges / freight. The Indian Contract Act 1872 has no explicit provisions related to set-off. The Indian courts have permitted set off both on legalxiv and equitable basisxv. In contrast, equitable set-off of freight is not available under English Lawxvi. The English rule against set-off is however only available for freight and not for freight forwarding chargesxvii. This being the case, unless the contract expressly provides against set-off, say by providing the same in the STC, it is submitted that the clients / cargo interests may be entitled to set-off.
    2. If the cargo is insured, the LO should direct their clients to claim from their cargo insurers in the first instance. The cargo insurers, on becoming subrogated, could pursue the LO for recovery but this would be on the basis of the applicable law and contract and not on the basis of undue commercial pressure. Accordingly, in order to avoid commercial pressure, it would be best for all LO’s to recommend to their clients to take appropriate cover for their cargo. Otherwise, this issue is bound to recur.
    3. LO acting as Carrier
      1. If the LO is acting as a Carrier, they would be entitled to either exclude or limit liability depending on the specific carriage laws / conventions applicable. If the sums held exceed these amounts, the LO should seek the excess amounts. Alternatively, the LO could wait for the time bar to engage and then seek the return of complete sums held on the basis that the cargo claims are time barred.
      2. In the event the loss occurred prior to or after the carriage, the LO may not be entitled to the provisions of the compulsorily applicable carriage laws / conventions. In this case, contractual provisions (say by use of STC’s) or common law would apply. Provision of a well-crafted STC will assist in either excluding or limiting liability for these losses.
    4. LO acting as Agents:
      1. LO can only be liable if they are personally negligent or at fault. However, opponents may insist that they were only contracting with the LO and not with third parties.
      2. Again, use of a well-crafted STC will assist in ensuring that the clients are aware of the correct contractual party to pursue. If there is an element of fault / negligence on the part of the LO, STC’s would also entitle LO to either exclude or limit liability.
    5. Dispute Resolution Process
      1. Given the inherent delays and costs incurred in pursuing recovery claims, it is appropriate to consider a Tiered Dispute Resolution Clause. This clause should also provide that claims below a certain amount are conducted by way of an expedited process with fixed costs (say Small Claims Procedure and Very Small Claims Procedure).
      2. Various shipping and logistics associations should take ownership of the dispute resolution process so that time and expenditure incurred for dealing with claims is kept to a minimum or at least commiserate to the amounts at stake (including the cargo interests).
      3. In the absence of any such processes available,  the LO should  must consider the costs for pursuits and should if not make commercial sense, absorb the claim costs as costs of doing business.
    6. Transport Liability Insurance:
      1. If the LO is insured, they should submit their claim to the liability insurers without delay so as to avoid any prejudice to their rights available under the policy. Most of the Insurance policy conditions invariably give the right to the Insurers to take over the conduct of the claim subject to it being established that the Insured  fulfilled their obligations provided under the policy i.e. such as contracting on the basis of compulsorily applicable cargo laws / conventions or approved STC’s.
      2. Given the charges are being held in relation to damage to cargo, the costs of pursuit for recovery would be a part of the total limit provided under the cargo liability cover. However, the policy would also require risk participation from the Insured by way of contribution by way of Deductible (the first portion of the loss) and which ranges from say USD 2,000 (approx. INR 146,679.21 as on 28th July 2020) to USD 2,500 (approx. INR 187,099 as on 28th July 2020) any one incident or occurrence.
      3. Insurers would also consider the costs of defence and pursuit and decide whether they wish to take this route. However, as the LO is insured, subject to the policy wordingsxv, they would be entitled to recovery of any charges held by their clients / cargo interests.
  5. Concluding remarks:
    1. Issues such as these could be avoided by ensuring that Clients are aware of the LO’s terms of engagement.
    2. Client/Cargo Interests should be encouraged to take an appropriate cargo insurance cover to cater to the risks of loss or damage to the cargo during the voyage.
    3. Finally, the LO should ensure to incorporate specific terms providing for prompt payment without any rights of set-off together with appropriate dispute resolution procedures enabling them to make economic recovery for costs/charges being held.

i. This article should not be considered as a legal advice. The views expressed here together with all errors are entirely ours.
iiFor a complete commentary on this act, please see our earlier article https://nau.com.sg/unintended-consequences-of-the-indian-mtga-1993/
iii. A Freight Forwarder was defined in “Jones v General Express” an English case as willing to forward goods for you … to the utmost ends of the earth. They do not undertake to carry you, and they are not undertaking to do it either themselves or by their agent. They are simply undertaking to get somebody to do the work, and as long as they exercise reasonable care in choosing the person to do the work, they have performed the contract.”
iv. All exchange rates shown in this article are from www.xe.com/ucc
v. See our earlier article on Standard Trading Conditions and its importance to Transport Operators at  https://nau.com.sg/standard-trading-conditions-and-its-importance-to-transport-operators/
vi. Failure to fulfill the contractual obligation of contracting on the basis of approved STC’s provided in the policy wordings may lead to the Insurers either denying cover or providing cover on the basis that the STC’s were incorporated with the balance exposures borne by the Insured themselves.
vii.See our earlier article on Mis-delivery of cargo – Time Bar which can be viewed at http://nau.com.sg/mis-delivery-of-cargo-time-bar/
viii. We thank Mr Rohan Janardhan of Rex Legalis for his informal advice on the application of time bar provisions under Indian law.
ix. The Malaysian Supreme Court in New Zealand Insurance Co Ltd v Ong Choon Lin denied the application of a time bar clause in an insurance contract due to the operation of S 29 of the Malaysian Contracts Act 1950 as it limited the time within which the respondent could enforce his rights under S 6(1)(a) of the Limitation Act 1953. Incidentally, the Malaysian Contract Act 1950 is modelled on the Indian Contracts Act 1872.
x. We have conducted a web search and note that LO’s using the FFFAI have differing limitation amounts incorporated in the standard trading conditions which they use. We would recommend standardization of the limitation amounts, so it becomes the industry norm such that the cargo interests are aware of this as being the custom of the trade. Additionally, this would assist in the enforcement of the limits should this be litigated or arbitrated as provided in the contract. Hence, should the LO act as agents or the loss occurs outside the ambit of carriage, the provisions of the STC’s should assist either in excluding liability or limiting liability.
xi. In the interests of disclosure, the author is a Supporting Member of the LMAA and a member and panel arbitrator of the SCMA.
xii. LMAA arbitrator fee’s for Small Claims (upto a claim and counter claim of US$ 100,000) is fixed at £4,000 (approx. US$ 5,157 as on 28th July 2020) and which may be increased up to a maximum of £2,500 (approx. US$ 3,223 as on 28th July 2020) which exceeds the amount of the counterclaim and with the costs capped at £5,000 (approx. US$ 6,443 as on 28th July 2020) and  £6,000 (US$ 7732) if there is a counterclaim. SCMA fee’s for Small Claims (up to a claim and counter claim of US$ 150,000) arbitrator fees is fixed at US$ 5,000 and US$ 8,000 if there is a counter claim and with the costs capped at US$ 7,000 or US$ 10,000 if there is a counterclaim.
xiii. We again thank Mr Rohan Janardhan of Rex Legalis for updating us on this case law.
xiv & xv. See Article written by Amit Bansal and which can be viewed at http://www.lawyersupdate.co.in/legal-articles/doctrine-of-equitable-set-off-approach-of-indian-courts/
xvi. See The Aries [1977] 1 WLR 185 (HL), an English court judgement which stated that  setting off a counter-claim against the freight claim was not permissible and the carrier was entitled to a summary judgment even if there was a considerable counter-claim with a realistic chance of succeeding.
xvii. See  Globalink Transportation and Logistics Worldwide LLP v. DHL Project and Chartering Ltd [2019] EWHC 225 (Comm) where the English Commercial Court has confirmed that the rule in The Aries, which precludes set-off against freight, does not extend to sums payable to a freight forwarding agent for arranging carriage under a freight forwarding contract.
xvii.See TT Club Transport and Logistics Operator Wordings 2020 and in particular Clause 1.2 of T5 costs and which states “ Costs arising from investigating an accident which may give rise to a claim and protecting your interests in relation to it (including legal and survey fees) – including the costs of recovering a debt if payment is withheld solely because of a claim.”
***. We thank Mr Rajakrishnan of Tristar Container Services Pvt Ltd for correcting the limitation amounts for the Air Carriage Act. 

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