The Risks of Shipping Cargo Overseas

A reader recently got in touch with a problem related to the above, looking for some help. They, as a manufacturer of goods had received an order from an overseas company and shipped a batch of their product to a foreign country, in a container, with a container line. However, the buyer never paid for the goods and didn't collect them either. The line was then claiming storage charges and they didn't know what to do as the buyer wasn't responding. 


Shipping lines will often charge this 'container demurrage' if goods are not collected and they must place them in storage. The cost can exceed the value of the goods in the container and you then risk the container being sold at a salvage auction to pay off the costs.

However, if your documents are all drawn up correctly you should not find yourself in the position where you have liability for these charges and no right to actually take possession of the goods. In giving some general advice on the matter to this reader I considered that a review of the processes at hand might be useful. The international transport of goods is risky, especially to new markets or customers, but often these new avenues of sales will open lucrative opportunities so it is all about minimising the risk. This can be done in four ways, as follows:

1. INCOTERMS
Ensure that your sales contract contains appropriate delivery terms. This can be easily achieved by selecting the correct INCOTERM (standard form international commercial terms drawn up by the International Chamber of Commerce) and using that in the Sales Contract. This determines who will do what and when the risk in the goods passes to the buyer.

You will probably want to just deliver the goods onto the ship in port (FOB) or may want to get them all the way to destination port in delivery country (CFR) or even direct to the buyer's door (DDP). This avoids arguments about whether you have done what you should have done in respect of the transport of the goods.

2. PAYMENT TERMS
You should arrange payment terms that match the risk of default and value of goods involved. Rather than sending goods to a customer in a foreign country on 30 days invoice terms and then chasing someone you barely know for payment in a foreign country, you should use a Letter of Credit or similar system, whereby you can use respective banks to essentially swap the cargo documents (which will allow collection of the goods) for payment or a guarantee of payment.

This avoids the problem, especially in new business relationships, that a seller doesn't want to release goods without payment and the buyer doesn't want to give over money without having the goods. A common process is that the manufacturer brings the goods to port and puts them on the ship, the ship checks them and signs off a Bill of Lading confirming x goods received onboard the ship. The shipper gives the Bill of Lading to the bank, who then releases the funds from the buyer's account and gives the buyer the Bill of Lading. They can then turn up at the discharge port and collect the goods.

3. CARGO CONTRACT
It is important to ship the goods on terms which allow the sales contract to be completed. For instance, if you send the goods off under a Sea Waybill (not negotiable) and the buyer doesn't pay then you will have a problem, as the ship will only deliver them onto the named received. These Bills cannot be endorsed. Similarly, if someone pays you in advance and you ship on a non-negotiable Bill of Lading to the named buyer, this might cause a problem if they were planning on selling on the cargo (trading it) during transit, and endorsing over the Bills to another party. Making sure this is agreed in Sales Contract should avoid problems.

4. INSURANCE
Finally, as with everything, the best way to alleviate risk is to insure against it. If trading in new markets take out a form of export credit or trade credit insurance (protecting you against the buyer defaulting and leaving you with unwanted costs and losses). If shipping on, say, CFR terms, the buyer will arrange his own cargo insurance but you will arrange the transport and shipping of the goods. What can happen here is that you ship the goods and the buyer contacts you to say they are damaged, so refuses to pay for them or pays less than the contract price. You can't claim the difference because the buyer has placed the cargo insurance and has the right to claim under that insurance. Of course they should then compensate you but this may not happen. There is a special type of cargo insurance - a Contingency (Seller's Interest) Policy - you can take out to cover this risk.

A marine insurance broker will be able to advise on which coverage is most appropriate for your needs and whether individual voyage or annual policies would be more cost effective in your circumstances.


Image Credit: Time Caynes

Laytime & Demurrage: A Back-to-Basics Guide

One of the more mysterious elements of shipping law, at least to the uninitiated, are the issues of laytime and demurrage. I thought, for this reason, that it might be useful to do a 'bare bones' guide to the area. As with other areas identified many people use the terminology incorrectly so don't get confused by people saying apparently contradictory things. 

This area of shipping law deals with the general principle that if you charter (hire) a ship to move cargo from A to B at a set price (i.e. a voyage charter), then you should pay the ship compensation if it gets held up whilst loading or discharging the cargo you wanted to move, i.e. if you delay in getting your goods to the port and the ship's journey takes 2 days longer as a result, you should compensate the ship for those 2 days lost. Here is the framework that has developed, in simple terms. 

Ships are not like trains and cannot confirm absolute timetables for being in place A to B, especially when they are 'tramping' (just going where ordered next and not between set ports). So, when you enter a charterparty to hire a ship to move your goods the ship is given Laydays, being the period of days in which the ship can arrive to load your goods. After this point comes the Cancelling Date; if the ship is not there by this date the charterer may cancel the contract, basically because the ship is so late they either no longer wish to move the goods or wish to use another ship. This period is sometimes referred to altogether as the Laycan (Laydays + Cancelling).

When the ship arrives to load or discharge it tenders a Notice of Readiness (NOR) to the charterer, stating that they are ready to load / discharge. After a period of time (normally 6 hours) of giving notification it is considered reasonable for the charterers to have been able to start loading, so Layitme starts to run. Laytime is a period of time set out in the charterparty which gives the charterer an allowance for time to load (often 36 hours, but depends on trade and means of loading - oil tankers load faster than bulk cargo for instance). Once the charterers used up their laytime allowance time switches to Demurrage. Demurrage is a rate of compensation per day (or pro rata per hour) that they must pay to the shipowner for holding up the ship for longer than agreed. 

If the ship is held up for reasons for which the charterer is responsible but outside the running of laytime / demurrage then the shipowner can sue the charterer for Detention. Usually the compensation awarded for detaining the ship is the same as the demurrage rate, because the parties have already agreed a convenient compensation calculation for using the ship's time outside the contract so it is easy for the courts to apply this rate. 

GUIDE: P&I Cover

P&I cover is a type of insurance shipowners can take out for claims made against them by third parties. It would cover, for instance, claims for damage to cargo, for injury to passengers or crew and for damage to other ships in collisions. The cover is provided through mutual insurance orgnaisations known as P&I Clubs. They are ‘mutuals’ in so far as they do not set out to make a profit, but merely to ‘pool’ or ‘spread’ the risks of all their clients.

Nomenclature
The world of P&I has its own unique terminology. Risks are not underwritten but ‘covered’. There is not an insurer but a ‘Club’. There are not clients or assured, but ‘Members’. Vessels are not insured by the Club but ‘entered’ with it. There is not an insurance policy, but a ‘certificate’. There is not a policy excess but a ‘deductible’. There are not premiums but ‘Calls’.

General Facts
Usually P&I cover pays the full third party liability claim less the deductible. However, in respect of collision claims the Club only typically pays 1/4 of the claim, providing an extra deterrent for the Member to avoid collisions. Although today many Clubs will cover full liability (known as 'four fourths') for an extra fee.

As P&I Clubs are only generally concerned with third party liabilities they are not concerned with covering damage to the Member’s own vessel. This damage will be covered under a separate ‘Hull’ or ‘Hull & Machinery’ policy.

The 'Pay to be Paid' Rule
As the Clubs are indemnity organisations, they generally compensate the Member for claims they have had to pay to third parties for liabilities incurred in the operations of the vessel. For that reason the Member will usually have to pay a claim and then ask the Club to compensate them for the amount of that payment; they cannot just ask the Club to pay the claim directly. One exception is in personal injury claims where the Club will often agree to pay the claim without the Member having first paid it.

FD&D  Cover
Many of the Clubs now provide FD&D Cover as an optional extra. This stands for Freight, Demurrage & Defence. Essentially it means the Club will represent the Member in respect of extra elements of legal claims not typically covered by general P&I insurance.

The International Group
There is an International Group of P&I Clubs who have agreed to pool their very high value losses (in excess of USD 8 Million) to provide yet further security to their Members. They also work together for the benefit of their Members as a whole. There are currently 13 Clubs who are members of the group; with The Shipowners' Club being the largest in terms of number of vessels entered and GARD being the largest in terms of Gross Tonnage of vessels entered.


Sometimes it can be quite confusing to an outsider to understand all the Club's referred to in the market, as all have a 'management company' which runs the day to day business on behalf of the Club; it will underwrite business and pay claims and the surplus is held for the Club to cover catastrophic losses or years when a very high level of claims are made. Technically, or at least theoretically, the Clubs (being the Members acting as a group) could withdraw or fail to renew their management contract and appoint a new management company, but the relatively small size of the market and shortness of relevant skills amongst the workforce as a whole mean that such an event would be extremely rare. 


Many of the management companies share similar names to their insurer accordingly, but some do not. As a brief guide the Members of the group with significantly different management company names and some nicknames are therefore as follows:

- The American Club
- Brittannia
- Japan Club
- Gard
- The London Club - Managed by Bilbrough
- The North of England (North, NEPIA)
- Skuld
- The Shipowners' Club (Shipowners, SOP, SMP)
- The Standard Club - Managed by Charles Taylor
- Steamship Mutual
- The Swedish Club
- UK Club - Managed by Thomas Miller
- The West of England (the West)

Further Details
Each Club has its own set of Club Rules, which act like a copy of the insurance policy would if the risk were underwritten by a commercial insurer. Typically the certificate will merely state that the Member is entered with the Club subject to the Club Rules and confirm any variances, exclusions or additions, i.e. rather than recite those rules in full. 


All of the Clubs publish a copy of their own rules on their website but the International Group clubs, due to their pooling arrangements must have essentially common insurance cover in their standard Rules (in other words, despite using their own wording, the same risks are overall covered, and the same items are excluded or limited within that cover).