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

GUIDE: Marine Cargo Insurance

Marine Cargo Insurance basically insures the owners of cargo for loss of, or damage to, it during a voyage either wholly or partly over water.

Because these insurance policies are relatively complicated and need to offer different levels of cover to different assureds, but they often need to be generated and agreed quickly for urgent shipments, sets of 'standard wordings' are often used by underwriters writing this kind of business.

The most common wordings are those of the 'Institute of London Underwriters'*, known as:
1) Institute Cargo Clauses A (provides the broadest cover, but also the most expensive)
2) Institute Cargo Clauses B (less cover, less expensive)
3) Institute Cargo Clauses C (least cover, least expensive)

There are also standard wordings for these additional risks:
1) War Clauses
2) Strike Clauses

Incoterms (International Commercial Terms)

Incoterms basically give legal clarity of the meaning of terms frequently used in iternational commercial conrtracts. The full descriptions are available here, but essentially they describe who is responsible for cargo and insuring it at varisou stages of transit. There used to be many categories, but now only three remain D, E and F.

Many exporters sell their cargo on a CIF (Cost, Insurance and Freight) basis, so the seller promises to arrange the cargo insurance. If a seller sells goods on an FOB, Ex Works or similar basis, then the buyer arranges his own cargo insurance. This can be risky, because usually the goods are not paid for until after delivery. If the goods arrive in a damaged condition, or an allegedly damaged condition, the buyer may simply refuse to pay for them. In this case, as the exporter has not taken out the cargo insurance, they have no one to appeal to for compensation. Special, relatively cheap, cargo cover has developed to cover only this situation, it is known as 'Contingency (seller's interest)' insurance. 


Common Types of Cargo Cover


Open Cover – This is the most common type. It covers a type of movement for either a set number of movements or over a set period of time. Each individual movement need not be notified to the insurer (for example, if you owned a factory in China exporting rubber ducks to the USA, and sent 10 shipments of one container each a month you could take out open cover for moving rubber ducks from China to the US by container and all your shipments would be automatically  insured).

Specific ('Voyage') Policy – This is cover for an individual shipment, usually high value or an unusual one for the exporter (sending a set of generators to Iraq, where you usually only ship to Europe and the USA for example).

Contingency (Seller's Interest) Policy – As described above, this is the cheapest insurance available. It specifically covers the situation where a seller is sending cargo overseas and the buyer arranges the cargo insurance. If the cargo arrives damaged the buyer may not pay for it and fail to make a cargo insurance claim, or make such a claim but fail to then compensate the seller or pay for the goods. 


Export Credit / Trade Credit - This type of insurance covers sellers exporting goods to customers in a new market. It repays the seller for the cost of the goods where they are shipped to a foreign country and then not paid for due to a fraud or because the buyer has gone bankrupt.


Premium

Cargo premium is generally calculated on the following basis:
1)  The value of goods insured (possibly with an increase to insured value to account for lost profit)
2) The type of goods (highly valuable, dangerous, toxic etc.)
3) The dangers faced by the goods (modes of transit, area, length of journey etc.)


Related Terms


General Average – All cargo must pay a portion of the damaged cargo on the basis that it was sacrificed to save the remaining cargo. Good examples include: cargo wet damaged when sprayed with water in a fire fighting action onboard. Generally the carrier will not release safe-landed cargo in a GA situation until a contribution to the damaged cargo is paid. If insured the insurer will pay this or post a bond for it to allow the cargo to be released.


Particular Average – A situation where the loss or damage to a cargo is borne only by the owner of that cargo, usually the shipper. 


Both-to-Blame Collision Clause – In the event of two ships colliding at sea where both are at fault, all vessels and cargo (by way of their hull or cargo policies) shall proportionately pay their share of the total losses based on the value of their cargo.


Sue and Labour Clause - A standard clause in a maritime insurance policy which allows the insured to recover from the insurer any reasonable expenses incurred by the insured in order to minimise or avert a loss to the insured property, for which loss the insurer would have been liable under the policy.


Facts to Note


Cargo which is insured against "All Risks" is not insured against "all losses", only losses caused by a "fortuity" in transit.

* The Institute of London Underwriters (ILU) recently merged with a re-insurers organisation (LIRMA) to create the International Underwriting Association of London (IUA).