September 28, 2016

Cost to retrieve Hanjin cargo will hit importers hard

Even as they bear the additional costs of rescuing their stranded goods, shippers will still have to pay the original freight bill.

By Toby Gooley

Nearly a month after the collapse of Hanjin Shipping Co., the world's seventh-largest container line, the most pressing issue now facing the Korean carrier's customers is how to retrieve the estimated $14 billion worth of goods still on board its container ships.

Hanjin's collapse has left vessels and containers stranded at or near ports worldwide because there had been no money to pay for the loading and unloading of containers. Terminal operators at a number of ports have refused to release Hanjin's containers until the cargo's consignees paid either a security deposit or the terminal-handling fee that the carrier would have normally paid. The Hong Kong Shippers Council decried that practice, calling it an illegal lien on Hanjin's customers that should rightly be levied against the carrier.

Thanks to a late infusion of cash from investors and creditors, Hanjin can now cover the cost of docking and unloading for some of its ships. The carrier, which left the maritime supply chain in chaos when it filed for bankruptcy protection Aug. 31, has been discharging containers in countries or ports where its ships are protected from seizure.

Once containers leave the vessel, customers will have to pay to retrieve their own goods. It won't be cheap. Hanjin has said it will only provide port-to-port delivery and has "disavowed" any on-forwarding or inland delivery it had contracted to perform under its through bills of lading, according to Richard L. Furman, an attorney with the law firm Carroll, McNulty & Kull who specializes in international and domestic transportation and trade. The shipper, the consignee, or the ocean consolidator (also known as an NVOCC) can be responsible for paying any handling charges required to release the shipment, as well as on-forwarding and inland delivery, Furman said. As a practical matter, however, the importer in the country where those services are contracted will be responsible for payment, he said in an e-mail.

This creates a potential nightmare for importers. In many cases, containers are being discharged far from their intended destinations. The additional costs could include such things as freight charges for a substitute carrier, the container and chassis rental, and local and inland drayage for both the full and the empty container. All of this is on top of the freight and ancillary charges that were specified in the original bill of lading.

"A lot of shippers don't understand that the carrier holds the cards when you have a situation like this," said Rick Bridges, a vice president with the international insurance firm Roanoke Trade, in an interview. "The bill of lading is a contract the shipper and carrier have agreed to. The carrier can legally, by the 'hindrance' clause, end responsibility for the cargo wherever it chooses," he said. "For example, you could have cargo coming from the Far East to the U.S., and Hanjin could decide to unload in Australia. You still owe the full freight amount, and now you also have to pay to get your cargo to its original destination."

Things are only slightly better for exporters. Hanjin previously said it would require exporters that had already loaded their containers to strip out the contents and return the empty boxes at their own expense. The carrier told a federal bankruptcy court on Friday that it would not charge U.S. shippers for the late return of boxes.

CONTRACT COMPLICATIONS

Hanjin is a member of the CKYHE vessel-sharing agreement (VSA), and many of the containers on its ships belong to the other VSA members: COSCO Container Lines, "K" Line, Yang Ming Line, and Evergreen Line. Because those shipments were carried under the other carriers' bills of lading, Furman said, those carriers "are responsible for performance of their contracts of carriage as if they were on one of their own vessels."

But nothing is simple, he added. The other carriers' contract of carriage and tariff rules, any service agreement they may have with a shipper or NVOCC under which they agreed to transport goods, and the terms of the VSA agreement with Hanjin may also come into play.

"It is my opinion that VSAs will have the first responsibility to secure the offloading of their goods from the Hanjin vessels, at their expense, and then work out the rest with the cargo interests and their agents as to who will bear any additional costs as a consequence of the situation, and if and to what extent the VSA members bear any liability for loss, damage, or delay that occurred to the goods while held up on the Hanjin vessels," Furman said.

Although service contracts, the annual agreements between shippers (including importers, exporters, NVOCCs, and shippers' associations) that specify pricing, terms of service, and performance obligations for both customer and carrier, are legal contracts, Hanjin may now be off the hook to some extent, according to Furman. That's because, in general, the terms of such commercial agreements "cannot obviate or override the bankruptcy code or the discretion of the court to administer the estate of the bankrupt," he said.

Yet service contracts could potentially cause additional tension between Hanjin and NVOCCs, a major part of the liner's customer base. Carriers' rate agreements with consolidators generally provide cheaper box rates in exchange for a commitment to book a minimum number of containers over a specified period, said Furman. It is safe to assume, he said, that many of those agreements will not be fully performed by NVOCCs due to the bankruptcy. This would result in a technical breach of the agreement, which ordinarily would "entitle Hanjin to demand the higher container rate that would have been charged if no rate agreement existed," Furman said.

The concern for NVOCCs, he explained, is whether the trustee or receiver of Hanjin's bankrupt estate will seek to recover the additional freight charges due as a result of the NVOCCs' inability to meet the volume commitment in their rate agreements, even though they were prevented from doing so by the bankruptcy. "It seems illogical that such an eventuality might arise, but stranger things have happened," he said.

Shippers that are looking to their cargo insurance carriers to cover the extra costs they incur as a result of Hanjin's bankruptcy should clarify with their insurer what would be covered and what would not, Bridges said. For instance, a shipper can't just abandon cargo and expect insurance to pay for that loss. "Under most cargo policies you're obliged to get your shipment to the intended destination and to minimize physical loss or damage," he explained. "Abandonment is not an option unless the shipper wants to bear all of the costs itself." Every policy is different, however, and Bridges and other experts recommend that if they haven't already done so, cargo interests notify their insurance provider now that they may file a claim, and discuss coverage details.

About the Author

Toby Gooley
Senior Editor
Before joining DC VELOCITY and its sister publication, CSCMP's Supply Chain Quarterly, where she serves as Editor, Toby Gooley spent 20 years at Logistics Management covering international trade and transportation as Senior Editor and Managing Editor. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

More articles by Toby Gooley

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