12 Oct 2016
Hanjin Shipping Bankruptcy Case: The Lessons to be Learnt by Traders
Ever since Hanjin Shipping filed for bankruptcy protection on 31 August this year, its vessels have been arrested, while ports are refusing to berth or work on Hanjin ships, leaving billions of dollars’ worth of goods stranded at sea or at port terminals. This has affected every creditor, service provider and shipper who has had business dealings with Hanjin, including ship owners, ports, freight forwarders, exporters and importers. While creditors are striving to submit their claims to the court in Korea by the deadline of 25 October, shippers and cargo receivers are still trying to regain control of their cargoes and arrange on-carriage to their final destination.
Fung King-Tak is a Partner with the legal firm of Stephenson Harwood. He specialises in Banking and International Trade Law and Practice. He believes that, although the chaos caused by Hanjin to date will possibly be resolved in due course, the case has exposed the repercussions of ignorance or neglect when it comes to overlooking the impact of international commercial terms (Incoterms) on sales, shipping, insurance and L/C contracts.
Speaking at a recent panel discussion relating to the Hanjin Shipping case, Fung said should the cargoes, which have been kept at the container yard pending the arrival of Hanjin vessels, have been damaged prior to loading, the exporter would be fully liable for any loss or damage as the risk had not been passed to the buyer under the FOB terms. It is therefore advisable, he said, to use FCA instead of FOB with regard to container shipments. Under FCA, the risk of loss of - or damage to - the cargoes would pass to the buyer once the container had been delivered to the carrier at the container yard. It therefore follows that the buyer would have an insurable interest and could claim on its marine insurance policy even if the cargoes had been damaged prior to having been loaded on to the carrying vessel.
Moreover, should exporters misunderstand and misuse the 11 Incoterms (E, F, C and D groups) in the sales contracts, they would be disqualified from claiming on their export credit insurance policy and had no right to claim the purchase price from the buyer under the terms of their underlying sales contract.
With specific regard to Hanjin, Fung said, had the buyer been using a shipment contract - with the "E", "F" or "C", group of Incoterms - even though the cargo was stranded at sea or not delivered to him, he would still be liable to pay the purchase price. This is because, once a shipment is effected, the seller has fulfilled his obligation under the sales contract and the buyer is then obligated to pay the purchase price. The buyer is not allowed to apply for an injunction to stop payment under an L/C unless a case of fraud can be established. However, if an arrival contract had been used - using the D group Incoterms, such as DAP, DAT and DDP - the seller would not have fulfilled his obligation until the cargo had been delivered to the agreed destination, thus the buyer would not yet be liable to pay.
In this case, the seller cannot claim on his credit insurance if the policy only covers the insolvency risk of the buyer. With reference to the Hanjin case, if the goods could not be delivered, it would be deemed a dispute. Under FCI arrangements, if the dispute is finally settled in favour of the seller, the buyer will have to pay as the FCI covers the non-payment risk of a buyer only in cases without any dispute.
It is, therefore, important for exporters to understand the risk exposure of using DAP, DAT and DDP terms in sales contracts, said Fung. He also pointed out that, in order to ensure the right to claim on the marine cargo insurance for any damages caused by the insolvency of the shipping company concerned, the insurance policy should be based on the 2009 version of the Institute Cargo Clause (ICC) (A) rather than on the 1982 version.
In the case of freight forwarders, who act as contractual carriers, they will be responsible for transporting the goods to the destination port and bear any additional costs incurred if the cargo is discharged at any port other than the designated one. A contractual carrier cannot abandon any cargo unless a formal confirmation is received from the shipper to that effect.