News / Liability warning to forwarders as they take more control of supply chains

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Freight forwarders that have taken over container supply chain management for blue-chip shippers could face a massive increase in liabilities their existing insurance policies may not cover.

Matthew Wilmhurst, an associate at UK law firm Holman Fenwick Willan, told the JOC’s Container Trade Europe event in Hamburg last week that changes in the way western retailers subcontract their supply chains, combined with the advent of ultra-large container vessels and vessel-sharing agreements between lines, has left many forwarders dangerously exposed.

“The change in the way western retailers are buying their freight services from freight forwarders is impacting forwarders’ position in the ULCV casualty context,” he said.

Traditionally, freight forwarders have acted under an agency agreement with the retailer, with a separate bill of lading contract signed between shipping line and retailer.

“The role of freight forwarder here was relatively simple,” said Mr Wilmhurst. “Arrange the sea carriage and perhaps arrange carriage at destination, as well as providing a few other value-added services.

“Under this model, the forwarder was only acting as an agent, so from an English law perspective his duty to his customer, the retailer, was limited to only in providing due skill and care in selecting the ocean carrier into which it puts its customer contract. From a legal perspective it’s an obligation which is pretty easy to discharge by putting the cargo with one of the major container lines.”

Because the forwarder wasn’t a party to that contract it did not have any further rights, obligations or liabilities to that contract and carriage.

However, Mr Wilmhurst added: “But that role is changing – retailers want forwarders to have greater control of the supply chain, which means there is a totally different contractual regime. Western retailers are consolidating their supply chains in order to leverage their buying power and using fewer people, and essentially they want one person they can claim against when things go wrong rather than lots of different shipping lines and perhaps lots of different hauliers.”

This has meant forwarders tend now to act as a one-stop shop and have set up non-vessel-operating common carrier subsidiaries to issue bills of lading, which legally means they are acting as the principal with the carrier, “so there is a slightly different contractual arrangement”.

“There is framework agreement between the retailer and forwarder, which uses its NOVCC to enter B/Ls contract of carriage with the carrier itself. So the forwarder is now assuming those contractual obligations and liabilities under the contract of carriage with the carrier and this where some of the problems for forwarders could arise,” he said.

Firstly, Mr Wilmhurst explained, these retailer-forwarder framework agreement normally contain KPIs on delivery times of imported cargo, which not only acts to benchmark performance across a contract period and is likely to be used for contract renewal, but also has the possibility of financial penalties for missing KPIs.

“With ULCVs, it means that more cargo for the freight forwarder will be carried on board one vessel, so when there is a casualty involving one of these ships there is likely to be a severe knock-on effect on these KPIs,” he said.

However, possibly more worrying for forwarders is their NVOCC arm entering into a contract with the container shipping line, with the B/L including a number of clauses about items such as misdeclared cargo and providing security for General Average and salvage.

“In terms of exposure on a ULCV, if you are talking about the loss of an entire 20,000 teu vessel and the cargo, you are looking at something well in excess of $1bn. I had a salvage claim on a 9,000 teu vessel in the last year where the combined value of the ship and cargo was just over $500m.

Under the traditional model, the forwarder was under no obligation to contribute to GA and salvage. Under general average rules the merchant – the shipper – has to provide security for General Average and salvage, and its cargo insurance typically relied on insurers to provide for that security.

Mr Wilmhurst said: “But under the new model, the forwarder is now responsible for that.

“However, many freight forwarders’ liability policies typically won’t respond to that type of demand. Many forwarders’ liability policies will not have the same obligation on the insurers, so forwarders are left in the difficult position of the container line asking for salvage security while the customer demands delivery of the cargo – but he has no mechanism whereby he can offer the same salvage and GA security.

“At the same time, shipowners can limit their liability outside of the normal regime but forwarders can’t, and forwarders could potentially receive very significant claims from customers because they are the principal, but what they are able to recover from the shipping line may be significantly less than what they pay out – and the larger the ship, the more cargo carried and the greater this problem will be,” he said.

He also warned that this could be exacerbated if cargo is carried on a vessel on which there are a lot of slot charter arrangements with other lines or are operated as part of an alliance.

“The forwarder also has no way of influencing the dispatch of cargo that is subject to a casualty. The VSA would have provision over General Average – when the line has to absorb it and when there needs to be a discussion with its VSA partners about whether they should declare GA.

“All the power is with the lines and VSA partners, not with the forwarder, who is effectively acting as a carrier – this is very difficult for forwarders and NVOCCs despite the fact they are controlling huge amounts of freight, but because they don’t own the assets they have no influence over what is happening on the ground.”

He did, however, suggest that the growing power of forwarders might lead to this balance of power being redressed.

“I suspect that forwarders and NOVOCCs, given the amount of contractual liability they are taking on and the huge increase in potential liabilities, will try and see that balance of power change somewhat,” he said.