When its Korean creditors pulled the plug on Hanjin’s financing in the last days of August, its fleet was reportedly carrying 530,000 teu (20-ft equivalent units) in manufactured goods and about US$5bn in debt.
With the country’s biggest container shipping line moving about 7% of the transpacific market alone, the ramifications are being felt throughout the length and breadth of its supply chain, with every link now facing potential losses. If there was ever a classic case study for the connectivity of 3rd-party risk in the modern supply chain, Hanjin’s collapse is it.
Cargo owners, some of whom didn’t even book with Hanjin, have taken to the courts to retrieve the more than $14bn in goods stranded on the carrier’s vessels across the globe. It will not be an easy task; some terminal operators are refusing to berth Hanjin’s ships without a cash advance, money which the line is struggling to produce.
One terminal operator in Hong Kong is charging cargo owners just over $2,500 for each 40-ft box to unload their goods (with half refunded when they return the box). The city’s cargo owners are outraged at the price, but have little alternative other than to pay, as they have no contractual relationship with the terminal operator.
Others have also used the bankruptcy to their advantage: Spot rates on the transpacific and Asia-U.S. east coast trades jumped 40-50% immediately after Hanjin’s collapse.
In the U.S., the fallout is playing out in several courtrooms: In New Jersey, a federal bankruptcy judge refused to pave the way for several fuel and towage companies to seize Hanjin’s ships to collect on liens they hold for unpaid goods and services. According to their lawyers, they had little chance to recover their losses in Korea, where the courts are far less likely to recognise the liens. At the same hearing, legal representatives for cargo owners were equally frustrated about their inability to retrieve their goods from the ships of Hanjin’s CKHY alliance partners—Cosco, K-Line, Yang Ming and Evergreen—with whom they had no commercial contracts.
Container lessors have also been left holding the bill. Representations in the same New Jersey courtroom revealed Hanjin to be in possession of 20,000 units from one U.S.-based lessor, whose agreement obligated the carrier to return them to Asia. As Hanjin is in no position to do so, the lessor suggested to the court that the cargo owners should have to foot bill for repositioning (estimated to be up to $20M), a request the judge has rejected.
In the past week, Hanjin has sought and was given limited protection against seizure of its ships in the U.S., as well as from vendors seeking to break service contracts. Several freight forwarders have been advised by their legal teams to withhold payments to Hanjin for shipments already delivered until the shipments presently stranded are also in their hands, worsening Hanjin’s cash-flow crisis.
In response, Hanjin has been reported to be considering taking legal action against forwarders who have failed to fulfill the volumes they were contracted to deliver.
Cargo owners, truckers and marine transport intermediaries are all being advised to protect themselves. All this before the major retailers begin to seek potential compensation for the shelves that are in danger of being left empty for the peak Christmas shopping season.
What to do
Each client’s situation is unique; however below we seek to provide some possible actions you may wish to take with regard to managing the situation.
For each issue we would recommend that clients consult with their legal advisers in respect of how to address the bankruptcy/receivership issues that have arisen to date. We are unable to offer any legal or bankruptcy/receivership guidance.
1. Locate cargo
Cargo owners and freight logistics providers can identify the location of their cargo through the Hanjin website
In some cases cargo originally delivered to Hanjin may be in the hands of third-party logistics contractors, and our understanding is that some of these contractors may release cargo if the cargo owner satisfies the freight obligations that have not already been paid. If that is the situation, clients may wish to take action to recover the cargo even if there are additional costs. Clients should always consult with their independent legal advisors as to their specific situation.
2. Keep accurate records and provide notice
Keep accurate records of costs in addressing the current situation, place underwriters on notice of potential losses if claims may fall within their policies.
3. Review insurance policies
A case-by-case and policy-by-policy review may be necessary to determine whether there is insurance in place to cover damaged cargo in the possession of Hanjin and to determine whether additional forwarding costs are covered. However, we have the following observations:
The “Delay Clause” contained in many marine cargo policies usually excludes all claims for loss of market or for loss, damage or deterioration to the cargo itself arising from delay, whether caused by a peril insured against or otherwise, unless such claims are expressly assumed by other provisions written into the policy. Delay claims are also usually excluded under both the “S.R.&C.C. Endorsement” and the “War Risk Policy.” Most shippers’ interest policies contain this endorsement.
The “Marine Extension Clause” likewise usually excludes loss, damage or expense proximately caused by delay or inherent vice or nature of the subject matter insured. Loss or damage arising from the other insured perils remains in place during the delay, but not the losses arising directly from the delay. A review of the relevant wording will show what is under the scope of cover and what is not.
An “Insolvency Clause” excludes losses caused by carrier insolvency. The Willis Towers Watson forms usually do not have this exclusion. However, the standard Institute Cargo Clauses do contain the exclusion so it is always prudent to check which clause applies.
Forwarding expense clause
Many cargo policies include a “Forwarding Expense Clause.” This clause may allow for recovery of additional expenses incurred related to the storage, transshipment, and transit to destination when an insured voyage is disrupted. Insurers may also be responsible for additional charges and legal fees which are incidental to the release, storage and/or onward shipment of the insured cargo which are incurred by the insured.
Freight forwarders and logistics providers should review their customer contracts to determine whether they are protected from the insolvency of carriers. They may have coverage under a freight liability policy if they have language in their policy akin to:
To indemnify the insured in respect of: Liability for, or arising out of loss or destruction of, or damage to goods, or delay in delivery, howsoever caused during the period of insurance stated, under Common Law, Contract, National or International Convention, or by Statute.
Typically, each situation will be unique and will need to be considered on its own merits, taking independent legal advice where necessary. If you have any questions, contact your usual insurance broker for guidance.
This publication and all of the information material, data and contents contained herein are for general informational purposes only, are not presented for purposes of reliance, and do not constitute risk management advice, legal advice, tax advice, investment advice or any other form of professional advice. This document is for general discussion and/or guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.