IT ONLY seems like yesterday but it has been almost 12 months since the attention of the global supply chain was focussed on the slow progress of Hanjin vessels through international waters towards their destination – whether that was the originally scheduled port or some other venue selected by an insolvency practitioner or Hanjin creditor.
It was a massive international problem. 68 Hanjin vessels were stranded at sea or in port in 23 countries with 540,000 TEU of cargo loaded in those vessels, much of which was intended for Christmas sales. In some cases, vessels were arrested on arrival and in other cases they cruised in lazy figures of eight to avoid that fate. At the same time, there were frenzied machinations in international law and finance as affected parties sought an orderly outcome allowing for the release and unloading of containers and their contents and the return of vessels to the appropriate jurisdiction.
It brought some interesting outcomes. Those in the supply chain waited for developments in urgent court proceedings such as in our Federal Court where those owed money by Hanjin were seeking to have their interests recognised to allow a “seizure” of a vessel (but not its contents). Other lawyers were acquainting themselves with the Korean Court of Commercial Rehabilitation and the ability to enforce its orders in foreign jurisdictions.
In Australia, the Hanjin California was “arrested” in Sydney and moved to the old container port at Glebe Island while competing creditors battled to establish their interests in Court. The Hanjin Milano remained at sea in Bass Strait outside the Port of Melbourne rather than run the risk of being arrested while lawyers sought orders to allow it to land without risk to its cargo, bunkers, fuel and oil. Ultimately, the Federal Court handed down an order on 23 September 2016 to allow the Hanjin Milano to dock without fear or arrest to the vessel or its contents.
The saga became big news in Australia where the arrival of the Hanjin Milano and speculation on the future of its cargo became lead stories and the press even resorted to seeking commentary from unusual sources with knowledge in the area. The extent of the desperation of the press became clear as even I was swamped with calls for comment on TV, in radio and in print. It took significant financial commitment from Korean Air Lines (as a major shareholder) and Hanjin executives to allow ships to be unloaded and the cargo in the containers to be moved through the supply chain although that movement was on unusual terms and conditions. For example, many consignees were required to pay for shipping and clearance twice as the first payment had been made to Hanjin with that money lost in the insolvency.
If the Hanjin insolvency wasn’t enough those in the Australian supply chain suffered the additional problems associated with the insolvency of the Australian line Great Southern Shipping (GSS) on 23 December 2016 while its first vessel was on its first voyage to Australia. Again there was recourse to unorthodox methods to get the vessel to the nearest port, unload its contents there and make arrangements (at additional cost) to have the containers sent here by other vessels.
The Hanjin and GSS issues raise some important issues to be taken into account:
- No entity, however large is free from the risk of insolvency. No party is too big to fail. Hanjin had been in financial difficulty since the GFC and operating at a loss since then. This was on the public record yet parties seemed to have misplaced confidence that it would continue to provide services. There have been some subsequent major consolidations in the container shipping market since Hanjin and GSS but even so, parties need to be cautious on the state of the marketplace and those providing services.
- Ensure that you have appropriate contracts in place with those providing services to you and then between you and those to whom you provide services. For example, you should have the right to terminate your contracts with a service provider on its insolvency and your contracts with customers should include provisions releasing you from liability on the insolvency of a service provider.
- Try and avoid direct exposure to service providers, for example by paying freight and related charges yourself. If possible ask your clients to pay those service providers direct. Similarly, look to clients to pay customs duty and GST to you in advance rather than paying “on account”.
- Be mindful that even if your contract with a service provider is effectively terminated by the insolvency of the service provider, you still have a duty to mitigate your loss and your client will have a duty to mitigate its loss. This may include the need to pay fees to arrange for other freight including payments to the insolvency practitioner in charge of your original service provider along with a new freight charge to another service provider for the freight.
- Be prepared to be practical. Having legal rights against an insolvent carrier are fine but they may only make you or your client an unsecured creditor in a massive insolvency here or overseas with little real prospect of recovery of moneys owing. For example, your rights and those of your client may only apply against the insolvent party and will not assist in a battle with the operator of the terminal where the goods are being held. That operator is owed money by the insolvent service provider and is in an excellent position to demand payments from other parties to have the containers released. The problem may become worse depending on the nature of the insolvency proceedings so be prepared to pay more than originally contracted.
- Make sure that you are dealing with the correct parties in charge of any service provider which has become insolvent. There could be actions here and overseas and identification of the correct party will not always be clear.
- If a service provider (such as a shipping line) demands payments of outstanding amounts to have cargo released make sure it is paid to the insolvency practitioner in charge of the insolvent entity and only then under arrangements which preserve any legal rights at the same time as making additional payments.
- The value of contractual rights will be limited by complex legal and practical issues. It is imperative to have insurance in place with provides “continuity of business” cover including coverage for legal costs and additional freight charges.
- Make sure that you manage the expectations of clients who will be fearful of the effect of any likely or actual insolvency. That includes advising on what is the real situation (where industry associations such as the CBFCA are vital) and ensuring that clients get practical advice along with advice on their limited legal rights. Most clients will have some degree of anger and distress about being caught up in the insolvency and while empathy is needed, quick practical decisions will advance their interests.
There are no easy answers in the event of insolvency of a party providing services to you and your clients. In many ways, the best option is to watch market indicators carefully, anticipate adverse events and appropriate responses and make sure that insurances are held to cover the risks of these adverse events.
Of course, as always, if pain begins or persists, see your lawyer.
* Andrew Hudson is a trade lawyer at Rigby Cooke Lawyers
From the print edition August 31, 2017.
Posted via www.thedcn.com.au on September 6, 2017.