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Freight forwarder in general average situations: Door to Door
Read our latest article to find out more about liability exposure of freight forwarders and NVOCC’s with a focus on risks relating to bills of lading and general average scenario.
Liner ships transport goods and commodities of every sort all around the world, which amounts to approximately 60 percent of the seaborne trade. Chances are that you are reading this on a device that arrived from South Korea, drinking your morning coffee that originated in Kenya, all while being clueless about the ramifications of container shipping.
Behind each shipment stands an exporter who sells its goods to someone in another country, known as an importer. While they may engange in the whole operation of commerce independently, more often than not, cargo owners would contract agents to take care of all formalities with customs, export documents and transportation. There are a lot of variables in this process, therefore, these agents – freight forwarders or NVOCC’s (Non-Vessel Operating Common Carrier) arrange cargo movement to an international destination for their clients.
The role of a freight forwarder here looks relatively simple: make all the necessary separate carriage arrangements with the sea, air or land carriers for cargo delivery from point A to point B and perhaps include a few other value-added services. However, they might face unexpected liabilities, especially when it comes to waterborne trade.
Freight forwarder traditionally acts as a party who arranges shipments of goods belonging to his customer, i.e. the shipper. However, he might also act as a principal contractor. Based on his clients demands for a door to door multimodal service without disclosing their identities, he would issue house Bill of Lading, showing the entire geographical scope of the transportation and arrange the carriage in his own name, as if he would be the shipping line. On these occasions, freight forwarder’s responsibility to the shipper becomes that of a carrier and to the carrier that of a shipper.
Bill of Lading generally serves as a document of title to the goods, indicating ownership of the cargo. Whoever holds the Bill of Lading is the legal owner of the goods. This enables the shipper to endorse the bill in favour of a buyer and hand it over against the payment of the invoice on the goods. In turn, the buyer can then demand delivery of the goods from the carrier by presenting the bill at the port of discharge.
However, not all Bill of Ladings are created equal as they can take two different forms:
- a Master Bill of Lading; is issued by the shipping line to NVOCC’s or freight forwarder, indicating agent as a shipper and
consignee. Serves as a Document of Title.
- a House Bill of Lading; is issued by the NVOCC or Freight forwarder and functions between them and their clients (the buyer/seller of the goods.) Not a complete document of title as it merely evidences the contract of carrier and receipt of goods and does NOT act as a Document of Title.
Freight forwarder receiving Master Bill of Lading from a container shipping line, might face clauses about misdeclared cargo and General Average (hereinafter referred to as GA) based on York-Antwerp Rules.
GA is an ancient maritime law principle, dating back to 800 BC (Lex Rhodia), which we still apply to present day. By this legal rule, when a serious and immediate danger threatens the voyage and requires payment of extraordinary costs to avoid or mitigate the common peril, ship owners and cargo owners must contribute proportionately to reimburse the interest suffering the loss, preventing
the total loss of a vessel, crew and its cargo.
Cargo interests must confirm their contribution by way of a financial guarantee before their cargo or interest can be released at the port of destination. In other words, you may have to compensate other cargo owners to release your cargo, even when your own cargo suffered damage. Since you are mutually liable for part of the damage sustained in the incident by vessel and other cargo, burden of the sacrifices and expenditures are spread equitably.
This legal principle under maritime law can be declared by the vessel owner under specific circumstances, for example in case of the mechanical breakdown of a vessel running aground, threatening with loss of the entire vessel and its cargo unless the vessel can be refloated.
As a freight forwarder, you might think that such incidents do not apply to you and rightly so. However, modern commercial practice shows that freight forwarder might be pushed to partake in GA contribution if he appears as a shipper in the Bill of Lading. GA scenarios are a real possibility and happen more often than one might think, leaving many wondering how it works.
The fire on Danish shipping vessel, Maersk Honam, illustrates the extent of damage that can occur on a large shipping container. Vessel owner declared General Average (GA) only a few days after the fire broke out on the vessel. Average adjuster had set the salvage security in the amount of 42.5% of the cargo value and an additional 11.5% required as GA security. This meant that a shipper with goods worth $100,000 in a container aboard the Maersk faced a combined GA bond bill of $54,000 to have the cargo released.
When a GA situation arises, the vessel owner normally “declares” GA and appoints a specialized firm of Average Adjusters to collect the GA contributions from all the parties liable to pay. The adjuster calculates how much each party is liable to contribute by establishing the total value of the property rescued and the values of the sacrifices and expenditure. To ensure that payment will be received, the adjuster requires each party interested in the voyage to provide a GA Bond as a security. A GA Bond is effectively a promise to pay the calculated contribution, backed up by a GA Guarantee from a bank or insurance company.
The adjuster uses the carrier’s records to identify from whom they should be demanding GA Bonds. Agents issuing their own house bills usually appear as the shipper on the carriers Master Bill of Lading and therefore the adjuster will send a letter to the agent demanding a bond in respect of the cargo.
Freight forwarders are left in a difficult position here with adjuster demanding a GA contribution while facing significant claims from customers for possible cargo detention.
Nevertheless, based on York-Antwerp Rules; General Average sacrifices and expenses shall be borne by the contributing interests only, i.e. the cargo and vessel owners.
For that reason, the obligation to pay for GA attaches to the cargo, not to the contract of carriage. The responsibility to pay the contributions lies with the cargo owners only and cannot be devolved onto the shoulders of an agent, even if they made the booking or concluded the contract of carriage with the actual carrier.
PRACTICAL STEPS FOR AGENTS:
- Freight forwarder shouldn’t sign GA Bond, GA Guarantee forms or admit any liability. Although freight forwarder appears on the line’s records as the shipper, he is not liable for the GA contributions in respect of the cargo: this is a matter to solve for the cargo owners.
- Cargo owners should be notified about what has happened, enclosing a copy of the letter from the adjuster. This letter normally contains brief details of the incident, asking for a declaration of the value of cargo and requests signed GA Bond form.
- First it should be made clear that cargo will not be released against a House Bill of Lading, as it is not a document of title and second the signed guarantee must be obtained and returned for confirmation to adjuster.
- Upon arrival of goods at the destination, the importer approaches overseas counterpart of freight forwarder for cargo and the freight forwarder issues delivery order to the importer. Freight forwarder then should approach the main carrier to release the cargo after securing all the necessary charges. www.underwriting.lv
- In order to facilitate the whole process, freight forwarder should check that they have all the documents on hands and send them to the appointed adjuster, who will then arrange for the cargo to be released at destination
- Freight forwarders should stay alert and always inform their clients in advance about the possible liabilities on their part,
especially GA, as it is their liability to bear.
- Cargo owners should be notified that relying on marine insurance is the most viable option for their goods in transit, as GA and
cargo damage risks are covered by a marine cargo policy.