Sunday, June 24, 2012

Freight Forwarders and Logistics Suppliers Must Inform Shippers of Risks

Insurers Point Out Lack of Clarity When Damage or Loss of Cargo Occurs in the Supply Chain
Shipping News Feature

UK – WORLDWIDE – Once again the brains at the TT Club, the mutual insurance operation which has been providing liability cover to freight forwarders, carriers, cargo handlers and others in the supply chain for over four decades, has come up with a no nonsense item in an attempt to clarify the amount of responsibility borne by carriers when the need to reimburse the owners of cargo arises following loss or damage. This question continues to be a source of confusion between shippers and their logistics suppliers with many on both sides simply taking an ostriches view until problems arise.

A TT Club review recently revealed that there continues to be a significant lack of universal understanding about the impact of clauses in bills of lading, other contracts of carriage and Standard Trading Conditions (STC) that limit liability with a number of transport operators are unclear how much risk they are taking on when accepting cargo from shippers and this lack of clarity can result in damage to commercial relationships, or the loss of the opportunity to further those relationships by ensuring shippers interests are fully protected for any loss that occurs that is not recoverable from third parties.

Likewise, transport operators report that some of their customers, mainly those that have irregular shipments or are new to the import/export trade, are not aware of the level of protection their cargo has when placed under the responsibility of a third party, be it a forwarder or a carrier, for international transport. The Club has on many occasions come across situations where the shippers of cargo have found that the value of their recovery claim for goods damaged in transit has been significantly lower than expected, and lower than the cargo’s value.

It is essential for freight forwarders and others to address this lack of understanding to enable them to better serve their cargo customers, reduce their own exposure to liability and costly litigation, and avoid damaging their commercial relationships. Anyone in the trade knows that a logistics salesman pressing for business is unlikely to bring up the seemingly negative topic of how little the client will be reimbursed when his company wrecks or loses their precious consignment! It is therefore essential that companies communicate the terms under which they are operating whilst pointing out that rivals will generally also operate under exactly the same policies before any incidents occur and of course traditional carrier and forwarder liability is limited by the various standard international carriage conventions, depending on the mode of transport, in most countries around the world (although there are certain situations in which the established international regimes may not apply).

The standard terms of liability (and hence the amount recoverable) are often limited by the relevant convention to a certain amount per kilo. Depending on the convention or applicable conditions this amount will range from less than $1 per kilo to around $20 per kilo. The nature of the cargo will of course determine whether this amounts to anything approaching the full value. For example the same per kilo rate will apply to flat-screen televisions as to a load of waste paper. In another circumstance, a Picasso masterpiece may weigh just 3 kilos but be worth £80m; the recoverable monetary value would be a fraction of this amount.

A TT Club case example cites a Lamborghini which was damaged in a warehouse by a forklift truck during storage pending international carriage. The car was valued at $123,000 and the repair costs were $101,534. Based on a weight of 1,626kg the monetary value that was applicable, according to the carriage convention would have been as low as $254.

A selection of regimes and resultant monetary values are shown in the following table: 

REGIME                NATURE                                       LIMITATION                 VALUE

UKWA                   UK Warehouse conditions            £100/ tonne                   $254 US     

COGSA                 Carriage by sea under US law       $500/ package              $500

RHA                      UK Road Haulage                          £1,300/ tonne               $3,302

BIFA                     UK  forwarding conditions               2 SDR/ kilo                   $4,932

CMR                    International Road carriage             8.33 SDR/ kilo              $20,540

CIM                     International Rail carriage              17 SDR/ kilo                  $41,919

Montreal             International Air carriage                19 SDR/ kilo                  $46,851

TT Club’s claims handling experience bears out the evidence that cargo owners are often unaware of the extent of protection that exists for the cargo being moved. There have been countless cases in which the full value of the cargo is not recoverable under the contracts due to a limitation clause. There are also a number of other circumstances where the contractual terms may lawfully protect the carrier and deny the cargo owners the value of the cargo, including time-bar provisions and specific defences.

Such limitations to liability are generally made clear within the appropriate clause of the contract of carriage or STC of the carrier or forwarder. TT Club advises that transport operators should make sure such clauses are adequately worded in their own documentation and also be incorporated into their terms of trade. The typical international provisions should generally be supplemented by adopting standard conditions made available by national trade associations to their members. The Club also has conditions available for its members that are widely used.

TT Club also advises that a forwarder or carrier should emphasise that the contract of carriage limits their liability to a shipper. As a result, the shipper needs to consider purchasing cargo insurance to ensure that the full value of the cargo is recoverable in the event of damage or total loss, regardless of whether it can be attributable to fault or negligence of a third party.

In order to clarify the way that these conditions operate in international trade, the TT Club has put together its ‘Handbook on the Conventions for the International Carriage of Goods’, available free to its members and at a cost of £36 to others. The Handbook provides good, reliable advice on the way such conditions operate. It is an aid to carriers, logistics operators and freight forwarders in explaining to their clients how the terms operate. Such a clear explanation will also support the sale of appropriate cargo insurance that will ensure that the customer is reimbursed in the event of damage occurring; without having to argue through contractual clauses.

Such understanding and guidance will help avoid many common risks of cargo loss or damage occurring and will ensure adequate management of such risks without exposing a shipper’s business unnecessarily and leading to customer dissatisfaction.

N.B. Where $ is shown this indicates US dollars. The term ‘SDR’ refers to 'Special Drawing Rights’ the IMF’s artificial monetary reserve currency defined as a "basket of national currencies". SDR’s are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments.