Hanjin Shipping insolvency and supply chain implications

The early ramifications of the insolvency of Hanjin Shipping, which entered Korean rehabilitation proceedings on 31st August, have been startling.

Immediate impact and update

The early ramifications of the insolvency of Hanjin Shipping (“Hanjin”), which entered Korean rehabilitation proceedings on 31st August, have been startling, but in some ways unsurprising given Hanjin’s position as the world’s seventh largest container line operator. They have 3% of market share, with vessels carrying reportedly US$14 billion worth of cargo belonging to thousands of separate cargo interests, including major consumer goods suppliers.

The immediate aftermath saw creditors rushing to secure their positions via global vessel arrest, Hanjin containers being liened in ports worldwide, and Hanjin vessels laden with containers either staying off shore for fear of arrest, or being refused entry by wary port operators concerned about non-payment of port dues. Almost two weeks on, the uncertainty continues amidst a reported failed corporate rescue by Hanjin’s parent company, and moves in 40 plus jurisdictions to have the rehabilitation proceedings recognised (or as in the USA, Chapter 15 proceedings started) to obtain protection from creditors while the rehabilitation proceeds.

Goods stuck in transit – rights and remedies

Against the uncertainty is the obvious effect that goods are, for one reason or another, now being seriously delayed in getting to market, and the supply chain - shippers, forwarders/NVOCCs and logistics providers - has had to consider exposures and remedies whether opposite other parties in the contract chain, or via insurance. Typical concerns are highlighted below, with comments reflecting the English law position.

Detention of containers by ports

Unpaid port and container dues has led to some port container terminals refusing to release Hanjin boxes. The right or otherwise of ports to refuse release of containers will usually be referable to lien provisions in their terms and conditions. Relevant considerations will include (i) whether their contractual lien is “general” so as to have wide application to all containers or equipment that happens to be in the port’s custody, and (ii) whether there is in fact debt due rather than an attempt to secure credit for future debt.

Also of relevance will be how widely “Customer” and “Goods” (or similar terminology) are defined so as to capture not simply containers but also the goods inside, and belonging not just to Hanjin, but also third parties. Although the shipper and consignee are blameless (save in the misfortune of having shipped with Hanjin) ports are likely to argue that the cargo owner has bailed the containerised goods to Hanjin on terms that Hanjin may contract with third parties (such as ports) on their terms, and has consented (perhaps unwittingly) to the terminal operator’s lien. Whether that is right or wrong is fact sensitive, and will depend on the terms of Hanjin’s bill of lading, intermediate forwarders’ terms, and terms to be implied into contracts in the chain. Potential remedies could otherwise be an injunction for delivery up of the goods, or to commercially negotiate container releases, albeit in the knowledge that any money paid to procure release will be unlikely to be recovered from Hanjin. If the Korean rehabilitation proceedings become recognised by the English Courts as “foreign main proceedings” pursuant to the Cross Border Insolvency Regulations 2006, thereby affording creditor protection, the ability of ports to continue to lien boxes may be much less clear.

Freight Forwarders' exposure

Freight forwarders exposed to customer claims for damage, loss or delay to goods as a result of the Hanjin situation will need to consider the effective incorporation of terms opposite their customer. For example under BIFA Conditions it is unlikely that any liability could bite, since the withholding of boxes by Hanjin (or port) by reason of the insolvency would be likely to be considered an event that the forwarder or NVOCC was unable to prevent by the exercise of reasonable diligence under clause 24(B). There is also a factual issue of whether the forwarder was acting as principal or agent in carrying out the services. So far as concerns lien by a port operator, there will also be the justification that the customer has consented expressly or impliedly to the bailment of the containerised goods on the port operator’s terms.

Insurance claims

Under standard policy wordings e.g. based on ICC(A) clauses, rights to indemnity will ordinarily arise only where goods have been either lost or physically damaged, but not where they have been merely delayed (and their whereabouts is known) causing a purely financial loss of market. If, however, goods were lost (in the sense of being unrecoverable) or physically damaged, then the insolvency of vessel owner exclusion under clause 4.6 would only apply if the insured was aware of the financial default/insolvency of Hanjin (which would seem unlikely for cargo loaded before August 31st). There would however be room for debate as to whether damage was proximately caused by delay (rather than insolvency), which is an exclusion under clause 4.5.

More likely is that cargo owners will seek recourse under their policies for recovery of forwarding or transshipment costs if there is termination of transit by reason of the insolvency, and arrangements needed to be made to ship containers with a substitute carrier. Such costs would in principle be recoverable under clause 12 of ICC(A) clauses.

Comment

The Hanjin insolvency situation and its consequences remain fluid and subject to almost daily developments. However the general issues and implications for the logistics chain are already becoming clear. Since a global solution and consistent industry approach to enable cargo to get to destination is likely to be some way off, affected parties in the chain will need to consider their contractual exposures, risk protection, and potential remedies only some of which are highlighted above.

Weightmans is available to deal with any instructions arising as a result of this issue. To discuss any of the issues in this update please contact: Mike Burns, Partner Marine Team on 0151 242 6527 or email mike.burns@weightmans.com

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