Collision course4 October 2010
On August 7 the container ship MSC Chitra and bulk carrier Khalija III collided just off Mumbai, India. Heavily damaged Khalija III made it to port whereas MSC Chitra was grounded close to the point of collision. In an official bulletin the Mediterranean Shipping Company advised that they held the Khalija III responsible for the accident. In their statement to their customers, who have cargo on board MSC Chitra, MSC advises: ‘It is most important that you notify your cargo insurers that you have cargo on the above ship. If your cargo is damaged, you may have a claim on the cargo insurance. Even if your cargo is sound, you will be asked to provide salvage security and this will normally be provided by your cargo insurer. In any event, you may need to call on your insurance company.’
All shippers who sell CIF must insure the cargo, but do all buyers actually insure their cargo when they buy C&F? When disaster strikes you become wiser, because this is where for some their problems may start. If, for instance, you have sold a container of chemicals to an importer/tanner in Bangladesh you could be in trouble because of this collision as happened to a European chemical supplier who had a container on board MSC Chitra for destination Chittagong. The supplier sold the container of tanning chemicals to a Bangladeshi tanner basis C&F, cost and freight, hence per definition the buyer is in this case responsible for the insurance cover of the cargo according to INCOTERMS 2000.
Having heard of the serious damage caused to MSC Chitra and having seen on TV the 70 degree list of the ship and the floating and stranded containers, the supplier immediately contacted their Bangladeshi agent in order to ascertain that the buyer had covered insurance for the cargo as per contract conditions. To his amazement the cargo was not insured and the buyer informed the supplier by return that he had no intention to pay for the cargo if it was not delivered to him in perfect condition. The buyer told the supplier that he didn’t care about the contract conditions and even blamed the supplier and his logistic agents ‘to have allowed the cargo to be shipped without insurance cover’. To say that this makes no sense legally is, of course, the understatement of the month.
It took the supplier quite a lot of patience and a large number of emails to make the legal situation clear to his own agent, who at first even refused to get involved as ‘the matter was too difficult’, and force the agent to discuss the situation with the buyer. Having at long last understood the legal situation, the buyer stated nevertheless that he would not pay anyway for the shipping documents unless he would first be reimbursed by the insurance underwriters of MSC. This is obviously another example of a contract not being worth the paper it is written on. To sue in Bangladesh or not to sue in Bangladesh, that is the question!
Now, one should wonder what would have happened if the shoe was on the other foot with the tanner/buyer shipping their crust and finished leather to one of their customers in Europe or China? Let us say that they have shipped a container worth US$100,000 of crust leathers and the ship on which the cargo is loaded sinks. The tanners in Bangladesh sell either FOB or C&F, hence insurance is in any case for their buyer’s account. How would this tanner react if their European or Chinese client informed them that he was not covered by insurance and that they would refuse the shipping documents unless they were paid up front by the insurance company of the shipping line? I am sure that the Bangladeshi shipper would scream hell and murder. So why do they think that they can permit themselves to bend the rules to their own purpose when they would not accept similar treatment from their buyer if the case were to be reversed?
The chemicals in question were sold on a CAD basis instead of by letter of credit which is the normal practice for trade with Bangladesh. First of all because Bangladeshi banks are totally unreliable when it comes to effecting payments to suppliers. They hand over shipping documents to consignees and delay payment as long as they see fit, which can be up to two months at their own discretion most probably in collusion with their local account holders. Secondly, because bank charges for shipments to Bangladesh are extremely expensive and seriously cut into profits. Thirdly, because Bangladeshi banks rarely accept documents without first refusing them for some discrepancy or other. If the chemicals had been sold by letter of credit then, due to Bangladeshi regulations, the Bangladeshi bank would have demanded that the buyer has covering insurance. But it is legitimate to doubt if that would have changed the situation because for an insurance company to reimburse will take a considerable amount of time, especially when maritime authorities will have to establish which of the two ships involved was at the wrong moment in the wrong place effecting the wrong manoeuvre.
This episode demonstrates that it is extremely dangerous dealing with buyers who are not capable of telling the difference between their rights and duties and who try to bend reality to their personal requirements. Whatever the payment terms, if the buyer doesn’t play ball, you are in for surprises, which can lead to payment delays, extra costs, losses and ultimately appearances in court.
A situation like this collision damages both parties and hence rather than being a subject of a test of strength it should generate a dialogue where one party tries to accommodate the other and contain the damage for both. In order to reach such a dialogue you need to deal with reasonable business people who have managerial skills and who are capable of looking forward in time rather than just judging and acting on the situation of the moment.