Sunday, 25 March 2012

The Risks of Shipping Cargo Overseas

A reader recently got in touch with a problem related to the above, looking for some help. They, as a manufacturer of goods had received an order from an overseas company and shipped a batch of their product to a foreign country, in a container, with a container line. However, the buyer never paid for the goods and didn't collect them either. The line was then claiming storage charges and they didn't know what to do as the buyer wasn't responding. 


Shipping lines will often charge this 'container demurrage' if goods are not collected and they must place them in storage. The cost can exceed the value of the goods in the container and you then risk the container being sold at a salvage auction to pay off the costs.


However, if your documents are all drawn up correctly you should not find yourself in the position where you have liability for these charges and no right to actually take possession of the goods. In giving some general advice on the matter to this reader I considered that a review of the processes at hand might be useful. The international transport of goods is risky, especially to new markets or customers, but often these new avenues of sales will open lucrative opportunities so it is all about minimising the risk. This can be done in four ways, as follows:

1. INCOTERMS
Ensure that your sales contract contains appropriate delivery terms. This can be easily achieved by selecting the correct INCOTERM (standard form international commercial terms drawn up by the International Chamber of Commerce) and using that in the Sales Contract. This determines who will do what and when the risk in the goods passes to the buyer.

You will probably want to just deliver the goods onto the ship in port (FOB) or may want to get them all the way to destination port in delivery country (CFR) or even direct to the buyer's door (DDP). This avoids arguments about whether you have done what you should have done in respect of the transport of the goods.

2. PAYMENT TERMS
You should arrange payment terms that match the risk of default and value of goods involved. Rather than sending goods to a customer in a foreign country on 30 days invoice terms and then chasing someone you barely know for payment in a foreign country, you should use a Letter of Credit or similar system, whereby you can use respective banks to essentially swap the cargo documents (which will allow collection of the goods) for payment or a guarantee of payment.

This avoids the problem, especially in new business relationships, that a seller doesn't want to release goods without payment and the buyer doesn't want to give over money without having the goods. A common process is that the manufacturer brings the goods to port and puts them on the ship, the ship checks them and signs off a Bill of Lading confirming x goods received onboard the ship. The shipper gives the Bill of Lading to the bank, who then releases the funds from the buyer's account and gives the buyer the Bill of Lading. They can then turn up at the discharge port and collect the goods.

3. CARGO CONTRACT
It is important to ship the goods on terms which allow the sales contract to be completed. For instance, if you send the goods off under a Sea Waybill (not negotiable) and the buyer doesn't pay then you will have a problem, as the ship will only deliver them onto the named received. These Bills cannot be endorsed. Similarly, if someone pays you in advance and you ship on a non-negotiable Bill of Lading to the named buyer, this might cause a problem if they were planning on selling on the cargo (trading it) during transit, and endorsing over the Bills to another party. Making sure this is agreed in Sales Contract should avoid problems.

4. INSURANCE
Finally, as with everything, the best way to alleviate risk is to insure against it. If trading in new markets take out a form of export credit or trade credit insurance (protecting you against the buyer defaulting and leaving you with unwanted costs and losses). If shipping on, say, CFR terms, the buyer will arrange his own cargo insurance but you will arrange the transport and shipping of the goods. What can happen here is that you ship the goods and the buyer contacts you to say they are damaged, so refuses to pay for them or pays less than the contract price. You can't claim the difference because the buyer has placed the cargo insurance and has the right to claim under that insurance. Of course they should then compensate you but this may not happen. There is a special type of cargo insurance - a Contingency (Seller's Interest) Policy - you can take out to cover this risk.

A marine insurance broker will be able to advise on which coverage is most appropriate for your needs and whether individual voyage or annual policies would be more cost effective in your circumstances.


Image Credit: Time Caynes

11 comments:

Steve Connor 29 March 2012 at 10:03  

I think this is an excellent point and I concur that an experienced marine insurance broker, with expertise in the supply chain sector, should be consulted in order to plug any coverage gaps. I speak to cargo owners all the time that think they have no exposure once their goods leave their premises because their buyer is purchasing on C&F terms only. There can be a multitude of reasons why the title to the goods is not transferred to the buyer and the buck reverts back to the supplier......there definitely is a contingent exposure (seller's interest in this case) that the cargo owner has and should insure against. Be aware of protecting your bottom line!

harrisonhyden 15 April 2012 at 22:40  
This comment has been removed by the author.
harrisonhyden 15 April 2012 at 22:42  

The points that you discussed are very right .If one keeps these points in mind then he will not suffer by the poor service provided by some companies in the end.

International Shipping Australia

Cynthia Samburg 17 September 2012 at 13:45  

You make some very good points here. When looking at the cargo contract, it is also important to actually read the terms you are signing! You might be agreeing to pay the storage costs if your items are not collected...

cory josue 10 January 2013 at 00:52  

You really have nice points here. Unfortunately, here in the Philippines, this industry is controlled by very few men who are in the echelon of society. I personally think this aspect of offshore trading should be part of the OPITO curriculum in the Philippines so that future seafarers will have more options when it comes to their careers. More so, I would love for this aspect of the industry be available for more Filipinos because as I can see it, not a lot of Filipinos do not have an idea of what this is.

Cruise Ship Accidents and Injuries 27 February 2013 at 04:00  

I got the four ways of The Risks of Shipping Cargo Overseas that really expained better. Your blog is very informative for Seamen and they can get points of Cruise Ship Accidents and Injuries of sealaw

Jason Knight 15 April 2013 at 17:20  

Interesting, i live up in ontario and i have been looking into/researching different methods of shipping, and this has helped, Thank you!

Devin Reginato 16 July 2013 at 12:53  

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John Decker 1 October 2013 at 10:14  

This is an interesting article. I have been trying to learn more about law and different important issues. It is amazing that all this goes into shipping laws. I wounder if a Hedge Fund Manager has the capability to improve this?

Thiago daLuz 22 October 2013 at 08:49  

For this reason I avoid overseas shipping, and rely on trucking companies wherever possible. Toronto has a good number of highly reputable ones.

Muitines Sandeliai 14 January 2014 at 05:54  

I agree about the risk of shipping, I prefer not to use it as well.

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