TT Talk - How to mitigate the risk of insolvency in the supply chain

It may be conjecture as to how many shippers assess the financial stability of their carrier, but the issue of freight payments, where a service provider goes into administration, raises some interesting points. The stated concern was that the shipper could end up paying twice, relying on a potential recovery from the proceeds of the administration at some future point.

This article seeks to provide a response, although clearly each situation remains unique.

In a straightforward situation, where the shipper has contracted with a forwarder or NVOC, who in turn makes arrangements with a shipping line, the situation of administration of the NVOC may be predictable. Depending on the market dynamics, it is possible that the shipper has agreed credit terms with the NVOC. In such circumstances, although the bill of lading may already have been transmitted through the chain and the ocean carrier will seek to enforce its right of lien under its bill of lading, the original freight may not have been paid, and direct payment to the shipping line or the administrator will resolve the matter.

At this point, the main problem is the ability to surrender the ocean bill of lading to the carrier, since it may well be in the hands of the administrator. This scenario is relatively simple, since it is rare to find that charges are paid far in advance of the release of cargo at destination; the chances are that freight is only paid once.

A dilemma arises where the shipper has prepaid the ocean carriage to the NVOC or their overseas agent. In this situation, the ocean carrier may remain unpaid and be entitled to hold consignments pending payment, even though a payment may well already have been made. The shipper may furthermore incur additional costs for transmission of the documents. In many cases, particularly for consolidation cargoes, it is likely that the ocean bill of lading will be 'freight collect', at which point the carrier will look for recovery from all cargo within the container. Where the selected NVOC has contracted with an overseas agent (ie. the agent is acting under an agency agreement and is not part of the administrative process), it is likely that payments between the agent and the NVOC in administration have not been resolved, where terms of trade would usually involve credit of 30 or 60 days.

However, since the agent will be identified as consignee on the ocean document, jointly responsible for costs in the case of default, where the ocean bill of lading is on a collect basis, it should be possible to persuade the overseas agent to settle the outstanding freight. Moreover, instances of consolidation containers caught in such a process will have multiple consignees placing pressure for release, and the parties outside of the administrative process, specifically overseas NVOCs, will not want their own reputations tarnished or the possibility of business being lost. Such negotiation, of course, takes time, effort and energy to bring to resolution.

In cases where the NVOC has co-loaded the cargo with another carrier, there is an increased likelihood that the shipper or buyer will pay twice for the same transaction. This does lend weight to the need to check the credit-worthiness of the selected NVOC. This applies equally for the selection of any contractor in the supply chain, and the TT Club's advice concerning 'know your shipper' and 'know your contractor' is relevant.

The trend in recent years has been a move from allowing the shipper to make the decision regarding the forwarding agent or NVOC, to a market dynamic where the buyer frequently controls the placing of cargo. Typically, this enhances controls and is accompanied by robust processes concerning selection of service providers. Many organisations have preferred or approved supplier agreements, usually with stringent requirements in respect of performance and financial stability. Contracts that go to tender will invariably require financial statements to attest to the supplier's ability to be in the market beyond the short term.

The risks of insolvency are real and clearly subject to differing legal rules dependent on each jurisdiction. It is important therefore to check carefully the reputation and stability of any organisation being handed an intermediary role in the supply chain. As ever, the organisation that offers the cheapest volumetric rate to fill a unit exposes others to the risk of loss or delay of cargo and additional, potentially duplicative, cost. The TT Club would advise proactive control of all elements of your supply chain to avoid being caught in the middle of a messy administration.

Staff Author

TT Club