TT Talk - Hazards in full liability contracting
Commercial relationships being what they are, there will be instances where a freight forwarder or logistics operator may be presented with an opportunity to start or continue to provide services to a customer on condition that they accept full liability for the goods in question. Consider such requests carefully!
Under normal circumstances, when contracting to undertake shipments for a customer, a freight forwarder or logistics operator would expect to be able to agree to provide the required services on trading conditions of their own choice. It is, of course, critical to ensure that business is contracted on terms that are incorporated clearly. Where possible, operators should use standard trading conditions, including ‘belt and brace’ conditions covering any temporary storage or ancillary services, alongside the use of house bills of lading or house air waybills, as appropriate.
However, due to the commercial pressure to attract or retain business, there will be instances where the transport operator is required to agree to process shipments on a full liability basis. While quite typical for project contracts, this may happen for high value cargo, such as electronic products.
This type of contract or agreement quite simply imposes full liability on the transport operator, most typically meaning compensation up to the full value of the cargo being stored, handled or transported in relation to certain contracted risks, such as cargo loss and damage. When a transport operator is faced with such a request, it is important to consider effective risk assessment and mitigation in order to determine the commercial viability of accepting these more onerous terms.
When faced with such a request, it is important to consider effective risk assessment and mitigation
Apart from discussing with your insurance broker and liability insurer, it may be possible to seek ‘back-to-back’ terms from counterparties involved in fulfilling the contractual obligations, such as delivery agents. Where this is achieved, it can be an effective mitigation.
An example illustrates this mitigation. The shipment involved air carriage from China to Germany, followed by local trucking to destination within Germany. The transport operator’s delivery agent appointed a trucking company to complete the local trucking in Germany for 34 pallets of notebook computers. The truck was broken into when the driver left it unattended at a parking area overnight. As a result, 16 pallets were stolen, with a value of almost USD600,000. The cargo was insured, so the customer was indemnified by its all risks insurer, who then proceeded under subrogated rights against the transport operator for the insured amount, being 110% of cargo value. In the event, the transport operator was able to settle with the cargo insurer at USD330,000.
On the basis of the Logistics Services Agreement between the transport operator and the delivery agent in Germany, which bound the subcontractor to the contract terms accepted with the cargo interests, the delivery agent was also liable to the full cargo value and indemnified the transport operator in full.
Another instance, however, displays the potential weakness in passing higher exposure just to the delivery agent. A seller instructed a transport operator to organise an air movement from China to the Netherlands. An airline was contracted for the entire airport to airport movement, and arranged air carriage to Frankfurt in Germany, followed by road transport to Maastricht Airport in the Netherlands. Unfortunately, during the road carriage 24 pallets of notebook computers were stolen, valued at about USD875,000. Under the terms of the master air waybill, which are typical, the airline was permitted to substitute road carriage in place of air carriage, to which the CMR Convention would apply. As a result of the full liability agreement, the transport operator was obliged to compensate the customer at the full cargo value. In the event, however, it was only possible to recover from the airline a limited amount subject to CMR’s terms. Since the theft occurred prior to the delivery agent taking custody of the consignment, it was impossible to secure any compensation at the full liability agreed with the agent.
Thus, while the circumstances were similar, the result for the transport operator first accepting the full liability terms was starkly different. It had been possible to impose the more onerous terms on the delivery agent, but other contractors in the supply chain were able to abide by terms that were standard.
Careful consideration required
In many instances, the transport operator’s liability insurer will also only provide cover under agreed standard trading conditions, subject to the limits in international conventions. As a result, it is prudent for transport operators to consider carefully all the potential risk elements they might encounter before finalising an agreement with a customer on full liability terms.
It is prudent… to consider carefully all the potential risk elements… before finalising an agreement with a customer on full liability terms
If you would like further information, or have any comments, please email us, or take this opportunity to forward to any others who you may feel would be interested.