Risk & Economy » Tax » Tide turns for cargo carriers

A ship set sail from a British port, ran into a swell soon after it passed
Land’s End and 28 containers of cargo toppled over in one of the holds. Result:
more than £600,000 of damage for the owners of the goods in the containers.

This is far from an isolated incident. Chris Welsh, general manager of
campaigns at the Freight Transport Association, tells the story of the container
holding a £5m machine for export. It slipped from the hook that was lifting it
onto the ship and crashed onto the quay. The machine was destroyed and a lengthy
wrangle ensued over whether the cargo owner’s or the ship owner’s insurance was
going to pay for the damage.

Take notice
There are two very good reasons why FDs should start to take an interest in
these tales of disaster on the high seas. The first is that, from autumn 2008,
the block exemption of ship owners from competition policy, which the EU had
granted in 1987 to conferences – cartels, in plain English – will be abolished.

Details of the system that will apply from that date are still being
negotiated, but it looks likely that charges for shipping cargo will fall. Welsh
expects the fall to be a single digit percentage, but for a company shipping a
lot of a cargo each year that could add up to a big saving.

The second reason is that the exemptions enjoyed by P&I (protection and
insurance) clubs – which provide insurance for ships and cargos – will end in
2009. As a result, insurance rates are also likely to fall, but, equally
important, shippers of cargos should be in a stronger position to negotiate
better terms and conditions.

The effect of both changes may mean that it will be possible to get ship
owners to take on more of the financial responsibility for the cargos they carry
if things go wrong. At present, the combination of cartel power in both shipping
and insurance cover means that the bulk of the financial risk of transporting a
cargo falls on its owner, even if it’s the ship owner or cargo handler’s fault
that it’s damaged in transit.

Welsh says: “The industry is probably losing tens of millions a year because
shippers are relying on their own cargo insurance rather than claiming against
the cargo insurance of the ship owners. In extreme cases, that could be a very
significant amount of money.”

Power shift
The changes could signal the biggest shift in the balance of power between ship
owners and cargo owners in more than a century. Currently, the relationship is
governed by a body of complex maritime law, some of which is enshrined in the
bill of lading which accompanies each cargo (see ‘Bearing the load’ below).

Over the years, the ship owners have used the power of their cartels to add
more and more onerous conditions to the bills of lading. Welsh argues that
companies that despatch large amounts of cargo could negotiate more aggressively
over some of the terms and conditions.

The way forward
The Freight Transport Association has recently published a guide which pinpoints
a range of areas which ought to be up for discussion. One of these is who pays
for onward transportation if an expected cargo is delivered to the wrong port –
not uncommon when ships are diverted by owners from their planned destination to
pick up new cargos.

But Welsh says that the big changes now underway shouldn’t end up with the
baby being thrown out with the bath water. “We are anxious to retain the best
aspects of the liability system, but many of the terms and conditions are
indisputably out of date with modern business practice and the high-quality
services and performance standards associated with such services,” he adds.

Negotiating Modern Liner Shipping Terms: a shipper’s guide
available from the F reight Transport Association.

Bearing the load
It is no wonder FDs feel an attack of narcolepsy creeping on when bills of
lading are mentioned. It’s one of those terms that conjures up visions of
Victorian ship owners sitting on high stools scratching copperplate on parchment
with quill pens. Even the language is archaic; lading is derived from a
mediaeval word meaning to load.

Most FDs will know that a bill of lading is the legal document which
describes a consignment of goods, their destination and those who are authorised
to take delivery of them. The bill should travel with the goods and is signed,
in turn, by the sender, the carrier and the receiver.

The back of most shippers’ bills of lading are packed with small print, which
sets out the terms and conditions of carriage. It may also state what type of
bill of lading it is – such as straight, order or bearer. For FDs, this level of
detail is probably too much information. And, anyway, isn’t that what corporate
lawyers are for?