[True Story] Is Your Marine Insurance a Waste of Money?

5-minute read

There are some harsh lessons sometimes handed out in business. A good case was reported in the Shipping Gazette™ of a cargo owner with a shipment on board the ill-fated cargo vessel Rena.

To pay for the freight of a consignment of export goods from Napier port that gets as far as the Bay of Plenty and ends up on the seafloor, seems to incur a triple slap in the face.

You don’t get paid by the buyer, you lose the cargo and you still have to pay the freight bill. Then comes the fourth kick in the guts —you have to pay the legal costs of the shipping company.

To the layperson, that seems mightily unfair. It felt unfair to the shipper too — timber exporter Resources New Zealand Ltd held off paying the bill of $101,306.26 for more than a year before, finally, Mediterranean Shipping Company (MSC) the operator of the Rena, lost patience and initiated legal action to get its money.

I get the impression many people view legal issues as dry, but behind the formal language and the court etiquette are human stories that materially affect people and companies, and this case is an excellent example.

How an “Ordinary” Voyage Turns Tragic

Resources NZ’s shipment of timber was loaded in Napier on October 3, 2011. The contract was based on MSC’s standard bill of lading which provided expressly for freight charges to be due when the carrier receives the goods.

MSC issued invoices in the sum of $101,306.26 on October 3. By the early morning of October 5, the cargo was history. One can imagine the anger Resources NZ, facing the bill for cargo that was underneath the ocean within a day of loading.

When the salvors were appointed, Resources NZ abandoned all interest in the cargo to them. However, the company did not settle the freight bill. MSC ‘pointed out that the grounding did not void the bill. Resources NZ queried that stance, MSC confirmed it was holding to its contract terms, and throughout 2012 the issue remained stalled, with MSC issuing reminders and Resources NZ not paying.

MSC decided the final straw was that if payment was not received by December 14, 2012, proceedings would be issued to recover its money. A director of Resources NZ responded, saying he was overseas and wished to discuss the matter on his return.

For whatever reason, no such discussion happened and seven months later, in July last year, MSC had its lawyers serve a statutory demand.

When it went to court, Resources NZ furnished a defence that I am sure engenders sympathy with some readers.

The company argued that an implied term of the contract was the goods be delivered safely before MSC could claim to have legally earned its freight charges.

However, the solid response from MSC’s solicitors was to point to the clause in the bill of lading dealing with freight and charges, which provided expressly that freight was due upon receipt of the goods, was payable in all circumstances (including where the ship or cargo were lost), and was to be paid “without set-off, counterclaim or deduction”.

Resources NZ also argued for an alternative relief, being an extended time for compliance, given there was a dispute as to whether or not a debt was owing, due to the obvious non-delivery of the freight.

This non-delivery, the company suggested via its lawyers, amounted to a repudiation of the contract. In layperson’s words, if the cargo gets lost and is not delivered, the original contract is null and void.

However, Judge Abbott gave these arguments short shrift. He said the contract was “clear and unambiguous that MSC’s entitlement to the freight charges arose when it received the timber”.

Importantly, he then went on to hand out a clear message to shippers: These were commercial parties, familiar with contracts of carnage such as this. It can be taken that they were aware of the risks inherent in these contracts, and how risks can be managed (for example, by taking appropriate marine insurance).

The Hidden Facts of Shipping Contracts

“There is no suggestion that the contract of carriage, represented by the bill of lading, was not entered into freely.” Furthermore Judge Abbott rejected the idea that the grounding was a case of’non-performance”.

Rather, it was “rather the occurrence of a recognised risk (loss of the ship and cargo) in the course of performance”.

If that appears rough justice, Judge Abbott actually addressed the issue in more lay terms, which helps us understand his reasoning more clearly.

“This takes me to the second aspect of Resources NZ’s argument, namely that there is something intrinsically unfair in allowing MSC to recover these freight charges . . .

“This argument has to be put in context. As already mentioned, these were commercial parties with experience in this kind of contract. The advance payment of freight is a common feature of contracts for carriage of goods, as is a ‘no set-off’ clause.

“The risks of the transaction (such as loss of the ship or cargo) were known, as was the ability of the parties to ameliorate those risks with marine insurance.

“The circumstances of the grounding of MV Rena and loss of its cargo were unfortunate, but did not make this transaction, or the claim for freight and the ‘no set-off’ clause, extraordinary, so as to make it unfair to require Resources NZ to adhere to the terms of the contract . . . “

All of this led the judge to dismiss the application from Resources NZ set aside the statutory payment. Plus, he ordered the company to pay MSC’s legal costs.

What We Can Learn From it

While one can sympathise with shipper for its bad luck, this judgement is not controversial from a legal point of view, according to maritime lawyer Neil Beadle of DLA Phillips Fox. He says the contract clearly carried the obligation to pay the freight.

“Commonly such cargo is sold to an overseas purchaser at a cost that factors in the cost of freight and marine insurance.

“While buyers might prefer to avoid the cost of insurance being passed on to them as part of the deal, given these common carriage terms, exporters need to appreciate that will leave them with “the cost of freight in the event of loss, unless they have insured for it.”

So there we have it, a lesson for Importers & Exporters from a case of dreadful luck. Ship at your peril, unless you are prepared to pay for sufficient marine insurance.

Source: the Shipping Gazette™

Question: Do you have a story about your shipment? Share your experience in the comments box below.  

P.S. Easy Freight Ltd helps New Zealand importers & exporters to save money on international freight and reduce mistakes by guiding how to comply with Customs and biosecurity rules. 

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