Shipping Industry Vulnerable Following Hanjin Administration

INSIGHTS Briefing September 2016 Shipping Industry Vulnerable Following Hanjin Administration

Shipping company Hanjin recently announced it was entering administration, following financial difficulties. As part of a shipping industry that is becoming increasingly interdependent, the company’s issues are likely to have an impact on ports and terminals, crews, other shipping companies, transport companies, and beyond. THE SITUATION SO FAR WHO IS LIKELY TO BE AFFECTED? Hanjin Shipping of South Korea, Within a day of the announcement, the world’s seventh largest ports began to refuse to allow Due to the inherent interdependency containership operator, operating Hanjin vessels entry into their ports, in the industry, the impact is likely to 98 containerships (some owned, for fear of not being paid port fees. be far-reaching. Below, we examine some chartered) and several other The 3,700-TEU containership, those who are likely to immediately types of ships, had been struggling Hanjin Rome, has become the first feel the effects: financially for some time, building Hanjin vessel to be arrested by up debts of reportedly more than creditors, while it was in the port US$4 billion. On 30 August, a of Singapore, according to reports. CHARTERPARTIES restructuring finance deal fell Goods due to be shipped on those through and the company went into Hanjin vessels that are now barred Firstly, of the vessels operated by administration. The results of this from entry have begun to build up Hanjin, the majority were not in were immediate and dramatic. in ports. The owners of the goods fact owned, but chartered by the have consequently been exposed to company, with Hanjin paying the Within hours of the announcement financial risks following the failure owners a daily charter hire amount by Hanjin, creditors moved swiftly. of the ship operator, as contractually for the use of the vessels, as is Meanwhile, other shipping companies agreed delivery dates would be common under bareboat, demise, have sought to defend their own missed, goods would need to be or time charterparty agreements. positions, so as not to be dragged stored, and extra expenses incurred It is often difficult to tell, simply down as well. Hanjin’s entering into as alternative routes for delivery by looking at a vessel, as to whether administration has created issues would need to be arranged. it is owned or chartered, as one for the CKYHE alliance, existing of the terms common to such between Cosco, “K” Line, Yang Ming, The time of year also presents charterparty agreements is that Evergreen, and Hanjin Shipping. additional challenges, as August the charterer can have the vessel The alliance partners of Hanjin have to October is generally the busiest painted into its own colors. announced that they will no longer time of the year for the shipping As a result of the recent developments, ship their goods on Hanjin vessels and industry, as companies stock up for the owners of those ships operated by would not carry Hanjin containers on the holiday season. Hanjin may stop receiving the charter their own vessels. hire amounts, and would therefore seek to terminate the charterparty

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agreement and re-take possession of goods in their freight forwarder their vessels, with a view to chartering agreements, in the event of the them out to another charterer. financial insolvency or default of the scheduled carrier. With a considerable number of However, few freight forwarders are vessels likely to be affected in this likely to have considered this. way, the market for hire rates for such vessels may be reduced due to All this could lead to ports becoming increased competition. As a result, rapidly inundated with containers owners may face a reduction in which are unable to be shipped income when they do find a new quickly. Available space to store charterer, or, failing that, be forced these containers could soon become to have the vessels laid up and suffer exhausted; therefore, the ports a complete loss of earnings. and terminals may have to close their gates to Hanjin-scheduled containers. TERMINALS AND PORTS This will then have an adverse effect Terminals and ports to which the on independent truck companies, Hanjin vessels were scheduled to rail freight companies, and hauliers, visit may need to protect their own as they will be refused entry to ports Due to the financial position, knowing that and will have to find a means of the payment of port fees, tug and storing these containers, with the inherent pilot services are at risk if they do added financial burden of not being permit the vessels to come into paid for having failed to deliver interdependency their facilities. They could be at risk the boxes to the port. In order to of not getting paid for these vessels avoid entering financial difficulties in the industry, entering the port. themselves, such companies may have to refuse to load boxes For those vessels owned by Hanjin, scheduled to be carried on Hanjin the impact is as well as being barred from port vessels. While this would reduce the entry, they may have been subject to likely to be problem of storage, it would also mortgages from banks, which could reduce their income. In addition, seize vessels under the terms of the far-reaching. since many trucking companies finance agreements once Hanjin goes work on very tight financial margins, into default on those loan agreements. the financial insolvency of Hanjin could lead to the financial default of FREIGHT FORWARDERS others all along the supply chain.

Freight forwarders could be put in a difficult position if they have taken CREWS goods into their care (or have The crews on Hanjin-operated contractually agreed to do so), vessels may find themselves at as those contracts may impose risk of not being paid, or receiving financial penalties if the goods are reduced pay, and being left stranded not delivered to the right place at various ports around the world. at the right time. If the freight While this may be lessened in some forwarder has scheduled to have the jurisdictions, especially following goods loaded onto a vessel that does the implementation of the Maritime not arrive, they will have to find Labour Convention (MLC 2006), the an alternative, which could prove likelihood of full pay is threatened. expensive, particularly as many Hanjin’s port agents around the freight forwarders will also world may also face a loss of income be looking to find alternatives. if their agency fees are unpaid. This is unless the freight forwarders have arranged to be contractually held not liable by the owners of the

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ALLIANCE PARTNERS INSURANCE Unsurprisingly, The CKYHE alliance partners of COVERAGE ISSUES Hanjin may also face logistical there is now problems, if they had relied on Hanjin Unsurprisingly, there is now vessels to provide a service for their considerable concern throughout considerable own customers (that is, under a the industry as to whether or not “box swapping” arrangement). companies are insured against this concern Similarly, some of those partners scenario, and certainly whether (for example, Evergreen) are already additionally incurred forwarding throughout the refusing to carry Hanjin boxes on costs are covered. Unfortunately, their own vessels, which merely adds there is no simple answer that fits to the woes of Hanjin customers. all cases, as marine cargo insurance industry as to However, while many of the boxes policies are written on a wide variety may be emblazoned with Hanjin’s of terms and conditions, for which whether or not color and logo, many are leased by the there are going to be very different company, not owned. The box owners answers on a “case-by-case” basis. companies are will want to claim back their property Many policies have additional if Hanjin fails to pay the required conditions imposed by insurers insured against lease amounts. beyond those laid down in the standard market “Institute” this scenario, The various companies that supply sets of clauses. to Hanjin-operated vessels, such as oil (bunker) providers and food Attention has been drawn to one and certainly and equipment suppliers could face particular exclusion commonly challenges and financial loss as a found in marine cargo insurance whether result of this insolvency. policies, namely the “Insolvency of Carrier exclusion” (Clause 4.6 of the additionally CARGO OWNERS Institute Cargo Clauses A, B, and C). incurred Despite that exclusion, for cover to The cargo owners entrusted to continue against the perils otherwise the care of Hanjin or other service covered under the insurance, the forwarding providers who have loaded onto, or shipper must not have been aware, were near to loading onto, a Hanjin at the time of loading the goods on costs are vessel, are perhaps most at risk of a the vessel, that the carrier was in financial loss following the shipping such a parlous financial state that covered. company’s failure. could prevent the voyage from taking place. OTHER CONSIDERATIONS – SUPPLY CHAIN However, one further concession under the Institute Cargo Clauses INTERRUPTION AND DELAY in 2009 was for the buyers of goods (presumably under a cost, From what has already been insurance, and freight (CIF) type detailed, it is clear that end users of contract of sale, and where the of goods or components could goods have already been loaded on suffer delay or a loss of supplies. the vessel at the time of purchase) In either case, the disruption could to be exempt from this exclusion. be significant and have knock-on In order to have a valid claim, effects as facilities become clogged any loss or damage would need to and competition for alternative have been proximately caused by a capacity intensifies. The potential peril otherwise covered under the disruption should be evaluated and terms of the policy. The Institute planning put in place prior to the Cargo Clauses go into further detail full effects being felt. in Clause 9, titled Termination of Contract of Carriage, on what

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happens if, during the period covered such CIF contracts, by the seller. by the contract of carriage (normally It should be noted that insurance from when the goods cover deemed to be “adequate” in have been loaded on the vessel), the mind of the seller, may not be so the carrier becomes insolvent. for the buyer. Clause 12, titled Forwarding WHAT NEXT? Charges, explains how expenses incurred should be handled. However, we must emphasize that Over the past few days, there have the standard Institute clauses been reports of financial injections are often just the initial basis of into Hanjin Shipping to save the insurance cover provided, and company. While this may happen, numerous amendments, additions, there is the strong possibility that, and alterations to the terms and despite all efforts, the company conditions will apply on a will still fall into bankruptcy. In case-by-case basis. addition to the survival issues for Hanjin, there is no “one-size-fits-all” For those that are unsure about, answer to the numerous insurance or have questions regarding, their questions arising from this turn coverage, we would advise you of events from cargo interests and We expect to consult your broker at the others. Marsh will continue to earliest opportunity. monitor the situation and will look that the wider to assist clients on various insurance WHAT RISKS SHOULD matters arising as this develops. ramifications BUYERS OF GOODS FOR MORE INFORMATION of such an NOW CONSIDER? PLEASE CONTACT YOUR LOCAL MARSH important Potential buyers of goods may REPRESENTATIVE OR: now find themselves being offered attractive bargains. However, buyers MARCUS BAKER company (or consignees) need to exercise considerable care when being +44 (0)20 7357 1780 failure are only offered goods that are already on [email protected] ships (commonly under CIF type of beginning to contacts), as they may, unwittingly, STEVE HARRIS be buying into this problem, if those +44 (0)1603 207 324 unfold. goods are actually being carried [email protected] on Hanjin-operated vessels. Before purchasing such goods, careful examination of the bill of lading (BoL) is strongly advised to see who the carrier is, in addition to scrutiny of the terms of the insurance that is offered to cover the goods on the vessel under

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. In the United Kingdom, Marsh Ltd is authorised and regulated by the Financial Conduct Authority. Marsh Ltd, trading as Marsh Ireland is authorised by the Financial Conduct Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules.