Freight forwarders – protect yourself!
In the last few months, supply chains have adapted very well, but consumer demand has been severely disrupted by restrictions put in place due to COVID-19. As countries slowly begin to re-open, supply chains continue to face significant uncertainty and disruption from the economic fallout of COVID-19.
As key facilitators of international trade, freight forwarders are particularly vulnerable to these disruptions, whether it be increased credit risk from customers, increased delays and non-delivery events, increased surcharges from carriers or increased abandonment of cargoes. In this article we look at ways freight forwarders can seek to insulate themselves from these risks.
As the threat of counterparty insolvency rises, completing due diligence and "know your customer" checks is the first line of defence. There is a temptation for companies to shorten their due diligence and compliance procedures in a crisis, to speed up the process of on-boarding new customers and suppliers. That temptation should be resisted as in the long run, it could mean vital signs regarding a customer's financial viability are missed.
Agent or principal?
Freight forwarders are increasingly providing fully integrated services. It is therefore ever more important for freight forwarders to clearly understand the role they are taking on and how this role might change throughout the totality of the services they provide.
If you are acting as agent to help minimise your exposure to the risks identified above, it is important that performance of the contract reflects that limited role. The way in which the contract has been performed may indicate that you have in fact contracted as principal, regardless of the description "as agent only".
As principal, a freight forwarder has direct liability under the contracts to which it is a party. If those contracts are not on back to back terms then the freight forwarder may end up ultimately liable for claims arising. In the current trading environment, this could mean liability towards carriers for large demurrage and detention sums caused by congestion at yards and storage facilities, and liability to cargo owners for delay and damage.
Where acting as principal, you should always ensure contracts are back to back, particularly with regards to law and jurisdiction, time limits, exclusions and limitations of liability.
Whether you are acting as agent or principal, you can seek to mitigate against the current risks via contractual clauses.
COVID-19 and the economic impact mean it is vital for freight forwarders to review their insurance policies and current standard terms and conditions to ensure they are still fit for purpose and address the new trading realities. Key areas for review include:
- Force majeure clauses - these may need to be amended to take account of foreseeable events. COVID-19 is already known to the parties at the time of contracting and a force majeure clause may therefore not provide protection in the event of further COVID-related disruption.
- Insolvency - Consider including clauses that allow for termination in the event of insolvency, and events short of insolvency that indicate financial distress, and an obligation for the counterparty to report such events to you within a short period of time.
- Credit terms – consider reducing the period in which payment must be made to you.
- Liens – ensure that your contracts include a lien over goods and documents, and a right to sell cargo for non-payment of any sums due.
- Guarantees – consider whether it is possible to obtain some form of security or guarantee of the customers' obligations, especially for high-value and long term contracts.
Once the terms have been updated, it is also vitally important to ensure that the revised version is incorporated into all new contracts, especially with existing customers.