TT Talk – Importance of standard trading conditions
The global supply chain is fraught with potential risks, so disputes are perhaps inevitable. The exposure to financial consequences can be minimised, however, by maintaining a robust risk mitigation policy. Risk mitigation extends not only to the proactive steps taken to improve operational safety and security, but also to ensuring, from the outset, that adequate contractual protections are in place.
Supply chains are typically complex, spanning diverse jurisdictions and subject to multiple complex contractual relationships, including between the shipper, freight forwarder, shipping line, port, terminal and those providing first and last mile transport. Some of these contractual relationships will naturally be governed by international law – typically conventions – while in other situations the parties might be free to agree between themselves the terms setting out their obligations.
Negotiating applicable contract terms
In some situations, this freedom will lead to the parties negotiating specific contractual terms, often developing a detailed set of bespoke documents for the services to be rendered. In other situations, the parties might seek to rely on the service providers’ Standard Trading Conditions (STCs). When forming an international contract, it is prudent to recognise that local laws might also dictate to what extent you are free to negotiate contractual terms. However, generally speaking it is the reliance on STCs that creates risk to stakeholders in the supply chain.
The following case study example serves to highlight a number of the associated risks and the importance of due diligence when negotiating contracts, particularly when seeking to rely on your STCs.
In this instance, the freight forwarder “IFF Inc” arranged the transport of machinery from Spain to Kazakhstan on the basis of door to door delivery, including ocean carriage. The ocean voyage was completed without incident. However, during the local haulage to the consignee’s warehouse, the driver of the subcontracted truck carrying the machinery considered that an unrelated third party vehicle was driving too close whilst proceeding along a busy stretch of the road. In an attempt to avoid a traffic accident, the driver manoeuvred the truck sharply to one side, intending to ensure that a safe distance could be maintained.
Unfortunately, in this manoeuvre the vehicle partially overturned and the laden container fell onto the ground, causing severe damage to the machinery that was packed inside the container. The value of machinery was USD1.5 million and the repairs related to the damage incurred were said to exceed USD900,000.
There was allegedly no fault on the part of the subcontracted truck driver. However, since the involved third party vehicle could not be identified or traced and there was no official authority investigation report confirming the subcontracted driver had no negligence, IFF Inc was not in a strong position to repudiate liability. Furthermore, recovery against the subcontracted haulier was unlikely to succeed since the trucker was a small sole proprietor who had not provided liability insurance details.
In the event, IFF Inc received a subrogated claim from cargo insurers in the sum of USD750,000. IFF Inc’s contract with their customer referred to their Standard Trading Conditions limiting liability to 2 SDR1 per kilo of the goods damaged, which was calculated to be approximately USD150,000.
Impact of local law
IFF Inc’s liability insurer sought legal advice from lawyers in Kazakhstan and was advised that under local laws the transport service provider’s liability for physical loss of or damage to the goods could only be limited to the lower of repair costs, the cargo value or the reduction in value of the cargo as a result of the physical damage. In other words, it was not possible to limit liability on the basis of weight, as might be usual in many jurisdictions.
Further, any agreements for transport service providers with their customers to restrict or limit liability other than as established by the local laws would be null and void, meaning that IFF Inc were not able to limit their liability according to weight of the goods as they had perhaps expected.
Notwithstanding this unpromising legal advice, during a negotiated settlement, IFF Inc and their liability insurer made reference to IFF’s Standard Trading Conditions and successfully persuaded the claimant to accept approximately 80% of the claimed amount.
In place and incorporated
It is recommend that freight forwarders and logistics operators always ensure that standard trading conditions are in place and sufficiently incorporated into all contracts. Even though general terms like STCs or indeed specific contract terms to limit liability might not be applicable or enforceable under local laws in some jurisdictions, an operator’s STCs are a fundamental risk management tool covering not just limitation of liability, but also critical other terms such as time bar provisions. Whilst STCs, even when appropriately incorporated into contractual negotiations, as in this instance, may not be fully operative, they may in any event prove pivotal in any settlement negotiation process.
STCs are extremely important for freight forwarders and other logistics operators, particularly where providing services in addition to international carriage of cargoes (for which the carrier’s liability would generally be governed in accordance with accepted international conventions). Th
e risks of physical loss of or damage to the goods will continue to exist to the point of delivery, even if the local carriage and physical handling occurs within a few kilometres of the destination port.
In TT’s experience, it is often these short journeys, as an adjunct to the total movement, where less formal contracts are entered into, giving rise to potentially unlimited exposures. It is recommended that STCs (whether bespoke or adopting national association forms) are in place to protect their interests for all operations and explicitly incorporated into all transactions.
Source: TT Club