By Alex Lennane
Shippers and forwarders could face multi-million-dollar bills from Hanjin if its creditors sue customers which failed to deliver all the cargo stated in the Minimum Quantity Commitment (MQC) they committed to. According to consultancy SeaIntel, shippers could face claims for between $40 and $300 million.
The potential claims follow similar action involving The Containership Company (TCC), which went bankrupt in 2011. Its lawyers argued that the MQC in annual service contracts – stating the volumes shippers pledge to deliver over the contracted period – should hold, and failure to deliver all the freight meant shippers should have to pay damages for any shortfall in bookings.
Although the shippers argued that, according to industry practice, service contracts were not usually enforced, a New York court ruled in April that service contracts are legally binding. However, the court also found that, because TCC had cancelled four sailings after it faced financial difficulties, the shippers were relieved of their MQC obligations. TCC has appealed, and the court is expected to rule on it shortly. The case could be significant for Hanjin and its customers.
SeaIntel uses an assumption that about 20 per cent of import shippers do not meet their MQCs, which would mean that Hanjin could have faced a shortfall of some 460,000 TEUs. SeaIntel estimates damages could be $250 per TEU.
While contracts covering the 2016-17 year are not relevant, as Hanjin stopped sailing four months in, the previous year’s agreements could be critical as the contract period has expired, and the court has ruled they are enforceable. However, this would be a “nuclear option” for Hanjin, and is likely only to be used if the line is not to be revived. As SeaIntel notes: “Suing a large amount of shippers would effectively end any aspirations to become a large transpacific carrier again.”
But if Hanjin is not revived, creditors may want to claim damages. It would be hard on shippers that have already lost out substantially due to Hanjin’s bankruptcy to have to pay out again for the line’s failures.
SeaIntel suggests that the industry’s attitude to contracts should change. “The sheer magnitude of such a potential claim also indicates a fundamental dysfunctionality in the industry, whereby contracts are agreed to, but both parties tacitly ignore the actual agreement and upholds a different set of “rules”, it noted. “Notwithstanding the Hanjin issue, the liner shipping industry – carriers and shippers alike – do appear to be in need of a mentality shift in relation to enforceable contracts.”
Reprinted courtesy of The Loadstar (www.theloadstar.co.uk)