You can lead a shipper to the water, but if the horse does not want to drink…
Vocabulary:
Shipper: In commercial trade, the person who gives goods to a shipping company to be transported to a foreign destination; in export transactions, it is usually the exporter. Do not confuse the shipper with the shipping company or carrier.
Consignee: The person who is ultimately receiving the goods, generally the buyer or importer. Sometimes these people will designate a “notify party” to be notified when the goods arrive in the port of entry, so that customs clearance can be arranged and the goods picked up for further domestic transport.
Carrier: A company that transports goods (sometimes referred to as a “shipping company” or a “freight company”).
Forwarder (or “freight forwarder”): A forwarder is like a travel agent for cargo – forwarders organize the transport of your goods from departure to destination, and charge a fee for their services. There are many different kinds of forwarders. There are firms that act as both forwarders and carriers. Sometimes forwarders will have relationships with a whole string of carriers and other forwarders, so that the shipper only deals with the forwarder but in the end the goods are actually carrier by a series of independent transport companies.
NVOCC: Non-vessel operating common carrier. A “common carrier” in the legal terminology refers to a carrier who has accepted the additional legal burdens imposed on a company that regularly carries goods for a fee (as opposed to someone with a truck who might agree to help you out just this once because you’re in trouble).
Container: Large standard-sized metal boxes for transporting merchandise; you see them on the back of trucks, or stacked up outside of ports like Lego toys, or on top of large ocean-going container ships. The capacity of container vessels is measured in TEU (twenty-foot equivalent units; containers generally measure 20 or 40 feet long; large vessels can now carry in excess of 4,000 TEU). There are different kinds of containers for different purposes. For example, refrigerated containers (for transporting meat or fruit, for example) are called “reefers,” so be careful where you use this term.
Consolidator: When large companies ship a lot of goods, they are usually able to fill entire containers. However, shippers who ship smaller amounts (like the shipper in the example below), often have their goods “stuffed” (the industry term) along with other goods into the same container; hence, they are “consolidated.” Some firms specialize in consolidating various shipments from different shippers, these are “consolidators.” A load which requires consolidation is a “LCL” or less-than-full-container load, as opposed to a “FCL” – full-container-load.
Marine Insurance: This is a common term for cargo insurance for international shipments, even in cases where much of the transport is NOT by sea; “marine insurance” often just means international insurance for merchandise transport.
“All risks” insurance: When you use Incoterms, you are required under CIF and CIP shipments as exporter to obtain MINIMUM insurance coverage for the benefit of the importer. This insurance will generally not cover such important risks as risks from theft or pilferage, risk of delay from strikes or war, etc. “All risks” insurance covers most of these additional risks, but it is always good to inquire as to exactly what is included in “all risks.” Specifically, as in the case below, it is good to inquire as to WHERE the insurance begins and WHERE it ends (maximum insurance would cover the shipment from warehouse (sellers) to warehouse (buyers).
Overview:
An Italian footwear manufacturer exports 130 pairs of shoes worth Euro 12,500 to the U.S. West Coast. The forwarder chosen does not have “regular less-than-container load” consolidations to the West Coast and to keep a regular schedule, resorts to co-loading with a third party consolidator (also known as “forwarder’s forwarders”) to meet the shipper’s delivery schedule.
The terms on the back of the forwarder’s house bill of lading state the following:
Limit of liability USD 500.00 per customary shipping unit, package or bill of lading unless otherwise expressly agreed to in writing prior to shipping.
Choice of law: Hong Kong law.
Choice of forum: Hong Kong.
Payment terms between shipper and his US sales agent: Open Account.
Why would a forwarder choose Hong Kong law and forum? The answer is that Hong Kong law and courts are pro-carrier and pro-forwarder. The shipper is unaware of this and has never had himself read the back of the bill of lading nor has the shipper ever requested to see the “terms and conditions available upon request” mentioned in fine print at the bottom of the forwarder’s quotations. The shipper has also never had an attorney experienced in maritime or trade law review the quotations nor the fine print on the back of the bills of lading. Instead, the shipper has relied on the forwarder to “look out for the shipper’s best interest to ‘earn and retain’ the business.”
The shipper never stops to wonder how the 20-year old sales people the forwarders send to call on him could possibly be experienced in international trade. Nor do people wonder why it is so hard to find a seasoned, experienced forwarder’s salesperson.
The shipper’s export manager seems more concerned in making sales and attending trade shows than in reviewing bills of lading. The grand-mother handling accounting also is tasked with calling forwarders for quotations and for pick-up of cargo and has no clue about the legal ramifications behind shipping documents. The owner of the company is more concerned with working with the designers to identify what the market wants to put the best chance of having a winner boot in his sales manager’s hands to be able to sell more, at a high price, while keeping down costs (so Shipping Clerk Grandma is instructed to accept the lowest quote not comparing the terms and conditions of the quotes to understand what is included and what is not to better understand pricing differences).
Due to the shipper’s “lowest quote mentality” and since shippers normally attach such little importance to finding a qualified, professional forwarder, the forwarder’s local branch manager and sales staff know more about “pressing flesh” and “making polite small talk” than about the technical aspects of international trade and how it relates to freight forwarding; therefore, the forwarders staff cannot offer the shipper much know-how to avoid problems. In the forwarder’s defence, some people assigned by shippers to find a forwarder are not very educated and might be overwhelmed by a forwarder who sends a “professor” to call on them and “lecture them” about the perils of international trade.
Forwarder profit margins can be very low. How can the profit margins be so low? Over time, forwarders tend to compete on price and “likability” instead of on knowledge, expertise or quality since competing based on these latter parameters for a non-tangible service is very difficult.
Many forwarders are part of a “network” (usually a “disguised franchise” sold to shippers as a “door-to-door seamless network” to “ensure more transparency” and “more control”) and the head office gets their 25% for giving the local branch use of the name and network plus the branch has to pay another 25% in “management fees” to the head office which leaves 50% in the exporting country of which another percentage goes to the local country head office (pyramid system), and another 25% goes to the destination country as a “transfer pricing profit split” leaving very little to the exporting branch. At first glance some people may think this is done because the taxes in the exporting country are high, but if you know the company you soon find out that it is a “disguised pyramid franchise system”. When you operate on such low profits, you are frequently left with little cash to attract and retain qualified staff. Most people therefore get hired by a freight forwarder to get hands on experience in international trade and use the forwarder as a launching pad into international business.
The Saga Begins:
In this case, the shipper ships “Landed Duty Paid” (the official Incoterm is DDP, but many companies in the apparel business have become accustomed to using LDP, which means virtually the same thing) to the US West Coast.
Forwarders often invest more in advertising than in qualified personnel. To make customers “feel important” it is routine for a larger forwarder to have a person with a Big Title on a little business card “give the customers some attention.” Since it is a substantial account, the VP of the USA Trade Lane does a routine sales call with the local staff and notices that the goods move DDP but without being insured. The VP of the USA Trade Lane proposes insurance and follows up with the local branch to sell the shipper “all-risk marine insurance,” but the shipper turns the requests down verbally and in writing. The shipper uses the excuses like “nothing ever happens” or “isn’t the forwarder supposed to cover that.” The VP-USA follows up direct with the exporter and shows the shipper’s company owner that Article 1739 of the Italian Civil Code that the forwarder must not insure cargo unless expressly instructed to do so by the shipper, and at this point the shipper states that his insurance company covers his cargo. For two years things go without a hitch between shipper and forwarder.
The week comes when the forwarder does not have his own consolidation from the Hub in Milan to the West Coast, and the goods sit in the hub warehouse. Unlike some forwarders who do not keep the customers informed until the customers start calling asking the whereabouts of the freight, the forwarder informs the exporter that the goods did not ship. The shipper pushes the forwarder to “ship the goods, find a solution” - if you don’t have your own consolidation find someone who does. According to the back of the bill of lading and the terms and conditions of carriage, the forwarder has 6 months (!) to deliver the goods, but according to Italian law if the goods have not been placed on board a vessel the shipper can revoke the mandate to ship the goods and at the shipper’s expense the goods could be turned over to a competitor. To “save the account” and keep competitors out of it, the forwarder “finds a solution” and ships with a third-party consolidator.
The goods move from Milan to Belgium on a truck and are placed in a consolidation in the Seaport of Antwerp. The documents show that at this point, the boots are in the master cartons which contain the individual boot boxes. All documentation from Milano to Antwerp to the US West Coast show a clean bill of lading without damage or tampering. After the goods clear Customs and delivery must be made, the trucker goes to get the goods out of the warehouse for delivery but the boots and master cartons are nowhere to be found.
The consignee, who is also the shipper’s USA sales agent, starts writing emails to the shipper about the matter. The shipper writes emails the forwarder’s export clerk who already accepted a job with another freight forwarder and could care less about doing much above and beyond the bare minimum about missing boots. So she only sends emails to her overseas counterparts who do not reply because they have turnover problems in their local office and the goods are in the consolidator’s warehouse and not in the forwarder’s destination office warehouse. Keep in mind that high turnover is common in freight forwarding, pay raises are hard to get, and going-away sabotage is common so that the new employee can tell the new employer which clients are ripe for the picking.
The shipper starts writing the local branch manager who has very little claims experience and decides to hide the problem, and the registered letters, in a desk drawer. The shipper then writes a registered letter to the VP of the USA Trade Lane in the forwarder’s corporate Milan head office. The VP takes the registered letter to the forwarder’s President and Country Manager who immediately reviews, on his laptop, the “profitability” of the shipper’s account with the freight forwarding firm -- and quickly determines that (for purely economic reasons) the shipper’s claim and demand for the value of the boots lost, the value of replacement boots, overtime production charges, and a rush airfreight shipment to get the boots to market are not worth it. Notice the President immediately looked at “what the account was worth in the short term.” The President then instructs the VP to write a dry letter stating that the forwarder has written records proving that insurance was offered several times to the shipper (and was declined by the shipper) so the most the shipper will get is USD 500 per “package” and it will take six months to a year to file and collect on the claim. The co-loader is claiming that legally he has six months to “find the freight” but the claim by the shipper must be made in very strict time periods.
The shipper is livid and demands a face-to-face meeting with the VP USA and the new local branch manager. Yes, the local forwarder’s branch now has a branch manager from a totally different part of Italy who until a few months ago was a glorified clerk and who has agreed to “accept a chance to show what he can do” for no pay increase for six months but will get the unofficial title “interim branch manager” (plus a free hotel room and board so he can get away from his wife during the week).
The VP is in shock when he visits the shipper with the new branch manager and the only thing the new branch manager can say is, “Read the back of the bill of lading, you can only collect USD 500.00. We are right, you are wrong. If you don’t like it, sue us in Hong Kong.” The shipper is outraged and to add fuel to the fire, the shipper’s insurance company has just informed them that their insurance policy only covers cargo INSIDE the shipper’s premises in the factory in the exporting country.
Since the VP actually lives in the province where this large and well-known shipper is located, on the long drive back to Milan he is thinking about how he can “save face” with his local community and how he can try to get the shipper a fair shake, though he knows the shipper also acted irresponsibly.
The VP points out to Upper Management that since the previous clerk and previous branch manager sat on registered letters, the shipper might have grounds to sue the forwarder in an Italian court by suing the forwarder as per his forwarder’s invoice and his “forwarder’s handling fee” for “gross negligence” since the forwarding side of the transaction are regulated by Italian law and not Hong Kong law which regulates the conditions of “carriage” as per the bill of lading. By co-loading, the forwarder did not act as a carrier but as a forwarder which is defined by FIATA and the UN as an “architect of transport.” Litigation would be expensive and that fact the forwarder’s staff ignored the shipper’s request for assistance in filing a lost cargo claim would result in an Italian court not giving the forwarder a favorable judgement because cargo claims have strict filing deadlines. “You can run but you cannot hide” from a cargo claim.
Upper Management realizes that there is nowhere to hide, so it decides to put pressure on the co-loader / consolidator – but, unfortunately, the consolidator knows that the forwarder is a competitor who only ships with the consolidator if he cannot ship it himself. Pressure is put on the consolidator to give more than just $500. Since boots have more dimensional weight than actual weight, a solution is found to recover Euro 6,000 from the co-loader’s West Coast warehouse and Euro 2,000 from the forwarder and consolidator under the Bill of Lading since the Master Cartons specified in the NVOCCs (Non-Vessel Operating Common Carrier) Bill of Lading and are considered “customary LCL – less-than-full-container -- shipping units”.
The shipper is completely shocked when she learns that she must pay the freight charges and any outstanding invoices before the check will be released from the forwarder to the shipper. The shipper, using a usual weapon, held up all payments for past shipments until the matter is resolved. By law the forwarder would now only be able to ask for cash in advance for future shipments and would have to sue for payment of past shipments and in Italy a law suit can take 10 years. The shipper already switched forwarders once she received the run-around for the freight claim so all the freight invoices are well past due.
The shipper is furious that she must pay freight charges, but marine law states that the shipper only has to ship it so that he has a legal claim to be paid for hauling it, whether it reaches destination or not.
The exporter pays the bills, fires the forwarder, and never totally recovers his/her loss.
Question:
Premise: Do not spend a lot of time on what the forwarder could have done differently. You will not be able to change the freight forwarding industry. To do that, you would have to create your own company and you would have to find shippers willing to treat the forwarder as more than “just a trucker with wings and sails.” Surprisingly, after they treat you that way, they have the courage to ask for “free advice” hoping to avoid having to hire consultants and lawyers.
What could the shipper, who was shipping DDP, have done differently to avoid the situation and/or resolve it?
Sample Solution