Originally published in the October 2009 issue of Port Strategy.

Port operators who have received increasing requests from users for extended credit lines (informally or formally) are exposing themselves to greater credit risks by retaining customers and market share in very competitive markets - when they might not otherwise have done so.

It is therefore increasingly important for operators to have adequate contracts in place and excellent credit control systems to minimise payment delays, improve cashflow and reduce credit risks. For those users facing difficulties in meeting their payment obligations, there is a risk for operators who fail to manage credit control effectively, that a greater number of their debts could become unsecured debts if their users enter into administration or other forms of insolvency.

The first place to look for payment terms is the contract between the operator and user or, if a contract specifically incorporates them, or in the absence of a contract; the operator's standard terms. These typically set out all the terms regarding the terminal which are not in the contract, including charges, and make them binding on all users.

It is important to incorporate standard terms into the contract as once a contract is formed a party cannot unilaterally impose additional terms. The user must know of or have had notice of the standard terms before the contract comes into effect, be familiar with them through previous dealings or have had the opportunity to request a full set from the operator. It is important therefore for an operator to use every opportunity to publicise its standard terms.

What triggers a payment obligation? Provisions may typically state that payment should be made within 30 days of invoice or month end. What is the position if payment is not made within 30 days of invoice, is the user in default whether invoiced or not? The same issue may arise for, "...payment within 30 days of month end or within 14 days of receipt of invoice, whichever is earlier".

It is also important to distinguish between the subtleties of invoice date, dates of dispatch and receipt. The wording of payment obligations should be clear and unambiguous.

The party responsible for payment of charges must be clear. This may be the cargo owner, freight forwarder, vessel agent, stevedore or any other party representing the user. The vessel agent may often be stated to be liable on the grounds that they are easy to identify and convenient to the local jurisdiction. Standard terms may state that the vessel is ultimately liable for payment of all outstanding charges and construe a contract by the application for a berth by the vessel agent and request for service by cargo agents.

Not all charges will relate to the vessel though and enforcement will depend upon the general law and/or the jurisdiction.

It may be inferred that payment is due without the right to challenge invoice amounts. Users may be well minded to scrutinise invoices more closely against services rendered and to challenge invoices as a means of deferring payment legitimately where this is provided for in the contract.

In the event of an invoice dispute, the user should not delay payment of any undisputed amounts, but may often withhold disputed amounts pending resolution. These provisions are typically not in the operator's interest and are therefore more common in negotiated contracts than in standard terms.

The operator may provide for interest on overdue payments and if so the rate and period must be clearly stated. This is usually justifiable subject to the rate of interest being compensatory and not penal.

Operators may wish to consider performing credit checks on new users and payment terms may be made more onerous. Payment requested in advance or guarantees from parent companies or banks of suitable standing or the provision of other appropriate security for credit may be considered.

Guarantees should be valid from the commencement of the contract until final payment of any amount outstanding. The denial of the use of facilities until such time as overdue charges have been paid may also be considered. The operator may even wish to consider terminating a contract where there have been persistent or longstanding delays in payment.

If a user does become insolvent and a debt is still due to an operator, there is still no guarantee that the debt will be paid in full as the operator may only rank as an unsecured creditor in insolvency proceedings. Where secured creditors have an interest in the winding-up, they take priority over unsecured creditors, and there may be no remaining funds in the winding-up for the operator.

Compared with insolvency proceedings, litigation has the added value that no other parties are likely to be involved, unless insolvency comes about during proceedings. Court action should obviously come as the last step in a dispute over unpaid charges because of its high cost and potentially damaging effect on customer relationships.

Standard terms, however comprehensive, do not guarantee the recovery of operator charges if a user becomes insolvent or has insufficient assets to satisfy the claim. If an operator has a claim against a vessel it should investigate whether proceedings against the vessel in an "in rem" action would be possible. The particular nature of the right of arrest depends on the jurisdiction.

If the vessel leaves the port and an operator decides to seek security by arresting the vessel, the challenge is finding where the vessel or an "associated" vessel is. The user's vessels will have to be tracked, using specialist consultants or IT systems to establish when they will reach a port where arrest can be effected. Local lawyers will have to be used to arrest the vessel in their jurisdiction. Generally the vessel owner's P&I club will put up security so that the vessel can be released.

An operator's standard terms may provide a lien in favour of the operator against the vessel or any cargo, container or other item of tangible property where services have been provided at the terminal. This may be expressed in relation to specific charges or for all monies due to the operator from the user upon any account. The clause is likely to be expressed in absolute terms without reference to the general law that governs the terminal.

Governing law cannot always be overridden by contract, so any right of security reserved over vessels in particular may be unenforceable in practice if there is no right of arrest under convention or local law, for example if the vessel is not owned by the user or if the registered owner of the vessel changes between the time that the alleged lien arose and the time of attempted arrest.

The difficulties facing users may translate into challenges for operators when recovering their charges.

In challenging trading times sound commercial legal advice based on experience and practical knowledge may often greatly facilitate recovery of outstanding sums.

There are various legal solutions at the disposal of operators, although many of these will depend upon the applicable law and jurisdiction in relation to each specific terminal.

Operators should combine these with robust credit checking and control procedures and foster closer relationships with users to yield longer term benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.