UK: Expansion Into Logistics - A Risky Business

Last Updated: 12 January 2010
Article by Damon Thompson and Craig Neame

Originally published in the December 2009 issue of Port Strategy.

Historically, ports provided traditional stevedoring and intermodal cargo-handling services to their customers whereby they loaded and unloaded ship cargo, transferred the cargo to any onward mode of transport and, perhaps, stored the cargo waiting for collection for onwards transport. Liabilities arising from such services were generally limited to claims in respect of damage or delay.

Typically, for example, an incident involving the collapse of a gantry crane would result in cargo interests bringing claims for damage caused to cargo and also any resulting penalties incurred under the relevant sale contracts if the vessel and/ or cargo operations are held up as repairs are made to the vessel or to shoreside equipment. Similarly claims might be made by the owners of the vessel if damage is caused during such an incident and the operators/charterers in respect of any lost time. Claims might also be expected from stevedores injured during operations.

These liabilities of course remain a significant part of a port service provider's risk exposure and the resolution of claims arising can be complex due to the complicated contractual structure of modern day transport. The port operator will expect a claim to be made by their customer under the enduser agreement which should contain provisions limiting the port's liability, liquidated damages clauses for certain types of loss and defences the port can seek to rely upon. It may be, however, that the loss has not been suffered by the contractual counterpart in the end-user agreement. The enduser will more often than not be the charterer of the vessel in a long chartering chain. The various charterparties are unlikely to be entirely back to back, given they will often be of different types (a demise charter will not be on the same form as a time charter) and the loss and expenses arising from the damage and delay caused to the vessel will be dealt with by the terms of the chartering chain. This gives rise to a number of difficult questions. What if, under the charterparty terms, the loss suffered is for the owners or disponent owner's account who has no contractual nexus with the port? Will the port potentially face a claim from two parties – the enduser/ charterer and the owner/disponent owner of the vessel? Where a claim is brought by the owner/disponent owner, what contractual terms will the port operator be able to rely upon in defending the claim?

The "traditional" risk exposure of a port operator is therefore complex and onerous in itself but, at least, it involves matters that are within a port operator's traditional areas of expertise. The industry has developed comprehensive contracts and insurance products together with risk assessment, compliance, safety and maintenance regimes to manage these risks as best they can. In our experience, difficulties increase where the port operator is taken outside of its comfort zone in relation to the risks it is exposed to.

In the brave new world of "one stop shop" logistics service providers, many of the major domestic and international port operators have developed into sophisticated 3PL and 4PL logistics service providers whereby, together with the provision of the traditional port services, they provide a whole range of logistics solutions to their customers. This results in an exposure to risks which port operators are traditionally not familiar with and which require dedicated expertise to manage.

From a review of the websites of various ports and terminals, it is apparent that port operators are particularly expanding into such areas as feeder vessel services, freight forwarding services, value-added warehousing, and distribution to name but a few.

Port operators are expanding into the provision of distribution services more and more so that when the goods have reached the port, the port operator will arrange the on-carriage as a freight forwarder or physically carry the goods themselves to their end destination. This can be by way of a short sea feeder service, road haulage or rail.

There is currently not an international convention or national legislation which applies compulsorily to traditional port services and operators are free to negotiate contractual terms to govern their liabilities.

In contrast, where a terminal operator expands into international distribution, it must be alive to the possibility that a convention will apply compulsorily, i.e. the Hague or Hague-Visby Rules if by sea, the CMR if by road, the Montreal/Warsaw Rules if by air; the CIM if by rail. The international conventions contain time bars, limits of liability and defences which will probably be different to the terminal operators negotiated contractual terms and, if any of the conventions are applicable by operation of law, it is not possible to contract out of them.

If a port operator is providing domestic distribution services, there are not compulsory regulations which apply and it can negotiate contractual terms. A port operator's standard terms and conditions will not be designed to cover the risks involved in short sea services or road haulage. Best practice will be for the port operator to incorporate into the booking documents a relevant industry association's terms and conditions. For example, where the services provided are road haulage, the latest version of the Road Haulage Association terms should be incorporated into the booking.

This legal landscape is probably soon to change with the introduction of the Rotterdam Rules. This is a convention that is still waiting to come into force. It will apply to contracts for the international carriage of goods where one leg is by sea. It will therefore apply to the terminal operations part of a multimodal movement. For the time being, however, there is no such convention applicable to terminal operations.

Where a port operator is providing storage services, it will frequently also now provide additional "value-added" services to complement the core services it provides to the customer. This adds value to the customer's supply chain (e.g. by fulfilling a task or function more efficiently or cost-effectively for the customer or delivering a capability which the customer may not have in-house). Typically, such value-added services will include pick-pack, inventory management, assembly and data processing services.

Unlike transportation, there are no internationally agreed conventions governing value-added services. Further, because logistics providers have, generally speaking, only recently started providing value-added services, few industry trade associations are promoting standard conditions dealing with value-added services. This means that most valueadded services are either provided on the basis of a specially negotiated contract or sometimes worryingly on the basis of the general law.

Under English law, a service provider potentially has a very large exposure for his customer's claims. If the customer can show that the provider has negligently provided the relevant value-added service (i.e. the standard of care achieved was not "reasonable") and this caused a loss, the customer can generally sue the provider for damages and the English case law on recoverability of damages will apply.

A port operator could also face potential claims from third parties, in these circumstances. A "manufacturer" of a product has a duty of care in tort (or negligence) to avoid his products causing injuries to innocent third parties. Statutory provisions, like the Consumer Protection Act 1987 also protect consumers against product liability risks. Logistics providers assembling goods for a customer could incur a potential liability to end users as a quasi manufacturer of the goods. Because such relationships will not be based upon contract (the logistics provider will have no contract with the consumer who bought the products from a retailer), potentially it will have an unlimited exposure for claims.

Another of the value-add services associated to the warehousing services provided by port operators is in relation to compliance with customs regulations. If a port operator agrees to submit a customs declaration on his customer's behalf and in his customer's name, it may be liable to pay the duties in accordance with the Community Customs Code (EC Reg 2913/92) and may be liable for any penalties levied as a result of contravention of customs regulations.

All goods moved in or out of the European Union are subject to duty measures of some kind and customs/excise duties can be enormous, even where the cost of goods is relatively small. If the customs procedures are not followed, for example, declarations are not made correctly; there can be financial consequences - direct consequences in terms of penalties levied by customs authorities or indirect financial consequences resulting from delays caused by goods being detained.

Goods which are already in the EU, may have been placed under a duty suspension regime, which means that they are not yet in free circulation, i.e. they have not been fully cleared from the customs procedures. Goods are normally placed under a duty suspension regime when they are stored in a warehouse before being moved on to their final destination for sale or where they are in transit before reaching a final destination. Before being removed from the warehouse or moved anywhere the goods must be either declared into free circulation and duty paid, or other customs procedures discharged, or placed under another regime which suspends the payment of duty again. If the goods are removed from the warehouse or agreed means of transit without being placed under another suspensory regime, duty is immediately payable. This applies even if the goods are stolen or removed accidentally.

In conclusion, a port operator expanding into logistics services must first implement risk management processes to identify the "new" risks it will be exposed to and then consider the contractual and insurance solutions to protect itself. Contracts must include appropriate indemnities, limits and exclusions of liabilities. In respect of insurance solutions, a "standard" transport liability policy is basically designed to respond to cargo loss and damage claims so providers therefore need to think about supplementary insurance to cover risks arising out of value-added services, including product liability cover, professional indemnity cover, and errors and omissions cover.

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.

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