Written by Conway Marshall
Last month’s grounding in the Suez Canal of the massive containership EVER GIVEN has put the world’s spotlight on shipping and logistics. As of this publication, the ship is floating again; however, it remains at anchor in a nearby lake without a date for when it will continue its journey. And so goes the fate for the roughly 20,000 containers and their contents on board.
Shipowners have declared General Average, a process to get the cargo owners to contribute to the liability and costs related to the grounding and salvage. The idea is that both the hull and the cargo share the same fate, and thus share the same burden. Cargo adjusters at Richards Hogg Lindley were appointed to adjust the claim, and now face the monumental task of collecting security from all 20,000 containers (and keeping their list straight!). No parcel of cargo will be free to continue its journey until a bond or guarantee has been posted.
In June of 2018, Bill Mongelluzo reported in a JOC article that “NVOCCs now control 44.6% of containerized imports on the largest US trade lane.” While the EVER GIVEN was on a different route in another part of the world, even the most conservative estimates would suggest at least several thousand containers on board the vessel are being handled by NVOCCs, most likely in Asia and Europe.
It takes no stretch of the imagination to consider a similar casualty happening in the Panama Canal on the China – New York route. In that case, US NVOCCs and Freight Forwarders would be much more exposed than the route the EVER GIVEN typically travels, and VOCC claims would mount as NVOCCs fruitlessly chase payment from their shipping customers.
The fundamentals of the Non-Vessel Operating Common Carrier are that a shipper will arrange with an NVOCC to move goods overseas, and since the NVOCC does not operate any vessels on its own, it will arrange for the cargo to be transported on space it has rented aboard a VOCC’s ship. The VOCC recognizes the NVOCC as its shipper, and the NVOCC in turn recognizes the original shipper as its own shipper. The VOCC issues a master bill of lading to the NVOCC, which lists the NVOCC as shipper, and the NVOCC issues a house bill of lading to the original shipper, which has the original shipper shown as “Shipper.”
The Shipper and VOCC never come into contact, and only the NVOCC is held bound to the VOCC for payment obligations, regardless of whether or not the original shipper fulfills its commitments to the NVOCC.
NVOCCs commonly initiate cargo movement for a client without collecting payment up front. The original shipper’s payment ideally arrives prior to the shipment reaching its destination, when the NVOCC is obliged to pay the VOCC, and if not, then the NVOCC can instruct the VOCC to hold the cargo until further notice when it is able to collect from the original shipper and forward the funds for onward remittance. When the economy is moving smoothly, this process works well, much like everything else.
Casualties cause shipment delays, and if goods are delayed too long then they might become less valuable if, say, next season’s fashion items miss their target landing time and become out of date before they arrive at their stores. This would possibly reduce the incentive for a shipper to pay the NVOCC for his goods if he did not pay up front. Abandoned cargo of course leads to disputes and litigation to determine who is responsible for outstanding charges, as the carrier will be sure to collect its pound of flesh. Since the NVOCC is obligated to pay the VOCC regardless of whether or not he collects from the shipper, the NVOCC can be left holding the bag.
VOCCs do a remarkable job working with NVOCCs offering credit and terms based on their business relationship. As payment issues arise the VOCCs are often willing to work with NVOCCs to find an amicable solution. It is in the best interest of both sides to keep cargo flowing. However, eventually money matters and the VOCC can leverage its position with the NVOCC to force payment.
The VOCC can delay cargo delivery, pause the relationship, and ultimately claim against the NVOCC’s $75,000 or $150,000 OTI bond on file with the Federal Maritime Commission (“FMC”). NVOCCs must maintain their bond to continue operating and any paid claim will cause the bond to be cancelled. It must be protected at all costs because an NVOCC would be denied by surety market after surety market once it has a claim on its record.
We have seen situations where a VOCC will make a bond claim simply to apply pressure without wanting to actually collect, but use it to force settlement with the NVOCC so both can continue their business together. We have also seen the worst case scenario where claims exceed the bond amount and the VOCC continues to pursue the NVOCC for the excess amount owed, driving the company into bankruptcy.
The latter situation above is very real and very possible, and highlights the need for NVOCCs to adequately account, collect, and remit appropriate payments, as well as the importance of working with solid, reliable shippers who won’t simply abandon cargo and ruin a lifeline. Ultimately an NVOCC exposes their bond to whomever they do business with.
As the EVER GIVEN remains under arrest in Egypt, the global supply chain will find out soon enough who is reliable and who is not. You can only kick the can down the road so far, and surely there are some NVOCCs sweating their positions as they check bills of lading and learn they have cargo on board the vessel without having yet collected payment form their shippers. Are the shippers reliable? How much of a delay can VOCCs, NVOCCs, and shippers tolerate? We are all about to find out.