Swords and shields in the carriage chain

For traders and logistics providers alike there are two key rules of international trade:  the first being to make sure you get paid, the second being never to forget the first rule.  Everything else is plain sailing.

But when debt, insolvency and contract breach rear their head, a third fallback rule comes into play, the oft-quoted but much underestimated saying that possession is nine tenths of the law. In other words, freezing and squeezing assets tends to produce the cash.

The contractual lien (often accompanied by right of sale) – as seen in UKWA, RHA and BIFA terms, as well as sea carriers’ bills of lading – is a weapon of at least moderate destruction, entitling the indebted warehouser or carrier to detain goods when money is owed. Importantly, the exercise of the right gives “secured” creditor status under insolvency legislation. Last year the English courts recognised in the La Senza decision that the carrier’s right to hold and sell goods of an insolvent debtor clothing chain trumped the administrator’s right to demand release of the goods.

Carriers’ contractual liens over sub freight and hires found in vessel charterparties are an equally effective mean of diverting the flow of money in the carriage chain.

In the sale chain there is also protection. The unpaid seller in the UK under the Sale of Goods Act enjoys special rights to stop goods being delivered to an insolvent buyer by either taking possession or by giving notice to the carrier who holds the goods- provided that under the carrier’s terms (e.g. bill of lading) that such a right has not been waived: so check the small print.

Correspondingly, a seller should remember that a bill of lading consignee, by simply being named in the bill, has no right to demand delivery of the goods; he first needs to have possession of the original bill. Therefore instructions to discharge port agents to withhold release can be an effective means to provoke payment. For the same reason a negotiating bank may retain original bills - the so-called keys to the warehouse – until the buyer has first repaid their letter of credit facility.       

Detention or arrest of vessels under Admiralty jurisdiction tends to concern the machinery of debt recovery used by marine suppliers, port authorities, mortgagee banks or parties with claims for damaged goods, and can be arranged quite swiftly. The prospect of a vessel’s schedule being interrupted will often exert payment by its owners, or at least a payment bond, in very short time.

Therefore, while “show me the money” will always be the modern mantra of supply chain credit protection, some knowledge of the legal swords and shields available to protect the balance sheet can prove highly effective in these difficult times. 

☛ Mike Burns is a partner in the marine and transit team at Weightmans LLP

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