Insurer examines the thorny issue of standard trading conditions

CARGO OWNERS must be careful that, what they consider to be prudent (some may even prefer to be seen as aggressive) commercial practice in as far as the appointment of their service providers (C & F agents, road hauliers etc) is concerned, is not placing these service providers on which they rely to such an enormous extent at the very edge of extinction. It is common and essential practice worldwide for any service provider to define both the conditions under which and the monetary extent to which it holds itself responsible for performance under the contract of engagement entered into with its principal / customer. In the South African environment and in the supply chain context, this has been done through the application of “Standard Trading Conditions” or some other form of specifically agreed contractual arrangement that governs the level of liability accepted by the contractor. Internationally this practice is entrenched through legislation (for example CMR legislation in Europe) and the cargo owner has no option but to accept that the carrier has a right to limit the extent to which he can be penalised for non-performance. The irony is that the same principals have for years accepted the limitations imposed on them by Ocean Bills of Lading and Airway Bills but in SA, because there is no protection given to the haulier / agent, commercial muscle becomes the currency of negotiation. More and more frequently, we are being asked for advice from clients in cases where their principal (the cargo owner) simply refuses to accept any form of limited liability whatsoever. This practice tends to be enjoyed by businesses at the top of the food chain who can afford to pressurise (some might say bully) suppliers into untenable positions to maintain or win valuable accounts. The commercial managers of the companies placing their Supply Chain Partners under what can at best be described as irresponsible pressure, would not dream of exposing their own companies to the extent they demand from service providers already straining under very difficult financial circumstances. The pressure is justified by some in terms of what the competitors of a particular freight operator are prepared to do without any consideration being given to whether the competitor offering himself up for slaughter has any substance at all. Obviously someone who has nothing to lose will be easily prepared to lose it. Corporate governance today demands that the management of any commercial entity manages the risks faced by its company with a view to ensuring long term sustainability of the business. Open ended legal liability exposures in an environment which is becoming increasingly litigious and where values at risk (particularly in South Africa) are getting bigger by the day, is a sure fire way to put any business, no matter its substance, at risk. Due to the fact that open ended risk is not quantifiable, it is also not insurable and the agent is therefore left “out in the cold” in the event that the worst case scenario or even the “larger than usual case scenario” occurs. Even a relatively small loss of a couple of million rand can have a serious impact on the P & L accounts and the balance sheet of a services based company running their business at profit margins of under 10%. A cargo owner will often respond to a debate of this nature along the lines of “if I fail to perform, I will refund my client the full value of the goods”, forgetting conveniently that this equates to his gross revenue generated by the sale of the product. The freight operator, on the other hand, is receiving a small fraction of the value of the goods but is nevertheless expected to compensate the owner on a full value basis if there is loss or damage. This says nothing of the issue of consequential losses which the operator is also (although admittedly less frequently) expected to accept responsibility for. I have yet to find a principal that would expose his company to such severe and again open ended financial loss under any circumstances! There is no doubt that the Standard Conditions in use within the South African freight industry are extremely severe and it is understandable that a somewhat more lenient approach is sought. Conditions of Trade are not however the beginning and the end of any discussion with a freight operator. Provided the exposure can be quantified and therefore insured, legal liability insurers (in the main London based) have shown substantial flexibility in their underwriting of more acceptable contracts of carriage which often include much wider contractual obligations for the freight operator. As long as the principal contracting party continues this “hard line” and dangerous approach, our recommendation to the exposed party would be (and we have seen more of this taking place as well of late) to walk away from the contract. No account is worth exposing a business to financial ruinÉ. unless of course the business has no substance to begin with.