Basic Contract Management and Claims Handling


Published: 19 March 2009

This is an outline of some of the basic measures for dealing with contract management and claims handling in shipping companies.

It is outside the scope of this outline to go into any great detail about the organisation of a shipping company’s claims handling. Things to consider include how to organise an efficient reporting system from vessels, from other operators involved in the carriage of the cargo, from agents in loading and discharge ports etc. and, ideally,  organise reporting in a fairly standardised format or form that allows easy onward transmission/notification to outside P&I Clubs, Defence Clubs, other insurers, lawyers and so on.

For claims handling, fact finding is extremely important and may make or break a claim and an efficient system for both collecting facts and documentation and passing it to relevant service providers is one of the best tools to have.

It is also necessary to decide on “who deals with what” (and should claims handling be centralised or not), authority levels etc.

Shipping companies are faced with having to deal not only with a great variety of different types of claims but also with a great number of different jurisdictions where legislation and custom can vary a great deal. For those reasons alone, there can never be an “all-in” formula for dealing with claims but there are things that can be done both to safeguard one’s own position but also simply to make the handling of each case as easy and as little time consuming as possible.

One overall recommendation must be that it always proves useful (and many times decisive) to ensure that the written documentation is not only in order but also easily accessible. A good document handling practise will be important – including guidelines for when archived documents can be discarded or deleted.  If the company becomes involved in litigation, there will be a duty to disclose evidence, and these days disclosure (in the US : discovery) will include electronic data and records including email correspondence. A well structured document retention policy both for physical documents and electronic records is vital.

What follows is by no means an exhaustive list of “best practice” but is an outline of what is preferable to have done or in place before and after a claim materialises. Things are being mentioned in no particular order of priority, but it may be helpful to look at what can/should be done before and after the occurrence which is the basis for the claim.

Before the claim

The contract

A BIMCO publication is titled “Check before fixing” and this is always good advice. There are today several ways of checking a prospective contracting party’s standing and ability to pay and the recent financial crisis has made this check more important than ever.

A good contract is the best protection against problems later.

It is important to check all terms in the charter party. Very onerous  provisions may be “hidden” in unexpected parts of an extensive number of rider clauses or even in lengthy clauses with a heading relating to something else – some  of these onerous or allocation of risk clauses may even result in the P&I cover being lost.

Charter parties are often made on back-to-back- terms  and, if terms are truly back-to-back, this is fine. It is not unheard of that an operator believes he is back-to-back but, in fact, he is not.  There is nothing wrong with this as long as the decision is made with the full knowledge that with a difference in terms there follows an exposure which may result in a liability which can not be passed on and with no indemnity being available. This may be compounded if the liability turns out to be outside insurance cover.

When contracting on back-to-back terms which include the Inter-Club NYPE Agreement (ICA), it should also be appreciated that this may well result in having to participate in the settlement of claims in accordance with the apportionments in the ICA.

Contract organisation and care are important : the use of recaps and basis charter parties,  previous charter parties all with logical amendments, rider clauses, “special clauses” (both owners’ and charterers’) etc. is a combination that, on a busy working day, invite failure to spot an exposure that there was no intention to accept.

When negotiating, make certain that the correct contracting party name is made clear. There can be problems if a party is described with a name similar – but different – to another, perhaps well-known and creditworthy company. Sometimes a party is named but as “c/o” another company/address. The company may be “managed” by a company in an easily accessible location but the contracting party is, in fact, incorporated and existing only in an off-shore jurisdiction. This may defeat any claim. In the DOUBLE HAPPINESS, there was sufficient uncertainty (or opportunity) to cause litigation concerning naming correctly the name of a company within a certain, larger company group.

Another point to watch out for is the not uncommon use of involving a parent company in the charter party with the intention that performance by the charterer will be guaranteed by the parent. To be effective, this requires careful handling : if this is expressed in terms  of: “ To be guaranteed” or “will be guaranteed”, there is a clear risk that this wording is not, in itself, a guarantee but that the guarantee will still have to be given expressly and separately. It is quite possible that this type of wording will be held to be only a promise that a guarantee will be provided. This was the outcome in a Hong Kong case (Wedge Marine Ltd v Oriental Holdings Ltd).

Correspondence via brokers may work fine but direct communication with the other party is preferable. It will certainly be helpful if it becomes necessary to take legal action and although service of claims etc. will often be accepted to be valid if done via brokers, it is better that a direct contact point is known from the start. In some C/Ps it may even be agreed that service is valid only if done to an official postal address. Apart from anything else, correspondence via brokers is delaying and time consuming at a time when legal action is necessary delay in this way should of course be avoided.

Make sure that whoever acts for the counter part is in fact authorised to bind that party (to sign for the company). Often, this will follow from the position within the company (chartering manager etc.), but it pays to pay attention to this. In the OCEAN FROST a vice president (transportation) who was also chartering manager could not validly bind his company to the contract involved in this matter and although this case did concern an agreement somewhat out the ordinary, it is a reminder on checking authority.

Other issues

In many trades, owners are under pressure to e.g. discharge, against a Letter of Indemnity, cargo without presentation of original bills of lading. In doing so, the owners loose their P&I cover, they are at risk for the value of the full cargo and will have to rely solely on the ability to pay of whoever has issued the LOI (typically the charterers).

When issuing an LOI, it is also important to ensure that this is done in a way so as to protect the owners’ own position as best possible. In the BREMEN MAX case, the owners issued an LOI which included a request to owners (in consideration of which the indemnity was given) to deliver the cargo without original Bs/L to a named recipient. There turned out to be no evidence available for the cargo being delivered to the named recipient, and when a third party claimant appeared saying that they were holders of the original Bs/L, the result was that the owners had not complied with the terms of the LOI given and owners were therefore unable to rely on the indemnity. This particular decision has therefore placed a significant burden of proof on the owners to make sure that they know precisely to whom they are delivering/releasing the goods. As a precaution, this type of standard LOI should therefore instead mention that the party to whom delivery/release is a person, agent etc. identified by charterers thereby removing this burden from the ship owners.

After the contract (claims to be raised or defended)

If any type of breach, claim, etc. occur or arise after the contract is made, there are other measures and steps which can help to either bring (or defend) the claim.

Some claims require special steps to be taken – some demurrage clauses have specific requirements for the claim to be presented. In the OBO VENTURE from 1999, the charter party required the demurrage claim to be accompanied by documentation signed by shippers “including signed copy of Charter Party”. This was not available with the demurrage claim which failed for that reason.

Check time limits. This is necessary whether you have a claim or is presented with a claim.

Check whether insurance cover is available and notify P&I Club or defence club as soon as possible. If the claim is not insurance covered, should the matter be passed to lawyers or other advisers.

If a P&I Club et al becomes involved they will assist and arrange for many of the subsequent necessary steps, but it is nevertheless important to recognise what must be considered and done:

This to consider include:

Which lawyers (and in which jurisdictions) should be instructed to assist?

Should – and can – security be obtained to protect one’s own position and exposure?

Should experts be appointed – and when?

Consider at every stage the possibility (or need) for settlement. Legal action can be very costly and whereas costs should never be allowed to escalate out of proportion to the amount in dispute, the cost alone can for smaller claims effectively rule out that legal action is recommended. Small amount claims can easily, despite their size, attract disproportionate costs especially if separate action for obtaining security would have to be considered as well.

Facts collection and documentation:  Facts must be secured as early as possible through survey reports, statements from those involved and, if necessary, take into possession any physical objects, arrange sampling and safe keeping of these etc.

Update information on counter parts: has anything changed with regard to ability to pay since the contract was made? A significant deterioration may regrettably in itself make any action pointless.

Documents: collect all relevant documents. For cargo claims this means bills of lading, relevant charter parties, mates’ receipts, tally sheets etc. Other claims will require copies of notice of readiness, pumping logs, empty tank certificates, on-hire/off-hire survey reports, bunker receipts etc. all depending on the type of claim.

Disclosure and Discovery: be aware that if the matter is litigated it may well be that there will be a request for disclosure. Much information is now exchanged or stored electronically and the required disclosure of “documents” will include electronic data, including email correspondence. The duty to disclose (discovery) does require that a “reasonable search” is made for the documentation/evidence, and both physical records and electronic storage facilities will therefore have to be organised and managed in a way that allows both easy search and easy access.

* DOUBLE HAPPINESS Front Carriers Ltd. v. Orient Shipping Corp. 2007.714 LMLN 3
* Wedge Marine v. Oriental Union [2005] 673 LMLN 3
* The OCEAN FROST – Armagas v. Mundogas [1986] 2 Lloyd’s Rep  109
* The OBO VENTURE – Mina Oil Resources v. Bocimar
The “BREMEN MAX” [2009] 1 Lloyds Rep. 81 (this decision may be appealed)