Q:

We sold c.i.f. on an LC, shipped on time, but the documents were lost somewhere between the banks. There’s now a very large demurrage charge, and the cost of a bank indemnity/shipping guarantee to resolve. What is our position?

A:

“Not every contract which is expressed to be a c.i.f. contract is such” (Lord Porter (MV The Julia) 1949).

This is a very complex situation and there’s always a chance that there may be some detail in the file that could materially change this response. Read the following with this caution in mind.

A c.i.f. contract (whether it is c.i.f. proper, or the watered-down CIF of the Incoterms rules) is the sale of documentation not the sale of goods, to the point that in the US Uniform Commercial Code, in a C.I.F. contract, the seller may not offer the goods in place of the documentation, neither may the buyer “…demand delivery of the goods in substitution for the documents.”

Given this final point, arranging a shipping guarantee to facilitate release would still leave the seller in breach of contract, and yet the c.i.f. Warsaw-Oxford rules (on which the Incoterms rule CIF is based) do allow for a shipping guarantee with the buyer’s permission, although Incoterms is silent on the subject.

The point here then is that much depends upon “which” c.i.f. / CIF/ C.I.F. the parties are trading under.

c.i.f. and the so-called ‘negotiable’ bill of lading are designed to be used in tandem when trading commodities. The ‘buyer’ is therefore potentially a middleman who does not want physical release of the cargo to their care, but rather wants the transferrable documentation so that they may on-sell this to the next trader.

However, if the seller and buyer agree to allow the seller to accomplish the sales contract by way of lodging a shipping guarantee as a substitute for the lost bill, then so be it. But be aware that this was a commercial compromise and not an automatic solution.

There is certainly no recourse to the bank who may have lost the documents while in their care. The credit will be subject to the UCP600, Article 35 of which protects the banks, who assume “no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any…documents…”

The acceptance of the shipping guarantee is at the discretion of the shipping line. The contract they have with their principal, as evidenced by the bill of lading, does not allow for release against anything other than the bill of lading, so it is a real risk for the line to release against something else (other than a court order), lest they be found in breach of their own contract.

For this reason, it can take a long time for the shipping line to consider the offer of the indemnity (as they investigate and contemplate their risk), and the accumulation of storage and demurrage charges – to which the carrier has no exposure – will not motivate the line to cut corners in the interest of haste.

As much as the seller might not like the answer, the answer – based on the facts disclosed – is that they are fortunate to be allowed by the buyer to arrange the shipping guarantee, and fortunate further if the shipping line accepts it.

Business is risk. There is no risk-free position, but there are some positions one can take where the risk is lowered. For sellers, the low-risk approach to business is not served in the 21st century tendering a 18th century transport document, to fulfil an 19th century contract term, under an early 20th century payment mechanism.

In practice, I would expect the consignee will be required to settle the demurrage charges prior to release, however as the credit will expire I also anticipate the applicant will have their funds returned, and the buyer will meet the incurred demurrage charges by short-paying the seller in due course.

Source: Freight Training