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Guest Blog – Issues arising out of Hanjin bankruptcy

gavin-pmlawOn 2 September 2016 Hanjin Line declared bankruptcy and a Receiver has been appointed under Korean law. The sudden collapse of one of the major global steamship lines has sent shockwaves through the supply chain as the Receivers, Hanjin’s partners, their customers, and subcontractors such as ports and railways scramble for solutions in an uncertain environment.

 While the situation remains fluid, the following Frequently Asked Questions are intended to provide guidance on some of the issues that have or may arise. CIFFA cannot provide legal advice, so if you and your customers are impacted by the bankruptcy you should seek the advice of a lawyer.

 What do I need to do right now?

Communicate, communicate, communicate. The circumstances of the bankruptcy and resultant additional costs are events which a Forwarder could not have avoided even with the exercise of reasonable diligence. Forwarders need to be proactive in keeping their customers apprised of the situation and advised on any and all additional costs and charges, and in obtaining their instructions where necessary on how to deal with goods that are delayed or re-routed. Make sure these communications are documented (e.g. by email). Under the common law principles of agency as well as the CIFFA STCs, your Customer is responsible for the additional charges that result.

 Who is in charge now?

The Receivers have taken control of Hanjin and all of its assets. In general, it is their obligation to realize as great a recovery as possible for the secured creditors, and so they have an interest in delivering up cargo so that empty vessels and boxes can be monetized. In so doing, however, they are bound by Korean bankruptcy law and the orders and procedures of their courts, and so ultimately it is the Korean Courts that are in charge.

 Will Hanjin vessels be arrested?

In bankruptcy, actions against the assets of the bankrupt under control of the receiver are “stayed”, which means they cannot be commenced and cannot proceed if already commenced, unless the claimant receives permission from the court. The Korean proceedings include such a stay, which is commercially necessary to enable the receivers to dispose of the assets reasonably. However, bankruptcy laws are national in nature and therefore creditors of Hanjin in Canada or elsewhere could attempt to obtain an order for the arrest Hanjin vessels in their national waters without regard to the stay on proceedings under Korean law. For this reason, a large number of Hanjin vessels are currently laid to in waters outside of (for example) US waters, a situation that is likely to persist unless and until Hanjin has confidence the vessels will not be arrested. As of the time of writing, there are several Hanjin vessels that have been docked for an extended period of time at ports in China and there is some speculation that they have been detained or otherwise prevented from proceeding.

So can Hanjin get services and not pay for them?

No. The stay affects all obligations and claims arising prior to the date of bankruptcy. The Receivers are fully authorized and obligated by the Court to meet obligations to which they agree from that date forward. Accordingly, for example, an unpaid contract for freight made with a rail carrier prior to bankruptcy for oncarriage of a multimodal carriage would be stayed, so rail and motor carriers that had been engaged for oncarriage cannot sue for those charges but rather must await their share of the proceeds of the bankruptcy; these parties will obviously be reluctant to provide freight services for arriving Hanjin cargoes as they will have no expectation of payment. If a Hanjin vessel docked after the bankruptcy to take on fuel, by contrast, that contract would have to be paid by the receivers in the usual course and in full, since it was agreed subsequent to the bankruptcy and does not form part of the debts of the bankrupt.

 Isn’t there a US bankruptcy proceeding?

Yes. Representatives of Hanjin sought protection in the US Bankruptcy Court for the District of New Jersey. That Court granted an Order confirming that the Korean proceeding is the main proceeding within the meaning of US bankruptcy law, however, there are a very large number of trade creditors and other interested parties and as such the situation there is quite fluid.

 What about Canada?

The Hanjin Scarlet discharged it’s Canadian cargoes and has left Prince Rupert apparently without incident, but at the time of this writing it and other Hanjin vessels in the region appear to be in a holding pattern. As yet there have not been arrest or insolvency proceedings commenced in Canada. Courts prefer to avoid a multiplicity of proceedings as being inefficient and rife with potential conflict, so in the event there are domestic proceedings it would be reasonable for the Canadian Courts to defer to the jurisdiction of the original proceeding in Korea.

 Will I be able to get delivery of incoming Hanjin containers?

Right now the answer is yes. The Receivers have an interest in emptying the vessels and retrieving the empty containers. As these arrangements were made pre-bankruptcy, however, both the affected ports as well as CN and terminal operators are seeking pre-payment or credit arrangements for their charges for their services in respect of the carriage. Arrangements need to be made directly with the designated representative of the port or CN:

CN Rail

E: Hanjinimports@cn.ca

DP World, Prince Rupert:

Tabare Dominguez, Commercial Director, E: tabare.dominguez@dpworld.com

GCT Vancouver

Chris Ng, Vice President, Marketing & Sales, E: cng@globalterminals.com

 Who is responsible for these additional charges?

Every CIFFA Member is obligated to trade under the CIFFA STCs or conditions at least as strong. Paragraph 11 deals with changed circumstances that affect performance of the Customer’s mandate, and require you to take reasonable steps to obtain their further instructions. If you cannot confirm instructions, you are authorized to store the goods at the customer’s expense or to sell the goods for the beneficial interest of your customer.

 What do I do about export cargo intended for Hanjin vessels?

These will need to be re-routed, and this will result in additional costs about which you need to keep your customers advised. If the cargo was booked with Hanjin and moved to port prior to the bankruptcy, new arrangements will need to be made from where the cargo is currently located. Where the cargo was booked on a Hanjin vessel by another line and is being re-routed at their direction, the carrier’s right to impose additional charges for this interruption will be determined by that carrier’s bill of lading terms, and you should consider seeking legal advice.

What about the empty containers?

The containers belong to Hanjin and are at the disposal of the Receivers. CN has advised that, where containers were the subject of a prepayment or specific credit agreement, they will accept them for return. As of the time of writing (23 September) CN will not accept Hanjin containers that left their system prior to the bankruptcy under their confidential agreement with Hanjin. For commercial reasons, Forwarders having numerous Hanjin containers should consider making arrangements for their storage off-site at lowest cost. As Hanjin is not your customer and would not in the usual course of business owe a Forwarder money, you do not have a lien in the container as you would in cargo for unpaid freight. If exposure to storage for containers is an issue for you, we recommend seeking legal advice.

What about perishable or time-sensitive goods?

Under paragraph 15 of the CIFFA STCs, damages for delay are highly circumscribed, and they are similarly limited or even unavailable under common carrier terms and international Conventions. Under paragraph 5 of the STCs, you are not responsible for on-time delivery unless you provided a written guarantee. Ensure good communication with your customer and take all reasonable authorized steps in order to minimize the potential for claims.

 What if a customer abandons their goods and refuses to pay?

Abandonment is also a changed circumstance under paragraph 11, and you are permitted to divert, store, and sell the goods on account of your charges. Paragraph 18 provides details on your right of lien for charges outstanding from such customers. Where customers refuse to give instructions in respect of cargo, or declare that they are abandoning cargo, you should seek legal advice.

 What about goods on Hanjin vessels stopped at foreign ports?

It is important to recall that bankruptcy law is particular to each nation, and while the process appear to be working as intended in Korea, the USA, and Canada, there is always the possibility of independent action under the national law of any port of call will permit arrest of vessel, for example.

Guest blogger is Gavin Magrath, Barrister & Solicitor, Magrath’s International Legal Counsel, CIFFA legal counsel. He is a civil and commercial litigator focusing on maritime, admiralty and transportation law, representing forwarders, carriers, ship owners, and cargo interests in litigation and dispute resolution before the Superior and Federal Courts. Can be reached at admin@ciffa.com.

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