Nordisk Skibsrederforening

Nordisk 101 - Who Are You Contracting With?

Having a vessel or fleet always fixed and on charter is the Holy Grail for an owner. But sometimes, particularly in a depressed market, it can be difficult to be sure of your counterparty and their ability to perform.  Over this and future articles, we will raise points for fixture teams to consider, hopefully improving the prospects of a good outcome once the subs are lifted.

Financial success is heavily dependant on the financial strength of your counterparty, and where they are based.  Are you sure that your counterparty is asset rich or a man of straw?  Are there hidden risks in their identity or home base?  Here are a few points to ponder:

1. You charter to a solid group with international standing, so you are bound to get the hire, freight or demurrage, aren’t you? Not necessarily. Just as many shipowners hold their fleet through single purpose one-ship companies, traders and charterers often have a chartering subsidiary.  These frequently have few assets, the real wealth from commodities trading, or real estate held in other companies within the group.  Consider the need for a parent company guarantee.

2. A charterer incorporated in a country with an underdeveloped judicial system may render any arbitration award ineffective through delay, or unfortunately sometimes corruption. You win on paper, but not in reality.  Again, consider a parent or other third-party guarantee, even from a bank, located in a place where you have confidence that awards will be quickly enforced.

3. Commercially you feel compelled to agree to accept a letter of indemnity (LOI) to discharge cargo, instead of bills of lading. Can the charterer demonstrate it has the ability to meet any possible indemnity?  What is the likely value of the cargo?  Try not to agree such an LOI clause in the charter but if that is not possible, look for spreading the risk through other guarantees, and more signatories to the LOI, such as shipper and receivers.

4. A person who contracts may not always be acting on its own behalf. If it is clear that your counterparty is an agent for another, the agent has no liability towards you, only the principal. You cannot rely on the agent’s good standing when things go wrong.

5. How well do you KYC? (Know your Customer). Are they a front for, or engaging in sanctioned trading?  Always try to include a robust sanctions clause which allows you to walk away at any time.

6. Things do go wrong, and litigation may be unavoidable. Make getting the process started easier by incorporating an address for service, including email contact details, and an identified person to receive claims.

Nordisk is always available to assist members address pre-fixture issues, so get in touch if you have any questions.