Removing the risk from logistics

There are two primary ways in which logistics users, and their service providers, can manage their risk

The first is to contract out of that risk. The second is to obtain insurance for any risks that cannot be contracted out of. If these two mechanisms are used in conjunction with each other, there is little room for disputes developing into litigious matters.

Risk management becomes complicated when statutory regulations enter the fray, and this is what happened to the logistics industry when the Financial Services Board (FSB) issued Information Letter 1/2012.

According to this letter, a transporter can only insure the goods of its customer, if, among other things, it is a registered insurer; or if it enters into a short-term policy with a registered insurer as a bailee.

The purpose of this letter was to stop the practice of transporters providing “tick the box” goods-in-transit (GIT) insurance to their customers – sometimes without there being a policy in place.

Recently, I had a matter on my desk that served as a good example of how not to do things. The truck concerned had jackknifed, which resulted in a container sliding off and the contents being damaged.

Transporter A had entered into a contract with the cargo interest, and had, in turn, subcontracted transporter B to carry the load. At the time of the incident, the cargo interest thought that its standard trading terms were applicable. Those standard trading terms prohibited transporter A from subcontracting, and limited liability to 500 000 SDR (special drawing rights), which equates to about R9 million.

When the cargo interest made a demand, transporter A argued that the consignment had been transported in terms of an oral agreement with the cargo interest’s local manager. It asserted that, in terms of that alleged oral agreement, transporter A had only agreed to provide GIT insurance cover of up to an amount of
R500 000. The subcontractor, transporter B, had, in turn, also agreed to carry the consignment on basis of GIT cover of R500 000.

There are two problems with the above scenario. First, the parties were not clear on the terms of their agreement. This error arose out of poor risk management. The parties clearly did not understand how standard trading terms operate, and did not know when to incorporate these terms into a written agreement.

Also, the logistics manager of the cargo interest was not familiar with his own company’s standard trading terms, and appears to have agreed to a local custom in terms of which transporters simply offer limited GIT insurance cover to their customers.

From the insurance perspective, the local custom of transporters putting up GIT insurance is prohibited by the FSB letter. The difficulty that the logistics industry faces is that there are a number of brokers and underwriters who do not appreciate the full implications of the FSB letter.

Because of increased trade, competition and new technologies, risk management in logistics is becoming more important. Logistics service providers and their customers must know the form of the logistics contracts and how to make them binding, as well as the agreed obligations and how the risks are allocated and insured.

They must ensure that they have proper insurance in place; be it bailees’ insurance, or liability insurance.

If risk management is undertaken correctly there would be little need to employ dispute lawyers.

Peter Lamb is a director in the Norton Rose Fulbright admiralty and shipping team, based in Durban. A qualified attorney, Lamb has an LLM in shipping law from the University of Cape Town. He focuses on shipping, logistics and marine insurance law. Lamb is also able to advise logistics service providers, and users, on numerous commercial aspects and risk management, with a focus on Africa. You can read more from Lamb on the Norton Rose Fulbright insideafricalaw.com blog.