Hanjin Shipping: From the eye of the storm and back
March 1, 2017
Types : Alerts
Since the bankruptcy of Hanjin Shipping Co. Ltd., so many articles have been written about how it happened, why it happened, and what can be learned from this tragedy. When Hanjin Shipping, once the 7th largest container carrier in the world and the 4th largest container carriers in the transpacific (Asia – US & Canada) trade, filed for bankruptcy, few believed that a “too big to fail” organization like Hanjin would not be given a government bail-out. So, naturally, no one really appreciated the kind of disruption and losses that would subsequently affect the global supply chain.
As the former General Counsel for Hanjin Shipping America, I have the unique perspective of having been in the eye of the storm. Instead of agreeing or disagreeing with the various positions taken on the legal merits involving common benefit claims (a type of Korean bankruptcy claim similar to US administrative claim), maritime lien vs. non-maritime lien rights in the bankruptcy context, and the balancing the bankruptcy proceeding of Korea and that of US, I take this opportunity to share three practical issues I have found to be the most significant to the shipping industry in general.
First and foremost, so many players are involved in moving a single containerized cargo from place of origin to final destination. Just to name a few (other than the seller & buyer of cargo itself), there are the container lessor, chassis lessor, M&R (Maintenance & Repair) vendors, cargo loading agent, warehouse, freight forwarder/NVOCC (“Non-Vessel Owning Common Carrier”), ocean carrier, ship owner, commercial charterer/ship operator, tugs, bunker supplier/provider, marine terminal, trucker and/or railroad, and the equipment storage facility. Of course, there are also the critical roles government, insurance companies, financial institutions, and the labor forces (on ship and on land) play in the global supply chain. For one container, many of the respective rights and obligations of the involved players are intertwined with and interdependent of each other. As Hanjin Shipping’s troubles unfolded, we learned the hard way that any one of these players, regardless of their size or even without having any legal merit, can easily disrupt the complex shipping processes; thereby, causing a chain reaction along the global supply chain. And now, it will be even more difficult to anticipate and to manage these risks because more and more of these players will want to protect their rights without fully understanding the extent of their interdependent natures.
Hence, secondly, it naturally follows that a real area of concern in the future will be the language that will be used in service contracts going forward. For instance, formal service agreements between ocean carriers and their customers, or between ocean carriers and their service vendors, will likely see the most changes following the Hanjin Shipping demise. Many are already trying to insert terms for ‘self-preservation’ or ‘self-help’ remedies. For one, many customers and service vendors of ocean carriers have realized that their typical protective clause that essentially read “we shall be able to terminate this ocean carriage contract in case of your bankruptcy” may not be sufficient protection or unenforceable in the case of an actual bankruptcy. It will just be a matter of time before container leasing companies, chassis leasing companies, terminals, certain cargo interests, and high volume buyers/sellers (beneficial cargo interests) introduce new or creative forms of remedial language in their contracts and tariffs – for example by inserting certain lien clause or clause gives them secured-creditors status. But, some of these protective changes might not be enforceable nor duly protect the players because of, again, the interdependent nature of the industry. Careful thought and prudence will be required.
Therefore, third and finally, the future of the industry remains unclear. If anything is certain, there will be even more changes – more mergers & acquisitions, more rules changes (heard of UNICTRAL?), different ‘versions’ of alliances or space sharing agreements, and the more demands by financial institutions and lenders. For national security, safety, preservation of environment, the restricted-trade or fair-competition, ocean carriers will continue to be on the front line bearing many regulatory demands and requirements. Then, there will be the NVOCCs, in light of the recovering US consumer market, taking more market share, and capitalizing on the current instability of the ocean carriers and the changing global logistics industry.
We may continue to disagree about what should happen with Hanjin Shipping’s unresolved issues. Yet, there are some things we can agree on – Hanjin Shipping’s once highly admired and praised transportation services will soon be replaced by others; and, more importantly, all of us – carriers, customers, and all the other players in the global supply chain – must learn from this experience and work together better in order for all of us to not just survive, but to thrive again.