“It is not only a classic example of the rule of transferring the risk under the CIF basis of delivery, saying that after the loading, even the flood may happen. This story became a bright example of how the market of international trade could not relate to the jungle, where everyone is on their own. There are long-established rules on the market, that obligations must be performed, and help in difficult situations must be provided.”
Partner at AVELLUM Law Firm
The other working morning began with a rather unexpected question via a telephone call. What to do if the vessel with the cargo is sinking? Naturally, it is vital to clarify whether the vessel is still sinking or is already sunk. This is a beginning of an unordinary story. After the voice in the receiver replied that the vessel is only sinking yet, all of the colleagues on the conference call sighted with relief.
Following the client’s statement that he is an actual seller of the goods on a sinking vessel and their price has not been paid yet, an awkward silence filled our office and even the computer entered a standby mode. We instructed the client to send us the documents and assured that we will resolve the issue. By sending an email, the computer was brought to operational readiness, and the e-mail box was ready to receive another 30 letters or so.
We had a very clear understanding that we need to take measures immediately, considering that at that moment, no one knew what exactly happened with the vessel, how fast it was sinking, and if we can still save the cargo. There was no way to communicate with the shipowner, however, keeping the buyers in the dark was not an option.
The Marine Traffic demonstrated the location of the vessel, which was not bad already. It was important to bear in mind that every single minute mattered, as the vessel was getting deeper into water, and lawyers into numerous documents, namely sales contract, insurance, charter party, bills of lading, insurance of vessel and certificates on vessel, correspondence between the insurance company and buyer, etc.
If you are drowning, only lawyers can save you!
One hour later, first conclusions have surfaced: (1) English law is applicable, (2) cargo was shipped according to CIF, (3) cargo was insured and loaded on the seaworthy vessel, (4) the seller performed all his obligations under the contract. What this means, is that all the risks are on the buyer. Even if the cargo will sink and the underwater fish market would be topped up by additional 5 thousand metric tons of highest level grain wheat, the buyer would be obliged to pay for the cargo.
Moreover, considering that everything is fair, the beneficiary under the insurance was the buyer as well. Meaning that the insurance company would compensate all the damages to the buyer.
The paperwork suddenly acquired a completely new form, everything was getting better on our side. Unfortunately, not so much for the buyer. What options did we have, (1) to sit still and wait for the payment to be received, (2) to write threatening letters that under the English law the risk has passed to the buyer and the buyer must pay for the goods? Of course, there is always an option to leave the buyer face-to-face with the problem, but that is not how business is done. The vessel began to sink as soon as it departed from the port of loading, in the Northeastern part of the Black Sea. The destination port and the buyer are both located in Turkey, but the contact with the insurance company and the ship owner lied with the seller.
A story about how beauty will save the world, and performance of obligations will save the money
Subsequently, we had to register the accident and write down a sequence of all events. We prepared a detailed plan of actions, as well as the buyers’ obligations in accordance with the contract and the insurance agreement to provide the buyer with the insurance compensation.
First of all, we needed to obtain the information regarding the situation on the vessel, and no one would know it better that the ship owner himself. We searched in open sources, and did not manage to find any valuable information, no clear facts, photos, or videos, only gossips.
We informed the insurance company about the accident, located the vessel, sent all the documents and the insurance compensation application. Then we had to bring the bad news to the buyer. If the only way of communication was a telegram, we would write something that resembles the following: “The vessel is sinking, the cargo is on board, you still have to pay for it. But we will not leave you in trouble.”
In the meantime, the ship owner got in touch, followed by this, information appeared on the web and even the representatives of the officials commented on the situation.
Adventures of a small vessel in the big Black Sea
As it turned out, there was an accident on the vessel. The engineering section was damaged and flooded, and the water filled the cargo holds. Although the team immediately reacted by trying to repair the breakage on their own, the vessel continued to sink. SOS signal was sent.
The nearest port responded and sent help. The team was safely removed from the vessel, which even during the rescue operation continued to slowly sink. Until the vessel was dragged to the shore it reminded of an iceberg. Only the upper part of the vessel remained above the water, whereas all the holds were under the water. The vessel ran aground.
A hope to save the cargo remained in everyone’s hearts. The buyer, which had to pay for the goods, was expecting to save the money. The seller, in turn, was deeply frightened that the wetter the cargo becomes, the worse are his chances to receive payment. The insurance company was hoping that it will not be necessary to cover the entire price of the goods, but only the extent of the damage. However, this was not the case. The problem went far beyond the limits of private interests. The fate of the goods, the vessel, and the insurance compensation were tiny in comparison with those problems, which were found out while examining the vessel. For example, out of the blue there was a risk of a fuel spill in the Black Sea. The access to cargo was put on hold. The governmental rescue company took over the vessel to pump out the fuel mixed with water from certain sections of the vessel.
The adventures of the vessel were far from over, the PI Club (insurance company of the shipowner) created even more problems, as they were interested in the fate of the vessel. The representatives of the port wanted to remove the vessel from the port as soon as possible. Furthermore, the authorities together with the environmental organisations put even more pressure by demanding to clean the water from the fuel.
It became clear that the situation will not be resolved quickly. When the pressure decreased and everyone was prepared to wait, the seller reminded about the payment again. Since all the documents were provided and there was no reminder that the 2-days limit for payment under the contract had already passed, as the seller understood that it was not the primary matter, and that money, in contrast to the vessel, were stored in a dry and safe place.
Payment for the goods
Buyer’s obligation to pay had not sunk with the cargo. Regardless of any problem that would wait for the cargo in the future, the main rule on the delivery has remained unchanged, the risks related to the goods, under the CIF, are transferred when the goods are placed on the vessel. Strictly speaking, if the vessel would have sunk right after leaving the port with loaded goods, the buyer must pay for the goods in accordance with the contractual documents. In our case, the seller provided all the contractual documents for the payment prior to the SOS signal. Thus, the buyer cannot deviate from performing his obligation to pay.
The payment was finally made. Moreover, by virtue of the seller’s actions, the buyer could rest as well, since the insurance company had to compensate the damages, as the seller performed all the requirements of the insurance policy. Due to the above, one reasonably calm (as calm as it can get at the busy law office) evening was interrupted by the clients’ call: “Oh my God, thank you! We received a payment for the goods. The buyer will further deal with the destiny of the cargo on his own”. Everyone felt relieved, and the computer entered a standby mode, as usual.
It is not only a classic example of the rule of transferring the risk under the CIF basis of delivery, saying that after the loading, even the flood may happen. This story became a bright example of how the market of international trade could not relate to the jungle, where everyone is on their own. There are long-established rules on the market, that obligations must be performed, and help in difficult situations must be provided. Fair winds!
We also suggest you to read our previous article titled "The art of silo fumigation".