Finance and insurance keep the supply chain circulating

This article was first published by DCN.

Much of the focus in the supply chain revolves around the physical logistics of moving goods to their final destination and the regulation of that movement.

However, two aspects which do not attract quite the same attention from those within the supply chain (as opposed to those outside of the supply chain) are the various finance and insurance aspects of the supply chain. However, they are equally important. After all, their absence would cause the supply chain to stop. Remember that some of the most recent crises in the supply chain with the Hanjin and GSS shipping issues arose from insolvency of those entities. Further, the absence of finance and insurance is often a major cause of problems for SMEs and developing economies.

Accordingly, it remains important for those involved in the physical element of the logistics supply chain to consider these issues which have a vital impact on the wider business environment. Some thoughts are set out below.

Finance issues

Every aspect of the financing of the supply chain is complex. Ownership of the physical assets has increasingly passed from public to private ownership which requires funding for the acquisition and then pushes pressure on the acquirer of the assets to increase revenues and profits. For example, the recent release of the ACCC’s Container Stevedoring Monitoring Report for 2016-17 makes particular reference to the adoption of new infrastructure charges by stevedores as a basis for new revenue streams.

Those operating in the supply chain require external funding as do those buying and selling goods passing through the supply chain. Even with the development of new funding options by the major banks and other parties such as the Export Finance and Investment Corporation, much of that funding will usually operate according to time-honoured processes involving Letters of Credit supported by Bills of Lading (BL) effectively giving title to the goods to those holding the BL. One of the crucial aspects of the supply chain and its security and funding is the reliance on these original BL and, over time, the adoption of digital equivalents through processes such as blockchain and digital transactions which may offer a more agile and secure option.

One of the most regular sources of calls for legal assistance relates to dealings with original BL, whether to replace original BL which have been lost or when an unscrupulous consignor or shipper refuses to release those BL without payments additional to those that have already been made for the goods. Difficulties also arise when the original BL are in the hands of insolvency practitioners appointed to a party to a commercial transaction who is unwilling to release those BL until further extensive inquiries regarding the transaction and the possibility of additional payments has been resolved. Problems also arise where there is a Letter of Credit raised on non-traditional banks in developing countries which are not honoured by other parties.

The importance of BL in respect of the financing of the sale and purchase of goods in the supply chain was demonstrated in the recent decision of the NSW District Court which ordered significant damages against an Australian freight forwarder whose ‘house’ BL were issued and treated as original BL by a financier as title for goods. However, those BL did not then deliver title for the goods leaving the financier without the goods against which it had already advanced funding. The financier successfully recovered against the freight forwarder for its ‘misleading’ conduct.

Securing the recovery of monies owing to providers of freight and logistics services has been complicated in recent years by the adoption of the Personal Property Securities (PPS) regime. This extinguished many of the older types of lien on which providers of freight and logistics services had relied to secure monies owing to them and required those parties to adopt new practices according to the new regime. This included attempts to require customers to acknowledge that they granted a form of interest over the goods being handled which would support registration of an interest on the PPS Register.

However, in many cases the service providers omitted to actually register their interest which adversely affected them upon insolvency of their customers or in a dispute with other parties over who they had registered their interests. I continue to review standard terms and conditions of trade for these service providers to ensure that the relevant PPS interests are created and recommend practices to those service providers to ensure that those interests are registered and administered. However, even then, difficulties arise as many large customers do not allow their service providers to have such security interests as it interferes with the customers’ external financiers who want priority of interest over the goods for which they have provided finance. That requires a separate negotiation on security for money owing.

As the reported cases continue to arrive in respect of the PPS regime, it is important for the providers of freight logistics services to properly embrace that regime to secure their interests both for their own solvency and for the interests of their own financiers.

Insurance issues

The presence (or absence) of insurance is another vital part of the supply chain. There is very little that moves without insurance. Every change to regulation and each natural disaster, terrorist or national security event changes the risk profile to the supply chain and which has an effect on the availability of the insurance. As risks increase, finance becomes more expensive and insurance also becomes expensive, even if available at all. Those risks affected by issues such as the location of the trade, the parties to the transaction, the existence of sanctions or other restrictions on trade, the nature of the goods and the manner of transport of those goods. Ultimately, insurance is driven by the value of the assets being conveyed and the nature of the risks being covered and the size of those risks. It is fair to say that even with the best due diligence by private parties, changes in legislation or regulation by government agencies can have an effect on the risks of a business and increase the demands for insurance.

By way of one very recent example, the Department of Immigration and Border Protection and the Australian Border Force recently issued a notice regarding their approach to who was the ‘owner’ of goods for the purposes of liability to under pay duty in respect of those goods. The result (in short) is that basically any party who is in the supply chain who has an interest in, control or possession of the goods, can be treated as owner of the goods and can be liable for customs duty which has been unpaid or under paid in respect of those goods. That could extend to service providers such as freight forwarders and licensed customs brokers. Not only do such notices create uncertainty as to liability (not good in relation to a revenue statute) but also require parties to consider their insurance needs and whether insurances will extend to such liability. There are similar challenges from the increased use of infringement notices. Changes to legislation, regulation and practice need to be monitored carefully, the risks assessed, practices reviewed and appropriate insurance engaged.

So, how to deal with these issues

Unsurprisingly, there is no one clear and simple answer to all of this. There is a limit to what can be done by the private supply chain to guard against events of war, catastrophic natural disasters or terrorist events. All these have an immediate and significant effect on the movement of goods through the supply chain and the risks of that supply chain and therefore adversely affect the availability of finance or insurance. So, the focus turns to how to manage them.

Methods of managing insurance and finance issues

Accordingly, a lot of work goes into mechanisms and methodology to manage the significant risks existing in the supply chain. These include the following:

• Additional due diligence prior to a transaction being undertaken on the goods being carried, the parties involved, and the financial risks of the transaction. Assistance can be sought in undertaking due diligence through industry associations such as the CBFCA, ECA, FBIA and the Ai Group. There are also other parties whose business includes such research and due diligence and I have a long-standing excellent relationship with FTI Consulting. Banks and finance corporations also provide some assistance and much can be gained from others in the supply chain who may be willing to provide advice such as licensed customs brokers and freight forwarders. State and Federal Government agencies such as Austrade also provide resources.
• Review existing terms and conditions of trade or other service contracts. These need regular review and attention especially in light of the commencement of the new ‘unfair contracts’ legislation affecting contracts with small businesses. A recent decision of the Federal Court struck out a number of provisions in a standard contract of services on the basis that they did not comply with the terms of that unfair contracts legislation.
• Consider whether interests are properly protected under the terms of the PPS regime. It is not enough to include provisions in relevant terms and conditions of trade or contracts which purport to create a PPS interest. That interest needs to be registered on the PPS Register and steps need to be taken to ensure that those rights are properly protected and asserted.
• Careful monitoring of customer accounts once work has commended. There needs to be good ‘financial hygiene’ and on occasion services need to be withdrawn.
• Pay close attention to the increase in the use of blockchain and related digital concepts in the supply chain to assess how they can be used. Although, in some ways, blockchain is in its infancy, there appears to be little to stop significant growth in its use. For example, the World Economic Foundation (WEF) found that 80% of global banks will have initiated blockchain-related projects by the end of 2017. Further, the WEF also predicts that by 2027, 10% of global gross domestic product will be held in blockchain technology. We are beginning to see the use of blockchain technology in the supply chain and the recent presentation by Richard White the CEO of WiseTech Global at the CBFCA National Convention, provided details of how blockchain practices and the use of artificial intelligence can improve the security of the supply chain and reduce costs and risks associated with the supply chain. That will have a consequent positive affect on the availability of finance and insurance for such transactions especially as the finance and insurance industries are key participants in the development of blockchain. The use by government agencies of the information contained in the blockchain to satisfy with their regulatory requirements instead of requiring separate reporting would advance the concept even further. Separately, the recent Bulletin of the Atomic Scientists contained an article which identified that blockchain might be a new aid to nuclear and other export controls. In the context of blockchain and related digitised trade practices, I recommend consideration of the ICC publication entitled ‘2017 Rethinking Trade & Finance – An ICC Private Sector Development Perspective’ and a publication entitled ‘The future of Australia’s Trade – a digital vision for 2025’ published by the ECA, KPMG and ADCA on 2 November 2017.
• Look to the development of new and innovative financial and insurance products within industry. I am aware that a number of parties in the insurance industry involved in insuring the global supply chain are developing new and improved products to deal with the changed risk profile being experienced by those providing services in the supply chain.

As always, if pain persists, see a lawyer!

Contact author and International Trade Partner Andrew Hudson to discuss how to best manage your supply chain risk.

Corporate & Commercial Partner Julia Cameron can help you register your security interests on the PPS Register and assess whether your terms and conditions need updating.