Uncovered cart before the horse?

International trade in coffee places well deserved reliance on fair play within a world of contractual rules - but what if an underlying basis changes drastically without a corresponding rule change?

Such a 'cart before the horse' approach is precisely what has occurred in the shipping

The ISM (International Safety Management) code, which became effective July 1, 1998, is the most recent outgrowth of a majority of maritime nations' agreement (SOLAS 1974) to ban use of unseaworthy vessels (vessels of 500 GRT and over) so that such vessels cannot even call on signatory ports.

The consequences? The vessel will be detained (seized) or rejected prior to making port should owners and/or operators not hold a DoC (Document of Compliance), and/or the vessel will be deemed unseaworthy if it does not have a SMC (Safety Management Certificate).

Relative to cargoes such as coffee, legal opinion regarding ISM has been expressed: shippers on such voyages in question could be regarded as illegal adventures, thus loss or damage - including sue and labor expenses to remove/safeguard cargo - could be excluded. (See Lloyds Press - International Journal of Shipping Law - June 1998 Quarter.)

The adoption of ISM codes sought to cut the world's exposure to pollution by outlawing dodgy older and/or unregistered vessels. Some vessels were so poorly maintained that even inspection itself was hazardous. I know of one case where a vessel's deck plates were so rusted that pathways were painted so crew could know where it was safe to walk without falling through the deck. This vessel had to be towed out by the U.S. Coast Guard from where she lay derelict in mid-channel Norfolk harbor.

In all fairness, over the years, London and U.S. underwriters tried in earnest to police by huge uprates on sub-standard vessels, but to no avail. Hull (vessel) class standards, meaning the ratings given by some national classification societies, have slipped or do not even address ISM. Cargo bookings, which are often unknowingly placed on unregistered vessels, are another natural outgrowth of ex-Soviet fleets coming into service under Charter. And some emerging markets could only rely on second tier vessels, i.e. CIS maritime states, many African ports, numerous emerging Asian regions, etc.

Therefore, in concert with ISM, outlaw of such non approved vessels from most origins was effected by cargo underwriters following suit by excluding cover, a problem impacting only shippers who: 'knowingly originate such freight,' or where, 'in the words of the endorsement ... the assured ... in the ordinary course of business, should have been aware.' (My emphasis.) However, underwriters exclusion would not apply to coffee bought in good faith under a binding contract.

Therefore, while responsible shippers should have nothing to fear, performance under existing contracts involving non-compliant vessels (either direct or by transshipment, etc.) could - at the very least - be exposed to unnecessary scrutiny.

Should coffee trade rules reflect the new reality?

Again, to close the loopholes found in purchases, legal opinion suggests that where trade rules specify "proper contract of affreightment," it is not enough - express trade rule contract language must be added to require ISM compliant vessels in CIF or CFR purchases. Regarding sales, legal opinion suggests that equal care must be taken to require the new BIMCO standard ISM clauses for FOB voyage or Time charter parties and b/l's under 'liner terms.'

Otherwise, as a buyer/seller, you might find your coffee is shipping on a vessel that is a veritable 'Flying Dutchman,' unable to make port and at extreme risk.

Within GCA or ECC contacts, the playing field would be leveled by simply adding a contract prohibition - for all growths to all markets - that "...freight bookings and/or substitutions in non-ISM vessels are prohibited...."

Put another way - don't force coffee underwriters to re-write your contracts post loss - and post facto!

Ted Rekerdres is the president of Rekerdres and Sons Insurance Agency located at: 500 Lee Park Center, P.O. 190265, Dallas, Texas 75219. Tel: (1)(214) 520-2345, Fax: (1)(214) 520-6372.