FMC rolls out financial contingency plan for members of THE Alliance

Earlier this week, the Federal Maritime Commission (FMC) said it signed off on an amendment to THE Alliance Agreement that, in a sense, ensures each member of THE Alliance has each other’s back in the form of a contingency fund that FMC said “can be used to help member carriers manage through, and recover from, the insolvency or financial distresses of a participating line.”

Established earlier this year, THE Alliance includes five container shipping lines, including: Hapag-Lloyd, K Line, MOL NYK, and Yang Ming. FMC said that under the terms of the agreement each container shipping member is permitted to share vessels, charter, and exchange space on each other’s ships and also enter into competitive working agreements.

“THE Alliance sought this amendment to address marketplace issues and consumer concerns. This amendment reflects the market process in action,” said FMC Acting Chairman Michael Khouri in a statement.

At this week’s FTR Transportation Conference in Indianapolis, FMC Commissioner Bill Doyle said a driver for this amendment stems from last year’s Hanjin Shipping bankruptcy, which left more than $14 billion in cargo unaccounted for and in turn forced shippers and carriers to get that cargo moving to its final destinations.

Doyle described this effort as a commercial solution designed to protect customers’ cargo and the ocean transportation chain should one of THE Alliance’s carriers experience financial distress or an insolvency event, adding that he supports the thesis is this amendment, which calls for the smooth and continuous flow of cargo even in the face of another ocean carrier bankruptcy or catastrophic failure.

Each member of THE Alliance will contribute $1 million into the contingency trust fund along with $9 million in additional funds or through a letter of credit for a cumulative $50 million investment.

Doyle stated that An “insolvency event” includes where a Liner company:

• is dissolved other than pursuant to a solvent consolidation or merger;
• becomes insolvent, unable to pay its debts as they become due;
• makes a general assignment, arrangement or composition with creditors;
• institutes a proceeding against itself seeking a judgment of insolvency or bankruptcy;
• seeks or becomes subject to the appointment of an administrator, receiver or liquidator; and
• where a secured party has taken possession of all or substantially all its assets

He also explained that the contingency fund may be used to ensure that any affected party continues to make port calls in accordance with the services provided by THE Alliance, pay costs, losses or liabilities reasonably incurred by the Parties as a result of the arrest of a vessel; to advance funds or payments related to carriage, handling, storage, or delivery of containers carried by an affected Liner; pay claims of third parties which could lead to the arrest or detention of a vessel; reimburse the non-affected Parties for costs, losses, or liabilities incurred by the other members of THE Alliance.

“As I have noted previously, last year’s collapse of Hanjin Shipping was a wake-up call for the entire ocean transportation and logistics chain,” Doyle said. “Over $14 billion worth of cargo was stranded at sea on 100 ships scattered around the globe. It is so important that another Hanjin debacle does not happen again. Companies may fail, but the responsibility lies with everyone, at least to the extent that we do not have the damage that occurred post-Hanjin. Looking back, things could have been done differently. Looking forward, things must be done differently. And, things are being done differently with the establishment of this contingency trust fund by THE Alliance. Hopefully the contingency fund will never have to be tapped.

The FMC executive added that he firmly believes that if a carrier joins an alliance, it is the responsibility of the alliance members to ensure the cargo gets to where it needs to go. And he noted if a carrier fails and that carrier is party to an alliance, the cargo carried on the failed company’s ships may equate to a fraction of the container volume carried. Many containers may belong to the other carriers in the alliance. My point is this — Hanjin was carrying the cargo not only of Hanjin but of the other alliance members of CKYHE as well.

“Everyone suffered in the ocean maritime transportation chain,” he said. “So it is essential that all take responsibility. The responsibility is to get the ship into port and get it unloaded, get the empties onboard and get the ship back out to sea. I applaud the innovative actions taken by carriers of THE Alliance. It is a responsible commercial reaction to the events of last year and it serves to assure the shipping public that its cargo will be delivered in a reliable and timely manner.”