Rule 10 - Debt Collection
ITIC’s Rule 10 provides ship agent and ship broker Members with cover for additional legal expenses and debt collection. This article (in the form of an interview) provides an insight into how the managers undertake this service as well as giving some practical guidance to Members as to how they can facilitate the task of the claims handlers who deal with such cases.
1. What is the information you need from a Member in order to start the debt collection process?
In the case of ship agents, the Club requires a copy of the disbursement account and a copy of the communication setting out the original appointment. In the case of ship brokers, the Club needs the commission invoice as well as a copy of the charterparty. In all cases, it is also important to supply copies of any correspondence with the debtor, particularly any communication where the debt is admitted. It obviously saves time if we are supplied with this information in the first instance. The time element can, of course, be critical where there is the possibility of arresting a ship in respect of the outstanding claim.
2. Why is it important to give early notification to the Club of an outstanding debt?
Many Members ask us how long they should wait before informing us about overdue outstandings for action under the provisions of Rule 10. Whilst we do not as a rule tell our Members how to run their businesses, many of the debts that the Club is asked to collect have been outstanding for a considerable period. We would recommend that Members employ a credit control regime that does not allow invoices to remain outstanding for more than 40 days from the issue of the invoice at most without triggering an enquiry or notification to ITIC - build the Club into YOUR credit control system. Furthermore, from a practical point of view, there are two reasons why the Club should be asked for assistance earlier rather than later:
a) Firstly, the older the debt the more difficult it is to collect. This is particularly relevant if the ship that incurred the debt in the first place has been sold and/or the ship owner, time charterer or voyage charterer has been declared bankrupt.
b) Secondly, most countries operate a time-bar within which a ship may be arrested. This can be one year after the time when the claim first arose. This is therefore particularly important, in the case of items in a disbursement account such as harbour dues, pilotage, canal dues and cash to Master. These items often constitute a maritime lien with a right of arrest notwithstanding the fact that the balance of the items in the disbursement account is due from charterers.
3. Can the Club act if the debt is disputed?
If the principal is disputing either the whole or part of the debt then it is important that we should be given this information. Disputes must normally be resolved before the debt collection process can be initiated. However, the Club is often able to resolve such disputes and in the majority of cases, these have been in favour of the Member.
4. Is it always possible to arrest a ship for an outstanding debt and what are the practical considerations that apply?
a.) Whether a ship can be arrested depends on the type of claim. As a generalisation, most maritime countries will allow a ship to be arrested for outstanding disbursements that the ship owner has incurred. Claims for outstanding commission due to a ship broker are more complicated and the possibilities of arrest are more limited.
b.) The arrest of a ship is not something that should be undertaken without careful consideration of the consequences. To detain a ship in port, even for a day beyond its schedule, may cost an owner or operator many thousands of dollars. It is, therefore, highly unlikely that any kind of commercial relationship can be restored between the respective parties once an arrest order has been obtained. Two of the main considerations when contemplating an arrest are the location of the ship and, once located, whether an arrest in a particular jurisdiction is possible or desirable. If the claim is one for which an arrest can be made, practical considerations then need to be taken into account, e.g. whether it is necessary for the claimant to give security for costs, damages and interest and how quickly an arrest order can be obtained. The costs of the arrest (and whether they can ultimately be recovered from the defendant) are also an important factor in deciding whether to proceed. The consequences of a wrongful arrest must also be considered since they differ from one jurisdiction to another.
5. Can a ship agent take any action to avoid a bad debt in the first place?
Most of the debts that the Club is asked to collect on behalf of ship agents are cases where there is an outstanding balance of a disbursement account. A balance will normally arise in cases where there has been an unforeseen event during the call of the ship that has inflated the final account. However, we see other instances where the principal has failed to remit any advance funds to the agent. Naturally, in such cases, the agent must make a commercial decision as to whether to undertake the work or whether to refuse the agency until he actually has the money in his bank account. The Club would always recommend extreme caution where no money has been remitted particularly where the principal is unknown. There is also the possibility of detaining the ship in port at the time if funds have not been received. This can be done by requesting the port authority to refuse clearance to the ship. The Club’s assistance can also be given in such instances.
6. In how many jurisdictions around the world is it possible to arrest a ship for debts due to Members of ITIC?
I would estimate that there are approximately 40 jurisdictions in which ITIC has successfully arrested ships on behalf of its Members. Some jurisdictions are particularly “user friendly” and others pose some difficult problems. For instance, a power of attorney is sometimes required and it may be necessary to have the documentation translated into the local language. The provision of counter security can also act as a deterrent in some cases.
7. Is there any final piece of advice you would give Members on this subject?
The most important factor is to notify the Club at an early stage of an outstanding claim. Many Members are reluctant to place a debt in the hands of a third party for collection in case it jeopardises their prospects of future business. However, this begs the question whether it is worth preserving a commercial relationship when the other party fails to honour his obligations by paying the amounts due even though they are clearly undisputed.
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