Logistics providers beware! In transit financing agreements may result in a loss of protections
Kennedys CMK is seeing an increased use of “imported goods agreements” (IGAs) in the US, under which the customers of logistics providers are able to secure in transit trade financing.
Typically, the logistics provider will be presented with an IGA by a customer who will advise that their bank “needs” the forwarder to sign the document in order to allow the customer to use the goods in transit as collateral for financing. However, if you are a forwarder, non-vessel owning common carrier, warehouse or other service provider in the logistics chain, do not sign this agreement without first being certain of the obligations that you are agreeing to take on and protections that you are surrendering - for free.
Many IGAs take the form of a contract between the bank, the importing customer and the logistics provider and place the logistics provider in a position of either agreeing to be bound by a contract which strips them of all standard contractual protections or lose the customer.
After the standard recitals, including an agreement as to the sufficiency of consideration, the IGA will generally require that the logistics provider:
- Waives the right to assert any form of lien against the cargo to secure payment.
- Waives any contractual or statutory limitations on damages.
- Does not accept any form of lien being asserted against the goods by third parties and affirmatively ensure that any lien is released.
- Provides regular reports to the financial institution with regard to shipments in transit and merchandise on hand in any warehouse facility.
- Agrees to report to the financial institution if the importer fails to pay the logistics provider for services rendered by the logistics provider.
- Agrees to accept instructions only from the financial institution in the event that the financial institution gives the logistics provider notice that the importer breached the terms of the separate loan agreement between the importer and the financial institution, which is generally not shared with the logistics provider.
- Agrees to allow the financial institution access to any warehouse facility to conduct an inventory of the importer’s goods.
- Agrees to allow the financial institution to remove the importer’s goods from any warehouse facility on as little as one hour notice if the importer seeks bankruptcy protection or if the financial institution believes that the importer may seek bankruptcy protection.
- Agrees to not seek any payment from the financial institution for services provided on behalf of the importer or the importer’s goods.
A workable compromise
Notwithstanding the onerous conditions contained in many IGAs, our experience is that most financial institutions are more than willing to explore ways to allow for sufficient protections for both the financier and the logistics provider. The financial institution wants to loan money to the importer while being relatively certain that it will recover any unpaid debt by seizing and selling the cargo. Once the financial institution understands that without the services of the logistics provider there would be no cargo, they generally will agree to modify the proffered IGA to ensure the logistics provider will get paid for their services and that the financial institution is still protected.
The logistics provider should, however, still exercise caution as some ‘concessions’ are not as beneficial as they first appear. Agreeing, for example, to retain a lien against cargo in the logistics provider’s possession for amounts owed for services rendered in regard to that specific cargo will result in no real protection for the logistics provider. The logistics provider will never have a right to assert a lien on cargo in its possession unless that cargo has remained in the provider’s possession for the thirty or forty-five day credit cycle.
When presented with an IGA by a customer, it is important to remember that it is generally not a “take it or leave it” proposition. We would recommend reaching out to the financial institution to see if there are ways for all parties to get what they need to allow for the in transit financing. Consider exploring alternative arrangements, such as a separate guarantee from the importer to cover an average thirty or sixty days’ worth of transactions. Remember, however, that a guarantee is only as good as the party giving the guarantee, so it is best to insist on some participation by a bank or corporate parent. Most importantly, the logistics provider has to be willing to walk away from any business which has the potential to leave the logistics provider performing services for free.