Three Letters on an Invoice

On 31 August 2016, Hanjin Shipping went into court protection. It was South Korea's biggest container line and the seventh biggest in the world, carrying about three per cent of all the world's containers.

The background was an industry that was quietly sick: too many ships, prices below cost, and a price war that the biggest companies could survive for longer than everybody else. Hanjin's banks finally refused to rescue it again. Its bigger Korean rival refused to merge with it. A company that had been losing money for years simply ran out of road between one evening and the next morning.

But this bankruptcy was not like other bankruptcies, and the reason is geography.

When an airline collapses, its planes are on the ground by the evening. When a shipping line collapses, its assets are in the middle of the ocean.

At that moment Hanjin had about ninety ships at sea, carrying around half a million containers. The cargo was worth roughly fourteen billion dollars.

Samsung and LG electronics for the American Christmas season. European fashion. Machine parts, furniture, toys. The whole pre-Christmas peak, floating.

Within hours, the world turned its back. Ports from Shanghai to Valencia refused to let Hanjin ships in — why give a place to a ship whose owner cannot pay the port, the pilots or the cranes? Fuel companies stopped supplying on credit.

And in every country without court protection, people Hanjin owed money to were waiting with legal papers. The moment a ship docked, it could be seized — with the cargo trapped on board.

So the sensible thing for every captain was the strangest thing. Stay at sea.

Dozens of fully loaded ships drifted offshore for weeks. You could see them on ship-tracking websites.

Then came the education.

In thousands of companies, somebody took out the sales contract and looked — often really looked, for the first time — at three letters.

Those three letters decide one question: at exactly which point do the goods stop being the seller's problem and become the buyer's?

A buyer who had bought "FOB Shanghai" discovered that the risk had passed to them the moment the container crossed onto the ship in China. The goods drifting off California had been entirely their problem for weeks — and they had never even touched them.

A buyer on "CIF" terms found that the seller had indeed arranged insurance, exactly as promised. But it was marine cargo insurance. It covers sinking, fire and theft. It says nothing at all about a shipping company going bankrupt, or about a three-month delay.

Sellers on "DAP" and "DDP" terms learned the opposite lesson. Their risk continued all the way to the buyer's door. So their money was floating offshore, not yet earned — while penalty clauses for late delivery counted against them.

And importers everywhere met the hardest fact of all. The freight they had already paid to Hanjin was gone. To get a box out of a terminal, they would have to pay again.

Because that is what the market became: a ransom, politely invoiced.

Eventually some Hanjin ships did get into port, after Korean courts and then American and other courts gave protective orders. But the terminals and the creditors holding the boxes wanted paying before they would release anything. Old handling fees. New transport. Deposits against returning Hanjin's containers. The figures ran from hundreds to thousands of dollars per box.

Retailers looking at empty Christmas shelves paid.

Samsung told an American court it had thirty-eight million dollars of goods on just two ships. It offered to hire aircraft — to fly cargo it had already paid to send by sea.

And the people in this story drifted with the assets. Crews rationed their food and fuel off foreign coasts for weeks, unpaid, unable to come ashore.

Here is why this case is worth fifty minutes.

In other business disasters, the danger was hidden — an assumption nobody wrote down, a number nobody checked. Here, the opposite is true. Hanjin's victims were hurt by clauses that everybody had written down, and nobody had read.

The three letters were never small print. They were the whole answer to a fourteen-billion-dollar question, sitting in plain sight on every invoice.

So the question this case asks any company that buys or sells across a border is unusually easy to check.

Pull ten of your own live contracts today. Who chose the three letters on each one? When did the risk on your goods actually pass? And if your shipping company failed tonight — which of those ten would you be reading for the first time?