There are several reasons why it’s important to rethink core aspects of the freight industry.
- A significant portion of overdue accounts for freight companies is attributable to unpaid Customs Duties and VAT.
- Credit Managers of freight companies should be empowered to play a more proactive role in addressing this issue.
- This can be assisted by amending parts of the commonly adopted SAAFF Terms and Conditions.
- The establishment of an Escrow account to allow for advance payments to be made by an overdue customer in exchange for the SAD 501 form will certainly help.
- The creation of separate accounts, one purely showing Customs Duties and VAT payments made and the other for the actual service charges and disbursements, should enhance early collection efforts relating to overdue VAT and Customs Duties payments made on behalf of defaulting “customers”.
- By implementing these strategies, freight companies should be able to significantly lower their exposure to outstanding debts relating to Customs Duties and VAT.
It is trite that in the freighting industry the largest portion of any overdue amount relates to the actual payment of disbursements to third party service providers/sub-contractors and particularly to SARS for customs duties, VAT and demurrage charges levied from time to time.
That being the case, it again to my mind begs the question as to whether this aspect should be addressed by substantially strengthening the impact of the standard trading terms by considering certain amendments.
A major part of the outstanding amounts owing to freight companies relate to actual disbursements pertaining to VAT and duties paid by the freight company for and on behalf of a customer, thereby almost acting as a “bank” for such customers. This practice is to my mind far too generous, considering the present tough economic times. It is already onerous enough to expose a freight company to extend credit facilities, especially in circumstances where their exposure to actual further disbursements (because of custom duties and VAT charges) could substantially be increased, in most cases, because of circumstances totally beyond their control.
The freight industry has in recent times moved from giving a quotation to rather framing a quotation as an estimate, thereby clearly indicating that the estimated amounts in the “quotation/estimate” may well be subject to change. The practical problem is that in many cases, customers have, despite the relatively one-sided standard trading terms and conditions utilized by many freight companies, still raised so called “bona fide disputes” on the basis that the freight company did not act in accordance with the initial instructions given by the customer and/or that the freight company was negligent when carrying out the instructions given by the customer.
In many instances, such so-called negligence is attributable to the failure of the customer to provide the relevant supporting documentation to facilitate and expedite the clearing process once the goods have landed or because of other delays (sometimes resulting in substantial demurrage charges being levied), beyond the control of the freight company.
Up until now, it was generally accepted by freight companies that:
- It was reasonable to accept the role to act as a “banker” for the customer.
- They will have to pay any customs duties and VAT charges levied by SARS for and on behalf of their customer.
It is also trite that such an obligation placed upon freight companies stems from the fact that SARS may in the event of any failure of the freight company to pay such customs duties and VAT:
- Revoke the importing licences of such freight companies.
- Claim any short-fall relating to any outstanding VAT and duties claimed by SARS by off-setting such amounts against the deferment accounts of freight companies held by SARS.
Up until now, the generally accepted approach of freight companies to offset this exposure was to either rely on the “holding back” of the bill of lading, being the document of title, to exercise control over the goods to be cleared and/or to rely on their lien as described in the “lien clause” as normally appears in the South African Association of Freight Forwarders (SAAFF) terms and conditions (as had been adopted by numerous freight companies).
As a freight company’s legal position regarding the exercising of its rights in terms of the aforesaid “lien clause” and the bill of lading are sometimes not clear-cut and could lead to costly litigation on an urgent basis, I am of the view that it is high time for the freight industry to reconsider their operational structure, credit policies and processes, to thereby hopefully minimize their exposure and thereby curtailing their bad debts.
2. SOME SUGGESTED AMENDMENTS TO THE STANDARD SAAFF TERMS AND CONDITIONS
To my mind this could be largely achieved if freight companies were to extend their rights contractually to give themselves more protection.
I would suggest that the following amendments and clauses be considered:
- As a new paragraph to the “definitions” paragraph:
“Written instructions” means the written instructions given by the customer to the company as described in the company/ies import shipping instruction document, to prepare, pack, transport, ship, load, unload, procure third-party carriage services and to handle the goods onshore or afloat for and on behalf of the customer for any length of time at any place.
- By amending the ambit of the “instructions clause” as follows:
“5.1 The entire ambit of the customer’s instructions to the company shall be contained in its written instructions which may be amplified by further written instructions given by the customer to the company.
5.2 The customer acknowledges, accepts and agrees that:
5.2.1 In order for the company to act in accordance with the aforesaid written instructions, the company shall be called upon by SARS to pay customs duties and VAT to SARS for and on behalf of the customer.
5.2.2 Any additional instructions given in writing by the customer to the company may therefore attract additional charges which the company may have to incur for and on behalf of the customer, to carry out the further written instructions received from the customer.
5.2.3 The customer shall always be liable for any additional charges which may have to be incurred by the company for and on behalf of the customer to give effect to such additional instructions.
The customer specifically acknowledges, agrees, and accepts that the company may at its sole discretion:
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Immediately suspend, delay or cancel any of its obligations pursuant to receipt of any written instructions from the customer in terms of these standard trading terms if:
- The customer fails to make full and immediate payment on demand of any custom duties or VAT charges which will be levied by SARS for payment by the company for and on behalf of the customer to SARS;
- In the event that the company, at its sole discretion, pays any customs duties and VAT charges as levied by SARS for and on behalf of the customer in order to carry out the written instructions received from a customer from time to time, such payment by the company for and on behalf of the customer to SARS shall be deemed to be a liquidated amount which shall without limiting the company to any other available remedy in law, entitle the company to provisional sentence or to obtaining summary judgment against the customer for such amount.
- Any default or adverse listing with any credit bureau appears on the credit profile of the customer at any time.
- By adding a “Certificate of Indebtedness” clause:
“The customer understands that any certificate issued under the signature of the company or its duly authorised agent that specifying the amount owing by the customer to the company and further stating that such amount is due, owing and payable by the customer to the company, shall be prima facie proof of the amount of such indebtedness and of the fact that such amount is so due, owing and payable, for the purpose of obtaining provisional sentence, summary judgment or any other judgment in any competent court and it shall not be necessary to prove the appointment of the person signing such certificate. The customer accepts the onus of disproving the amount so stated as not being the amount owing.”
3. INTERACTION WITH SARS AND CREATING AN ESCROW ACCOUNT:
The aforesaid clauses assume that a freight company may elect, prior to instructing the authorities to clear the goods, to refrain from giving such clearing instructions to SARS. If this assumption is correct, it will release such a freight company from any possible exposure to SARS for any possible custom duties and VAT charges which may be levied to clear the goods in accordance with the written instructions of the customer.
A freight company should be able to determine with a high degree of accuracy the exact value of the SARS invoice to be issued for payment by the freight company. Should this view have any merit, I would suggest that one should consider overcoming this concern by creating an escrow account. Such an escrow account can serve as a “holding account” that safely guards the funds transferred by the customer to the freight company as “cover” for the expected payment to be made by the freight company on behalf of the customer for the VAT and duty charges. The funds can then be released to the freight company, once payment by the freight company to SARS for the VAT and duties has taken place. The freight company can then decide whether they wish to pass the electronic communication via EDI (Electronic Data Interchange) and the SAD 501 form to their customer to reclaim the VAT input from SARS.
The question then remains what will happen to the uncleared goods?
It is my understanding that in such instances, SARS will be able to seize such goods. Furthermore, a customer shall have no claim whatsoever against SARS or against the freighting company.
Should the aforesaid approach be accepted and endorsed by means of amending the standard trading terms, it will mean that:
- The exposure of the freight company will be hugely reduced as it will, under such circumstances, not be exposed to the payment of custom duties and VAT charges levied by SARS.
- If the freight company at its sole discretion, elects to pay such custom duties and VAT charges, it should greatly enhance the prospects of the freight company to obtain provisional sentence or summary judgment against such a non-paying customer.
4. REVISITING CLAIMS BASED ON “SERVICES RENDERED AND DISBURSEMENTS INCURRED”
- In essence, this further means that legal actions based on the clichéd “services” rendered and disbursements incurred” notion should be revisited.
- Up to now, such actions have always been fairly easy to defend. I however wish to argue that the “disbursements” part of such a cause of action, should be separated and treated as a separate claim in a summons. This portion of the disbursements part of the claim should, given the aforesaid circumstances, be seen and treated as almost being indefensible.
- The particulars of claim to such a summons could then be broken up into two parts, namely:
- Claim 1 – based on payment of the liquidated amount in respect of the VAT and custom duties paid by the company for and on behalf of the customer, which claim should not be exposed to a bona fide defence, thereby curtailing the legal process and unnecessary legal costs which will have to be incurred to pursue the matter to its logical conclusion in a trial Court and thereby also expediting the finalization of that portion of the claim and;
- Claim 2 – based on the actual freighting and logistical charges levied by the company, to carry out the written instructions given by the customer. (i.e. strictly relating to services rendered, as opposed to disbursements being incurred)
5. EFFECT ON CREDIT AND OPERATIONAL POLICIES
This view is however based on the assumption that a freight company will not “cloud” the charges raised on its invoices by adding on its own charges to any custom duties and VAT charges levied by the authorities.
This furthermore means that a freight company should then be able to base its decision to pay customs duties and VAT for and on behalf of the customer, based on the credit profile and status of the customer from time to time.
This will then also mean it will therefore be critical for freight companies to carefully manage the onboarding and vetting processes of such new potential customers, and to then “grade” such new customers according to their credit risk profiles.
6. Possible impact on credit insurANCE POLICIES
Should the aforesaid recommendations be accepted, it should imply that credit insurers might have to consider amending their policies with such freight companies by allowing for an immediate payment of any claim amount relating to custom duties and VAT paid by a freight company for and on behalf of an insured “customer” (based on the view that such an insured customer will not have a bona fide defence to a provisional sentence summons or summary judgment application brought by the freight company for enforcement of payment of such custom duties and VAT paid by the freight company for and on behalf of the insured customer to SARS).
It is furthermore suggested that the following information should be obtained from a freight company when submitting a claim in accordance with such a credit insurance policy, namely:
- What portion of its claim relates to undisputed VAT and custom duty charges paid by the freight company for and on behalf of its insured customer.
- What portion of the customer’s claim falls within the ambit of Section 1(h) of the Admiralty Jurisdiction Regulations Act 105 of 1983.
7. CONCLUSION
The adoption and implementation of these views should have a major impact and far-reaching consequences on the operational structure and procedures adopted by freight companies in South Africa.
I do appreciate that the views expressed in this memorandum might not be popular, but I do hope that it will at least open a healthy debate, which will hopefully have a positive impact on the freight industry.
