Damages in a customs bonded warehouse

I was talking to my learned friend Madhuri Sharma, when she brought up the case of imported cargo getting burnt by fire in a customs bonded warehouse in India and if the marine policy covering imports would cover the loss. My initial reaction was NO as it would fall under 8.1.2 of the Duration clause of ICC and cover would cease, the moment the imported cargo is bonded:

This insurance terminates ” on completion of unloading from the carrying vehicle or other conveyance in or at any other warehouse or place of storage, whether prior to or at the destination named in the contract of insurance, which the Assured or their employees elect to use either for storage other than in the ordinary course of transit or for allocation or distribution “

The situation in this case is slightly different, she insisted. It is not ‘the Assured or their employees’ who elected to use the bonded warehouse for storage/ or for allocation/distribution. They had no choice but to bond the goods to comply with the Ministry of Commerce regulations and for customs examination & clearance. The DGFT had vide a gazette notification in 2000, listed out products that would comply with the following”

‘All such packaged products, which are subject to provisions of the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 when produced/ packed/ sold in domestic market, shall be subject to compliance of all the provisions of the said rules, when imported into India. The compliance of these shall be ensured before the import consignment of such commodities is cleared by Customs for home consumption. All prepackaged commodities, imported into India, shall in particular carry the following declarations:
(a) Name and address of the importer;
(b) Generic or common name of the commodity packed;
(c) Net quantity in terms of standard unit of weights and measures. If the net quantity in the imported package is given in any other unit, its equivalent in terms of standard units shall be declared by the importer;
(d) Month and year of packing in which the commodity is manufactured or packed or imported;
(e) Maximum retail sale price at which the commodity in packaged form may be sold to the ultimate consumer shall include all taxes local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertising, delivery, packing, forwarding and the like, as the case may be.’

How will these declarations be carried on the packages of such products? The importer or his agent has to ensure that these declarations in the form of labels are affixed on the imported packages BEFORE THEY ARE SUBJECTED TO CUSTOMS EXAMINATION and clearance. In other words, customs clearance would not be possible without carrying out this labelling process. Next question arises — Where will this process of labelling that may take some time, take place? Well, it could be done in the Import shed at the port/airport, prior to Customs examination and clearance. However there is a problem — Small packages and products sensitive to heat and dust could not be/ not advisable to be labelled in the side-open Import Sheds, exposed to the elements. The DGFT, vide below circular in 2011 had allowed importers to make use of the bonded warehouses for this labelling purpose and laid down the procedure for the same.

It is clearly laid down that the importer has to file a ‘Warehousing Bill of Entry’ and that 100% Customs examination will be carried out at the time of ‘Ex-Bond ‘ clearance. It is further stated that the labelling process will be considered as a manufacturing operation.

In the light of the above, if an imported product undergoing labelling in a Customs bonded warehouse meets with a loss/damage, will it be considered as a loss/damage in the ordinary course of transit or a storage loss? There could be arguments for and against either. First, it should be considered as in the ordinary course of transit, since labelling of the imported goods is mandated by regulation and without it, customs clearance is not possible. Importer perforce has to label the goods and the goods are not in the insured’s/importer’s control. The counter could be that when the goods are in the insured’s control as he has access to the same for labelling purpose, notwithstanding the fact that he cannot take possession of the goods for home consumption, it cannot be considered as being in the ordinary course of transit. Further, the importer/insured has to file a ‘warehousing Bill of Entry’ that in the normal sense would mean, an intentional storage of the goods.

Those arguing against the goods not being in the ordinary course of transit could also say that the DGFT circular mentions labelling as a manufacturing operation and manufacturing can be done only by someone who is in control or possession of the raw material/semi-finished/finished goods. My submission would be when goods are in the ordinary course of transit means, they are outside insured’s control. What does insured’s control mean? He is free to decide on what he would do with the goods — consume them, store them, transfer them or direct someone to handle the goods in whatever manner he deems appropriate. It will be solely the insured’s decision. In this case, can it be said that the insured/importer acts of his own free will in bonding the goods? No, he has to do it to comply with a regulatory requirement of labelling before he can take delivery of the goods after Customs examination. It can be argued that insured/importer can carry out the labelling in the Import Shed itself, but then he exposes the goods to loss/damage and by doing so he will not be acting ‘ as if uninsured’. Loss/damage occurring whilst the goods are lying in the Import Shed prior to Customs clearance is certainly in the ordinary course of transit and would be covered under cargo insurance, even in policies where cover terminates at the port/airport. The termination would be at that location/warehouse, where the insured/importer can take physical delivery of the same.

Insureds, insurers and intermediaries should be aware of these aspects of the transit, ensure capture of the same in RFQs and policies structured suitably to ensure contract certainty. Alternate views are welcome.