At first glance, the global shipping industry may appear to be regulated and organized. A number of international organizations and industry associations—the United Nations Commission on International Trade Law (UNCITRAL), the International Chamber of Commerce (ICC), the International Federation of Freight Forwarders Associations (FIATA), to name a few—have been around for decades. These organizations are responsible for harmonizing various aspects of international business and reducing transactional costs. Nevertheless, any experienced practitioner may recall situations that exposed inconsistencies between legal requirements and prevailing business practices or the lack of relevant legislation at all. These “grey areas” in global shipping practices fall into one of the following categories:
· Conflicting legislation
· Legal lacunae
· Misapplication of legal frameworks
· Operational bottlenecks
In each category, there may be ramifications at the national, regional, and transnational level.
Often, the grey areas are discovered only when a legal dispute occurs. Unfortunately, the affected organizations rarely confer with the industry to rectify the failed business practice, indirectly contributing to its perpetuation.
In this study we’ll bring to light some typical inconsistencies in global shipping practices, illustrate historical and operational context that shaped them, and suggest ways to mitigate associated risks.
All parties with a stake in an international transportation agreement need a legal framework to define rights, obligations, and liabilities of carriers and freight forwarders on the one hand and shippers, financiers, and insurers (the “cargo interests”) on the other. Such legal frameworks, or carriage liability regimes, have long existed at a national and regional level, but it was not until 1924 that the first global framework, the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading (aka the “Hague Rules”), evolved.
The Hague Rules were developed by the International Maritime Committee, a not-for-profit organization based in Belgium. Although the scope of the Rules was limited to marine transportation, it was an important milestone in facilitating international trade. In 1968 and 1979, the Hague Rules were amended by two additional Protocols and became known as the Hague-Visby Rules. These two conventions have been ratified, wholly or partially, by most states engaged in international maritime trade.
In the late 1970s, the United Nations Commission on International Trade Law (UNCITRAL) developed another set of rules with the aim to overcome certain deficiencies of the existing conventions. As of 1992, when the United Nations Convention on the Carriage of Goods by Sea started to be enacted at a national level, it entered into direct competition with the Hague Rules and the Hague-Visby Rules. At the time of this writing, the UNCITRAL convention (aka the “Hamburg Rules”) has been ratified by thirty-four nations.
These developments resulted in a complex maze of carriage liability regimes that coexist at present. The three major international conventions have been adopted, wholly or partially, by most nations. A few countries have not ratified any international convention. Some countries have materially amended the existing conventions, thus creating a “hybrid” national or regional legislation, such as the North Sea Standard Conditions of Carriage enacted in some Nordic countries. To further complicate the situation, neither international convention on marine transportation addresses modern shipping practices, such as multimodal and door-to-door transportation agreements, electronic exchange of shipping documents, and containerization of trade.
Due to these inconsistencies, cargo interests and transportation service providers are increasingly exposed to conflicting legislation at the national, regional, and transnational level. What does it mean in practice? Consider just two possibilities:
· Contrary to the initial intention of a contracting party, an international transportation agreement falls into another carriage liability regime or unwelcome national jurisdiction.
· Contrary to the initial intention of a contracting party, a legal dispute is brought to a jurisdiction with inexperienced, slow, or corrupt magistrates.
These factors may have substantial effect on the outcome of any legal dispute.
To reduce the likelihood of conflicting legislation, the following steps should be taken:
· Make sure that the transportation agreement has clear provisions as to governing law, jurisdiction or arbitration, and venue of eventual legal proceedings. These should be stated in the “General Paramount Clause” at the back of the Marine Bill of Lading.
· Compare the national legislation in the country of shipment and the country of destination. In most cases, these will be based on one of the international conventions mentioned above. The up-to-date lists of countries that ratified each convention are available on the websites of the International Maritime Committee and UNCITRAL.
· Unless both countries adhere to the same convention, conflicting legislation poses a risk that should be mitigated by modifying the General Paramount Clause or other measures. Seek specialized legal counsel in this respect.
Conflicting legislation and operational bottlenecks, as discussed below, encourage some carriers to introduce clauses into the Bills of Lading that limit their liability in such cases as cargo delivery without surrendering the original Bill of Lading or cargo delivery against a forged Bill of Lading. These practices infringe upon the international carriage liability regimes and are considered unlawful in many jurisdictions. Whenever possible, cargo interests should contest them.
The regulations become particularly patchy in door-to-door transportation agreements involving a marine segment, which are often concluded with freight forwarders. Shippers entering into such agreements should consider the following:
· The forwarder is likely to subcontract transportation services to regular carriers and other service providers in several jurisdictions.
· The forwarder has no possession of the cargo handed over to each carrier. Accordingly, the Bills of Lading issued by the forwarder (the “House Bills of Lading”) may bind the carrier only if the forwarder is duly authorized to act as a dual agent for the shipper and the carrier. In such a case, the relationship between the shipper and the forwarder would be governed by the carrier’s standard terms of business, which should be made known to the shipper.
· The forwarder’s standard terms of business may limit its obligations to “arranging for transportation.” Instead, the forwarder should assume full responsibility to deliver the cargo to the agreed-upon destination.
· If presented to a bank under a Letter of Credit, the House Bill of Lading must meet certain criteria to be accepted as a transport document.
In response to the evolution of multimodal transportation agreements, UNCITRAL has developed the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (aka the “Rotterdam Rules”). The Rotterdam Rules were adopted by the General Assembly in December 2008. They aim to replace the three outdated international conventions with an integral legal framework covering both marine and multimodal transportation. Time will tell whether this convention will finally reconcile various interest groups or just increase the number of subject international conventions to four. In the meantime, the parties to a marine transportation agreement are left to navigate through complexities outlined above.
Mate’s Receipts, Sea Waybills, Forwarder’s Certificates of Receipt, and other non-negotiable shipping documents largely facilitate global trade operations. These auxiliary documents, however, remain unregulated in many national law systems. Legal lacunae are instances when there is no controlling law to a business situation. By exploiting the legal lacunae, an organization may avoid a contractual obligation without violating the law.
Let us have a closer look at the Forwarder’s Certificate of Receipt (FCR) to exemplify practical implications.
The initial format of the FCR was developed by the International Federation of Freight Forwarders Associations (FIATA) in 1955 to facilitate settlements for goods under the forwarder’s control. Apparently, the Federation aimed to enhance the role of the freight forwarder in the supply chain with a quasi-warehousing function. In the early 1990s, the FCR became extremely popular in East European countries, whose cash strapped producers required payments upon placing goods at a port of loading. Further developments, however, revealed the FCR’s shortcomings, which stem from intrinsic conflicts of interest.
Contrary to a warehouse receipt, whose release mechanism makes a warehouseman exclusively liable to the warehouse receipt holder, the FCR creates a situation whereby the forwarding agent assumes obligations to two principals. The first principal, the forwarder’s client under a forwarding agreement and the source of the forwarder’s income, usually possesses the goods. The FCR consignee—usually a bank or a buyer in a sales contract with the first principal—becomes a de facto second principal. By issuing the FCR, the forwarder assumes certain obligations to the second principal without fully repealing its obligations to the first one. This creates an obvious conflict of interests, as any dispute between the forwarder’s principals over the underlying sales contract may create a legal impasse with respect to the goods blocked by the FCR. If such conflict occurs, the forwarder is likely to receive contradictory instructions from its principals with respect to the subject goods. In many cases, the forwarder follows the instructions of the first principal on the premise that he is bound by the forwarding agreement. Such conduct violates the forwarder’s obligations to the holder of the FCR, who may have already paid for the goods. If the FCR is not regulated in the jurisdiction where it is issued, the disgruntled consignee may be unable to claim any damages from the forwarder.
Legal lacunae may provoke abusive and even fraudulent business practices. In the case of the FCR, these practices may involve the following:
· FCRs issued on the basis of shipment declarations, without actually possessing the goods
· Several FCRs issued for the same cargo
· FCRs issued for noncompliant goods or goods that are not cleared for export
Confronted with these controversies, FIATA reacted by stripping noncompliant forwarders of FIATA membership but to no avail. In an action that speaks for itself, in 2001 FIATA officially prohibited the use of the FCR in steel shipments, where fraud occurred most often.
Nowadays, apart from acknowledging the authorship of the FCR, the FIATA website does not provide any guidelines as to the use of the FCR in international trade. By distancing itself from the FCR, FIATA implicitly acknowledged that it failed to regulate the market that evolved around this instrument.
Despite its intrinsic deficiencies, the FCR remains a very popular instrument in international trade, simply because no better substitute has yet emerged. The key is to know these deficiencies and proactively manage related risks.
The parties making payments against the FCR should consider the following:
An FCR is not a Warehouse Receipt
The FCR must not be confused with the Warehouse Receipt, which is a document of title in some (but not all) jurisdictions and whose flow is generally well regulated. The FCR has neither of these qualities.
The Forwarder’s standing is paramount
Since the FCR may be issued by ANY forwarder—not necessarily a member of FIATA or similar national association—the forwarder’s standing must be verified with utmost vigilance. How many years has the forwarder been in business? Is the forwarder duly licensed? Who are the forwarder’s clients and shareholders? Is the forwarder a member of a national or international forwarders association? Does the forwarder provide references from banks, clients, and industry associations? How is the forwarder staffed? Answering these questions will help to verify the forwarder’s credibility.
The FCR formats may vary
In addition to the “official” FCR format backed by FIATA, national forwarders associations and individual forwarders may adopt their own formats reflecting national legislation, the forwarder’s standard terms of business, and more. Feel free to negotiate the FCR format that would reflect your business circumstances.
Validate the FCR with a relevant authority
Although there are no restrictions to the contrary, in most cases the FCR is issued at a port of loading, where the forwarder leases warehousing facilities. Nothing prevents the FCR holder from establishing direct contact with the port authority and confirming the availability of goods covered by the FCR. Secure in the sales contract the supplier’s obligation to render reasonable assistance in your communications with the port authority, as well as the right to inspect the goods by yourself or an independent inspection organization. Remember, however, that in case of any dispute, you may have recourse to the forwarder only, unless the FCR is co-signed by the port.
Confirm that the cargo is ready for export
The current format of the FIATA FCR does not provide that the goods must be cleared for export. Accordingly, make sure that the goods have passed all customs formalities and are ready for export in all respects. Particular attention should be paid to availability of export licenses, which may be required by local regulations. In case of doubt, liaise with the local attorney.
Whenever possible, avoid the FCRs issued by the order of intermediary companies as the forwarder’s principals. This structure significantly increases transactional risks, as the intermediary may depend on your payment to settle accounts with the producer. Regardless of the forwarder’s undertakings in the FCR, including any “irrevocable instructions,” it is very unlikely that the cargo could be shipped without the producer’s approval. If such structure cannot be avoided, analyze the relationship between the producer and the intermediary and access related risks. Sometimes, only a tripartite agreement involving the producer may guarantee delivery of goods payable against the FCR.
The FCR gives no quality assurances
The FCR usually confirms receipt of goods in “external apparent good order and condition,” but it does not provide any assurances as to compliance of goods with the related sales contract. If you have any concerns about the quality of goods, have an independent surveyor inspect it prior to payment.
Verify cargo safety aspects
The FCR does not oblige the forwarder to insure the goods. If the risk of loss or damage to the goods is transferred upon payment under the FCR, you may end up owning a cargo that is not protected by any insurance, whereby the warehouseman’s professional liability insurance may be inadequate or nonexistent. Make sure that the cargo you paid for is insured against theft and other casualties.
These issues are highly relevant to the parties making payments against the FCR. On the other hand, the suppliers are also exposed to the risk of blocking the goods with the FCR and not being paid by the FCR holder. To avoid this possibility, engage a financial intermediary:
· Issue the FCR to your bank.
· Have your bank issue an undertaking to release the FCR against payment, within agreed deadline, for the goods indicated in the FCR.
· Having received the payment, make sure that your bank returns the original FCR to the forwarder with instructions to release the goods to the payer or a party designated by the payer.
Should the buyer fail to effect the payment on agreed terms, your bank’s undertaking would expire and you would regain control over the subject goods.
International trade practitioners should know the limitations of auxiliary shipping documents and apply them with caution, especially in a new business relationship. In case of doubt, give preference to Bills of Lading and Warehouse Receipts.
Further examples demonstrate that policymakers are not alone in creating and perpetuating the grey areas.
Misapplication of legal frameworks
The Incoterms rules were first published by the International Chamber of Commerce (ICC) in 1936. Over the years, the ICC has shown commitment to attune the Incoterms rules to evolving trade practices in a timely fashion. The Incoterms 2010 was preceded by releases in 2000, 1990, 1980, 1976, 1967, and 1953. The last revision much simplified the application of the Rules by introducing two new rules and reducing their total number to 11. It also set clear requirements in terms of cargo insurance, electronic communication, security-related clearances, and some other aspects.
Despite these advantages, the Incoterms rules are often misplaced in sales contracts. This phenomenon may partially stem from the misconception that the Incoterms provide “trade terms.” Indeed, the Rules set a legal framework for delivery terms and related obligations but not all facets of trade. Considering that the Rules were revised every decade over the past thirty years, another reason may lie in the sheer time it takes the business community to adapt to changes.
Another misconception is that the Incoterms rules regulate a transfer of ownership in a sales contract. This is not the case. The Rules regulate a transfer of risks from one party to another, which does not necessarily coincide—and often should not—with the transfer of ownership. The transfer of ownership procedure should be additionally agreed upon in the sales contract.
It is not uncommon that the parties to the sales contract, considering there is no exact Incoterms rule for their transaction, modify the existing Incoterms rule. Although such practice is permitted, the parties rarely follow the ICC recommendation to “make the intended effect of such alterations extremely clear in their contract.” As a result, the seller and the buyer may perceive their delivery obligations in a different way.
Some parties to a sales contract complement the existing Incoterms rule with the terms of a Charter Party, which gives rise to delivery terms such as “CIF Free Out” and “CIF Liner Out.” In the context of a contract of affreightment, “Free Out” means that the cost of unloading the cargo at the port of destination is borne by the shipper, and “Liner Out” means that such cost is borne by the carrier. Should this principle directly apply in the sales contract ? In other words, should “CIF Free Out” mean that the seller bears the cost of unloading the cargo at the port of destination?
In March 1995, the ICC Arbitration Case No. 7645 held that “Free Out” qualified the term “freight” under CIF and CFR contracts, and that the expenses connected with discharging the goods from the vessel are to be included in the freight. Following this logic, the term “CIF Liner Out” should mean the opposite, i.e., the buyer’s obligation to pay for unloading the cargo. The buyer may claim, however, that such obligation is in any case provided by the standard CIF term, whereby the hybrid term implies that the seller delivers the goods to the port of destination (the CIF component) and further unloads them (the Liner Out component). Further, if the seller delivered the goods by a bulk carrier, the buyer might later claim that the goods had to be delivered in containers, as otherwise there would be no sense to invoke liner shipping terms in the sales contract.
Recurrent legal disputes witness that parties to a sales contract may agree on hybrid delivery terms and later interpret them quite contrarily.
Fortunately, the simplicity of the Incoterms 2010 enables anyone to address virtually any business situation in international and domestic trade. Make sure that your organization has already embraced the Incoterms® 2010 and there will be no need to reinvent the wheel. Any deviations from the standard Rules should be clearly described in the sales contract.
The grey areas in this category are created by gaps between the “real life” operational environment and relevant legal provisions. Contrary to the legal lacunae, operational bottlenecks force trade practitioners to deliberately deviate from customary legal requirements.
Consider the endorsing of a negotiable Bill of Lading as an example. As the endorsement legally transfers the right of cargo possession from one party to another, it is of paramount importance for the carrier that the endorsement represents a legally binding deed. The endorsement instructions must be executed by the transferor’s authorized signatory, whose authority should be properly verified.
In real life, however, establishing the signatory’s authority is an onerous, time-consuming process. Global trade dynamics often leave the carriers with no chance to establish the legality of all endorsement instructions on the Bill of Lading. By accepting unverified endorsement instructions, the carriers expose themselves to the risk of releasing the cargo to an unauthorized party. No wonder that some carriers attempt to mitigate this risk by adding a Bill of Lading clause that allows them to deliver the goods upon “reasonable proof of identity” of the consignee. In this example, the overlap of inadequate legislation and operational bottleneck reinforces the grey area effect.
Every day suppliers, consumers, and their service providers must make similar “real life” decisions to keep the business running. The wheels of international trade would clog if such decisions—and associated risks—were not taken.
Global shipping practices reflect continually changing business circumstances. In contrast, international regulations emerge after years, if not decades, of horse trading among various interest groups. As the shipping legislation becomes more complex, more time is required to implement it. These dynamics suggest that the issues discussed in this paper will not disappear soon.
Modern technology may help to resolve some of the grey areas. In the last example, the existing electronic commerce and paperless document management systems would provide the carrier with a risk-free endorsement process. Due to inadequate regulation of electronic commerce, security considerations, and sheer resistance to change, these systems are adopted at a glacial pace. With any luck, further technological and regulatory advances will help the shipping and trade industries embrace change more readily.
Finally, international trade participants should become more vocal in revealing failing business practices, as well as take more initiative to stop them. If your industry peers are affected by the same problem, report it to relevant national and international associations and suggest ways to tackle it. Further progress will invariably depend on cooperation between businesses, industry groups, and policymakers.