Incoterms_® and Commercial Contracts

13.1 Introduction

Each of the main transport methods has a different business, legal and documentary framework. The choice of sea, air or ground transport may appear to be dictated by the transaction, but traders should always consider alternative means and providers. Air freight can be surprisingly competitive, for example, if one factors in cost-savings from lower insurance rates and less time-in-transit.

Traders should coordinate transport operations with the rest of the export process by maintaining open communications between sales, marketing, purchasing and logistics personnel. When the trader uses an outside service provider like a freight forwarder, it is important to develop and maintain good communications. Traders are much more likely to encounter problems in transport when they are dealing with unfamiliar forwarders or carriers. When there is an established business relationship with the carrier or forwarder, fewer problems occur, and those that do occur are more likely to be resolved by a quick concession or negotiation.

Given the extreme complexity of the legal rules that apply to international transport, traders should seek complete insurance coverage, including “gap” or “contingency” policies which complete any other insurance coverage applicable to a transaction.

13.2 Transport management

Transport service providers charge lower freight rates (or offer rebates or discounts) for large or regular cargo shipments. Consequently, exporters and importers should seek, whenever possible, to ship larger volumes or to ship consistently for longer periods of time. This can be done by:

• consolidating several different sales into a single shipment;
• arranging for “door - to - door” shipment; and
• organizing shippers’ clubs or councils for group bargaining of freight rates.

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Transport costs may account for a significant part of the final cost of the product to the importer, especially in the case of commodities or low-value products, so it is important for both exporter and importer to be very clear as to their respective transport obligations and risks. The price that an exporter quotes to an importer is based on the Incoterm chosen (because this determines who must pay for the main international transport). Small and beginning exporters often choose the Ex Works Incoterm (EXW), because this places all transport responsibilities and risks on the buyer’s shoulders. FCA or FOB are equally favoured because, even though they require the seller to clear the goods for export, they still place the cost of international transport on the buyer.

In choosing Incoterms which place few transport obligations on the seller - such as EXW, FCA or FOB - the exporter may neglect a potential profit centre. The exporter could instead manage the transport operation itself and charge a commission to the buyer for services rendered. An exporter that can competently negotiate and oversee the transport chain can earn money by quoting prices CIF, CIP or DDP, handling the transport itself and billing the buyer a commission for these services.

Optimal transport economies are facilitated when either the exporter or importer accepts the entire transport obligation (i.e., either EXW or DDP). The total amount of transport services purchased by the shipper will be larger, as it will not be divided between two parties. Since larger shipment volumes command proportionately lower prices, it would seem that the choice of Incoterms at either “extreme” of the range would result in economies. In fact, DDP has become increasingly popular with importers.

In many markets, speed of delivery is a crucial competitive factor. A related consideration is reliability: how common are late or delayed shipments? Since delays may result when a shipment is transferred from one transport provider to another, some exporters prefer to control the entire transport chain (and consequently ship under DDP). For some parties, reliability may prove to be a higher priority than speed. Regardless of which party is at fault for a delayed shipment, the exporter may risk breaching a contractual deadline or otherwise losing the customer by projecting an image of unreliability.

Long transit times increase total costs owing to the fact that payment of interest rates on working capital throughout the period the goods are inaccessible. For this reason, air transport is sometimes a surprisingly competitive alternative to sea transport. d. Stock and inventory management

d. STOCK AND INVENTORY MANAGEMENT

In recent years, corporations have turned to improved stock and inventory management as a means for cutting costs and increasing efficiency. A prime example is found in the “just-in-time” (JIT) manufacturing systems, pioneered in Japan, which reduce the need for manufacturers’ warehouses because supplies are delivered daily. JIT systems are now common around the world.

Packaging costs vary according to the mode of transport. Improper or insufficient packaging results in a higher rate of damage to goods in transit. A transport mode with cheap freight may require a more expensive packaging and/or have a higher frequency of lost or damaged goods. Door-to-door shipments by full container load, which require minimal packaging, may be competitive against other transport methods with cheaper freight.

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If the importer is arranging for transport, it should inform the exporter as early as possible of the nature of that transport, as it may alter the type or amount of packaging required.

The various transport modes entail different procedures for customs clearance, which may have an impact on transit time. The simplified customs procedures available for air and postal shipments, and under certain regimes for road and rail shipments, can increase the competitiveness of these modes as against sea transport.

The choice of payment method may have an impact on the mode of shipment, or vice versa. Thus, payments by documentary credit may require the presentation of an on–board marine bill of lading. In such a case, air shipment will violate the terms of the credit (because an air waybill will not be accepted if the credit calls for a marine bill of lading).

13.3 International treaties and conventions

Several different international treaties apply to the various modes of transport. These treaties set forth the extent and limitations of carriers’ liability for goods lost or damaged in transit.

• The Hague Rules (1924) – The International Convention for the Unification of Certain Rules relating to Bills of Lading (also known as the Brussels Convention). Signed by approximately 89 contracting countries, this treaty was subsequently criticized for setting liability limits for shipowners too low, and for providing a multitude of exemptions and exclusions from liability. The Hague Rules apply to goods carried by sea under a bill of lading drawn up in one of the contracting countries.
• The Hague–Visby Rules (1968) – A Protocol amending the Hague Rules, and referred to as the Hague-Visby Rules, was signed in Brussels in 1968 and has to date been ratified by 33 countries. The Hague–Visby Rules generally raised the exposure to liability of the shipowners.
• Hamburg Rules (1978) – The UN Convention on the Carriage of Goods by Sea, signed in Hamburg in 1978, was intended to remedy some of the defects of the rules produced by the earlier two Conventions. The Hamburg Rules have found little favour in shipping circles, and although they went into force in 1992, many of the major trading nations have not signed the treaty, and there is some doubt as to whether it will be signed by enough of the trading powers to provide truly global harmonization. Approximately 33 countries have ratified the rules.
• UNCITRAL Convention on the Carriage of Goods by Sea (the “Rotterdam Rules”) – the Convention establishes a uniform legal regime governing the rights and obligations of shippers, carriers and consignees under a contract for door-to-door carriage that includes an international sea leg. The Convention builds upon, and provides a modern alternative to, the Hague, Hague-Visby and Hamburg Rules. The Rotterdam Rules seek to take into account the technological and commercial developments that have occurred in maritime transport since the adoption of the earlier conventions, including the growth of containerization, the desire for door-to-door carriage under a single contract and the development of electronic transport documents. The Convention provides shippers and carriers with a universal regime to support the operation of maritime contracts of carriage that may involve other modes of transport.

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• Montreal Convention for the Uniformity of Certain Rules of International Carriage by Air (1999) – This Convention was adopted on 31 May 1999 and entered into force in 2003. It has been ratified by 86 countries. The Convention establishes a comprehensive and up-to-date set of uniform rules defining and governing the liability of carriers in relation to passengers, baggage and cargo. It will eventually replace the 1929 Warsaw Convention, as amended by various supplementary conventions and protocols.
• Warsaw System (1929) – For those countries not having ratified the Montreal Convention, the Warsaw liability system is in force. The Warsaw Convention was signed in 1929 and subsequently supplemented by the Hague Protocol (1929), Guadalajara Supplementary Convention (1961), Guatemala City Protocol (1971) and the Montreal Protocol (1975).

• COTIF (1980) – Since rail transport does not link the continents, it is not surprising that rail transport lacks a global legal framework. Nonetheless, in Europe at least, and in certain contiguous countries linked to the European rail network, rail transport is governed by the 1980 Convention concerning International Carriage by Rail (COTIF), which entered into force in 1985 and applies in approximately 41 countries.

• CMR (Convention Internationale pour le transport des Marchandises par la Route) (1956) – The situation in road transport is similar to that of rail transport. Virtually all European countries have signed the Convention on the Contract for the International Carriage of Goods by Road.

UN Convention on the International Multimodal Transport of Goods (1980) – This Convention will enter into force when it has been signed by 30 countries.

Given the absence of an international treaty effectively covering multimodal transport, freight forwarders have sought to establish and abide by standard rules and documents which would put documents issued by freight forwarders on a similar footing with those issued directly by sea carriers. The UNCTAD/ICC Rules for Multimodal Transport Documents, adopted in 1992 (ICC Publication 481), reflect a movement towards the liability regime of the Hamburg Rules and a rejection of the loophole-filled approach of the Hague-Visby Rules. The UNCTAD/ICC Rules are incorporated into standard industry documents, such as the FIATA Multimodal Transport Bill of Lading and the MULTIDOC 95 bill of lading issued by the Baltic and International Maritime Council (BIMCO). Through the wide use by carriers and freight forwarders of these documents, the UNCTAD/ICC Rules will have a certain level of international applicability in the foreseeable future. The UNCTAD/ICC Rules replaced the prior ICC Uniform Rules for a Combined Transport Bill of Lading.

13.4 Carrier’s liability

As can be seen from the above, there are a number of different legal conventions that can define the extent of the carrier’s duties and liabilities in the international carriage of goods. Adding to the complexity of the matter, these treaties do not all have global coverage.

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While the rules related to carrier liability can go into fine detail, the following general principles are useful:

• Money limit to liability claim - Under each of the conventions, there is a monetary maximum that can be claimed for loss of a cargo, and this is usually expressed in terms of a fixed amount of money per unit of weight or per package.
• Carrier’s responsibility – Under the Hague and Hague–Visby Rules, the carrier must exercise “due diligence” as regards the seaworthiness of the vessel, its state of fitness for handling the goods, and proper loading, storage or discharging procedures.
• Carrier’s immunities – Again, under the Hague and Hague–Visby Rules, there is a long list of carrier’s exemptions from liability, including:

– force majeure or fortuitous acts, such as earthquakes, tidal waves, fires, perils of the sea, wars, strikes, accidents;

– defects in the goods/packaging causing the damage – if the goods or packaging contain a defect which itself causes the damage, the carrier is exempt;

– negligence of employees – the carrier is not liable for the negligence in the navigation or operation of the vessel by the master, pilot or crew;

– procedural limitations – Normally, any action against a carrier must be brought within a certain time limit, defined by the applicable conventions or law. A buyer receiving visibly damaged goods should make an immediate written, specific notation on the delivery note. This note should be addressed immediately to the carrier or his agent as well as the insurer.

The extent of these carrier’s immunities and protections should make it clear why it is so important for international traders to obtain sufficient insurance coverage.

13.5 Charter parties

A buyer or seller may wish to transport certain merchandise by chartering or hiring an entire vessel or part of a vessel. The contract for the lease of the vessel is known as the charter party. Charters are generally classified as:

• voyage charters – the shipowner runs the ship and crew; the charterer merely “hires” the ship, or part of it, for one voyage;
• time charters – the shipowner runs the ship and crew, but the charterer handles sales and bookings of the cargo;
• bare boat – the charterer runs the ship and crew.

The charterer may itself sub-charter the vessel. Whether it does or not, bills of lading for goods shipped on the chartered vessel will be issued to particular shippers that may or may not themselves be sub-charterers. These bills of lading are said to be issued “subject” to the charter party. In essence, the charterer becomes a commercial intermediary between the shipowner and the ultimate receiver of the bill of lading. The holder of the bill of lading in such cases needs to know who to sue if the goods are delivered in damaged condition or

have been lost.

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The charter party contract is only a contract of carriage, and is thus distinct from a bill of lading, which is also a receipt for the goods and, to some extent, a document of title. A charter party is merely a contract between the shipowner and the charterer, setting forth the price of the freight and the other conditions of hire. Charter party contracts cannot, therefore, be endorsed and negotiated as can bills of lading.

In many jurisdictions, charter parties are allowed greater freedom of contracting than is available for bills of lading, which may be governed by one of the international treaties. Thus, a shipowner may contract with a charterer under terms of lower shipowner’s liability than would be possible with an ordinary shipper under a bill of lading.

There may be two kinds of bill of lading in charter parties: the shipowner’s bill of lading to the charterer, for the whole of the goods received on board, and the charterer’s separate bills covering parts of the shipment.

The fact that a particular bill of lading is issued in connection with a charter party has a definite impact on the interests of the cargo owner, at least by making its rights much more complicated to ascertain. Thus, the purchaser or endorsee of a bill of lading issued under a charter party will have to ask itself certain questions, as for example:

• whom to sue - if the goods are damaged or lost, who should the buyer sue, the shipowner or the charterer? Under which contract will the suit be made, the charter party or the bill of lading?
• acceptability - are bills of lading referring to charter parties acceptable under theterms of shipment sales and letters of credit?

The bills of lading issued by the charterer may seek to “incorporate” the terms of the charter party contract. It is understandable that the charterer would want the two contracts to accord with each other, so that he would not expose himself to any liability beyond that entailed in the charter party.

If the charterer transfers the bill of lading received from the shipowner to a third party, the contract between the shipowner and the third party will be covered by the bill of lading.

If the bill of lading incorporates a charter party, and if, for example, the charter party specifies that dispute resolution will be by arbitration, then any litigation by a third party buyer against the shipowner would have to be dismissed, because the appropriate forum would be an arbitral one.

However, to incorporate the terms of a charter party, the bill of lading must do so conspicuously and clearly and, in any event, the terms of the charter party must not contradict the bill of lading itself, nor the provisions of any international convention applicable to the bill of lading.

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13.6 Freight forwarders

13.6.1 Introductory

An indispensable member of the international trade community, the freight forwarder arranges for the international shipment of merchandise. Like travel agents - but dealing with cargo rather than passengers - freight forwarders use their knowledge of varying freight rates to offer the shipper the best “package deal”.transaction.

The terms “freight forwarder” and “forwarding agent” are generic terms encompassing a variety of specialized functions within the profession. Some forwarders offer a wide range of these functions, whereas others restrict themselves to a single speciality or particular geographical coverage. These various functions are summarized below. In addition, it is important for traders to understand that forwarders may act as either agents or principals, with differing legal consequences.

Freight forwarders as agents or principals – A freight forwarder acts as an agent when he performs functions on behalf of, and under the instructions of, the principal (the exporter or importer). As an agent, the forwarder will procure the services of third parties who will perform the packing, storage, transport, handling and customs clearance of the goods. The agent thus acts as an intermediary, “introducing”, in a manner of speaking, the principal to the service providers. The principal then enters into direct contractual relations with the service providers. Consequently, the forwarder is generally not liable for the errors or breaches of the service providers. As with other agents, the forwarder owes the principal various duties, including the duty to inform and the duty of diligence (see Chapter 5 on agency law).

When the forwarder acts as a principal, it contracts directly the exporter or importer (the “customer”). The customer will deal only with the forwarder, who will issue a single bill to the customer for the total amount of services rendered. As a principal, the forwarder is generally liable for the errors or breaches of the sub–contracted service providers.

It is also possible for a forwarder to enter into “hybrid” arrangements, acting as agent for certain functions and as principal for others.

13.6.2 Different functions and types of forwarders

This function involves grouping or assembling diverse shipments from various customers so as to make up full container loads, thus obtaining lower freight rates. Some consolidators offer regular shipments on seagoing vessels that they do not own; these are referred to as NVOCCs.

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A multimodal transport operator offers “one–stop shopping” for traders. This enables traders to completely outsource or sub–contract their export logistics to a single service provider. Multimodal transport operators typically offer “door-to-door” transport, with coverage of all related functions such as insurance, customs, warehousing, etc.

These parties act as the agents of exporters and importers in order to process customs declarations and other formalities and pay duties and taxes. Because they may be liable for very large payments of duties or fines, customs brokers are usually bonded by banks or insurance companies. Traders should take care to give precise directions and limits to customs brokers to avoid incurring liability in the event that an unexpectedly high tariff or fine makes it uneconomical to process a particular shipment.

This agent represents the shipper at the point where the goods are transferred from one transport mode (typically, from a truck or lorry) to another (as to a seagoing vessel or airplane).

These agents process shipments for airlines and may have the authority to issue air waybills. Frequently, the air freight agent also handles customs clearance.

Road transport is characterized in many countries by the proliferation of small service providers. Road haulage brokers act as intermediaries between road carriers and shippers and are usually paid by commission.

These brokers act as the agents of shipowners to obtain and process cargo shipments. Commonly, a freight forwarder will represent the shipper while a loading broker represents the shipowner, so that there are two intermediaries between the customer and the transport provider.

13.7 Shipping documents

13.7.1 Miscellaneous documents

The documents associated with international transport frequently also play a key role in the payment mechanism and the underlying sales contract. Consequently, certain of these documents have been treated elsewhere in the sections on legal and payment aspects.

The most important transport document is the bill of lading (or one of its many variants); because of its central role, it will be presented in some detail below. First, however, let us summarize some of the other documents commonly encountered.

This is essentially a bill for the goods sold. It should comprise all essential information concerning the sale, including a precise description of the goods, address and identity of exporter and importer, as well as delivery and payment details. In many countries, customs authorities use the commercial invoice as the basis for calculating import duties. Unscrupulous traders have been known to prepare a separate, deliberately understated [Page187:] invoice for submission to customs authorities so as to reduce the amount of duty paid; this fraudulent practice is known as “double–invoicing” and, when detected, can result in substantial penalties.

A certificate generally issued by a respected independent agency, it verifies that the quality, quantity or specifications of the goods shipped are in conformity with the sales contract.

A certificate, usually issued or certified by a local chamber of commerce, establishing the country where the merchandise was produced or manufactured. This may be required, for example, for exports from developing countries to benefit from preferential tariff treatment.

Proof of type and amount of insurance coverage, often required for payment by letter of credit (especially under CIF and CIP Incoterms).

A highly detailed list describing the weight, volume, content and packaging for each separate

export package.

An official permit issued by an agency of the exporter’s government, without which the goods cannot be exported. Some countries require all exporters to obtain an official government export licence. Hazardous items (e.g., toxic chemicals) or politically sensitive goods (e.g., weapons) often require special export licenses and may, in addition, be subject to quotas or ceilings.

Some countries require an invoice on an official form for all imported goods; these invoices

are generally purchased from that country’s local consulate in the exporter’s country.

13.8 The bill of lading

The bill of lading (the “B/L”) is a central document in the traditional export transaction, linking the contract of sale, the documentary payment contracts and the contract of carriage. We shall first consider the classic B/L, the marine (or ocean) bill of lading, which provides the documentary basis for traditional maritime shipments.

The marine bill of lading is issued by the transport carrier (or its agent, such as a freight

forwarder). This B/L serves three basic functions:

1) The B/L represents the right to physical delivery of the goods – Or, as is sometimes said, the B/L “stands for” the goods. The legal holder of the B/L is solely entitled to take delivery of the goods. Moreover, the B/L is a “negotiable instrument”, because it can be sold or transferred (“negotiated”), thereby transferring control over the goods. The goods may thus be sold repeatedly even while they are in transit, by mere transfer of the B/L. The negotiable status of the B/L makes it useful to banks as a security device; a bank that has been pledged a B/L may be willing to extend credit or additional credit on the presumed collateral value of that B/L. Under an order B/L, the shipper consigns the shipment “to the[Page188:]order of ” a named party, who may be the shipper itself, the buyer or a bank, depending onthe level of trust existing between those parties and the banks involved in the financing of the letter of credit. The export seller can transfer the B/L by endorsing it and delivering it to the buyer or to a bank, where payment is organized through the banking system.

2) The B/L evidences the contract of carriage – The B/L must contain the terms of the contract of carriage, either explicitly or by reference to another document. Under documentary shipment sales, the seller must procure and transfer to the buyer a contract of carriage on “usual” or reasonable terms; as between the buyer and the carrier, the B/L is that necessary contract of carriage.

3) The B/L is a receipt – The B/L is a receipt that evidences the delivery of the goods for shipment. As such, it describes the goods and states that in a certain quantity and in apparent good order they have been loaded on board. If there is a notation that the goods have been in any way damaged, this will be made on the face of the B/L, and it will no longer be considered clean. In some cases, a carrier will issue a B/L as soon as the goods are received, but before they are loaded - this is a “received for shipment” B/L, which will not be acceptable for documentary sales until, after loading, it is converted by the carrier into a “clean on board” B/L (also called a “shipped” B/L).

i. Uses and advantages of the clean on board B/L – In light of the above, there are certain useful advantages of the clean on board B/L (a B/L which shows the goods have been loaded on board, and which is “clean” - e.g., which does not contain any markings or notations indicating damage to the goods). For the buyer, the clean on board B/L provides a valuable bundle of rights. It provides evidence that the seller has performed its contract obligations, by shipping goods that at least appear to conform to the contract of sale (otherwise, the buyer could hardly be expected to allow its bank to make payment against the B/L).

Note that UCP 600, ICC revised rules on documentary credits, state that: “The word ‘clean’ need not appear on a transport document, even if a credit has a requirement for that transport document to be ‘clean on board’’’.

Moreover, the B/L gives the buyer important rights against the carrier of the goods:

– the right to demand delivery of the goods when they arrive in the port of discharge, and

– the right to sue the carrier for lost or damaged goods.

The B/L also allows the buyer to speculate on the market, selling the goods in transit by transferring the B/L via endorsement. Finally, the B/L allows the buyer (and the seller) to raise finance on the strength of the document’s value as the key to the goods.

Because the B/L provides the above benefits to the buyer, it has corresponding benefits for the seller: the seller can get paid as soon as the goods are properly shipped, by presenting the B/L to an authorized bank. Thus, the seller avoids the risk of nonpayment. The B/L generally benefits international trade, especially in commodities, by reducing risk and enabling markets to speculate on goods while they are in transit. Trade is also facilitated because banks are willing to extend credit on the strength of the value of the goods represented by the B/L.

ii. Disadvantages of the negotiable marine B/L – Despite the foregoing, there are significant disadvantages associated with the use of the traditional negotiable marine B/L. The most common of these arises when the ship arrives at the port of discharge before the B/L. Today, with the vastly increased efficiency of marine shipment, particularly in the case of container vessels, a large cargo shipment may cross the Atlantic faster [Page189:] than the related documents. In the oil trade in particular, it is common for the cargo to arrive before the documents. Because the negotiable B/L is a document of title, a carrier takes a grave risk in delivering to anyone other than the holder of an original B/L. If a carrier does so, it is liable to the true holder for the value of the cargo wrongly delivered. The most common solution for this problem is for the receiver of the goods to obtain a bank guarantee or letter of indemnity which protects the shipowner from liability for delivery to the wrong person.

Another disadvantage of the marine B/L is that it is not well suited to multimodal or combined transport, where the ocean shipment is only one leg of a chain of transport operations. Frequently, the entire operation will consist of a land leg from the seller’s premises to the port of shipment, a sea leg to the port of discharge and then another land leg to the buyer’s premises. Only a multimodal transport document or B/L (discussed further on) can cover all three legs.

The multimodal transport B/L has very similar characteristics to the marine B/L, except that the multimodal B/L is used for carriage whenever there are at least two different forms of transport. In fact, UCP 600, ICC’s revised rules on documentary credits, no longer entitle an article “Multimodal Transport Documents”, but rather “Transport Document Covering at Least Two Different Modes of Transport”. Although the multimodal B/L also serves as a receipt for delivery of the goods, it does not necessarily evidence that they have been shipped “on board” an ocean-going vessel. Receipt in this case may refer to receipt of a container in a container handling terminal.

A shipment sent under a straight B/L is consigned to a specific party, usually the importer. The consignee does not need an actual B/L to receive shipment; adequate identification will do. Unless the choice of consignee is made irrevocable, the shipper remains free to change the consignee any time before the importer pays or accepts the obligation to pay. For this reason, for documentary sales the straight B/L does not provide banks with the security of an order B/L. Straight B/Ls may be used when the exporter is confident that the importer will pay, as in open account contexts, or when the importer has already paid, as with cash in advance sales.

Another variation on the non–negotiable B/L is the sea waybill. The sea waybill (which comes under a variety of different names, as for example, data freight receipt) serves as evidence of the contract of carriage and as a receipt for the goods, but is not a document of title. Consequently, it should not be used whenever the importer wishes to sell the goods in transit, or when the bank requires the bill to provide collateral security. The sea waybill can be advantageous in that an original is not required to take delivery. This is useful whenever it is likely that the goods will arrive in the port of destination before the relevant documents - a common occurrence in international trade, especially on short ocean routes.

For air shipments, the transport document is the air waybill (or “AWB”), for which the standard form is the IATA air waybill (International Air Transport Association). The air waybill is frequently issued by freight forwarders acting as agents of the air freight carrier. Generally, the seller chooses the forwarder and has it clear the goods for export. The AWBs that forwarders issue are known as “house air waybills” (HAWB), while the airlines themselves issue “master air waybills” (MAWB).

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For rail shipments, the transport document is the railway consignment note. In Europe, this document is governed by the CIM Convention (Convention Internationale pour le transport des Marchandises par voie ferrée).

For road shipments, a road consignment note is used, governed in Europe by the CMR Convention (Convention internationale pour le transport des Marchandises par Route).

13.9 Sea transport

13.9.1 Overview of basic commercial practice

Worldwide, maritime transport carries more international trade than any other mode. Much of international transport law and practice, even with regard to other modes of transport, is derived from long-standing practices in the carriage of goods by sea. Traders should therefore have a basic familiarity with sea transport.

A typical process begins when the shipper (in CIF contracts, for example, this means the exporter) concludes a contract with the consignee (importer). The shipper contacts a freight forwarder to arrange the transport. The forwarder will make enquiries to determine the dates and places of sailing of suitable ships. Frequently, the forwarder will do this by contacting loading brokers, who are agents of shipowners, and who market the shipowners’ available space.

Loading brokers handle logistics from the carrier’s side. They advertise the dates of sailing, supervise loading and consult with shipowner’s cargo superintendent with regard to the stowage (packing of goods in the ship’s hold). In practice, it is not uncommon for a single forwarding firm to act as both forwarding agent and loading broker, although these tasks are usually handled by separate departments.

Commonly, the forwarder will reserve space on a particular vessel, then will appropriately fill in a set of pre-printed bills of lading (a “set” comprises from two to four identical originals). Most shipowners or carriers print their own bills of lading and make these freely available. The forwarder will indicate on the draft bill of lading all necessary information, including the identity of the consignee, a description of the goods – which includes shipping marks (visible identification markings on the packages) - and details regarding the payment of freight.

The shipper, with the forwarder’s assistance, will make sure that the goods are either delivered alongside the ship or into the care of a port terminal, storage shed or warehouse. When the goods are delivered, the shipper will customarily receive a receipt document such as a mate’s receipt, dock receipt, cargo quay receipt or wharfinger’s note.

The shipowner will record the details of the goods received, as well as any important defects or damages, on the mate’s receipt. This is important, because the bill of lading will be based on information from the mate’s receipt. If the mate’s receipt indicates damaged goods, then the shipowner will not issue a “clean” bill of lading which, as we have seen, is generally necessary for the shipper to obtain payment under a letter of credit.

The shipowner will compare the details of the goods as loaded (recorded by the shipowner’s clerks) with the draft bills of lading that the forwarder or shipper has provided. Provided the details match and the goods do not exhibit damage or defects, the shipowner will issue the [Page191:] completed and signed clean bills of lading. The information from the bills of lading is also recorded on a register carried by the ship itself, called the ship’s manifest.

Once the goods have been loaded and the shipper has, in addition, obtained a marine insurance policy (in CIF shipments, with buyer as policy holder) and prepared a bank draft, the shipper is able to assemble a set of shipping documents. This bundle of documents serves as the hub of many international payment and finance mechanisms. Control over the goods can be freely transferred by endorsement of the bill of lading. Endorsement is effected when the party holding the bill of lading and wishing to make the transfer signs the back of the bill of lading. The signature may also be accompanied by directions to deliver to a specific person.

When the goods arrive at the port of destination, the ship’s master will deliver the goods to the first party who presents an original bill of lading. Commonly, the importer will present the bill of lading to the ship’s agent, who will then issue a delivery order; the importer then uses the delivery order to obtain release of the goods.

It is not uncommon for the goods to arrive before the bills of lading have been processed through the payment system and received by the importer (the consignee). Since a delay in receiving the goods may result in penalties or storage charges, the consignee may ask its bank to issue a letter of indemnity (“LOI”) to the shipowner, which will protect the shipowner in the event that it incurs liability for delivery to the wrong person. The shipowner will then release the goods against the letter of indemnity. In some sectors, such as the oil trade, this practice is common.

13.9.2 Sea freight

Conferences are groups of shipping companies serving specific ocean routes and ports. They fix and publish common freight rates and adhere to quality standards and regular shipping schedules. Because they function much like cartels, which are prohibited by the anti-trust or competition law of many countries, conferences have obtained specific exemptions from such laws.

Shipping companies that are not members of conferences are called outsiders. Outsiders are not obliged to adhere to conference freight rates nor observe their quality standards and shipping schedules. However, certain large outsiders are able match the quality and regularity offered by the conferences. Outsiders tend to offer lower freight rates than conference members.

Tramps are vessels for hire. Their services are marketed through brokers, and freight is negotiated on a case-by-case basis.

Since the 1990s, there has generally been a trend by carriers toward the use of individual confidential contracts rather than common freight rates. Carriers increasingly recognize that price fixing is no longer required in today’s market conditions, and shippers look forward to an era of customer-focused relations with carriers. The European Commission repealed the anti-trust immunity it had provided shipping conferences, with the repeal effective as of October 2008. Anti-trust immunity provided to ocean carriers is also under review in other regions. However, there are still conferences operating in other parts of the world, including in the Trans-Pacific trade, which consists of very important trade volumes.

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Freight is the price the carrier charges for carrying the goods to destination. The amount of freight is most commonly calculated according to either the weight or volume (e.g., per tonne or cubic metre) of the cargo, whichever is most favourable for the carrier. Commonly, the carrier will provide alternative freight rates based on a standard ratio between volume and weight. If the goods exceed the ratio of volume to weight, the freight is charged according to volume; otherwise, freight is charged according to weight. Other possibilities are for the freight to be calculated per unit or parcel, or relative to the value of the cargo.

Sea carriers commonly levy certain surcharges on the basic freight. The most common surcharges are the Bunker Adjustment Factor (BAF), which allows the carrier to adjust freight according to fuel price fluctuations, and the Currency Adjustment Factor (CAF) for fluctuations in the exchange rate of the currency in which the freight is quoted. While the basic freight is usually fixed for periods up to six months or one year, the CAF and BAF are subject to overnight revisions. Consequently, exporters should consider including price adaptation clauses in their sales contracts for CAF and BAF adjustments. Other common surcharges are levied for cargo that is exceptionally long or heavy.

Under CIF contracts, the price includes carriage to the port of destination. The freight may either be prepaid by the seller or paid by the buyer on arrival under a “freight collect” bill of lading.

Charges will commonly arise when goods arriving in the port area by truck or lorry are unloaded and transferred to storage sheds or brought alongside the ship. These charges are generally not included in the freight and will therefore be paid either by the exporter or importer according to the Incoterm selected (see section on Incoterms).

Before agreeing to a given freight rate, the shipper will want to know whether the loading and unloading of the goods is included in the freight. The answer will depend on the particular “liner term” offered by the shipping line. Again, since Incoterms such as FOB, CFR and CIF divide the costs and risks of loading at the ship’s rail, it is important that the Incoterm chosen in the contract of sale accord with the liner term specified in the contract of carriage (see Chapter Three on Incoterms). It is crucial that traders understand the distinction between liner terms, as part of the contract of carriage, and Incoterms, which are part of the contract of sale. Liner terms govern the contractual relations between shipper and carrier, whereas Incoterms govern the relationship between seller and buyer. A trader that has the responsibility for carriage should look first to the contract of sale to see whether the chosen Incoterm sets a clear rule with regard to loading or unloading. The trader, acting as shipper, should then make sure when procuring a contract of carriage that any liner terms in it do not conflict with the contract of sale’s Incoterm.

There are many variations for quoting liner term freight rates. Commonly, however, particular liner terms correspond to freight which covers transport beginning and/or ending 1) on the quay, 2) under ship’s tackle and 3) on board the vessel. Each of these three variations can be found upon both loading and unloading (since these can be freely combined, there are at least nine basic variations; moreover, since port and conference customs vary widely, the practical number of variations is very high).

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1) ex quay

loading - the carrier’s responsibility extends to loading goods brought anywhere within the area alongside the ship. What exactly is meant by “alongside the ship” may vary according to port custom.

– unloading - the carrier’s responsibility includes lowering the goods to the quay, sorting the goods into different consignments and, in some cases, storage under cover or in shed.

2) under ship’s tackle

– loading - the shipper must bring the goods directly under the crane or derrick that will hoist the goods on board; in particular, the goods must be taken out of any storage shed on the quay.

– unloading - the carrier will unstow the goods and place them on the ship’s deck; all other operations, including lowering the goods to the quay and sorting them, are for the shipper or consignee.

3) on board - also called “free in”, “free out”, or “free in and out”

– loading - “free in” - the carrier only makes the ship available; the shipper must hoist the goods on board and stow them in the ship’s hold.

– unloading -“free out” - the carrier only brings the ship alongside the quay; the shipper or consignee pay for having the goods unstowed and lowered to the quay.

– “free in and out” - under this variation, the carrier will handle only the stowing and unstowing of the goods.

In many cases, private contractors called stevedores will take care of all cargo handling operations and will bill them, according to the particular shipment, either to the carrier, the shipper or the consignee. Stevedores will not normally split the charges between shipper and consignee. This caused problems in the past with respect to the FOB, CFR and CIF Incoterms, which, prior to the Incoterms 2010 revision, required that costs be divided at the ship’s rail. The troublesome ship’s rail was changed to the current rule, which provides that costs and risks are divided at the point when the goods have been loaded on board the vessel.

13.10 Containerized and multimodal transport

Although not all containerized transport is multimodal, and vice versa, they are so often inter-related that it is useful to consider these two concepts together. When, as is common in international trade, goods move from seller to buyer through two land legs and one sea leg, the advantages of using the container become evident. Not only is the container transferred with ease from one leg to the next, the risks of damage and theft are greatly reduced.

Containers are basically large boxes, 8 x 8 feet in cross–section, and either 10, 20 or 40 feet long. The first all–container ship came into operation in the Pacific in 1956. In 1965, the first container vessel docked in Europe. The spread of containerization throughout the world progressed with breathtaking speed. Today, each of the world’s major ports handles millions of containers per year.

Container volumes are measured in TEU’s (Twenty-foot Equivalent Units). The standardization of containers allows for great automation of loading and transhipment, so that port operations that used to take days are now completed in hours.

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Shippers should always be careful to demand the internal measurements of the type of container they plan to use, so that the packaged or unitized goods can be prepared so as to properly fit the container.

13.10.1 Containers and Incoterms

In light of the considerable importance of containerized shipment in international trade, ICC has seen fit to adapt its Incoterms to container traffic. Thus, it has introduced terms which are specifically appropriate to containerized and multimodal transport:

• FCA (Free Carrier), which can be thought of as the containerized/multimodal equivalent of FOB;
• CPT (Carriage Paid To), which can be thought of as the containerized/multimodal equivalent of CFR; and
• CIP (Carriage and Insurance Paid To), which can be thought of as the containerized/ multimodal equivalent of CIF.

The importance of using these newer Incoterms is linked to questions of insurance cover and division of costs. Since container shipments are frequently taken over by the carrier at the shipper’s premises or at container terminals, which are remote from the port of departure, it does not make sense to divide risk (and therefore, insurance coverage) at the ship, as is done under FOB, CFR and CIF.

If a shipper uses FOB or CIF for containerized shipments delivered to an inland transport terminal, it will have to be careful to provide for insurance cover for transport from the inland terminal to the ship’s hold. It may happen that the goods are damaged or lost after delivery to the inland terminal and before loading in the port of departure. In such a case, a shipper that has only insured transport up to the inland terminal could find itself without possible recourse via an insurance claim.

Moreover, with regard to costs, a shipper that hands the goods over to the carrier at the shipper’s premises will prefer not to absorb the costs all the way to the ship, and will therefore prefer FCA to FOB.

13.10.2 Overview of basic commercial procedure

As with traditional cargo shipments, container shipments are frequently arranged by freight forwarders. There is a basic distinction between shipments that fill a full container load (FCL) and shipments for less than a full container load (LCL).

FCL - In the case of FCL shipments, an empty container is taken out of a stack in a container park and sent to the exporter’s premises, where it is loaded or “stuffed” with the goods. After the container has been stuffed, it is closed with the carrier’s seal. Theft or pilferage of the goods in transit will normally be indicated by a broken seal. Sophisticated electronic seals have become available to help protect valuable goods.

LCL - In the case of LCL shipments, the exporter delivers the goods to a container terminal, where the cargo is grouped together with other cargo sufficient to stuff a container. At a terminal near the destination point, the cargo is unloaded from the container and broken down into separate consignments.

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There are two separate cost elements - the rental of the container and the freight. Frequently, the rental of containers provided by the carrier is included in the freight. In other cases, however, the shipper will lease the container. Shippers are advised to take care as to the time period allowed under the lease contract, because these contracts often provide for liquidated damages in the case of containers returned late.

Container freight charged by shipping lines in conferences is generally linked to the type of goods shipped, whereas outsiders tend to charge a flat rate per box.

Containers are usually delivered in the port area to a terminal that charges a fixed amount for handling the container and moving it to the ship’s side. At the port of departure, the terminal charges are often referred to as container service charges, whereas at the port of destination they may be called termin al handling charges; in practice, the terms are employed interchangeably.

13.11 Air transport

13.11.1 Introductory

Air transport has profoundly accelerated the pace of international business. Indeed, international trade in certain kinds of merchandise would not exist were it not for the rapidity of air transport. Highly time-sensitive goods, such as newspapers and magazines, or highly perishable goods, such as fresh flowers or seafood, would not be available at all in many markets if it were not for air transport. The speed of air transport also reduces exposure to risk so substantially that goods of great value - such as jewellery, pharmaceuticals and medical supplies, prize livestock, art works or manuscripts - will usually move by air. Air freight is said to account for only 1% by weight, but 10% by value, of all goods transported. However, even with regard to products for which distribution is not so time-sensitive, air transport is deceptively competitive.

Although air freight rates are much higher than ocean rates, air shipments can provide savings with respect to other crucial costs:

1. Insurance – premiums are generally less than half those for sea transport (e.g., 0.3% of cargo value as opposed to 0.7%);
2. Customs duties – may be charged on gross weight, which is generally lower for air shipments (less packaging) than for sea shipments;
3. Packaging – much lighter and cheaper for air transport;
4. Inventory costs – in many cases, air transport can greatly reduce and even eliminate the need for warehousing, which would be necessary with sea transport; since warehousing costs include, not only the leasing of warehouse space at either end of transit, but also related tax and insurance costs, as well as the cost of goods which become obsolescent while stored in the warehouse. This cost factor can be decisive in favour of air transport;
5. Financing costs – for shipments in which the buyer’s payment obligation is triggered by delivery to the buyer’s premises, the seller will receive payment much sooner with air transport.

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Even in those cases where the cost of sea transport is lower, for competitive reasons the seller may prefer to use air transport. Thus, an export seller of spare parts may find that it cannot compete against domestic sellers unless it matches their delivery speeds, which can only be done with air transport.

13.11.2 Overview of air transport procedures

Air freight is either shipped:

• along with luggage in passenger planes,
• in hybrid aircraft with special compartments for cargo, known as combis, or
• in cargo aircraft.

Specialized cargo craft, such as the Boeing 747F freighter, carry payloads in excess of 100,000 kg, but combis and passenger planes remain more profitable for airlines than cargo freighters. Thus, shippers have in the past complained that airlines did not pay enough attention to the cargo business. However, with some airlines today generating close to half of their revenues from cargo, shippers can now expect a competitive air freight market.

In the past, many shippers quoted “FOB Airport” prices for air shipments. This often caused misunderstandings with respect to airport handling charges and the extent of insurance coverage. The FOB (free on board) term was developed in maritime trade, and the application of principles derived from sea transport was not appropriate. Consequently, ICC discontinued the FOB Airport term in 1980. ICC recommends that shippers use the FCA Incoterm instead, with the specified point of delivery being the named air freight or consolidator’s terminal.

Air transport gave many freight forwarders an entire new line of business. Air carriers, through the International Air Transport Association (IATA), oversee a worldwide cargo agents’ organization, to which many forwarders adhere. Appointment as an IATA air cargo agent allows a forwarder to market air cargo services, knowing that IATA airlines will carry the goods for a fixed price and with a commission for the forwarder. IATA agents must demonstrate certain financial and cargo-handling resources, and must agree to remit to the air carrier freight billings according to fixed schedules.

Air carriers may provide forwarders with air waybills (AWBs) featuring the airline’s logo. As with other non–negotiable transport documents, the AWB is both a receipt for the goods and a contract of carriage. In some countries the AWB system is computerized, and the air carriers only issue AWB numbers to forwarders, leaving the forwarder to print out the AWB number and airline logo on a form known as the Neutral AWB.

Forwarders acting as consolidators may issue AWBs in their own name as carriers, in which case their role can be likened to that of NVOCCs (Non-Vessel Operating Common Carriers) in sea transport. By consolidating - grouping - several consignments together, forwarders are able to obtain the lower freight rates offered by carriers for large shipments. In this, the air consolidators perform a groupage function like that of container shipping terminals. Consolidators may provide highly efficient warehouse services upon departure, and upon arrival may handle the notification of the consignee by telephone. In addition, consolidators often offer a door-to-door service, which includes customs clearance and insurance coverage.

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Air cargo containers corresponding to the shape of the plane’s cabin are known as unit load devices (ULDs). There are various shapes and sizes of ULDs (some are called “igloos”), each designed to be stored in a different part of the airplane. Cargo is handled primarily by pushing or pulling of pallets and ULDs, which move over systems of rollers. Since ULDs are usually stuffed in terminals at or near the airport, it is possible for cargo delivered to an air terminal to be shipped on a departing flight within two hours. The actual loading or unloading of cargo can take less than one hour.

Some airlines offer guaranteed shipment times or dates, which eliminate the risk to the shipper that its cargo will be delayed as a result of being forced off a particular flight to make room for special high-priority items. Although the extent of the guarantee varies from airline to airline, it is generally useful for the shipper to request one, in particular because some airlines make such guarantees at no extra charge.

Since shipments of hazardous goods can, in some cases, jeopardize the safety of the entire aircraft, regulations on restricted articles are strictly enforced. IATA publishes an annual update of these regulations. In many cases, cargo is allowed, provided that it is appropriately packaged and “hazard” labels are affixed. Both shippers and forwarders must be quite careful in assuring that all declarations relating to potentially hazardous cargo are complete and correct; failure to do so can result in the application of heavy penalties.

IATA once played a major role in setting international air freight rates, but this role was progressively eliminated due to concerns that IATA or IATA members were acting as a price setting cartel.

13.12 Road and rail transport

13.12.1 Road haulage

The total number of vehicles engaged in road haulage worldwide, more than 80 million, dwarfs the number for any other transport method. The great advantage of international road haulage is that it offers the possibility of true door-to-door service with no transhipment whatsoever. Moreover, loading at point of departure and unloading at destination require relatively little in the way of specialized equipment - a loading platform and a steel sheet “bridge” are often all that is needed. Articulated vehicles (a lorry or truck which pulls a container-trailer) are particularly well-suited to roll-on roll-off (Ro-Ro) ships, which allow for safe and simple transfer from land to sea and back again to land. In addition to this great flexibility, road vehicles can carry as much as 45 tonnes, although national regulations may set a maximum limit.

As with sea and air transport, specialized forwarders offer consolidation services for road transport. Their services can involve grouping small consignments, warehousing, and integrating several modes of shipment so as to offer a door-to-door price. Sophisticated integrators today offer many computerized services, including monitoring of the progress of the shipment from departure to destination. In addition, many of these integrators offer express services featuring guaranteed delivery dates.

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Rates vary widely from country to country. One reason is that labour rates for drivers will correspond to the prevailing wages in the particular country. As with sea and air transport, road freight is generally calculated by weight but subject to a volume-weight ratio. For road transport this ratio falls between the ratios for sea (1.33 to 1) and for air transport (6 to 1), generally in the area of 3. Thus, if the volume in cubic metres is more than three times the weight in kg, freight will be set according to a “theoretical weight” in kg calculated by dividing the total volume in cubic metres by three.

International customs carnet for road haulage - The TIR (Transport International Routier) Carnet is very similar in function to the ATA Carnet discussed earlier, except that the TIR Carnet was created to allow trucks or lorries carrying international cargos to pass through intervening countries (provided they are signatories to the TIR Convention) without having to go through customs control procedures.

13.13 Rail transport

While road and air transport have boomed for half a century, rail transport has declined. As compared with road transport, rail transport is much less flexible in terms of the total number of shippers and consignees that can be directly reached. Moreover, loading is generally not so easy. Since different countries may use different rail widths or gauges, as well as different tunnel clearances, international consignments can be complicated and require transhipment.

However, for certain classes of shippers or cargo, rail remains the indicated transport choice. Railway wagons can carry cargo of tremendous weight. Certain special flat-bed rail trucks can carry up to 500 tonnes. Consequently, rail is often the preferred choice for bulk transport of industrial ore and liquids. Moreover, when both shipper and consignee have private rail sidings (direct connections from warehouses to rail lines) rail shipments can provide the most straightforward door-to-door service. Additional flexibility has resulted from the development of road-rail schemes, under which, for example, a road trailer arriving from a roll-on roll-off ship is placed on a rail wagon and transported to destination by rail.

Railway freight – In contrast to other modes of transport, freight is generally not subject to a volume-weight ratio. Railways generally offer two sets of rates for full wagons, one for express service and one for slow goods service. In terms of price per unit of weight, railway freight is quite competitive.

13.14 Cargo insurance

Almost without exception, international trade shipments are insured against damage or loss in transit by some form of cargo insurance. Depending on the Incoterm chosen and any express insurance provisions in the contract of sale, either the exporter or importer may have the primary responsibility to insure. In some cases, both parties will have the cargo insured to varying extents. The variety and complexity of possible permutations is such that no exporter or importer should do without the counsel of an insurance agent or broker.

Many small traders have insurance cover arranged by their freight forwarder. Alternatively, the trader may have a long-term “open” or “floating” cover with the insurance company, which will cover a number of shipments over a given period of time. In other cases, the trader will directly insure a particular shipment via a marine, aviation or overland insurance [Page199:]policy. Despite their names, such insurance policies are generally not limited to insurance for only the marine, air or land legs of transit, but can each be extended to cover the goods ”warehouse-to-warehouse”

An initial distinction must be made between the contractual duty to insure and the commercial need to insure. Thus, under CIF and CIP Incoterms, the exporter has a contractual duty to the importer to provide a minimum level of insurance to cover the goods during international transit. Under all other Incoterms, there is no contractual duty for either side to provide insurance (although the parties may freely stipulate any additional insurance requirements in the sale contract).

However, in most cases the absence of a contractual duty to insure does not remove the obvious practical need to obtain insurance. The parties will normally obtain insurance coverage to protect themselves as a matter of ordinary commercial prudence. At a minimum, they will wish to be insured during that part of transit during which they are at risk. Each Incoterm fixes a point for the transfer of risk from seller to buyer; before that point, the seller is at risk and will wish to be insured; after that point, the buyer is at risk and will wish to be insured.

Therefore, it might seem reasonable that parties will only wish to pay for insurance coverage for that part of the transit during which they were at risk. If we take the example of an FOB shipment, transfer of risk is on board the named vessel. Since the seller is at risk up to that point, it might reasonably wish the cargo to be insured by itself up to the ship’s hold, and no further. It has no contractual duty at all to insure the goods up to the ship’s hold, but will normally do so out of self–interest. Likewise, the buyer might desire that its insurance coverage should begin at the ship’s hold, and no earlier.

However, since insurance coverage is most often warehouse-to-warehouse, it is not a common practice to split insurance coverage at the transfer of risk point. Splitting insurance coverage, each side seeking only to insure its own interest for its leg of the transport, has several disadvantages. First, there is the risk that the two insurance covers will not match up exactly, leaving a gap - a portion of the transport chain where there is no insurance cover. Second, if loss or damage is only discovered upon arrival, it may be difficult to prove where the loss or damage occurred (and therefore, under which policy), with the result that both insurers may be able to avoid payment. Finally, two separate partial insurance covers are generally more expensive than a single warehouse-to-warehouse cover for the entire transit.

It would therefore seem preferable for one of the parties to obtain continuous coverage for the entire transit, warehouse-to-warehouse, from a single insurer. However, this is not always [Page200:] possible. By law, many countries require that their importers and exporters insure transport risks with domestic insurers. Also, many traders already have long-term marine cargo insurance under a floating policy or open cover (discussed further on). Moreover, some traders may be reckless enough to wish to do without insurance cover for their leg of transport.

Even in those cases where the other party has taken out a warehouse-to-warehouse policy, the coverage may be for an insufficient amount, or may exclude certain likely risks. The trading partner in such a case may wish to take out supplementary “gap” or “difference in conditions” or “contingency” insurance.

As can be seen from the foregoing, traders should carefully consider how much insurance coverage they need, and for what portion of the transit they need coverage. They should consider whether insurance coverage provided under minimum standard terms such as the Institute Cargo Clauses is sufficient for their purposes, and if not, they should consider amplifying or increasing the coverage. If the other party has procured insurance, they should also consider whether it is sufficient, or whether it should be complemented with contingency insurance.

Traders should review with their insurance agent or broker, as well as their trading partners, the various options for obtaining such coverage. Finally, they should stipulate precisely in the contract of sale the desired level of coverage and who must pay for it.

Regardless of who takes out the insurance policy, a party can only recover under a claim on a policy if it has an “insurable interest” in the goods at the time they were damaged or lost. Roughly, this means that a party must have ownership or some other interest (including risk) in the goods in order to claim under the policy. Generally speaking, the seller will have an insurable interest in the goods up to the transfer of risk point, and the buyer will have an insurable interest thereafter. However, there are exceptions to this rule and, in some cases, one of the parties will assign its rights under the policy to the other party.

“Open” cover and “floating” policies are intended to cover multiple shipments over a period of time, and therefore only state the general conditions of the insurance contract. In each case, the insured party notifies the insurer of the specific voyages to be covered under the policy. Open cover may also be taken out by forwarders or carriers, who then use it to cover specific consignments for their clients.

Under a floating policy, the value of the risk insured on each voyage is deducted from the total value of the insurance contracted. Under an open policy, the insurance limit is automatically renewed after each voyage.

In some cases, such as those involving payment under a letter of credit, the shipper may need to have an insurance document included in the set of shipping documents. Under an open policy, this is accomplished by the use of “insurance certificates”, which are issued by the insurers at the instruction of the insured party. Traders should take care, because a letter of credit that explicitly requires submission of an insurance policy will not allow an insurance certificate as a substitute.

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Insurance premiums vary widely according to the mode of transport and the nature of the goods. Premiums for air shipment are generally the lowest, in the area of 0.3% of the value of the goods, while the highest are for long road or rail transport legs (especially in developing countries), which in exceptional cases may be up to 2%. Sea transport premiums are commonly in the range of 0.6%-0.7%.

Only two Incoterms, CIF and CIP, specifically require insurance. Under these terms, the seller must take out an insurance policy for the buyer. The minimum amount of coverage is set at 110% of the value of the goods, and the conditions of the coverage are specifically those set out in the Institute of London Underwriters Cargo Clauses. The Institute of London Underwriters is a professional association of insurance companies; there are three standard clauses, known respectively as Institute Cargo Clauses A, B and C. These clauses define the risks covered by the insurance policy and were intended to replace and improve the previously common clauses known as “all risks”, “with average” (WA) and “free of particular average” (FPA). Institute Cargo Clause A provides the broadest coverage; therefore, it is sometimes considered to provide “all risks” cover. However, such terminology is deceptive, because several important risks are not covered by Clause A, notably the risks of strikes or war, as well as damage resulting from insufficient packing, delay, ordinary wear and tear of transport or the insolvency of the carrier, amongst others. Clauses B and C are even more restrictive, covering only risks that are specifically referred to.

Under Incoterms, the seller may choose Clause C, which provides the least coverage. Importers should therefore be forewarned that in cases where such minimum coverage is insufficient, they will need to specify in the contract the level of additional insurance they require. For example, if the importer expects to earn a high profit margin on the goods, coverage of 110% of the value of the goods may be insufficient; 120% or 130% may be advisable (although this will obviously raise the cost of the premium).

One solution is to provide a specific clause in the contract of sale setting out the scope, time and extent of insurance coverage, and particularly whether coverage will extend to risks of strikes, riots and civil commotion (called “SRCC” coverage; an example of such a clause is set out in the Chapter 3 on Incoterms).

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