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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
For exporters and importers, choices related to international transport have a direct impact on price, speed of delivery and the risk of loss or damage. Large traders have logistics departments and personnel experienced in global supply chain management, while smaller traders often rely on the services of international freight forwarders.
Shippers should inform forwarders or carriers fully and precisely as regards the transport obligations contained in the sale contract. Directions should be specific with regard to such items as place of pickup, place of delivery, costs for handling and loading, and amount of required packaging.
The legal regime that applies to international cargo shipments is complex and in the event of loss it can be difficult for a non-expert to determine liability. As a result, it is safest for traders to be fully and completely insured against all likely transport risks.
Transport documents such as bills of lading and waybills play a crucial role in the transport process, but also in payment methods such as the letter of credit.
It is essential to distinguish between negotiable documents such as the marine bill of lading and non-negotiable documents such as waybills.
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 reduced 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 more likely to encounter problems 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 with 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 the transaction.
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:[Page170:]
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 clear as to their respective transport obligations and risks. The price that an exporter quotes to an importer is based on the Incoterms® rule chosen (because this determines who must pay for the main international transport). Small and beginning exporters often choose the Ex Works Incoterms® rule (EXW), because this places all transport responsibilities and risks on the buyer’s shoulders. FCA or FOB are equally favoured because, though they require the seller to clear the goods for export, they still place the costs and risks of international transport on the buyer.
In choosing Incoterms® rules 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® rules that are 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.
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 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.[Page171:]
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 compared to 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).
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.
> Hague Rules (1924) The International Convention for the Unification of Certain Rules of Law 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.
> 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. Note that both the Hague and Hague-Visby rules specify that the carrier’s liability will be limited to a specific amount per package or per kilogram (667 SDR [Special Drawing Rights] per package under Hague-Visby, though individual signatory nations may implement these treaties with higher or lower amounts) unless the shipper has bargained for greater coverage in the bill of lading.
> 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. 34 countries had ratified the rules in 2014.
> Rotterdam Rules (2008) or UNCITRAL Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea This 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, the Hague- Visby and the 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.[Page172:]
> Montreal Convention for the Unification of Certain Rules for 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, the Maghreb and the Middle East, rail transport is governed by the 1980 Convention Concerning International Carriage by Rail (COT IF), amended by the Vilnius Protocol of 1999. This modified version entered into force on 1 July 2006. A list of the states party to the convention and the declarations and reservations they have made against particular appendices may be found on http://otif.org/en/
> CMR (Convention relative au contrat de transport international de marchandises par 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.
> UNCTAD/ICC Rules for Multimodal Transport Documents 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 MULT IDOC 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.
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.
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.[Page173:]
> 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:
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.
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.
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 bills 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.[Page174:]
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 would the suit be made, the charter party or the bill of lading?
> Acceptability are bills of lading referring to charter parties acceptable under the terms 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 it would not expose itself 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.
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”.
In addition to booking freight, freight forwarders may also handle export and customs documentation, insurance and port and terminal charges. Small exporters often consult with their freight forwarders before quoting a price in a tender for a particular international 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 relation 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.[Page175:]
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.
> Consolidators/NVOCC
Consolidators offer transport services which involve grouping or assembling diverse shipments from various customers so as to make up full container loads (FCL), thus obtaining lower freight rates. Some consolidators offer regular shipments on seagoing vessels that they do not own. These are referred to as NVOCCs (non-vessel operating common carriers).
> Multimodal transport operators (MTOs)
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.
> Customs brokers/Agents
Customs brokers or agents 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.
> Port agents (sea port, airport, cargo terminal)
The port 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).
> Air freight agent (air waybill agent)
Air freight agents process shipments for airlines and may have the authority to issue air waybills. Frequently, the air freight agent also handles customs clearance.
> Road haulage contractors
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.
> Loading brokers
Loading 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.
The bill of lading (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.[Page176:]
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:
> Control of the goods
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 order of a named party, who may be the shipper itself, the buyer or a bank, depending on the level of trust existing between those parties and the banks involved in the financing of the letter of credit (for this reason such bills are sometimes referred to as order bills. 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.
> Contract of carriage
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.
> Receipt for the goods
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).
> Advantages
Documentary credits commonly call for presentation of a clean on board B/L. This means a B/L which shows that the goods have been loaded on board and is “clean” (it 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’.” Rather, the word “clean” refers to an absence of markings or references on the B/L indicating damaged goods.
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.[Page177:]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 non payment. Thus use of 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.
> Disadvantages
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 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 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 (as distinguished from an “order bill”). 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 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, 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[Page178:]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” (HAWBs), while the airlines themselves issue “master air waybills” (MAWBs).
For rail shipments, the transport document is the railway consignment note. In Europe, this document is governed by the CIM Convention — Uniform Rules Concerning the Contract of International Carriage of Goods by Rail (CIM) which is part of the Convention concerning International Carriage by Rail (COT IF).
For road shipments, a road consignment note is used, governed in Europe by the CMR Convention (Convention relative au contrat de transport international de marchandises par route).
Test Your Knowledge: International Transport
True/False
Answers: 1. F 2. T 3. T 4. F 5. T