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Chapter 11 Transportation

I. Text Materials

Trade Terms

Sales involving transportation customarily contain abbreviated terms describing the time and place where the buyer is to take delivery. The trade terms may also define a variety of other matters, including the time and place of payment, the price, the time when the risk of loss shifts from the seller to the buyer, and the costs of freight and insurance.

Virtually all domestic laws allow the parties to define the terms themselves, or to incorporate definitions from foreign legislation or from a specific set of private rules. The United Nations Convention on Contracts for the International Sale of Goods similarly allows parties to incorporate trade terms of their choosing.

The most widely used private trade terms are those published by the International Chamber of Commerce (ICC). Called , they are well known throughout the world, and their use in international sales is encouraged by trade councils, courts, and international lawyers. First published in 1936, they are revised every 10 years—the current version is Incoterms 2010. Parties who adopt the Incoterms, or any other trade terms, should make sure they express their desire clearly. Parties should also refrain from casually adopting any particular set of terms. Parties should be wary about making additions or varying the meaning of any particular term, except to the extent that it is allowed by the rules they adopt or by judicial decision.

The parties’ failure to use any trade term at all can also produce unexpected results. Courts are then left to divine the parties’ intent and to decide the case based on local commercial practice.

Case 11-1: St. Paul Guardian Insurance Company v. Neuromed Medical Systems & Support, GmbH District Court for the Southern District of New York, 2002. Facts: Shared Imaging, a U.S. company, purchased an MRI system from Neuromed, a German company, for delivery CIF New York Seaport. The also provided that Neuromed would maintain to the system until full payment was made. When the MRI system arrived at Shared Imaging’s facility in Illinois, it was damaged. Two insurance companies paid Shared Imaging for the damages and then sued Neuromed to recover what they had paid. The insurance companies allege that Neuromed is liable under the CIF term. Neuromed contends that the CIF term is inapplicable, that it is not liable, and it moves to dismiss. Issue: Did the parties intend for their shipping term to be the CIF Incoterm? Holding: Yes. Law: (1) The United States and Germany are both parties to CISG. (2) CISG Art. 9(2) provides that the parties are bound by accepted usages of trade. (3) According to the German courts, the CISG usage of trade rule requires that “CIF” be interpreted as meaning the CIF Incoterm. (4) The time for passage of title does not affect the meaning of the CIF term, as both the Incoterms and the CISG look to passage of risk and ignore passage of title. Explanation: (1) This is an international sale governed by CISG. (2/3) The Incoterms provide the accepted definition of shipping terms according to the usage of the shipping trade. (4) Although the parties provided that title would not pass until after payment in full was made, this does not affect the applicability of the CIF Incoterm as 2 both the Incoterms and the CISG define the term in relationship to passage of risk and ignore passage of title. Order: Motion to dismiss is denied.

A Note on the Incoterms – The Incoterms 1990 revision made several significant modifications to the earlier terms, reflecting changes both in technology and in shipping practices that occurred during the 1980s. According to the ICC, “The main reason for the 1990 revision of Incoterms was the desire to adapt terms to the increasing use of electronic data interchange (EDI).” The second major reason for the revision stemmed “from transportation techniques, particularly the unitization of in containers, multimodal transport, and roll-on roll-off traffic with road vehicles and railway wagons in ‘short sea’ .” Older terms that applied to peculiar modes of land and air transport—such as free on rail (FOR), free on truck (FOT), and FOB airport—were eliminated and the free carrier term was expanded.

Incoterms 2010 is classified into only two groups. The first group can be applied to any mode(s) of transportation and includes Ex Works (EXW), Free Carrier (FCA), Carriage Paid To (CPT), Carriage and Insurance Paid (CIP), Delivered at Terminal (DAT), Delivered at Place (DAP), and Delivered Duty Paid (DDP). The second group can only be applied to sea and inland waterway transportation and includes Free Alongside Ship (FAS), Free On Board (FOB), Cost and Freight (CFR), and Cost, Insurance and Freight (CIF).

Incoterms 2010 also formally defined delivery as the point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer.

“Free” Terms – “Free” means that the seller has an obligation to deliver the goods to a named place for transfer to a carrier. National laws sometimes treat the “free” terms as interchangeable, so it is important for contracting parties to identify not only the term but also the set of rules that applies to their particular transaction.

FOB—Free on Board – It is a maritime trade term, and in most of the world its use remains limited to seaborne commerce. The FOB (port of shipment) contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port.

The essence of an FOB contract is the notion that a seller is responsible for getting goods on board a ship designated by a buyer. The seller continues to be responsible for the goods even after the buyer’s chosen ship takes control of the goods at the end of its cargo boom and begins to hoist the goods off the dock. The seller may remain responsible for the goods even after they are loaded onto the ship if they remain unidentified to the buyer’s contract.

FAS—Free Alongside Ship – The term “free alongside” or “free alongside ship” requires the seller to deliver goods to a named port alongside a vessel to be designated by the buyer and in a manner customary to the particular port. “Alongside” has traditionally meant that the goods must be within reach of a ship’s lifting tackle. This may, as a consequence, require that the seller hire lighters to take the goods out to a ship in ports where this is the practice. The requirements of an FAS term are the same as those of an FOB contract. The seller’s responsibilities end upon delivery of the goods alongside.

CIF—Cost, Insurance, and Freight – The most important and most commonly used shipping term is cost, insurance, and freight. A CIF contract requires the seller to arrange for the carriage of goods by sea to a port of destination and to turn over to the 3 buyer the documents necessary to obtain the goods from the carrier or to assert a claim against an insurer if the goods are lost or damaged. The three documents that the seller (as a minimum) has to provide—the , the insurance policy, and the —represent the three elements of the contract: cost, insurance, and freight. The seller’s obligations are complete when the documents are tendered to the buyer. At that time, the buyer is obliged to pay the agreed-upon price.

The CIF term is preferred by buyers because it means that they have little to do with the goods until the goods arrive at a port of destination in their country. A CIF price quote also allows buyers to compare prices from suppliers around the world without having to take into consideration differing freight rates, since the seller pays the freight and insurance.

CFR—Cost and Freight – The cost and freight (port of destination) term is the same as the CIF term except that the seller does not have to procure against the risk of loss or damage to the goods during transit. Because the insurance required under a CIF contract only has to cover minimum conditions, buyers wishing to purchase more extensive policies will want to use a CFR contract.

Case 11-2: Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd. United States, Court of Appeals, Second Circuit, 1985. Facts: Phillips agreed to buy 25-30,000 tons of naphtha from Tradax for shipment from Algeria to Guayama, Puerto Rico. The contract incorporated the Incoterms 1980 C & F trade term and a clause. The seller, Tradax, proposed that the naphtha be shipped on an integrated tug barge named the Oxy Trader. Phillips, on determining that the Oxy Trader would fit in its Puerto Rico berth and was available at the correct time, agreed. En route the Coast Guard detained the Oxy Trader at Gibraltar. Tradax received word that the Oxy Trader might have a latent defect and might not be allowed to proceed. Tradax relayed this information to Phillips. Phillips responded by saying that it was declaring force majeure and that it would cancel the contract if delivery were not made within 30 days. Tradax responded that under a C & F contract, its responsibility ended at the time of shipment. Tradax then presented the shipping documents to Phillips and demanded payment. Phillips refused and Tradax brought suit. Issue: (1) Did the risk of loss pass to the buyer at the time of shipment? (2) Could the buyer invoke force majeure? Holding: (1) Yes. (2) No. Law: Incoterms 1980 states that under a C & F term, the seller arranges and pays for the transport of the goods, but the buyer assumes title and risk of loss at the time of shipment. Explanation: The risk of loss passed to the buyer at the time of shipment as the carrier selected was properly certified for the transport of naphtha. It was then too late for the buyer to invoke force majeure. Finally, there was nothing wrong with the documents that the seller presented (as indicated by buyer’s agent’s comments) and the seller should have been paid. Order: Phillips must pay Tradax.

FCA—Free Carrier – The term applies to any form of transport (maritime, inland waterways, air, rail, or truck). It requires the seller to deliver goods to a particular carrier at a named terminal, depot, airport, or other place where the carrier operates. The costs of transportation and the risks for loss shift to the buyer at that time. 4

EXW—Ex Works – Under an ex works contract, a seller is obliged only to deliver the goods at his own place of business. All the costs connected with transportation are the responsibility of the buyer.

Transportation

The following is a typical example of how goods are transported by sea from a seller in Country A to a buyer in Country B. Goods are picked up at the seller’s place of business by an inland carrier and transported to a seaport for carriage abroad. The inland carrier will deposit the goods in a warehouse or port depository for examination by customs officials and for consolidation with other goods if the load is not large enough to occupy a ship by itself. A company or the ship’s crew will load the goods. The crew will then stow the goods aboard ship, mark the goods with leading marks, and issue a bill of lading to the shipper. At a seaport in Country B, the ship will be directed by port authorities to tie up at a pier or to anchor at a moorage in the harbor. When the buyer produces the bill of lading, the ship’s crew will unload the goods onto the dock or, if the ship is anchored out, into a lighter for transfer ashore. The crew or a stevedoring company will then deliver the goods to a customhouse or a bonded warehouse for inspection. Once customs has inspected the goods and their related documents, and collected any import taxes or duties, the goods will be released for entry into Country B. A local inland carrier will then transport the goods to the buyer’s place of business.

When goods are transported by air, rail, or truck, much the same procedure is followed, except that the carrier will issue an air or similar non-negotiable instead of a bill of lading, and the transfer of goods will more commonly be done by the carriers without the assistance of or other intermediaries.

In making arrangements for the transportation of goods, the buyer and seller will deal with a variety of intermediaries, such as freight forwarders, warehousemen, port authorities, stevedores, and customhouse brokers.

Freight forwarders are companies with specialized knowledge of international markets, finance, transport, customs, sales law, and other related matters. In most countries they are licensed by the government. Unless a merchant has a large staff dedicated to making shipping arrangements, the use of a will save time and expense.

Unlicensed brokers and agents also are commonly available who perform much more limited services (such as the booking of ocean freight or the handling of air cargo). A full-service freight forwarder can help with or perform the following:  Obtaining quotations on CIF and C & F contracts  Determining the availability of ships and port facilities  Estimating costs based on gross weight, cubic feet, value, description of the goods, and the port of destination  Booking space  Procuring export licenses  Reviewing letter of credit terms  Tracing inland shipments  Preparing shipping documents, including export declarations  Preparing and authenticating consular  Procuring certificates of origin from local Chambers of Commerce  Purchasing insurance 5

 Presenting banking drafts and collecting payment

Inland Carriage

The first stage of transporting goods overseas almost always involves an inland carrier, either a trucking or rail company, which moves the seller’s goods from the seller’s place of business to a seaport or airport. Except for ex works contracts, it is common for the seller to arrange for inland carriage, with the inland carrier transferring the goods to a freight forwarder at a seaport or airport for the latter to arrange and oversee the shipment of the goods abroad.

In the absence of universal conventions, several regional agreements regulate transport by road and rail. In Europe, road transport is regulated by the 1956 Convention on the Contract for the International Carriage of Goods by Road (Convention relative au contrat de transport international de merchandises par route, or CMR) and rail transport is governed by the 1980 Convention Concerning International Carriage by Rail (Convention relative aux transports international ferroviares, or COTIF).

The CMR is representative of the conventions governing road transport. It applies whenever goods are shipped between two countries, at least one of which is a signatory of the convention. The convention requires a carrier to issue a note. The CMR consignment note is not a negotiable instrument. It is, nonetheless, prima facie evidence of the making of a transport contract and of the receipt and the condition of the goods.

The convention also grants the the right to demand delivery of the goods in exchange for a receipt and to sue the carrier in his own name for any loss, damage, or delay for which the carrier is responsible. However, up to the time that the goods are turned over to the consignee, the shipper () has the right to order the carrier to stop them in transit, to change the place for delivery, or to order them delivered to a different consignee.

If a road carriage contract involves the use of multiple carriers, each carrier is treated as a party to the contract, and each is responsible for the entire transaction. Suits can be brought against the first or last carrier or the carrier in possession at the time of the loss.

Carriers are liable for loss, damage, or delay up to the liability limit set by the convention, so long as the consignment note states that carriage is governed by the CMR. The liability limit is 8.33 Special Drawing Rights (SDRs) per kilogram unless the consignor declares a higher value and pays a surcharge. If the consignment note fails to include a reference to the CMR, the carrier will be liable for any resulting injury.

The burden of proof rests on the carrier, which will be liable unless it can show that the loss, damage, or delay was caused by the consignor or the consignee, by an inherent defect in the goods, or “through circumstances which the carrier could not avoid and the consequences of which he was unable to prevent.” A consignee has to notify the carrier within seven days of delivery to assert a claim for loss or damages, and within 21 days to make a claim for losses resulting from delay.

The COTIF, which governs rail transport, contains in most respects the same provisions as the CMR. The carrier’s liability for losses, however, is 17 SDRs per kilogram. 6

Carriage of Goods by Sea

Most goods are transported by a , that is, a carrier holding itself out as available to carry goods for more than one party. Only a few shipments are large enough to require the shipper to hire an entire vessel. The contract to employ an entire vessel is known as a .

Common Carriage – Where the owner or operator of a vessel is willing to carry goods for more than one person, the vessel is known as a general ship or common carrier. Common carriers are the subject of extensive municipal legislation and international conventions.

There are three types of common carriers:  A conference line is an association of seagoing carriers that have joined together to offer common freight rates.  Independent lines have their own rate schedules.  Tramp vessels also have their own rate schedules, but unlike conference and independent lines, they do not operate on established schedules.

Exporters who agree to ship all or a large share of their cargoes with a conference line receive a discounted rate. Independent lines generally offer lower rates than a conference line’s nondiscounted rates.

The Bill of Lading – A bill of lading is an instrument issued by an ocean carrier to a shipper with whom the carrier has entered into a contract for the carriage of goods. The multilateral treaty governing bills of lading is the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading. This treaty is known both as the 1921 and the Brussels Convention of 1924. The domestic laws implementing these conventions are typically called Carriage of Goods by Sea acts. Many states have supplementary legislation that also governs bills of lading in both municipal and international settings

A bill of lading serves three purposes:  It is a carrier’s receipt for goods.  It is evidence of a .  It is a document of title; that is, the person rightfully in possession of the bill is entitled to possess, use, and dispose of the goods that the bill represents.

Receipt for Goods

A bill of lading describes the goods put on board a carrier, states the quantity, and describes their condition. The form itself is normally filled out in advance by the shipper; then, as the goods are loaded aboard the ship, the carrier’s tally clerk will check to see that the goods loaded comply with the goods listed. The carrier is responsible only to check for outward compliance. If all appears proper, the appropriate agent of the carrier will sign the bill and return it to the shipper. Bills certifying that the goods have been properly loaded on board are known as on board bills of lading or clean bills of lading.

If there is a discrepancy between the goods loaded and the goods listed, the statement on the bill is considered prima facie evidence that the goods were received in the condition shown in any dispute between the shipper and the carrier. 7

If, at the time the goods are being loaded, the carrier’s tally clerk notes a discrepancy, a notation to this effect may be added to the bill of lading. Called a claused bill of lading, such bills are normally unacceptable to third parties, including a buyer of the goods under a CIF contract or a bank that has agreed to pay the seller under a documentary credit on receipt of the bill of lading and other documents. Such a notation, however, may be made on the bill only at the time the goods are loaded. Later notations will have no effect, and the bill will be treated as if it were “clean.”

Case 11-3: M. Golodetz & Co., Inc. v. Czarnikow-Rionda Co., Inc. (The Galitia) England, Queen’s Bench Division, 1978. Facts: The seller contracted to sell between 12,000 and 13,200 tons of sugar for delivery C & F Bandarshapur, Iran, and the buyer agreed to arrange for its bank to pay the seller (under a letter of credit) upon the seller’s presentation of clean “on board” bills of lading. After the sugar had been loaded on the carrier, a fire broke out and damaged 200 tons of the sugar. The ship then gave the seller two bills of lading: one for the 200 tons of sugar, the other for the balance shipped. The first contained a notation that the sugar had been properly loaded aboard the carrier but damaged thereafter. The buyer and its banks paid when the first bill was presented, but they refused to pay when the second (the one representing the 200 tons of sugar) was presented on the ground that it was not a “clean” bill. The seller then sued. Issue: Was this a clean bill of lading? Holding: Yes. Law: The International Chamber of Commerce’s Uniform Customs and Practices for Documentary Credits (UCP Rules) are accepted by virtually all banks as the rules governing letter of credit transactions. UCP Rule 16 provides that “a clean shipping document is one which bears no superimposed clause or notation which expressly declares a defective condition of the goods and/or the packaging.” Explanation: Buyer’s contention that because two banks and the buyer had rejected the bill as being unclean is not a valid “practical” test for determining if the bill was clean or not. UCP Rule 16 is not helpful because it does not indicate when the notations must be made. Under a C & F contract, the seller is not responsible for what happens to the goods after they arrive on board. Thus, it seems that notations on a bill of lading made after the time of shipment should not make them “unclean.” Order: Seller is entitled to payment.

Contract of Carriage

Between the shipper and the carrier, the bill of lading is evidence of their contract of carriage. Either may rebut this by producing evidence of other terms. However, the bill becomes conclusive evidence of the terms of the contract of carriage once it is negotiated to a good-faith third party. This is because the endorsee’s knowledge of the terms of the contract of carriage is limited to what appears on the bill of lading.

Document of Title

Two kinds of bills of lading need to be distinguished: the straight bill and the order bill. A straight bill is issued to a named consignee and is non-negotiable. The transfer of a straight bill gives the transferee no greater rights than those of his transferor. An order bill, on the other hand, is negotiable and conveys greater rights. The holder of an order bill of lading, provided he has received it in good faith through due negotiation, has a claim to title and, by surrendering the bill, to delivery of the goods.

Order bills of lading may be made out to bearer or to the order of a named party. Bearer instruments are transferred by delivery; order instruments by negotiation, that 8 is, by endorsement and delivery. In practice, bills of lading are seldom made out to bearer, as they are documents of title that serve as the symbol or token of the goods described in the bill. The negotiation of an order bill transfers title in the goods. Because the bill is negotiable, so too are the goods. This enables the person named on the bill to transfer the goods while a ship is in transit.

A transferee who obtains an order bill of lading in good faith and for value paid is not a holder in due course who is entitled to claim the goods from the carrier free of equities or free of personal defenses. It means that should an order bill of lading be obtained by fraud and endorsed to a bona fide purchaser for value, the recipient will not acquire title to the goods described in the bill. On the other hand, if the same thing were to happen with a bill of exchange that was neither overdue nor dishonored, the recipient would be entitled to the money or property described in that bill. Because of this difference, an order bill of lading is sometimes described as only a quasi-negotiable instrument.

Even when a bill of lading is properly endorsed and delivered, title to the goods will pass only when the bill of lading is negotiated with the intention of transferring the goods. Bills of lading are also distinct from bills of exchange because they additionally represent a contract for carriage. Negotiation of an order bill of lading produces the unique result of a transfer of the right to enforce the underlying transportation agreement.

Carrier’s Duties Under a Bill of Lading – A carrier transporting goods under a bill of lading is required by the Hague and Hague-Visby Rules to exercise “due diligence” in:  Making the ship seaworthy.  Properly manning, equipping, and supplying the ship.  Making the holds, refrigerating, and cool chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage, and preservation.  Properly and carefully loading, handling, stowing, carrying, keeping, caring for, and discharging the goods carried.

Carrier’s Immunities – Both the Hague and Hague-Visby Rules exempt carriers from liability from damages that arise from any:  Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship;  Fire, unless caused by the actual fault or privity of the carrier;  Perils, dangers, and accidents of the sea or other navigable water;  ;  Act of war;  Act of public enemies;  Arrest or restraint of princes, rulers, or people, or seizure under legal process;  Quarantine restrictions;  Act or omission of the shipper or owner of the goods, or his agent or representative;  Strikes or lockouts or stoppage or restraint of labor from whatever cause, whether partial or general; provided that nothing herein contained shall be construed to relieve a carrier from responsibility for the carrier’s own acts;  Riots and civil commotions;  Saving or attempting to save life or property at sea; 9

 Wastage in bulk or weight or any other loss or damage arising from inherent defect, quality, or vice of the goods;  Insufficiency of packing;  Insufficiency or inadequacy of marks;  Latent defects not discoverable by due diligence; and  Any other cause arising without the actual fault and privity of the carrier and without the fault or negligence of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage.

These immunities are narrowly construed. If cargo is injured and the injury falls within one of the exemptions, the carrier will nonetheless be responsible if the underlying cause was the result of the carrier’s failure to exercise due diligence in carrying out its fundamental duties.

Case 11-4: Great China Metal Industries Co. Ltd. v. Malaysian International Shipping Corp. High Court of Australia, 1998. Facts: Forty cases of aluminum can stock were consigned aboard the MV Bunga Seroja from Sydney to Keelung, Taiwan. The vessel encountered heavy weather that had been forecast and some of the consigned goods were damaged. Issue: Was the loss due to a “peril of the sea”? Holding: Yes. Law: Determining if a loss is due to a peril of the sea is primarily a factual inquiry. Did the loss result from “want of proper stowing”? Did it arise from the “act, neglect, or default of the master or of the servants of the carrier in the management of the ship”? Or, did it result from “some other cause peculiar to the sea”? This last is a peril of the sea. Explanation: The trial court found that the ship was properly stowed. The trial court, having heard the evidence of the experts, also found that there were no deficiencies in the management of the ship. This being so, the loss has to be attributed to a peril of the sea. Order: The carrier is not liable for the loss.

Liability Limits – Carriers have long attempted to set monetary limits on their liability in the event that they are found liable for loss of or damage to a cargo. The permissible limits are now established by convention. The Hague Rules of 1921 limit a carrier’s liability to (1) UK £100 per package or (2) UK £100 per unit when shipped in “customary freight units.”

The limits do not apply if the parties agree to higher amounts. They also do not apply if the carrier acted either (1) “with intent to cause damage” or (2) “recklessly and with knowledge that damage would probably result.”

The low limits set in the Hague Rules have forced shippers suing in American courts to suggest creative definitions for the terms package and customary freight unit as a way to obtain a respectable recovery. Courts, not unsympathetic to their plight, have sometimes adopted these suggestions.

Case 11-5: Croft & Scully Co. v. M/V Skulptor Vuchetich et al. United States, Court of Appeals, Fifth Circuit, 1982. Facts: Shippers Stevedoring (SS), a stevedoring company in the employment of Baltic Shipping, negligently dropped several containers filled with soft drinks as it was 10 loading them on to Baltic’s ship, the M/V Skulptor Vuchetich, pursuant to a bill of lading. Croft & Scully, the shippers of the soft drinks, sued SS and Baltic. The district court dismissed the case against Baltic since it had no agency relationship with SS (SS was an independent contractor). Relying on a Himalaya Clause in the bill of lading, the district court held that SS was protected by the liability limits in the U.S. COGSA (The Hague Rules §4(5). It also held that the container was a “package” as that term is defined in the COGSA (and The Hague Rules) and, therefore, SS’s liability was limited to $500. Croft & Scully appealed. Issues: (1) Are Himalaya Clauses valid? (2) Was the container either a “package” or a “customary freight unit”? Holdings: (1) Yes. (2) Not a package; may be a container. Law: (1) Himalaya Clauses are valid in the United States. (2) The COGSA limits a carrier’s liability to $500 per “package” or “customary freight unit.” A COGSA package is the smallest package unit described on the bill of lading. A customary freight unit is the container on which shipping charges are calculated. Explanation: Because the contents of the container were described on the bill of lading (as 1,755 cases of soft drinks, with each case containing four six-packs), the container was not a COGSA package. And, as the district court had not elicited any evidence to determine how the freight was calculated, this appeals court could not determine if the container was a customary freight unit (and thus whether or not SS’s liability would be limited to $500). Order: Remanded to determine how the freight was calculated.

Time Limitations – A claim for loss or damages must be instituted within one year after the goods were or should have been delivered. The claim may be initiated by filing suit or commencing an arbitration proceeding.

Third-Party Rights (Himalaya Clause) – The Hague and Hague-Visby Rules apply only to the carrier and the party or parties shipping goods under a bill of lading. Third parties who help in the transport of the goods but who are not parties to the carriage- of-goods contract contained in the bill of lading have no contractual right to claim the liability limits established by the conventions. Thus, officers, crew members, agents, and brokers who work for a carrier, as well as stevedores who commonly work for a unit of a shipping line, can be sued under local laws of without the convention- imposed cap.

Carriers have added a clause to their bills of lading, known as a Himalaya Clause, which entitles them to claim the protection of the Hague or the Hague-Visby Rules. These clauses are valid in the United States but are generally unenforceable in the United Kingdom. Most U.K. courts refuse to enforce the Himalaya Clause because of a doctrine known as privity of contract, which says that only persons who are a party to a contract may enforce its provisions.

Charterparties

A charterparty is a contract for the hire of an entire ship for a particular voyage or a set period of time. The Hague and Hague-Visby Rules do not apply to unless a bill of lading issued by the shipowner comes into the hands of a third party.

The charterer and the owner are free to set the terms of their contract, and commonly they use standardized contracts drafted at various conferences and known by such code names as Baltime and Gencon. Interpretations and legal obligations vary from country to country, so a forum selection clause and a choice-of-law clause are common, and important, provisions. 11

Voyage Charterparties – When a charterer employs a ship and its crew for the carriage of goods from one place to another, the charterer and shipowner have entered into a voyage charterparty, under which the owner agrees to provide the ship at a named port at a specified time and to carry the goods to the contract destination.

The charterer agrees to provide a full cargo and to arrange for its loading at an agreed-upon time. If less than a full load is provided, the shipowner is entitled to charge dead freight for the amount of the deficiency. This dead-freight charge will be noted on the bill of lading issued by the shipowner, and a holder who acquires the bill will be obliged to pay the charge before the ship will turn over the cargo.

The charterparty will also describe the number of lay days that the ship may be idle while goods are loaded or discharged. Because modern cargo ships are expensive and have a short working life, the charterparty will additionally describe damages, known as , that the shipowner can charge for every idle day that exceeds the agreed-upon number of lay days.

Time Charterparties – Under a time charterparty the charterer engages the use of a vessel for a stated period of time. The charterer normally pays hire monthly, and the shipowner is entitled to withdraw the ship from the charterer’s use if a monthly installment is not paid promptly. Questions of demurrage and dead freight do not arise.

The charterer has the right to direct the ship to proceed to wherever it is needed. Ordinarily, the only limitation on this right is the charterer’s promise to engage only in lawful trades, to carry only lawful goods, and to direct the vessel only to safe ports. If the shipowner attempts to interfere with the charterer’s use of the vessel, he will be in breach of the charterparty.

Charterparties and Bills of Lading – The contract of carriage between a charterer and a shipowner is the charterparty. The shipowner will commonly issue the charterer a bill of lading when goods are loaded on board; however, between the two of them, the bill will be only a receipt for goods and a document of title.

The Hague or Hague-Visby Rules will apply, and the contract between the shipowner and the endorsee will be governed by the bill of lading. Of course, the bill of lading may incorporate the terms of the charterparty. In that case, the endorsee will be governed by its terms.

Maritime

A is a charge or claim against property that exists to satisfy some debt or obligation. A is a charge or claim against a vessel, its freight, or its cargo. The main purpose of maritime liens is to ensure that a vessel can adequately obtain credit to properly outfit itself for a voyage.

In countries, a vessel is regarded as a juridical person separate and apart from its owner. Thus, a ship itself may be liable. In countries, a maritime lien is a right in property, but the property is not independent of the owner. The lien, in essence, exists against the owner as a debtor.

The distinctive characteristic of maritime liens, whether defined by the common or the civil law, is that they do not require possession. They attach to the res and travel with 12 it. They are also secret. If a vessel is sold, the lien “goes with the ship,” even if the new owner is unaware of its existence. In common law countries, the foreclosure of a maritime lien follows a peculiar procedure. The res is seized without prior notice to the owner. An admiralty court takes custody, and a suit proceeds against the thing. If the lien-holder’s claim succeeds, the res is sold, the proceeds are distributed among the various lien-holders, and the title to the property is transferred to the purchaser of the res free of all claims.

In civil law countries, by comparison, the res is not regarded as something distinct from its owner. A foreclosure suit is initiated against the owner, and the res is then seized as a way to compel the owner to appear and furnish security before the res can be released.

When there are multiple lien-holders, the various claims must be ranked. A multilateral treaty, the 1926 International Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages (known as the Brussels Convention), establishes a hierarchy among lien claims as follows:  Judicial costs and other expenses  Seaman’s wages  Salvage and  Tort claims  Repairs, supplies, and necessaries  Ship mortgages

Case 11-6: The Chinese Seamen’s Foreign Technical Services Co. v. Soto Grande Shipping Corp., Sa People’s Republic of China, Shanghai Maritime Court, 1987. Facts: Plaintiff (P) contracted to provide crewing services to Soto Grande Shipping (SGS), the owner of the M/V Pomona. SGS was delinquent in making payments to P, and P brought suit. P’s petition asked first for the seizure of the ship, and second for SGS to post security in the sum of U.S.$200,000, or alternatively, for the ship to be sold. After reviewing P’s claim, the court ordered the ship seized. When SGS failed to post security, the court ordered the ship sold. This was done, and the price of U.S. $430,000 was deposited in the court’s registry. In addition to P, there were several other claims against SGS, including claims of another crewing service, a provisioning firm (for supplies), a bank (for the ship’s mortgage), and a shipyard (for repairs). SGS failed to appear and a default judgment was handed down. Issue: How should the proceeds of the sale of the ship be distributed among the claimants? Law/Explanation: The following priorities among multiple claimants are established by international practice and Chinese law: (1) court costs; (2) seamen’s wages; (3) national taxes, harbor usage fees, and other port charges; (4) ship’s mortgages; (5) other registered claims. In allocating the funds available among these categories, the claimants are (and were in this case) encouraged to negotiate among themselves. Holding/Order: The following claims were paid: First, P and another claimant for seamen’s wages. Second, a claim for harbor usage, etc. Third, a claim on the ship’s mortgage. Fourth, a claim for repairs made to the ship. Other claims were left unpaid.

Maritime Insurance

The trade terms the parties choose in their sales contract determine who is responsible for purchasing maritime insurance and who benefits from it. Even when the risk of loss shifts from the seller to the buyer, the seller continues to have an 13 interest in seeing that the goods are insured. If the goods are lost and the buyer is either bankrupt or unwilling to pay, insurance may be the only basis for recovery available to the seller.

Should a party who is required to purchase insurance be involved in an isolated sale, he can purchase a special cargo policy covering the single sale. Such a policy is an open-ended contract that insures all the cargo of an exporter during a particular time period. All of the exporter’s shipments, whether by truck, rail, air, or vessel, are covered. Parties involved in an isolated sale often arrange to have their goods covered by the open cargo policy of a freight forwarder or customhouse broker.

Perils – The perils covered by special and open cargo policies commonly include the following:  Loss or damage from the sea (e.g., weather, collision, stranding, sinking)  Fire  Jettison (i.e., the dumping of cargo in order to protect other property)  Forcible taking of the ship  (i.e., the fraudulent, criminal, or wrongful conduct of the captain or crew)  Explosion  Fumigation damage  Damage from loading, discharging, or transshipping cargo

Case 11-7: Assicurazioni Generali (Underwriters) v. Black & Veatch United States Court of Appeals, Eighth Circuit, 2004. Facts: MEP Pleasant Hill contracted with Black & Veatch to design, procure equipment for, and build a combined-cycle electricity generating facility in Missouri—this was known as the Aries Project. Black & Veatch then contracted with Toshiba to manufacture Heat Recovery Steam Generators (HRSGs) for the new facility. HRSGs are boilers that turn waste heat produced by gas turbines into processed steam, which is used for combined-cycle electrical generation. The HRSG components were to be shipped from Japan to the United States. Black & Veatch used a broker to procure a policy for marine cargo insurance from “Underwriters.” The Underwriters denied a claim for additional costs on the basis that the cargo had never been surveyed. The Underwriters then filed a complaint with the United States District Court for the Western District of Missouri. Black & Veatch filed counterclaims seeking a declaratory judgment that their losses were covered under the policy. Issues: Were the losses covered under the policy? Holdings: Yes. Law / Explanation: The case demonstrates the importance of carefully reading and adhering to the requirements of the contract and shipping documents. The correspondence between the parties was unclear as to the exact items covered and whether a survey was required. The court found that the policy’s language unambiguously stated that a survey of the critical items was only required for items that were contained in the “list of items” described in the Survey Warranty Wording. It was also held that the critical items must be included within the policy and not in an ancillary document outside the written agreement and that the critical items should be surveyed “as per the warranty wording attached.” So the court decided that no survey was required, and that the claims for consequential damages ($38 million) were covered under the second section of the policy. Order: Courts ruled in favor of Black & Veatch.

Average Clauses – The loss of cargo can be either total or partial. Total loss is ordinarily governed by a constructive loss clause in a maritime insurance policy. This 14 usually includes (1) losses exceeding one-half the value of the cargo or (2) losses where the cost of recovery exceeds the cargo’s value.

A partial loss is known in the marine insurance industry as a particular average. A free from particular average (FPA) policy provides the most limited recovery for partial losses. A with average (WA) policy provides more protection; however, it ordinarily contains a franchise clause that provides for payment only if the loss exceeds a specified minimum amount.

General average comes about in the carriage of goods at sea when, in order to avoid some threat to the whole venture, some expense has to be incurred, or some loss or damage is deliberately inflicted, in order to save the ship and its cargo.

Normally, marine insurance will cover each shipper’s contribution. However, if insurance is not purchased or if a policy does not cover general average, then the shipper must pay the contribution before the ship’s crew will release the goods. If a buyer has already paid for the goods and received a bill of lading, then the buyer must come up with the contribution before the ship’s crew will turn over the goods.

A person seeking to claim a general average contribution from other parties must show (1) that the loss was incurred to benefit everyone and (2) that the person making the claim was not responsible for causing the danger.

Carriage of Goods by Air

The carriage of goods on aircraft is regulated by the 1929 Warsaw Convention (formally known as the Convention for the Unification of Certain Rules Relating to International Carriage by Air). Four amendments to the convention were adopted between 1955 and 1975—the Hague Protocol of 1955, Montreal Protocol No. 1, Montreal Protocol No. 2, and Montreal Protocol No. 4 of 1975. These subsequent amendments together with the original Warsaw Convention came to be known as the Warsaw System.

The documents used in air carriage—the air and consignment notes—are not documents of title. At the heart of the Warsaw System agreements was the definition of the air waybill. In states that are parties to the convention, the bill must describe:  the nature of the goods being shipped;  the method of packing and any marks or numbers;  the weight, quantity, volume, or dimensions of the goods;  the apparent condition of the goods and their packaging; and  a statement that the carriage is subject to the convention’s rules.

The Montreal Convention (and Protocol No. 4), which encourage carriers to use electronic records, require only three things to appear on the paper waybill that accompanies a consignment of goods:  the places of departure and destination,  an intermediate stopping place in a different state (if the places of departure and destination are in the same state), and  the weight of the consignment.

The incentive the convention offers carriers for including these required elements on a waybill is a limitation on liability. This is set at 17 SDRs per kilogram. 15

The benefit to the shipper in using a Warsaw System or Montreal Convention air waybill is that the claimant does not have to prove that the carrier’s fault caused the injury to any lost, damaged, or delayed goods. The person entitled to delivery has to make a claim within seven days of when the goods arrived or should have arrived (Warsaw Convention) or 14 days if they are covered by the Montreal Convention for loss or damages. The time limits are 14 days (Warsaw) or 21 days (Montreal Convention) in the case of damages caused by delay.

The relevant criterion for the application of any one of the international air conventions and its corresponding legal regime is the concept of “international carriage.” The international air convention that will apply to a particular carriage of goods is the one that has been entered most recently between the nation from which the goods are sent and the destination nation.