The Rotterdam Rules

An important ceremony for users of sea freight services will take place on September 23, 2009: the signing of the Rotterdam Rules, officially known as the Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea.

Negotiations over the past seven years saw the United Nations General Assembly adopt the rules on December 11, 2008.

Currently, there are three international conventions operating on the carriage of goods by sea: 1) the Hague Rules, 2) the Hague-Visby Rules, and 3) the Hamburg Rules. The Hamburg Rules have not received a lot of support from the major shipping nations, consequently, although it is an international convention, it carries comparatively little weight in global maritime freight movements.

The Rotterdam Rules aim to provide a new regime that is intended to replace all of the other rules currently in place, including regional variations such as the U.S. Carriage of Goods by Sea Act. But just what is in store under the proposed new rules? And what are the major issues of contention at the moment?

One concern about the Rotterdam Rules is that the information recorded on a bill of lading may deem to represent the contract of carriage. This would run contrary to the present systems that regard the bill of lading as evidence of contract of carriage rather than the contract of carriage itself. It is too early to say whether this subtle difference will result in variations to carriage contracts in the future.

While on the subject of bills of lading, there are some other interesting aspects to the Rotterdam Rules that may present some significant challenges for shippers and consignees. The bill of lading is proposed to be replaced with a negotiable transport document (NTD).

The Rotterdam Rules also contemplate achieving functional equivalence by issuing electronic documents of title. The issue of documents of title at law has a long list of precedent cases based on paper documents. However, in quite a number of jurisdictions electronic trade and the law haven’t quite reached the same point.

In countries like Australia, legal developments on electronic trade are quite advanced, but the same cannot be said for all other countries around the world.

The idea of dealing with electronic transport documents under a letter of credit is something that in theory may sound appealing, but the practice may actually be starkly different. While it is true that the International Chamber of Commerce, the authors of the rules that letters of credit operate by (the ICC Uniform Rules and Practice for Documentary Credits 2007 Revision – commonly referred to as UCP600) have issued an electronic supplement to letter of credit operations, careful scrutiny of that supplement would make any exporter’s hair stand on end, even in the absence of any hair!

A detailed explanation of the electronic supplements is beyond the scope of this article. In summary, there are some amazing impositions placed on exporters when electronic records have to be lodged with the bank under a letter of credit transaction.

For example, the beneficiary of the letter of credit has to notify the bank when presentation has been completed. To understand the ramifications of this requirement, we need to consider a situation where electronic documents may be lodged directly to the bank from a third party, such as a carrier.

Logic would suggest that a carrier directly lodging electronic documents to a bank is an example of an efficient, streamlined system. However, in doing so, the carrier would bypass the beneficiary. The transport document may be discrepant against the letter of credit, but the beneficiary, if they have not seen it beforehand, would not be aware of any mistakes. However, the beneficiary still carries the financial risk of not being paid because of discrepant documents.

The beneficiary under the UCP600 electronic supplement has a responsibility to advise the bank when the presentation is complete. The beneficiary would therefore need evidence that the third party (the carrier) has indeed transmitted the record to the bank, meaning that the beneficiary would need to receive the electronic document for checking and submitting to the bank, or for checking and then asking the carrier to submit it directly to the bank. The back and forth between the beneficiary and third party runs contrary to the notion of streamlined, efficient processes.

It should also be noted that under the UCP600 electronic supplement, an electronic record that is corrupt after presentation merely requires the bank to seek a replacement electronic transmission. However, if a bank receives an electronic record that it cannot authenticate, it is deemed not to have been presented—read into this a discrepancy, and the possibility of non payment.

Clearly there are a range of issues that may present significant challenges in the issue of electronic negotiable documents that leave doubt as to whether the devil is in the detail has actually been given due consideration in letter of credit transactions under the proposed new Rotterdam Rules.

There are other issues in relation to contract opt-outs available under what are referred to as volume contracts. There appear to be opportunities for the liability regime to be contracted out from the contract of carriage.

Another issue is a very controversial option under the Rotterdam Rules that apparently enables the carrier to deliver uncollected goods to third parties without the production of the mythical “negotiable transport document.”

The trading community around the world is apparently divided on the Rotterdam Rules. While the National Industrial Transportation League in the U.S. apparently supports the Rotterdam Rules, the European Shippers Council has voiced some concerns. An article published by the Logistics Association of Australia also does not seem to favour these rules.

It is not possible to know whether the requisite 20 nations will sign the document in Rotterdam on September 23, 2009. Even if the minimum number of countries sign the Convention, it will depend on their shipping nation status as to whether the Rotterdam Rules will indeed replace other existing regimes or whether they will merely turn out to be a fourth Convention.

It will also remain to be seen whether major shipping nations agree to sign the Rotterdam Rules without qualifications, essentially changing and/or watering down their effect through national legislation. Indeed this may put a different spin on ships ahoy!

In the end, we may well be left to ponder the benefits of these rules. It could well be that the Rotterdam Rules may yet be referred to by some as the Rotten-Damn Rules!