The Rotterdam Rules: The Issues

Roberto Bergami | December 13, 2009 | Export Finance
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The Rotterdam Rules: The Issues | Shipping SolutionsThis is the second of two articles dealing with The United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, which are commonly known as the Rotterdam Rules.

The first article provided the background to the process of converting the Rotterdam Rules into an international convention.

This article deals with aspects of the Rotterdam Rules in the context of their affect on 1) delivery terms (Incoterms 2010) within international sales/purchase contracts, and 2) documentary requirements of letters of credit where they are used as the method of payment in international trade transactions.

Delivery Terms (Incoterms 2000)

There are 13 Incoterms that sellers and buyers may agree upon. Four of these, in particular, may be affected by certain applications of the Rotterdam Rules. The Incoterms in question are:

Sea Freight Mode Only

  • Cost and Freight (CFR)
  • Cost Insurance and Freight (CIF)

Multimodal Transport (Where It Includes Maritime Carriage)

  • Carriage Paid To (CPT)
  • Carriage and Insurance Paid To (CIP)

These Incoterms 2000 place the obligation on the seller to enter into a contract of carriage (and prepay the freight charges) and, for CIF/CIP contracts, to additionally insure the cargo and provide evidence of insurance to the buyer.

This is one of the areas of possible concern because of the opportunity for the carrier to vary the conditions of carriage and reduce liability in certain circumstances. Article 80 provides an example of the vagueness of the Rotterdam Rules, as it states, in part:

… a volume contract to which this Convention applies may provide for greater or lesser rights, obligations and liabilities than those imposed by this Convention.

The definition of a volume contract in Article 1 does not provide much clarification as it states:

For the purposes of this Convention … Volume contract means a contract of carriage that provides for the carriage of a specified quantity of goods in a series of shipments during an agreed period of time. The specification of the quantity may include a minimum, a maximum or a certain range.

It has been claimed that carriers may contract out of liabilities through inducements—read into this cheaper freight rates. Saving money may be a good thing, but in such a circumstance this savings may be more than counterbalanced by a greater assumption of risk as the carrier has reduced its liability.

Let us consider this scenario where the seller enters into a contract of carriage as a result of having agreed to trade under the four Incoterms 2000 identified earlier: CFR, CIF, CPT or CIP. The problem that may arise is that while the seller contracts and pays for carriage, the buyer is responsible for the risk on the cargo in transit. The risk transfers from seller to buyer at ship's rail under CFR and CIF terms and when the cargo is placed at the disposal of the first carrier under CPT and CIP terms. Some questions need to be asked under these situations:

  • How does the seller cost the sale price?
  • Is the sale price based on the presumption of a volume contract making it possible for the carrier to reduce their liability and offer a cheap freight rate, and should the seller disclose this fact to the buyer during the negotiation stage?
  • What if the seller does not contemplate a special deal with the carrier until after the contract of sale/purchase has been executed?
  • Does the seller, as the shipper, clearly understand what the reduction in carrier liability actually means in practice?
  • What if the carrier's liability reduction cannot be mitigated through insurance cover?

Depending on the answers to the questions above, the veritable Pandora's Box may indeed be opened. The situation could arise where the buyer, having agreed to trade on CIF/CIP terms, may end up with a much more limited liability contract of carriage and, depending on the insurance coverage provided by the seller, cargo loss or damage may be excluded from insurance cover. This may result in financial losses and does not augur well for the relationship between the seller and the buyer.

As a means of avoiding such a circumstance, the contract of sale/purchase would need to incorporate appropriate, specific clauses and, accordingly, expert legal opinion is recommended.

The reader should note that the current Incoterms 2000 are being reviewed with the intention of an updated set of terms due to become operational in 2010 and, although a specific date has not been released, the updated terms are not expected to apply prior to July 1.

Documentary Requirements of Letters of Credit

The Rotterdam Rules envisage the concurrent use of a number of transport documents, including:

  1. Negotiable transport document,
  2. Non-negotiable transport document,
  3. Negotiable electronic transport record, and
  4. Non-negotiable electronic transport record.

Options 1, 2 and 3 are existing documents and, therefore, it is presumed that these will not cause any significant difficulty. However, the same cannot be said for option 4. To the best of my knowledge, there is no legal equivalence between a traditional paper based maritime transport negotiable document, the Bill of Lading, and a negotiable electronic transport document. Certainly this is not an option under the UCP 600, which are the rules that govern letter of credit transactions.

Transferability is also another area of concern. Let us consider the example of a paper based Bill of Lading consigned to order. Any endorsement is physically present upon that document. Yet, how does such an endorsement appear on an electronic record, and how may this be verified by third parties? The legal fraternity around the world remains concerned about this issue.

Although it has been possible for traders and bankers to transact letters of credit electronically since 2003, pursuant to a specific set of rules (eUCP), these rules have hardly been adopted anywhere. The primary reasons for the lack of electronic documentation under letter of credit transactions are two.

The first reason is that the negotiability and, therefore, the legal standing of certain documents is not easily replaceable—the Bill of Lading and the Bill of Exchange provide examples of such documents.

The second reason is that banks have developed proprietary, not generic, electronic solutions and, consequently, traders may need to run several parallel software programs on their systems to deal with the different banks, a process considered simply too hard and expensive. Electronic trading is certainly plausible to increase efficiencies in data transfer between parties, but this has to be in the context of seamlessly compatible generic systems, not proprietary solutions that require multiple software installations.

Finally, in relation to the banker's requirements under a letter of credit demanding a negotiable transport document, there is the issue of altered carriage terms—the volume contract option. This presents some real difficulties for the banker and the importer alike.

Article 20 (a) (v) of the UCP 600 specifically states: "Contents of terms and conditions of carriage will not be examined." Therefore, the banker will not check the terms and conditions of carriage. This leaves the buyer exposed to the situation outlined earlier, where the conditions of carriage may be to the detriment of the buyer. By the time the documents reach the buyer, the shipment has, obviously, already been effected and, consequently, the contract of carriage executed—too late for changes.

It would be difficult to overcome this problem through a variation of the UCP 600, as this would require the agreement of the bankers, probably something they would not be interested in doing because they would not hold themselves liable to check conditions of carriage as this is not their core expertise. Article 20 (a) (v) reflects just this. It would not make sense to try and make the banker the checker of carriage clauses, just as you would not seek advice about a mechanical problem from a pharmacist—a knowledgeable person, for sure, but not an expert in the area in question.

In conclusion, there are a number of issues that the Rotterdam Rules raise and, to date, total solutions may be difficult. This article has highlighted some aspects that may be of concern to traders, in general, and buyers in particular. The degree to which the Rotterdam Rules will become law in any one country remains to be seen, and it may well end up with qualified acceptance by some, or a majority, of the signatory states.

Download Incoterms 2010 Chart of Responsibilities