Rotterdam Rules topics, a useful analysis

There has been heated and passionate debate in academic circles and industry publications about the pros and cons of the Rotterdam Rules.

Supporters of the Rules hope that they will achieve widespread adoption and thereby bring greater uniformity to sea and ‘wet multimodal’ carriage contracts (i.e. multimodal transport including a sea leg).

They argue that, by replacing the current ‘patchwork’ of maritime and unimodal conventions for road/rail/inland water transport, the unnecessary costs that inevitably arise out of legal complexity will be eliminated. Many supporters also think that, if the provisions in the Rules seeking to promote electronic bills of lading are successful, further cost reductions will be achieved.

Those opposed to the Rules criticize them for being poorly drafted, ill-conceived and too ambitious. Some critics have suggested that, rather than introduce a new set of rules, the United Nations should just update the Hague-Visby Rules and campaign for greater adoption of existing unimodal conventions such as CMR.

The aim of this article is not to say which view is right and which is wrong but, instead, to consider some of the potential ‘real world’ impact that the Rules will have on shipowners if they come into force. The Rules can no longer be changed, which means that they must either be adopted ‘as is’ or rejected in full. The Rules present both strategic threats and opportunities and it is essential that owners start planning for their possible introduction as soon as possible. The Rules will require owners to undertake a review of all their contractual arrangements and operating procedures to ensure compliance. Where necessary, commercial, operational, insurance and legal staff will have to be given extensive training. The Rules will also have an impact on day to day cargo claims handling by shipowners and P&I Clubs.

 

New definitions

The Rules introduce a large number of new definitions and it is important to keep four of these in mind when reading this article. The first important new definition is ‘liner transportation’ (Article 1(3)). This definition captures shipping services provided in accordance with published timetables and will therefore cover most container, ro-ro, car carriage and scheduled break bulk shipping. The converse of ‘liner transportation’ is ‘nonliner transportation’ (Article 1(4)). This is the second new definition and will mainly cover tramp services.

The third new definition is the ‘volume contract’, which is defined as ‘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’ (Article 1(2)). The definition is wide enough to cover Carriage Service Agreements entered into by container shipping lines with supermarkets and manufacturers (i.e. liner transportation), and long-term contracts of affreightment entered into between bulk shipowners and commodity houses (i.e. nonliner transportation).

The fourth new definition to consider is ‘maritime performing party’ (Article 1(7)). This definition covers the carrier’s subcontractors who exclusively undertake their services between the time that the goods arrive at the load port and leave the discharge port. The definition will therefore capture shipowners who charter their vessels to ship operators who issue operator bills, operators providing space to other operators under alliances/consortia/slots, feeder vessel operators and terminal operators. It will, however, rarely cover inland carriers such as road or rail providers as explained below.

 

Applicability

The Rules will not apply compulsorily to demise or time charterparties in either liner transportation (Article 6(1)(a)) or non-liner transportation. Shipowners who charter their vessels out to charterers and do not allow the charterers to issue owners’ bills may therefore conclude that the Rules are of no concern to them. This is incorrect. As explained below, the Rules provide that shipowners chartering out tonnage can be ‘maritime performing parties’ and that cargo claimants can bypass time charterers issuing time charterers’ bills and sue owners directly for cargo loss, damage and delay. Some shipowners may actually consider this to be advantageous because the Rotterdam Rules can then be used by the shipowner to defend and/or limit claims brought by cargo claimants in tort.

The same principle applies to slot charters and alliances/consortia arrangements. They will not be compulsorily subject to the Rules (Article 6(1)(b)) but despondent owners under slot charters will be liable to claims by cargo interests on the terms of the Rules because they will be ‘maritime performing parties’. Maritime performing parties (unlike performing parties) have joint and several liability with the carrier under the Rotterdam Rules.

The Rules will not apply compulsorily to voyage charterparties. Shipowners who charter their vessels to voyage charterers may similarly be under the apprehension that the Rules are therefore of no concern to them. Again this is incorrect. The Rules will actually apply to all claims brought by consignees/transferees against owners under bills of lading issued pursuant to the voyage charter (Article 7). An example of how this would happen will assist. A typical scenario would be in the context of a CIF sale contract where the master issues, say, a CONGENBILL to the charterer (the CIF seller) pursuant to a GENCON charterparty. Once the CONGENBILL is handed over by the charterer to the named consignee, or the bill is transferred to an endorsee (the CIF buyer), the CONGENBILL will be a contract of carriage as between the owner and the consignee/endorsee and the Rules will govern the owner’s liability.

Finally, the Rules will also apply to those contracts the draftsmen mainly had in mind when preparing the wording: any international contract of carriage (port to port bill of lading, multimodal bill, waybill, ship’s delivery order, standard terms, etc.) where any of the following are in a Rotterdam state: the place of collection, port of loading, port of discharge or point of delivery (Article 5(1)). Bills of lading issued by shipowners operating their own ships may therefore be subject to the Rules, as will bills issued by operators chartering in tonnage.

 

Liability regime

Probably more space has been devoted in academic articles to Rotterdam’s ‘general’ liability regime than anything else: the three ‘fundamental duties’ of the carrier (Articles 11, 13 and 14), the burden of proof when claims arise (Article 17), the excepted perils and the abolition of the ‘negligent navigation/management’ defence (Article 17(3)), incidents arising out of a combination of causes (Article 17(6)), the compulsory application of the Rules to deck cargoes including on break bulk vessels (Article 25), how the Rules interact with non sea unimodal conventions (Articles 26 and 82), the increased limits of liability (Article 59) and the extended time bar (Article 62).

The concerns about these areas have been well made and if the Rules come into effect, the courts will need to consider a number of test cases to establish guiding principles on their application. Fundamentally, however, the world will not change. Under a ‘transport document’ (the new definition to cover bills, waybills and other types of carriage contracts), there will still be a carrier and there will still be shippers and consignees. If a claim arises, someone will still have the burden of proving a breach of the contract and causation. There will still be defenses, limits of liability and time bars.

There is no doubt; however, that there will be a period of increased claims activity and litigation as the courts seek to clarify the effect of the Rules in the real world. In the short term, the overall effect will probably be to increase legal expenditure on cargo claims and waste management time.

For the vast majority of cargo claims arising outside volume contracts (see the next section), where breach and causation are clear, the reality for shipowners and P&I claims handlers is that life will largely be ‘business as usual’. For example, if it is clear that the cargo has been damaged owing to poor lashing or negligent terminal handling, there will be no need to debate the complex wording in the Rules about the burden of proof. A lot has also been made about the extension of the seaworthiness obligation. The reality, however, is that shipowners already have an ISM obligation to maintain a seaworthy ship, so the impact of the extension may not be as great as some commentators have suggested. Whilst there will be some grey areas in relation to the extension of the seaworthiness obligation (e.g. reefers failing during a voyage), we will have to await guidance from the courts before we can assess the true impact of this change.

 

Volume contracts

Volume contracts are a controversial innovation of the Rules. This is because the Rules say that parties to a volume contract have almost unlimited freedom of contract to contract out of the Rules’ ‘general’ liability regime. Parties can agree higher limits of liability, uncapped liability or even carrier responsibility for consequential losses.

Alternatively, parties can agree that the carrier benefits from lower limits or additional defenses. Because freedom of contract is being given such a powerful ‘conventional blessing’, it is suspected that parties who had hitherto shied away from bespoke contracts may find a renewed enthusiasm for them.

Historically, marine cargo insurance has been relatively cheaper than P&I or SOL insurance for cargo loss or damage. With some large contracts, there may therefore be a good business case for parties to agree in a volume contract that in return for lower freight rates the carrier is liable for (say) the customer’s marine cargo deductible only and perhaps liquidated damages for delays. Owners who are prepared to have these discussions with their customers may provide themselves with a competitive advantage. Alternatively, at the other end of the spectrum, owners who accept in volume contracts liability for (and perhaps arrange SOL insurance to cover) uncapped liability and consequential losses may also steal an advantage over competitors. Owners need to start thinking about whether they could gain a ‘first mover’ advantage by being the first to enter into discussions with customers about volume contracts.

They also need to consider what their competitors will do if ‘volume contracts’ become a reality.

 

Jurisdiction/arbitration

The basic provisions relating to jurisdiction and arbitration are described in the Britannia News Conventions Supplement article. Readers will note that the jurisdiction and arbitration chapters of the Rules (Chapter 14 and 15 respectively) are optional for state signatories (Articles 74, 78 and 91). This means that certain Rotterdam states will adopt them but others will not. For example, because EU states already have provisions in this area (EU’s Jurisdiction Regulation 44/2001), EU states are unlikely to adopt Chapters 14 and 15. What are the implications for owners?

First, the good news.

Because the Rules do not apply to charterparties per se, owners can be confident that the Rules will not cut through jurisdiction or arbitration clauses in their time and voyage charters. Furthermore, in those Rotterdam states not implementing the optional jurisdiction and arbitration provisions, exclusive jurisdiction clauses and arbitration clauses found in the transport document (i.e. the bill of lading) will be unaffected by the Rules. Finally, even in Rotterdam states adopting the arbitration chapter, the Rules will not affect arbitration agreements in non-liner transportation contracts of carriage, for example owners’ bills issued pursuant to charterparties, providing the bill identifies the parties to the relevant charterparty, its date and specifically incorporates the arbitration clause (Article 76).

Next, the bad news.

In those states which adopt the jurisdiction and/or arbitration chapters, the only exclusive jurisdiction or arbitration clauses in liner transportation bills (as opposed to charterparties) which will be enforced as between the carrier and customer will be those which:

1.                  specify a Rotterdam state for jurisdiction/arbitration (Articles 66(b)); and

2.                  are contained in volume contracts (Articles 67(1) and 75(3)).

 

There are also specific rules which, if followed, can make the jurisdiction and arbitration clauses enforceable as between the carrier and the transferee/endorsee of a bill or waybill issued under a Volume Contract (Articles 67(2) and 75(4)).These need to be followed if owners want to preserve the wider integrity of their exclusive jurisdiction clauses.

Against this background, owners issuing contracts of carriage for liner transportation need to think very carefully about the importance (to them) of having a specific law and jurisdiction (or arbitration) in their contracts of carriage. Do they favour a particular jurisdiction or tribunal because it brings certainty or benefits such as the recoverability of legal costs? Will owners be happy that in ‘opt in’ Rotterdam states, the convention ‘blesses’ claimants bringing claims in a whole host of alternative jurisdictions? Should owners be happy knowing that jurisdiction and arbitration clauses will only be enforceable in certain countries but unenforceable in others? Are the jurisdiction and arbitration chapters another good reason why carriers should be thinking about extending Volume Contracts to as many parties as possible?

Owners need to be prepared for these challenges – by evaluating, as best they can, the potential impact that the Rules could have on the specific trades with which they are involved. Unfortunately, of course, much of that work cannot be undertaken until it is known precisely which states sign up to the Rotterdam Rules and whether those states decide to ‘opt in’ or ‘opt out.’ In any event, it is unlikely that the Rules will put an end to ‘forum shopping’; and there are likely to be cases where the courts in a Rotterdam state that enforces jurisdiction clauses will end up in dispute with the courts in another Rotterdam state that does not pursuant to Chapter 14.

 

Pure economic loss for delay

Where a delay under a contract of carriage has caused cargo loss or damage, cargo interests and carriers are usually able to have relatively straightforward discussions about whether the carrier was liable or not. Where, however, there has just been pure economic loss suffered by cargo interests because of a delay in the ocean carriage, the position has always been much more arguable. As part of the ‘general’ liability regime, the Rotterdam Rules seek to address this issue by providing for a separate limit of liability for pure economic loss caused by delay. It is suspected that courts will be generous to claimants when applying the delay provisions and less generous to carriers seeking to escape liability by relying on liberty clauses that entitle them to proceed by any route, at any speed, etc.

Whilst the damages payable in respect of delay will be limited to 2.5 times the freight costs for the relevant shipment, with margins so tight in certain areas of shipping, carriers may need to think seriously about how they might minimise exposure to delay claims by operational changes in their services. Will seeking to avoid delay claims be another justification for the continuation of the current slow steaming policies of many carriers?

Should carriers instead enter into volume contracts to minimise their exposure to delay claims?

Yet again, much will depend on the specific trades in which an owner is engaged, but where appropriate advice should be sought and the issues carefully evaluated.

 

Deck cargoes

Although most container operators treat on-deck and under-deck cargo on the same basis for liability purposes, many break-bulk operators do not. With break-bulk movements, it is not unusual to see carriers making deck carriage at ‘shipper’s risk’. Because Rotterdam does not apply to charterparties, break-bulk owners entering into a charterparty can still exclude on-deck liability in a charter and this will bind the charterer. Where, however, a bill of lading issued under the voyage charter has been transferred to a third party, the exclusion clause will be invalid in respect of claims brought by the transferee. Similarly break bulk operators offering liner services without a charter will also be unable to exclude liability to shippers and consignees in their standard liner bills.

Given that most break-bulk operators build the deck exclusion into their freight charges, they will need to think very carefully about whether to buy additional cover or, where possible, to enter into volume contracts with customers to maintain the exclusion.

 

Pre and post ship’s rail

The Hague and Hague-Visby Rules were tackle-to-tackle conventions. It was therefore open to owners to exclude liability pre or post ship’s rail.

The Rotterdam Rules, however, go much further and, subject to agency and FIOS clauses discussed below, make the carrier liable for sea carriage, terminal handling and inland carriage (in multimodal contracts) on exactly the same basis.

In non-liner trades, FIOS (‘free in/out, stowed’) terms are usually incorporated into owners’ bills, making charterers/receivers responsible and liable for all terminal handling. This was permitted under. The Hague and Hague-Visby Rules. Fortunately, these clauses will still be recognized and enforced under the Rotterdam Rules (Article 13(2)). Indeed, it is probable that FIOS clauses may become even more popular after the introduction of the Rotterdam Rules, given that ‘gross terms’ (which make owners responsible/liable for loading/discharging) will probably mean higher damages if cargoes are damaged in a terminal.

In early liner bills, many operators excluded liability pre and post rail and also defined themselves as agents when engaging road, rail or barge operators for inland carriage. The net effect was that the owner could only ever be liable for the sea carriage itself. Most modern liner bills no longer include the agency provision, but it is still the case that very few assume liability pre or post ship’s rail on the same basis as the sea carriage. In most modern bills, unless a unimodal convention applies, the carrier has less liability for terminal handling and inland carriage than sea carriage.

Under the Rotterdam Rules, however, liner operators will need to carry out a cost/benefit analysis about whether they should revert to limiting their responsibility as carrier to sea transport and loading/unloading only. They may even want to think about adopting FIOS terms. The Rotterdam Rules appear to allow owners to enter into contracts making them carrier for the sea and terminal elements only and agent for the inland legs. An FIOS or agency approach may bring cost savings in terms of both below and above deductible claims. Owners will need to consider, however, whether their customers will accept an FIOS or agency approach in today’s ‘one stop’ service world.

 

Terminal handling subcontractors

In liner trades, the liner operator usually contracts with the load and discharge port terminal operators. Bulk owners carrying ‘dry’ cargoes entering into ‘gross terms’ voyage charters and issuing charterparty bills which the charterer transfers also contract directly with the terminals. The Rotterdam Rules make such terminal operators ‘maritime performing parties’ (Article 1(7)). By becoming maritime performing parties, the terminal potentially assumes joint and several liability to cargo interests for any loss or damage occurring during the terminal services (Articles 19 and 20).

For the first time, the Rotterdam Rules will therefore put many terminals directly in the firing line for cargo claims. At the moment, cargo claimants normally bring their claim against their contractual counterparty, the shipowner. The carrier then seeks an indemnity from the terminal – in accordance with either the terms of a bespoke terminal handling agreement or local law. In short, at the moment, terminals normally only have to deal with a small number of claimants, namely the shipping lines, rather than the individual cargo claimants. All that is about to change.

Because of the direct right of action against them, terminals will want to open discussions with carriers about how direct claims against the terminal should be managed, whether the terminal should carry any extra Rotterdam Rules exposure or obtain an indemnity from the owner in respect of Rotterdam Rules liabilities to cargo interests. At the moment, most terminals are simply not prepared to deal with claims from a large number of cargo claimants. Their systems and processes are geared up towards dealing with claims ‘funnelled’ through shipping lines. Because the Rotterdam liability provisions are also likely to be largely more generous than the terminals’ current exposure to the shipping lines, the terminals are also likely to end up with worse claims and this may impact their insurance programs. Some terminals are already talking about the need to pass on the extra cost of supporting a larger claims department to their shipper/operator clients and/or asking for the shipping lines to agree contractually to take over the handling of claims on behalf of the terminal.

Other terminals are considering asking lines for indemnities in respect of any extra liability that a terminal may incur resulting from the compulsory application of the Rotterdam Rules. Carriers therefore need to start thinking about how they would deal with these issues if the Rules come into effect. Early discussions with terminal operators would be prudent.

 

Feeder vessel operators, alliances/consortia and slots

Shipping lines tend to subcontract to each other and to specialist feeder vessel operators. Like terminals, these companies will also be considered as ‘maritime performing parties’ within the meaning of the Rules, making them exposed to direct claims from cargo interests if the cargo carried is lost or damaged during the performance of their services.

At the moment, many feeder vessel operators contract with main liner shipping companies on the basis of a frame agreement incorporating the feeder vessel operator’s standard bill of lading to define its liability to the main line operator. Similarly, alliance/consortia agreements and vessel sharing agreements between large liner operators also define the liability of the performing carrier to the carrier whose boxes it is carrying. Most of the current agreements provide that the subcontractor will be liable to the principal carrier in accordance with the provisions of the Hague or Hague-Visby Rules. They also generally provide that the principal carrier will handle all claims brought by cargo interests and then pass on the claims to the performing carrier on the terms of the relevant agreement. The same principle applies in most slot agreements.

If the Rotterdam Rules come into effect, there could be at least two consequences. First, because the Rotterdam Rules (with their higher limits etc.) will govern the principal carrier’s liability to the claimant, but the old alliance/slot agreement will govern his recovery, there may be a shortfall under the alliance/slot agreement. Second, because cargo interests can arguably make direct claims against the feeder vessel operator or alliance partner (because the subcontractor is a ‘maritime performing party’), the subcontractor may demand an indemnity from the principal.

Owners need to start thinking about how they would deal with these problems. Agreements may need to be revised to avoid the problems highlighted above. This may, of course, put significant pressure on important commercial relationships. Multi-party alliances, consortia and vessel sharing agreements take a long time to negotiate, so lines need to start thinking about revised terms sooner rather than later.

 

Sub-contracted hauliers

The Rotterdam Rules will rarely apply to hauliers, because they can only be ‘maritime performing parties’ where they perform their services ‘exclusively’ within the terminal area. Most hauliers provide services both inside (collection) and outside the terminal (carriage to the consignee). In these circumstances, there could potentially be significant shortfalls between what an ocean carrier has to pay its customer under the Rotterdam Rules and what they can recover from subcontracted hauliers under the haulier’s standard terms.

Liner operators therefore need to think about whether they should be demanding Rotterdam limits of liability and imposing time bars from subcontracted hauliers. Alternatively, they will need to recognise that there is a potential shortfall and build this into their freight costs.

 

General average

Whilst the Rotterdam Rules expressly state that they are not seeking to regulate or change general average (Article 84), in reality they will. General average payments are only due to shipowners from cargo interests when there has been no breach of the contract of carriage.

Currently, under the Hague and Hague-Visby Rules, an error of navigation or management of a ship (Hague/Visby Article IV, Rule 2(a)) will not constitute a breach of contract providing due diligence to make the vessel seaworthy has been exercised. In contrast, because Article 17 of the Rotterdam Rules abolishes the so-called ‘nautical defense’, if a casualty causing cargo damage arises because of negligence of the master or crew, no general average contributions will be payable.

In these circumstances, it is to be suspected that owners carrying cargo under Rotterdam Rules contracts will be more reluctant to declare general average and demand contributions from their customers. A number of liner operators are already reluctant to do so because of the pressure it can put on customer relations and it is suspected that the Rotterdam Rules may add extra momentum to this trend. Who would want to go through a general average process and the pressure it puts on customer relations if at the end of it none of the general average contributions will actually be payable by cargo interests? It is to be suspected that, if the Rules come into effect, more carriers will be looking to either add a general average absorption clause to their hull policy or to increase the size of the limits on their absorption clause.

 

Electronic bills of lading

Paperwork accounts for significant cost in maritime supply chains. Research indicates that importing a single consignment generates an average of 36 original paper documents and 240 copies from 27 parties. The World Bank estimates that paper documents waste 7% of the total value of world trade. This apparently equates to approximately US$660bn annually. Compounding the problem, parties often run independent IT systems, thereby preventing even limited data-sharing. This means that 90% of the information found on documents needs to retyped, resulting in delays, duplication and a high likelihood of errors and variances.

The Rotterdam Rules seek to create the ‘legal architecture’ for the increased use of electronic documentation in maritime supply chains including electronic transport documents (bills of lading, waybills, etc.). The Rules in themselves will not deliver maritime e-commerce but they should provide a safe legal backdrop between those states who are party to the Rules for the recognition of any IT systems which satisfy the provisions within the Rules. Although there will be costs adopting any new IT systems and processes, carriers who are first adopters may be able to steal an advantage over their competitors.

 

Operational issues

The Rules will have a substantial impact on day to day operations. For example, the Rules deal comprehensively with (a) releasing goods at the discharge port and (b) who has the right to give instructions to the carrier during the carriage contract.

Traditionally, release procedures have been dealt with by the law governing the relevant contract of carriage and/or by the small print in the carrier’s bill of lading. The Rules seek to impose a uniform regime (Chapter 9). Ship operators operating in Rotterdam states will therefore need to train their staff on how these procedures are supposed to work and, given that there are some problems with the drafting of the Rules, when matters should be escalated to in-house or external legal teams for guidance to avoid extra exposure.

The same also applies regarding who has the right to give instructions to the carrier during the carriage.

There are comprehensive provisions in Chapters 10 and 11 of the Rotterdam Rules.

Operating procedures will need to be developed in this area and staff will need to be trained accordingly.

 

Final thoughts

The Rules will have a far-reaching impact across the whole of maritime commerce. There will barely be an untouched area. Owners need to keep a close eye on who is signing and ratifying. If the US ratifies, the UK follows and China shows a renewed enthusiasm, there is a very good chance the Rules will achieve widespread adoption. Owners who are ahead of the game will probably steal a competitive advantage, while avoiding the extra costs that last minute solutions always bring.