Rotterdam Rules
Beautiful compromise or ugly duckling
Nicknamed the Swan because of its unusual profile, the Erasmus Bridge over the Nieuw Maas in Rotterdam is one of the city's landmarks, completed in 1996.
On Sept. 23, delegates from around the world will gather, to sign the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, or what's been given the shortened name Rotterdam Rules in recognition of the signing location.
Delegates will then go back to their home countries where their governments will have to decide whether to ratify the treaty as a beautiful compromise among competing interests ' or reject it as an ugly duckling.
If 20 or more countries approve it, the new convention will replace older treaties in those countries for determining liability in the event of damage or loss of cargo such as the 1924 Hague Rules (the basis for the 1936 Carriage of Goods by Sea Act, or COGSA, in the United States), 1978 Hague-Visby Rules, or the lesser used 1978 Hamburg Rules.
Approved by the U.N. General Assembly last December, the world body describes the new convention as a 'contemporary and uniform law providing for modern door-to-door container transport including an international sea leg, but not limited to port-to-port carriage of goods' ' something many see as overdue as containerization and intermodal transport has come to dominate the movement of general cargo.
Among the benefits for shippers noted by groups like the National Industrial Transportation League, the rules would:
' Eliminate the nautical defense that has permitted carriers to escape liability based on negligent handling of a vessel.
' Extend a carrier's obligation to exercise due diligence in making its ships seaworthy and fit for cargo for the entire voyage by sea, not just at the beginning of the sailing.
' Raise the liability limit to 875 Special Drawing Rights (SDR) per package or 3 SDR per kilogram. This compares to 667 SDR per package or 2 SDR per kilogram under the Hague Visby Rules, 835 SDR or 2.5 SDR per kilogram under the Hamburg Rules, or $500 per package under COGSA.
' Include liability protection in the amount of two and one-half times freight for shippers arising from economic losses incurred as a result of deliveries delayed beyond an agreed upon time.
' Give shippers and carriers the right in volume contracts to apply terms different from that of the convention except in certain key areas.
' Recognize the increasing use of electronic commerce for shipping transactions.
Hammering out the treaty has been a long process. Delegates to a working group at the U.N. Commission on International Trade Law (UNCITRAL) met twice a year beginning in 2002, and their work built on efforts by the Comit' Maritime International, an international organization of admiralty attorneys, stretching back to at least 1996.
If supporters see the signing ceremony as a cause for celebration, then the European Shippers Council might be viewed as letting a skunk loose at the party.
In March ESC released a statement with a long list of concerns about the Rotterdam Rules, and said they should not be supported because 'there is nothing in the final text of the convention which justifies a departure from the status quo of Hague Visby Rules for the majority of shippers.'
That view is strongly opposed by supporters of the treaty, which include the ESC's U.S. counterpart, the NIT League, as well as the leading organization representing liner shipping companies, the World Shipping Council (WSC).
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| Gatti |
Peter Gatti, NIT League's executive vice president, and Don O'Hare, a spokesman for the WSC, discussed their organizations' support for the Rotterdam Rules and why they disagree with the ESC.
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| O'Hare |
Both groups have been involved in the drafting of the new convention from the start. Following an unsuccessful attempt to rewrite COGSA in 1999, the two groups issued a joint statement in 2001 laying out features they would like to see in a new treaty on international cargo liability reform.
The rules 'carefully balance the affected maritime and other interests,' the NIT League said.
ESC 'had very limited participation in this thing,' said O'Hare, and that the negotiations the group laid out 'nothing as significant as what they are coming up with at this point.'
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| van der Jagt |
ESC Secretary General Nicolette van der Jagt said while 'it would have been preferable to have been more fully engaged earlier in the debate … it would be exaggerated for anyone to suggest European shippers have not been involved in the debate.'
At this point Gatti said there is limited room for the ESC and NIT League to find common ground.
'There is not an effort at this point and I do not see where we are in a position to find any other ground than what the U.N. General Assembly approved back in December,' he said. The treaty was developed with 'a tremendous amount of transparency and a lot of dialogue among a mixture of government delegations. They employed experts in the area of this highly specialized law, including academics, government officials, and non-governmental organizations, including the European Shippers Council.'
O'Hare said the ESC's comment about maintaining the status quo doesn't take into account 'that the status quo is going away no matter what. We can either ratify this convention or go in the direction of regionalization, because the Hague Rules and Hague Visby rules are outdated. They just don't do the job.'
The Rotterdam Rules would cover cargo moving under bills of lading. It would not apply to most bulk cargo movements that move under charter parties, for example.
O'Hare said older conventions like Hague and Hague-Visby don't take into consideration a lot of the realities of containerization and intermodal shipping, but are focused on port-to-port movements of cargo. And they don't take into consideration the electronic transmission of transport documents. While the Hamburg Rules were intended to try and update the older conventions, he said they cover less than 2 percent of world trade.
'Whether they go away and are replaced by the Rotterdam Rules or go away and are replaced by U.S. domestic legislation and European Commission regulation remains to be seen. But the Rotterdam Rules are the only show in town if we are going to create uniformity,' O'Hare explained.
'We view this as a vast improvement over the multiple-type conventions that are in place today,' Gatti said. 'It creates compatibility, the type of predictability that I think both shippers and carriers will see as a vast improvement over the status quo.'
Van der Jagt said, 'one of our biggest concerns remains for those shippers that choose or are persuaded to opt out from the minimum liability and obligations placed on the different parties under the Rotterdam Rules through volume contracts.'
But Gatti said, 'these are the same arguments that were raised by opponents to shipping reform in the U.S. back in the 1990s.'
When the Ocean Shipping Reform Act was passed, there was a lot of suspicion that the freedom of shippers and carriers to enter into confidential contracts would serve only the interests of big shippers who would have leverage over carriers, he said.
'The fundamental basis of that reform was the ability of a shipper and a carrier to negotiate agreeable terms in a contract,' he said. 'What we found out is that groups of small and medium-size shippers were able to collectively get together and leverage cargo volumes and negotiate terms with their suppliers in much the same way that large account shippers were capable of doing.
'This idea that it is going to be lopsided in terms of contracting ' well, we have had over 10 years of experience with that in the United States and we know that is not the case,' he said.
Shippers may want to 'derogate' or modify the standard liability provisions under the Rotterdam Rules in a contract because they want to self-insure, said Gatti, or use some other mechanism that is in their interest.
Shippers should not be caught unaware that they are surrendering rights laid out in the Rotterdam Rules. Gatti and O'Hare note volume contracts must contain prominent statements if they derogate from the convention and that shippers must be given the opportunity to enter into a contract that does not derogate from the convention.
Furthermore, Gatti believes market competition makes it unlikely that shippers would be unable to obtain the protection they seek.
In addition to booking cargo with actual ship owners, carriers also have the option of doing business with intermediaries such as non-vessel-operating common carriers that are treated as carriers under the convention.
Gatti added that in Europe, the EC's decision last year to end the bloc exemption from antitrust laws for liner shipping companies makes it likely that regulators would take an unfriendly view if ocean carriers in lockstep refused to offer such protections.
Some attorneys and insurance executives expect that when the Rotterdam Rules are first implemented there may be an uptick in litigation as shippers and carriers dispute what the rules mean and players in the shipping industry are exposed to new liabilities.
For example, the U.K law firm of Holman, Fenwick Willan said carriers' bills of lading will no longer be able to exclude liability for cargo damage pre- or post- 'ship's rail,' and terminal operators will have to accept 'greater and the probability of higher insurance spend.'
The European Association for Forwarding, Transport, Logistics and Customs Services (CLECAT) has also issued negative remarks about the Rotterdam Rules, saying they are 'far too complex' and 'limitations to liability seem to work in one direction only, without offering shippers or freight forwarders any mitigation.' CLECAT has asked its members to urge the EU and European governments not to ratify the convention.
The Rotterdam Rules are 'long and complex, but this is an area of law that is complex, it is not simple, but very sophisticated with specialists that deal in admiralty law,' Gatti said. 'That is not going to change under these rules, but that is not a reason to say that it is not better than the existing regimes.'
Both Gatti and O'Hare said the rules are much better than further regionalization of cargo laws. 'The biggest advantage to the rules from the carriers' perspective, is not any one of the provisions ' it is the potential for predictability and uniformity. That is the thing we need most,' O'Hare said.
Writing in the Texas International Law Journal, Michael F. Sturley, a professor at the University of Texas at Austin, said, 'If we focus on the big picture, the convention's proposed changes to U.S. law will not be earth-shattering. The new convention is deliberately evolutionary, not revolutionary. The focus is on updating and modernizing the existing legal regimes that govern the carriage of goods, filling in some of the gaps that have been identified in practice over the years, and harmonizing the governing law when possible.'
Other nations are likely to look carefully to see if the United States approves the treaty, and O'Hare said the Obama administration 'appears to be in full support.'
Mindful of the fact that 'the political law of physics is that it is easier to stop something than it is to get something through,' Gatti said there was an effort by the U.S. delegation, headed by Mary Helen Carlson of the State Department, to brief and bring in the views of as many interests as possible during development of the convention.
Sturley said 'several proposals to deal with more revolutionary subjects, or at least subjects in which harmonization would have been difficult, were abandoned,' so the UNCITRAL working group that developed the Rotterdam Rules 'could in fact complete the project and address the core issues.'
That big tent approach 'vastly increases the chances that the United States will be able to ratify this convention. This is not a prediction, just a comment on the favorable atmosphere that has been developed and worked hard for,' Gatti said.
If the Obama administration signs the treaty, it would be sent to the Senate Committee on Foreign Relations, and then the full Senate for advice and consent.
If the treaty is not deemed to be 'self executing' then implementing legislation will have to be passed by both the House and Senate and signed by the president.