CIFFA ANNUAL GENERAL MEETING
By JACK KOHANE
July 19, 2010
When the Rotterdam Rules finally rule the waves it could make for some very murky waters for those transporting goods from port to port. Prepared through intergovernmental negotiations that have lasted for the past decade by the United Nations Commission for International Trade Law (UNCITRAL), the aim of the Rotterdam Rules is to replace The Hague Rules, The Hague-Visby Rules and the Hamburg Rules in order to achieve greater harmonization and enhanced unification of the law of international trade in the field of maritime carriage.
But the implementation of the Rotterdam Rules comes at a cost. One of the most contentious aspects is the volume contract exception, which allows the shipper and carrier to agree on greater or lesser rights, obligations and liabilities. Thus, they can (for example) agree that the carrier should have full value liability or, with a couple of basic exceptions, that its liability is completely excluded.
How the new Rotterdam Rules will change the old rules for freight forwarders was analyzed by a panel of experts in transportation law and insurance issues at the recent annual general meeting of the Canadian International Freight Forwarders Association held in Toronto. Under the ominous title Your World Will Change and Your Liability Will Skyrocket, the panel discussion faced a packed hall of logistics leaders, many unsure of how the Rotterdam Rules will impact the flow of international trade. But if the intent was to help clarify the murky rules, the goal may not have been entirely met.
Panel moderator Tony Young, CEO of LCL Navigation and current chair of the CIFFA Transport Law Working Group, launched the discussion. “A new feature in the Rotterdam Rules is the carrier’s liability for delay,” he pointed out. “Under the present convention, there is no statutory liability for delay to a shipment and any claim made in a court of law would require proof of an agreed delivery date, proof of economic loss directly attributable to the delay, the unreasonableness of the delay, etc.
“Under the new convention, the liability for delay will be a statutory two-and-one-half times the freight payable on the goods delayed if delivery simply did not take place ‘within the time agreed.’”
This is new territory, Mr. Young observed, adding that the Rotterdam Rules do not provide exculpatory considerations for such instances as port congestion, railway congestion, shortage of rail or truck equipment, derailment or bad order railcars and traffic congestion which are the usual causes of delays. “These delays are not out of any human negligence or acts of God but a simple fact of life that is unavoidable in spite of best efforts,” he countered.
Keynote speaker Peter Stockli, legal counsel for the London, England-based TT Club, a provider of insurance and related risk management services to the international transport and logistics industry, told CIFFA members that indeed their liability could skyrocket under the Rotterdam Rules. He explained that freight forwarders who assume liability as carriers, typically by issuing their own house carriage document, will be liable as Rotterdam Rules carriers.
“It is generally thought that the Rotterdam Rules are more favourable to cargo interests than the existing international sea carriage conventions such as the Hague-Visby Rules, because there is no more defence of ‘error in the navigation or management of the ship,’ the shipowner’s obligation to maintain seaworthiness is extended to the entire voyage and the liability limits are raised to 3 SDR (Special Drawing Rights) per kilogram or 875 SDR per package or other shipping unit, whichever is the higher.
“Also, carriers might face higher exposure for delay claims. On the other hand, it might assist carriers that misdelivery claims are probably within the scope of the Rotterdam Rules and that breaking a carrier’s liability limits requires its personal intent or recklessness with the knowledge that loss would probably result.”
Focusing his presentation on one of the most contentious items in the Rotterdam Rules – the volume contract exception – Mr. Stockli explained that “this allows the shipper and carrier to agree (on) greater or lesser rights, obligations and liabilities. A volume contract requires a specified quantity of goods in a series of shipments during an agreed period of time. As these three elements are not defined further, many in the industry believe that small numbers might already suffice, with the result that there is a very wide scope for contractual freedom through volume contracts.
“Small and medium-sized freight forwarders, who act as contracting carriers between cargo interests and performing carriers, are more likely to be exposed to commercial pressure by larger parties.”
Is this Armageddon? That leadoff question by speaker Jerry Giroux hushed the hall. “Yes, the (Rotterdam) Rules may not mean the end of the world as we know it, but it will dramatically change the freight forwarders’ exposure in terms of their limits of liability and the back-to-back protection they seek from the main carriers as opposed to the contracts and promises they make,” began the president of Aldis Underwriting Managers, a marine insurance provider.
Agreeing with Mr. Stockli that the key issue revolves around the volume contracts provision, Mr. Giroux said, “We know that the freight forwarder will likely be pressed by his clients for volume contracts with their NVOCC (non-vessel-operating common carrier) for full liability.” In Canada, the term “NVOCC” generally means a consolidator of small shipments that acts as a common carrier and “international freight forwarder” who may act as a contractual carrier by issuing a transport document but generally acts as the shipper’s agent.
“There may be some significant income to be made between the two liability contracts but the liability gap will need to be managed likely by way of primary cargo insurance,” Mr. Giroux said.
There will be significant risks and opportunities, he predicted, noting that freight forwarders that are prepared for this change in legislation will be the ones to survive and profit. To get ready now, he recommended that freight forwarders aggressively market all risk cargo insurance, as well as educate their staff on the benefits and value of a cargo insurance solution for as much of the freight as possible that they handle.
“Review all the service contracts you have with your logistics suppliers to ensure that those parties are properly insured and that those partners … will be able to go forward with under the new Rotterdam Rules,” he said.
According to Gavin Magrath, legal counsel to CIFFA and partner in the Toronto law firm of Magrath O’Connor, the Rotterdam Rules represent a compromise – a diplomatic compromise in which “the American delegation negotiated very hard for provisions permitting what they call ‘freedom of contract’ but which are frankly a ‘loophole’ for permitting derogation from the convention terms.”
The diplomatic delegations accepted that the Americans could not be brought to the table without accepting that compromise, and so they accepted it, Mr. Magrath said. “But many of those same diplomats then went home to tell their nations that they had essentially failed, and that the price of bringing in the Americans was too high. The feeling was that the ‘loophole’ would eviscerate the convention, establishing a new universal regime that would be universally ignored in favour of ‘volume contracts.’ That’s why, even though all interested countries including Canada were involved in the negotiations, most of those countries have not yet signed on.
“The rules are far from perfect, but the Hague-Visby regime is also far from perfect. If we have the opportunity to improve certainty and uniformity by re-integrating the U.S. into an imperfect new global regime, would that not be a worthwhile objective?
“Accordingly, I believe the many cooks have prepared a stew that’s a bit of a mess, but if the Americans sit down for dinner then we’ll join them for stew and not take our potluck salad and go home.”
Mr. Magrath stressed the importance of recognizing the fact that the convention will come into force one year after 20 countries ratify the Rotterdam Rules. “We are presently at zero, so there is still lead-time to respond,” he said.
He urged freight forwarders to not only prepare themselves for the Rotterdam Rules (when they come into effect), but also to ensure that their lawyers, brokers and underwriters are prepared as well. “Are they getting ready for the new world? Go talk to your lawyer and broker. If their eyes glaze over when you mention the (Rotterdam) Rules, fire them,” he exhorted the CIFFA audience.
Asked his reaction to the panel discussion, CIFFA board member Christopher Gillespie, president and CEO of Gillespie-Munro Inc., an international freight forwarder headquartered in Montreal, replied that the discussion left him with more questions than answers.
“The very nature of a convention that went from 12 conditions in Hague-Visby (which is the current convention ratified by Canada) to 94 in the Rotterdam Rules makes this an obvious poster child for the legal community,” he said. “Canada, unfortunately, will be dragged into this regardless of what we may feel is right, simply because if ratified by the U.S. we have little other choice.
“Those of us who still handle shipments as agents for the shipper, anyone of us who issues contracts of carriage, will be impacted by new levels of liability that we have never seen nor could have envisioned. The whole issue is still so complex it is really hard to say how it will all shake out, but suffice it to say it won’t be anything that will bode well for our industry as carriers.”
Steve Valentine, president of Mississauga, Ont.-based Cargo Alliance Ltd., said though the Rotterdam Rules may be scary to many, he believes if they are ratified it may very well force the industry to be more cognizant of the communication protocols required to ensure compliance and efficiency – “something that over the past 15 years appears to have been forgotten by many in their quest for achieving pure volume,” he said. “I hope the quality of what we do as forwarders will return tenfold should the Rotterdam Rules come into force.”
CIFFA executive director Ruth Snowden summed it up best. “With all of the complexities and challenges facing the international freight forwarding community today, sometimes it is difficult to focus on changes that will likely not impact one’s business for several years down the road,” she said. “The Rotterdam Rules may not ever be adopted or ratified into Canadian law. But we can be almost certain that the United States will ratify – and with them the requisite 20 countries. When that happens, the forward thinking firms that have invested in bringing the new learning into their firms, adjusted their liability coverage to address gaps, communicated with their customers – these are the companies that will gain.”
On the same theme, Mr. Magrath added that there are many untested or novel provisions (in the Rotterdam Rules) and no one knows how they will work out. “Forwarders are logistics experts. And in an environment of increasing complexity … and their understanding of the industry and the risks will permit them to create and offer profitable products and services to their clients. The tide will rise, and we will find out which boats float and which are grounded,” he said.