CHAPTER II

EVOLUTION OF GLOBAL MARITIME REGIME

1. Introduction

Transport industry operates under the regulatory regimes of different jurisdictions.

Every aspect of transportation sectors is governed by different international

organizations 1, regional organizations, 2 Regional Memorandums of Understandings

(MoDs) on Port State Control, bilateral agreements, and national laws of various

countries. Considering the complexities of international transport services, particularly

concerning its already well-established and wide-ranging regul_:ltory, regimes, the

negotiations within WTO framework failed to make a substantial progress, as narrated in

the earlier chapter.

The complexity of this sector can also be attributed to the diversity in the market

structure of international transport. The maritime transport market is differentiated by the -- -····--~--......,~" ~~

type of ship (Liner, Tramp, or Tanker), the kind of trade (general cargo, dry and liquid ----..:_....------- -- -

bulk cargo, live cargo etc.) and the geographical route. It is run by diverse individuals-..______---the ship-owners, brokers, freight forward operators, shipbuilders and bankers; who

together carry out each year, the task of transporting more than 3000 million tons of

cargo by sea (Stopford, 1988). It embraces not only ships of varied type, design, and

employment but also the cargo they carry, the origin and destination of those cargoes, the

routes traveled, the men who operate them afloat and ashore, laws relating both to the

seamen and the ship, insurance, and governments of various countries. The conditions

that govern its operation in one sector do not necessarily apply to another.

Many aspects of maritime transport process have their roots in history

(McDowell, 1954). Through a consistent usage of sea as a highway, usages reflecting the

conduct of States in maritime affairs emerged. The usages were later concretized into

customs of international law, thus creating rights and duties attached to the peaceful uses

2

International Civil Aviation Organisation (ICAO), International Labour Organisation (ILO), International Maritime Organisation (IMO), the United Nations (UN), United Nations Conference on Trade and Develoment (UNCTAD), United Nations Commission on International Trade Law (UNCITRAL) etc. Organisation for Economic Co-operation and Development (OECD), European Union (EU) etc.

52

of the ocean in merchant transport. The legal superstructure exists as a result of early

state conduct which created rights and duties of the subjects of international law (Mahalu,

1984).

Before proceeding to the discussion of Transportation Services under the GATS

framework, it is pertinent to discuss the historical development of maritime industry and

understand its nature, composition, and functioning, and the existing legal norms that are

presently governing this sector. This chapter is mainly divided into four sections: The

first section deals with the origin and history of maritime transport services. The second

section looks at the effects of technological development on this sector. The third section

deals with the legal regime and the institutional mechanism which is currently governing

this sector (an effort is made to discuss the legal regime according to the way in which

the maritime sector is organized in the GATS maritime negotiations i.e. the "four pillars"

of maritime transport).3 And the fourth section deals with the concerns of developing

countries and their aspirations for developing their own merchant fleet.

2. Origin and History Of Maritime Transport

For centuries ships were main instruments of commerce and communications

between nations. As a result several aspects of the shipping process have their roots in

history. Though the development of shipping was motivated by private enterprises and

initiative, over a period of time however, it called for government regulations,

interventions, and financial assistance in the form of subsidies, concessions, etc., because '---------- ----------------

of its importance and contribution to the national economies.

Crete and Phoenicia were considered as the earliest maritime powers4 but modem

scholars contest this claim, they assert that India and Egypt were the earliest maritime

3 Auxiliary services are not discussed separately because they are covered under the discussion concerning multimodal transport. The small island of Crete situated on the Mediterranean developed as a maritime power from 3500 B.C. and traded with Egypt, Greece, and Syria. Their Maritime Supremacy started declining about 1400 B.C. and were succeeded by the Phoenicians, who lived in the narrow strip of land on the coastline of Syria and Palestine. Being dependant on trade for a living, the Phoenicians developed not only caravan routes, but also used sea extensively for transportation. Siddon and Tyre were major maritime ports of Phoenicia. The Phoenicians supplied Egyptian grain to Greece. They were expert ship builders and furnished the war ships to Assyrians, Babylonians, and Macedonians. In about 1000 B.C. the Phoenicians ventured beyond the Mediterranean sea and traded with England and Spain. Their supremacy as a maritime power lasted till 800 B.C. (Ram, 1969).

53

powers (Ram, 1969). Earliest man grasped the floating log (dug outs, log rafts, and boats

made of hides stretched over a frame), it took many centuries to develop sailing ships­

the Egyptians invented the sailing ships in 3500 B.C. (The World Book Encyclopedia)

which depended on the direction of the wind and the polar star was the only guide to the

sailors for direction.5

After the decline of the Greeks in the 3rd Century B.C., the Romans became

supreme, and the Mediterranean Sea became a Roman Lake for all purposes. The period

of Roman maritime supremacy saw codification of maritime law, a process which started

with the Greeks. The code was based on the ancient laws and customs of the sea

formulated by the inhabitants of the Islands of Rhodes. Seamen wages, rights of

merchants, ship-owners' responsibilities for passengers and cargo, punishment for

offences from piracy to negligence etc., were laid down by the Roman law. These laws

survived the Roman Empire and were incorporated in the laws of Oleron, in the 1100 '-..--------

A.D., which was to become the foundation of modem maritime law.

The sailing ships later in history went through several structural improvements6

accompanied by other gadgets such as charts and mariners compass 7 and the invention of

cross-staff which enable the accurate measurement of the altitude of the pole star. Now

the world has come a long way from catamarans and sailing ships to VLCC and OBOC.8

The discoveries of 15th century A.D. marked a definite break in the history of the

evolution of shipping as an industry. The ancient channel of trade from the Orient via the

Mediterranean to Atlantic Europe was destroyed by the capture of Constantinople by the

Turks in 1453, one of the major links between the East and the West. The Ottomans

(Turks) also succeeded in blocking the routes across Syria (alternate route); leaving the

Isthmus of Suez as the only means of access for oriental goods. The Egyptians imposed

5 During the period of sailing ships, countries discovered and conquested other countries and made them to be their colonies and established trade relationships among them. Pytheas of Masil (modem Marseilles) then a flourishing Greek colony is said to have discovered the Britain (Ram, 1969).

6 The sailing ships were dependent upon the wind direction and the sailors were guided by the pole star till the 15th century. The structural developments such as the perfection of the stern rudder which gave greater control over ship and the single mast sailing was replaced by two mast sailing and later by three masts which helped in increasing in speed.

7 Cartographers of Venice are said to have produced excellent charts and mariners compass which was originally a Chine invention that came to Europe through Arabs (Ram, 1969). Very Large Crude Carrier and Ore Bulk Oil Carrier.

54

higher dues on the transit of oriental goods. These events brought economic difficulties to

the Mediterranean trading cities, and caused the Western European powers to intensify

their search for new sea-route to the sources of eastern trade.

In 1486, Bartholomew Diaz, the Portuguese Navigator rounded the Cape of Good .._ ------ ~

Hope (South Africa) and prepared the way. In 1498, Vasco da Gama landed in Calicut in

the West coast of India. His discovery of a direct route to India shifted the center of

gravity from Europe to Asia and established for the first time India's direct contact with

western world by an ocean route. The Cape route not only freed the merchants of Atlantic

Europe from charges for the Suez Isthmus transit, but also enabled them to bypass the

ancient link provided by the Arab traders in the Indian Ocean. The Portuguese defeated

the Arab naval resistance and established their own ports of trade in India, South-East

Asia, and at Macao in China. The Portuguese brought ivory, silks, spices, and other

products from India, China, and the Far East.

Christopher Columbus braved the Atlantic Ocean in three small sailing ships and

reached the New World-the America in 1492, some years before Vasco da Gama landed

in India, but the land discovered by him was a virgin land, sparsely populated and it took

many generations of development before a profitable return could be ensured, from this

land when compared to the rich civilization that Gama found in India (Anand, 1983). In

1519, Magellan started the voyage from Spain and proved the theory that the earth was

round by sailing from east to the west, as he circumnavigated the world across the

oceans. He voyaged from Spain to Brazil through the straits to the Pacific and to

Australia and Asia and crossed the Indian Ocean, and returned to Spain via Cape of Good

Hope (Ram, 1969). The Spainish and the Portuguese tried to maintain these ocean routes

that they discovered as their monopoly by the Treaty ofTordesillas (Anand, (1983), Ram,

(1969), Couper, (1972)).

The Portuguese trade with India was a royal monopoly; the risk was that of the ----King and the profits and losses were the King's. But the Spanish King did not

monopolise the entire trade, he levied duties of trade and in addition claimed some --- ·-- _., percentage of profit as his share. The Portuguese plundered and drained India, they were

said to have returned with a cargo that amounted to six thousand times the entire expense

55

of the voyage.

One significant aspect is that for the first time since the Greco-Roman period, an

area which contained the principal markets for oriental goods was now in direct contact

with the source of supply. Their ability to control the ports and channels of trade directly

by vessels from Europe, finally shifted the basis of commercial and political power from

the Mediterranean and Indian Ocean to Atlantic Europe.

In the 1500s, while all trade was on the King's account in Portugal; the King was

a partner and shared profits from the trade in Spain; the English genius showed - --- . .

themselves in the organization of Joint Stock Company that was organized by the Royal

Charter (Ram, 1969). It was one such Joint Stock Company that was formed in 1599 to

trade wi!h lndia.thatwon the Indian Empire for Britain, and the co~p~y-~led it tjll --' --------- ----------- ---·

1858, when the Empire was transferred to the British Crown. The rise of British shipping ------~·~-·--~- ---- ---~

represented a revolutionary advance in the British economy.9 The rise of Britain altered

the trading pattern; no longer did oriental luxuries come to the west but raw materials;

and high value goods were now flown into opposite direction as the products of British

manufacturing industries (Anand (1983), Ram, (1969) Couper, (1972)). 10

America became independent in 1776 and the development of America in the 19th

century created increased demand for transportation. The 19th century was also a period

of Anglo-American rivalry in ship-building; in 1815 the American tonnage was half as ,.---- --------- -------------·-

that of British tonnage but later with the natural advantage of possessing large quantities

of soft wood, the US was able to produce cheaper and faster ships. The discovery of gold

in Califomi~-2_~ 184_8 _gay~ extraorgjnar.ystimulus to the shipbuilding industry. The US

started building Clipper ships (Clip means to move swiftly), it had many sails and as

9 One of the main keys to the expansion of British commerce was the existence of a large merchant fleet, supported by strong navy, which took advantage of the discoveries and the advances in cartography and navigation as well as Britain's favourable geographical position in a world turning increasingly to seaborne trade. By the end of 1700, there were between 5,000 to 6,000 British owned merchant vessels carrying coal and other cargoes in the coastaL continental, and overseas trade. At the same time, the British seamen numbered about I 00,000 who constituted the non-agricultural sector of the working population. These developments gave a new spatial dimension to the British economy, which facilitated its subsequent industrial growth and dominance in the world (Couper, I 972).

10 After the crushing defeat inflicted on Napoleon by the English, in I 805 at Trafalgar, made them finally supreme on the seas and the commercial functions of Amsterdam got eroded and London was confirmed as the center of world trade_

56

many as six rows of sails to a mast designed for speed. 11 After the World War II, the US

had the largest fleet in the world (Ram, 1969).

3. The Impact of Technology on Maritime Transport

The substitution of sail by steam and wood by iron and steel, brought about yet __ ...... --~ -· ........ -·~-· ... ~ ... -~ - ----another revolution in the history of shipping. The first steam ship, the AmeiiC<iiCShip-

Savannah, was built in 1819, this ship was primarily a sailing ship equipped with engines

for use when the wind failed. 12 The first steamer to reach India was the "Enterprise" via ~--.;_.--·-~

the Cape of Good Hope in 1822; it reached Calcutta in 113 days. The steamships ensured ~---___.,....- ----

certainty of performance and risks of the sea became known and predictable; then triple

expansion steam engine was introduced and was universally accepted, this meant not

only increase in speed but more economical operations, in terms of fuel consumption and

time taken for voyages. The steam ship also had an advantage of being more independent

of the weather than the sailing ship and it was possible for a ship-owner to introduce and

maintain regular scheduled services (Deakin, 1973). Yet steam ships were not

commercially viable because the heavy consumption of coal in the early steam ships

meant heavy running costs, and the space occupied for storage of fuel can be put to use as

cargo space and thereby earn more money.

The development of shipping as a whole received an impetus from th~~ing of ---~---- ·-------- ~-~- ·-

the Companies (Limited Liability) Act 1862 in the UK. This made it possible for wealthy

individuals to invest portions of their wealth in shipping enterprises with a certainty that

if the venture failed their liability would be limited to the amount of their subscription to

the limited company. Prior to passing of this act the investor assumed unlimited liability

11 By the outbreak of the First World War, the British Merchant fleet stood at over eighteen million tons. Its nearest rival, Germany, owned almost five million tons. and the US possessed two million (Couper,l972). The First World War brought about tremendous destruction of ships; many sailing vessels were destroyed and were replaced by stream ships. There was also, following the First World War, a significant shift from coal to oil as a source of energy. The new type of oil fuel required changes in maritime technology and the British shipping industry was slow to respond. A system of American government subsidies helped increase the tonnage of the US fleet. At the same time, during the World War II, more than half of British tonnage was lost in enemy action. The US experimented with the production of mass production of ships. Prior to this experimenting it was considered that the ships required individual attention and were not capable of mass production. The US succeeded in its endeavour in building 2709 Liberty ships, during the War which was a classic example of the technology of mass production as applied to shipping industry (Ram. 1969).

12 It crossed the Atlantic in 29 days, but in its first voyage it was under steam only for 85 hours.

57

if the venture failed (Ram, 1969). Another major development took place, which made

the steam ships popular; the invention of the screw propeller and the perfection of "";----- -

compound engine that reduced th~u~ption_Qf_coal. Later in the 1900, coal was -replaced by oil for propelling, which saved lot of space when compared with coal, and

this space could be used for bringing in extra revenue by carrying cargo. 13

The Industrial revolution in the UK, the development of the New World (the

America), and the opening of Suez Canal contributed to an increase in the volume of

international trade. The next important development was the replacement of wood by iron

as the chief building material for the ships. The iron ships could be built with large

tonnage capacity than the wooden ships.14 Iron soon yielded to steel as a building

material. Steel possessed a tensile strength from 25-30% more than iron. It was

homogenous in substance and uniform in quality.

The risk involved and the time taken for the voyage started to decrease due to

further developments in the maritime technology and organisation. 15 It was now possible

to receive through radio linked equipment, daily forecast maps of the sea conditions

which showed the wave contours for 24 hours ahead or the Master could receive

information from a shore-based meteorologist, on the optimum route to adopt to avoid

high wave obstacles. One of the most pronounced advances in shipping is the greater

carrying capacities of modem vessels, with the corollary of deeper draughts. The

13 The diesel engine was invented in 1902 (by Dr. Rudolf Diesel, a Bavarian) and the diesel oil engine dispensed the necessity for boilers, since the oil is injected directly into the cylinder on high pressure where it is ignited by the high temperature resulting from compression of the air cylinder.

14 In 1858, the "Great Eastern", which was constructed with iron was said to be a land-mark in the history of change over from sail to steam and wood to iron. The maiden voyage of the first iron built ship fitted with compound engine and screw propeller took place in 1886. The commercial success of this voyage paved way for the ultimate triumph of the steam ship as an ocean cargo carrier (Ram, 1969).

15 The period between discovery of ocean routes and ending with the emergence of steamships also witnessed certain other developments in shipping industry. The ship owners emerged as separate and distinct class from the merchants during this period. The General Ship-owners' Society was founded in 1888. New classes of men such as ship brokers, cargo brokers, marine underwriters, insurance brokers, etc., made their appearance and these professions came to be organized. Edward Lloyds took the initiative in collecting and posting accurate shipping intelligence and information. The publication of Lloyds Register began in 1734 giving all arrivals and departures of ships. In 1760, Lloyds underwriters formed a society for publishing a Register of ships. The Register contained particulars of ownership, the age, dimensions, state of the hull and equipment, etc. Accurate Register containing details of ships helped the development of shipping insurance and under-writing.The Greenwich Observatory was established in 1675. The first successful chromometer was produced in 1759 by John Harrison for ascertaining ship's longitude.

58

construction of Suez Canal, Panama Canal and Kiel Canal etc., also helped in reducing

the voyage time.

Though the age of steam revolutionized shipping industry, the foundations of an

organized shipping industry were already well-laid during the age of sailing ships. Steam

ship is said to have established and proved itself stronger with the opening of Suez

Canal, 16 it ensured certainty of performance and the risks of the sea became known and

predictable. The boom in the sea-borne trade that followed the opening of the Suez Canal

in 1869, gave rise to stupendous expansion in the tonnage of the European maritime

countries, and this in tum unbridled competition to secure cargo. There was also a

demand for stable freight rates-the response came in the form of co-operation among

the ship-owners in establishing the 'Liner Conference System' to provide scheduled

services between ports. This system came to govern shipping operation throughout the

world (Rao, 1965).

India was one of the greatest centres of European commercial and shipping

activity at that time and it was natural that the conference system first came into being in

the Indian trade. The first conference, the Calcutta Liner Conference, was established in

1875, and consisted of liner companies engaged in trade between India and the UK. As

1

::E::,:::::~=:~:::·::~:::~:::~:::~::::n:00

:~:::~~~::::o;, ) Europe controlled most of the world shipping, shipbuilding, and Liner Conferences; a

situation founded on the economic lead gained during the Industrial Revolution. The

world maritime transport network that emerged was built around the colonial system­

carrying outward cargoes of manufacturers and returning with primary commodities

(Stopford, 1988).

16 It crosses the Isthmus of Suez, between Port Said (Mediterranean) and the Gulf of Suez. The importance of the canal was recognized by the major powers in the Constantinople Convention of 1888, which guarantees freedom of passage through the canal of ships of all nations in peace and war. In 1854-56, Ferdinand de Lesseps obtained rights from Said Pasha of Egypt to establish a company to build and operate a canal to ships of all nations for 99 years. The company's shares were bought by French, Turks, and Said Pasha, who bought half of the company's stock. In I 875 the Pasha was forced to sell his shares and thus the UK acquired the controlling interest in the company. Egypt became independent in 1936, and in 1956 the Egypt's President Gamel Abdel Nasser nationalized the canal company 12 years before the 99 years lease was to end.

59

The decades after the Second World War saw a major change in this established

pattern of shipping and trade, which had profound effect on maritime industry because

many of the most important colonies attained independence. By the 1960s, most Asian

~------------------------------and African countries became independent; this development shook the established

pattern of maritime trade (Stopford, 1988).

For many centuries the sailing vessels were plying in the ocean, but the first 50 to

60 years of the twentieth century witnessed the size and speed of ships progressing in

geometric progression from 2000 tons to 500,000 tons increase in size, and from 7 and 8

knots to 30 to 40 knots of speed. Fuel economy, the design and compactness of engines,

sophisticated navigation technology and instrumentation, radgr.-g-yF~c.Q__mpass, automatic

compass etc., are all innovations of the first half of the twentieth century. Hull fabricated

from wood, steel, ferroconcrete, aluminum alloy, fiber glass, and re-inforced plastics are

the innovations in the materials in use. Ships designed for carriage of bulk cargo, for

crude oil, combination carriers, luxury liners, refrigerated vessels, liquefied gas carriers

and container vessels, barge carrying vessels-transformed ocean transportation

technology between 1950 and 197 5. The post war developments also made it necessary to

build various other types of ships for special purposes, such as carrying automobiles,

trucks and other vehicles, and came to be known as "roll on and roll off' ships (also

called Ro-Ro ships) and there was increased demand for larger ships. llie increase in ship

size had the effect of reducing unit shipping costs by at least 75% (Stopford, 1988).

Until the Second World War, the operation and organization of the liner trade

progressed at a very slow pace; multi-deck vessels were used and teams of stevedores

stowed general cargo in the ship's hold which was a slow and labour intensive process. - -- ---~ ..... # -~-··_..-

With the growth of volume of trade in the post war era and the rapidly rising cost of

manual labour, the system became overstretched. The volume of general cargo grew

steadily during the 1950s and the 1960s; and the whole system started to become

unmanageable in administrative, physical, and financial terms. Until the mid-60s most

general cargo traveled loose and each item had to be packed in the hold of the cargo liner

using 'dunnage' -pieces of wood or burlap--to keep it in place. This was a highly labour

intensive operation which was slow, expensive, and difficult to plan and the cargo was

exposed to the risk of damage and pilferage. As a result, expensive cargo liners spent

60

two-third of their time in ports, and cargo handling costs had escalated to more than one­

quarter of the total shipping costs (Stopford, 1988). As the volume of cargo increased,

liner operations found it increasingly difficult to provide the service that shippers

required at an economic cost and as a result their profit margins were squeezed. The

shipping industries' response to this problem was the 'unitization' of general cargo­

individual items were packed into standard units, which could be handled quickly and

economically. During the 1960s the traditional liner shipping became increasingly

unable to cope with the escalating volume of world trade, and 'the old methods had

reached the end of the line' to overcome this problems, palletization17 and

containerization18 were introduced to speed up the flow of cargo (Stopford, 1988). The

containers were safe from damage and pilferage and readily transferable to rail or barge

with the minimum of delay or manual effort. The most recent technical development was

the introduction of containers and multi-modal transport system into the liner shipping

system. The first deep sea container was introduced in 1966 and the containers came to

dominate the transport of general cargo. _, .Jc:l ,_( Without containerization it is in fact very likely, that the problems and cost of

shipping general cargo would have been a severe impediment to development of -- -- ---· - .

international trade in_ the _world econ_omy. Thus the most important development in the

maritime transportation is containerization, which has emerged as a modem concept in

inter-modal transport.

Containers are box like transport equipment which are specially designed to

facilitate the carriage of goods by one or more modes of transport, without intermediate

unloading and reloading. The container system aims not only to arrest the rising cost of

handling cargo but also to eliminate delays at ports. The shippers and consignees are also

benefited because of quicker transport, cheaper packing, and less susceptibility of cargo

to damage and pilferage. Besides, the thorough movement of cargo in large units from

door to door without intermediate loading and unloading, facilitated the growth of

international trade by making it easier and quicker for manufacturers to send their goods

17 Pallets are flat trays, suitable for handling by fork-lift truck, on which single or multiple units can be packed for easy handling.

18 Containers are standard boxes into which individual items are packed.

61

I I

abroad. Till mid-1970s, the containers were the exception rather than the rule. Although

in 1986 there was 60% containerization, a substantial amount of cargo could not be

containerized, since most developing countries still lacked the infrastructure of roads and

road haulage required to handle containers effectively.

Container services have been steadily expanding and a substantial proportion of --the world general cargo trade is presently being carried in containers. Containersation

however, requires huge capital outlay, not only in-building and operating container ships

but also in equipping the ports, and providing the necessary inland .tran§p._2rtation ...... . --·- --- ._....

facilities. The containerization also required advancement in the port infrastructure and

lienee c~iers themselves started building modem container terminals designed for

handling large number of containers. The terminals are equipped with specially designed

giant cranes and other lifting and moving equipment to permit the carrier to move the

containers within their own terminals, and to load stow and discharge the same into and

from their container-ships. This involved a major investment in completely new ships,

shore based handling facilities and, of course, the containers themselves. In order to

mobilise large investment, consortia were forrned. 19 Container services have therefore

been introduced mostly by ship-owners or consortia of ship-owners belonging to

developed countries (Stopford, 1988).

The explosive popularity of containerization carne about which called for

installation of computers to keep track of !-.D-~_rnovernent of the containers. Containers --------were economical, efficient in the method of handling, loading, stowing, discharging and

...____~ ---~ ----·-~ -transferring of hundreds of packages simultaneously by means of_..I!l_~~,llanized equipment

... -- ""-- ·~~- ~ -·~-_....

instead of the fo~er slowyet- costly manual methods of individual package handling. By

the elimination of manual handling of packages by longshoremen, it prevents cargo

damages resulting from the throwing or dropping of packages to the deck of the pier or

ship, deliberately or otherwise. The risk of damages to cargoes resulting from stevedores

carelessly stowing heavy cargoes on top of delicate ones were eliminated under

containerization.

19 For example, Overseas Container Limited (OCL) which was a joint venture between P&O, Ocean, British and Commonwealth and Furness Withy. This approach remains a feature of the container trades (Stopford, 1988).

62

The overseas trade of developing countries, including India, is still carried on by

conventional ships. There are no fully containerized ships in developing countries but

there are however quite a few ships, that can carry a limited number of containers,

including refrigerated containers.

Containerisation and multi-modal door-to-door services were developing and it

was underway when the GNS negotiations started. By the time they were concluding the

Uruguay round, the use of containers and use of multi-modal services were increasingly

advancing. A full blown discussion was not there in the GNS on this issue, but the

negotiations did discuss issues pertaining to whether multi-modal transport mode should

be included in the national schedule of commitment, or it should be taken as an additional

commitment.

4. Evolution of Institutional Mechanisms

In terms of services provided, the maritime transportation market could be divided

into three segments according to the services they offer to the shippers-( 1) Tramp (bulk)

services, (2) liner services,20 and (3) multi-modal services. In the following paragraphs

an attempt is made to study each of these main segments of services offered, its market

structure, composition, and the evolution of institutional mechanism, and legal norms

pertaining to each of these services.

The liner services and bulk services are distinct; they provide services that are

completely different from each other and have different economic structures and they

represent two major segments within the shipping industry.21 At the same time one

cannot afford to treat the market as a series of isolated compartments.22 Further,

20 Initially the liner services were started for passengers. After a while the shipping companies found it more profitable to run cargo services and hence the cargo liners were organized and operated exclusively to carry goods. Moreover the development of air transportation which has taken away the cream out of the passenger trade and operation of passenger liners became less and less profitable. The cargo liner services became all important and have come to stay as common carriers of general cargo in various trade routes.

21 Liner Shipping companies had to maintain fleet of vessels, on an average 15 to 20 ships, to maintain regularity of seaices.:_ It should have large shore staff, p@nch office/agencies at ev~ foreign go[ls

-~- -- . . ~., - .- . -· -- ----- ----which required large scale investment. Liner shipping carried around 30% of the trade and the remaining trade was carried by tramp shipping.

22 Generally the liners and tramps operate on separate markets, and both perform a very useful and economic service to the shipper in transporting commodities from one country to the other. These two sectors have a totally different approach-the types of organizations involved, the shipping policies,

63

technological development in the shipping industry brought about the container shipping

which facilitated multimodal transport services. The transportation of containerized cargo

has become a common feature in the modem maritime transportation services which

became part and parcel of liner services. These days Liner shipping has come to be

known as container liners. Thus, the maritime transport services market can be broadly

categorized into: a) tramp services, b) conventional liner services, and c) container liner

services (multimodal services). These three kinds of services are distinct and are

governed b.y. distinct legal regimes.

Tramp services and the liner services both fall under the "first pillar" of the GATS

draft schedule. Some countries have identified them as such and made commitments

accordingly.23 Tramp shipping involves vessels carrying shiploads of bulky commodities

in loose i.e., not packaged form. There are two kinds of bulks carried in the tramp; one,

dry bulk commodities such as ore, grain, timber, coal, fertil_i~ers etc., and 24 two, liquid

bulks such as petroleum, wine, juice etc. The Tramp carrying liquid bulk is called Tanker.

They do not follow any specific route. A tramp vessel may load wheat from a port in th~

US and discharge them at London and load, s_ay, fertilizer from there to be discharged at .

Bombay Port, and from there l_2ad rice and take it to a Port i!l !}pan, and if they do pot.

get any cargo from there then ballast25 back to the west coast of the US port. The freight

rates are kept open, to be negotiated with the shipper from time to time, which fluctuate

depending on the demand and supply of tonnage because some products are seasonal in

nature such as wheat, rice, and other food grains. Tramp services are highly competitive.

If a shipper has a long term requirement for bulk transport, he may charter a ship for ten

and even the type of people employed in the two businesses are quite dissimilar. Liner companies have to organize the transport of many different parcels and need a large shore-based staff capable of dealing with shippers, handling documentation, planning the ship's loading, and through transport operations. The bulk shipping industry, in contrast, handles fewer, but much larger cargoes. A large shore based administrative staff is not required.

23 Refer Chapter III. 24 Cargo like that of grain, iron ore, timber etc, could not be shipped in consignments or parcels because

the quantity of such cargo is large enough to fill the entire ship. It was, thus, more economical to use fully chartered ships for such bulk cargoes rather than ship them as part of a mixed liner cargo. To meet such demand to transport bulk cargo, the services of tramps became necessary. Tramp ships first appeared on the world trading scene about the mid-nineteenth century, which were introduced by British Ship-owners. Throughout the period of industrial growth in the nineteenth century, tramp ships proved invaluable. The industrial countries depended on the services of tramp shipping for their supply of raw materials. It was estimated that 85% of the bulk cargo move in fully chartered tramps.

25 If no goods are loaded in the ship then the ship is filled with ballast water for balance.

64

to fifteen years. Short-term time charters may range from twelve months or three to five

years. Agricultural trade requires single cargo to be transported such as grains, sugar, etc.

The seasonal factors and volatility of the market make it difficult to plan shipping

requirement in advance. In such case the shipper prefer to charter the ship for a single

voyage, at a negotiated freight rate per ton of cargo carried.

The contract between the charterer of the ship and the ship-owner is called the

charterparty.26 A charterparty is a contract whereby a ship-owner places his entire ship or

some principal part thereof at the disposal of a merchant who is called the charterer,

either for a duration of a voyage, or series of voyages (voyage charterparty), or for a

given length of time (time charterparty). A detailed charterparty provides clear guidance

on the allocation of liability.27 There are no international conventions governing

charterparties but are forms of contract and are subject to usual requirements of law of

contract. 28

26 The early merchant shipper who owned ships loaded cargo in one port and sold it in another, and on the way back purchased goods from that port or intermediary port and sold it in his country and made huge profits. In the process the ship-owning merchants became the capitalist who built and owned more than one ship which the merchants let them on hire or charter. The contract entered between the hirer/charterer and the ship-owner was written on a sheet of paper, occupying half the sheet, and again recopy the same matter in the other half. This sheet of paper was tom-one part, retained by the ship­owner and the copied part given to the charterer. Parting of this sheet of paper or tearing it into two pieces appeared to have given the name "Charter Party" to the contract (Ram, 1969). If there were any disputes the parties had to produce their respective sheets and they were put together to make sure that they are counterfoils of the same paper. This established the genuineness of the charterparty.

27 The charterparty usually contains several stipulations as to: a) the name of the ship, b) nationality of ship, c) class of the ship i.e. sailing ship, steamship etc., d) registration class of the ship at Lloyd's, e) carrying capacity of the ship, f) registered tonnage of the ship, g) position of the ship at the date of the charterparty, h) that the ship will be ready to load by a given date, i) that the ship will proceed forthwith to the port of loading, and j) ceasser clause.

28 The terms and conditions of charterparties had been evolved over a period of years in keeping with the growth of maritime commerce and shipping industry. Organisations such as, the UK Chamber of Shipping and the Baltic International Maritime Conference (BIMCO) in Copenhagen have played significant roles in evolving internationally accepted standard charterparties. In the modem era, Charter market occupies a central place in the organization of maritime transport. The Baltic Exchange in London facilitates the charter business-a ship-owner with a vessel for hire, the charterer with cargo to transport, an agent/broker to mediate between the two; all of them come together to complete a deal-it acts as a clearing house and an established shipping centre. Now a days the stipulations in the Charter party are standardized, there are different standard forms available in respect of different commodities and cater to the peculiar conditions of the trade. These standardized forms are given short title or code names, such as Entrocon, Baltime, Gencon etc.The chambers of shipping, Baltic and International Maritime Conference have produced such standard charter party forms, from the accumulated wisdom and experience of charterers and owners dealing with the particular commodity or trade. The charterer selects the charterparty form that is most appropriate to his business, and the negotiations proceed on the basis of parties accepting to enter into the contract, in one of the standard form (Ram 1969,

65

Liner services are provided by 'common carriers'29 which carry general cargo, ~----·---~ ,_____ ...

such as, packaged items of goods i.e., goods put into packages, individual itell)s,_b_Qxes, "----- - ·'·- ~--~-- ----

. f h. . . d 30 all . d 31 I 32 1· 'd pieces o mac mery, contamenze cargo, p etlze cargo, pre-sung cargo, tqm , - --·- = -- - -- ~ ..... ,. ~ . - . - ~ ~

refiigeratedcargo, 33 large and -heavy loads etc. The cargo liners34 provide services by

calling regularly at specified ports, follow a set route, and return to their starting points

with whatever inbound cargo they can get, and be ready for the next sail; provided

certainty of date of arrival and return from particular port; liners lifts few kilograms of

cargo at the same rate as few tons of cargo (Couper, 1972). Managing liner services

requires mass of paper work; loading the cargo into the ship in such a way that ensures

that it is not damaged, and at the same time accessible for discharge, 35 running the ship

with punctuality while allowing for all the normal delays arising from adverse weather,

breakdowns, strikes, etc. All of this is management intensive-the skills, expertise, and

organizational requirements are very different from that of tramp services.

4.1 Tramp Services: Some Legal Issues

There are two main legal issues relating to tramp services, which the negotiators

at the WTO should take note of while negotiating maritime services annex. The first issue

is relating to th~ registration of ship, some countries in their national schedule of

commitment have specified in the market access column, that only locally registered

shipping companies with majority local shareholding would be allowed to register their

ships in their countries; the second issue is also related to first issue, that is, registration

Stopford, 1988). 29 Common carriers are sea-going vessels, that hold themselves out as being ready to carry goods from the

public at large and are available for carrying number of shipments received from different shippers, for delivery at different ports of destination along the ships' route. Where as tramps house just one single kind of cargo, for instance, as ship full of wheat or rice or coal or a tanker full of petrol.

30 Standard steel boxes, usually measuring 8 feet wide, often 8.5 feet high, and 20, 30 or 40 feet long, are filled with cargo.

31 Cargo packed onto a pallet for easy stacking and fast handling. 32 Small items such as planks of wood lashed together into standard size packages. 33 Cargoes that are perishable which need to be shipped chilled or frozen, in insulated holds or containers. 34 There were two kind of liners: 1. cargo liners and 2. passenger liners. 35 It is the Liner ships' duty to take care to avoid stowage of edible items with crushed bone or

chemicals, lest edible items be contaminated or spoiled, and also to arrange special ventilation for combustible cargoes like cotton or oilcakes, and careful handling of fragile cargoes like crockery. These cargoes have to be collected and stowed carefully according to the port of discharge. Liners serve small shippers as well as medium shippers. The transport of a mass of small items on a regular service, faces the liner operator with a vastly more complex task, than the one facing the bulk ship-owner.

66

of hired ships or chartered ships. 'Rental of ship with crew' is construed as services under

maritime transportation services by the classification list MTN.GNS/W/120, and based

on this listing several countries have made commitment on 'rental of ship with crew.' 36

Thus, it is a pertinent issue to be discussed at this juncture with respect to the "first

pillar."

4.1. a. Registration of Ships

Ships on the high seas are subject to the law of the flag state and this makes it

necessary, that every ship which is lawfully on the high seas should be registered in a

state so that it has a nationality. Unless it has a flag (nationality) it is liable to be captured

as a pirate ship on the high seas. The registration process makes the ship an extension of J•" ~·-· • -

national territory, while it is in international waters (Singh, (1962) Anand (1983)).

Registration of merchant ships as a means of bestowing upon the ships the British

nationality was recognized in the UK ever since 1660, when the 'Charta Maritima'

(Navigation Act 1660) was passed (Agarwal, 1973). By registration, a ship was

recognized as a British ship by law and thus entitled to fly the British flag, and eligible to

claim the "benefits, privileges, advantages or protection usually enjoyed by British

ships.37 With the passing of time and the progress of international law, registration gained

international significance. The Act of registration traditionally constituted a grant of

nationality, the flag being prima facie or visible evidence of registry.

Identification of national character of a ship, with high certainty and precision,

was required for the implementation of jurisdictional principle. For that purpose each

State had imposed upon itself, responsibility to ascribe its nat~onal character to ships f?r -------~

the lawful conduct of ships and for the interaction in the .high seas (M~Dougal, 1960).

The mode by which national character was traditionally been conferred upon vessels by

the simple act of a State making formal attribution through appropriate registration and

documentation. The expressed manifestation of this attribution was seen when a State

confers upon a ship the right to fly its flag, by which the State extend certain rights and

privileges (McDougal, 1960). The principal responsibility for the effective application of

36 Refer chapter IlL 37 The UK Merchant Shipping Act 1854, s./06 and Merchant Shipping Act 1894, s.72 (Agarwal, 1973 p.

14).

67

standards lay down in international instruments, rests upon the authorities of the State

whose flag a ship is entitled to fly.

Historically, there are different criteria through which a State could bestow a

national character upon a vessel and practically, the States possess unlimited discretion in

their choice of criteria. An examination of national legislations reveals that, States had

adopted one of the three criteria in the attribution of national character to ships.

Traditionally each State has exclusive competence to determine the conditions for the

ascription of its national character to vessels, and because of this reason the states have

adopted either of the three criteria for conferral of national character: 1) Closed Registry:

It is the practice where a State bestows national character only to ships wholly owned by

its citizens and manned primarily with national crew. 2) Hybrid form: It is a modified

version of closed registry, where ownership and manning requirements are limited only

to the majority of flag State's citizens. The hybrid form represents an attempt to reconcile

the extreme exigencies of both the closed and open registry. 3) Open Registry: It is the

practice where a State allows the conferment of national character upon ships regardless

of ownership, control, and manning (Tache, 1982).

The open register was set up by some countries with the specific aim of offering

ship-owners internationally competitive terms, often as a means of earning revenue for

the flag state.38 The primary aim of any shipping company is to enhance fiscal advantage,

38 The terms and conditions offered by open registers vary considerably, depending upon the policy of the country concerned. The use of an international open register generally involves payment of an initial registration fee and an annual 'tonnage tax,' which enable the ship to cover its cost and make profit. In tum, the registering country offers a legal and commercial environment, specifically designed to suit a ship-owner trading internationally. In general, the open registers do not impose tax on profits but subscription tax on registered tonnage. The ship-owner has complete freedom with respect to the recruitment of crew and their working conditions: shipping companies are given complete freedom over their corporate activities such as, appointment of directors, administration of business etc.; safety standards are also kept flexible. Some registries are highly professional and enforce international conventions on safety, whilst the others are less vigilant, allowing ship-owners to cut comers. When a company registers a ship in a pai1icular country, it becomes subject to that country's laws such as: the liability to pay tax, organization of the company, auditing accounts, employment conditions of the crew, limitation of liability etc. If the country of registration has ratified, say, 1974 SOLAS Convention, then the ship is subject to safety regulations laid down for the construction and operation of that ship. If that country has not ratified this convention or does not have any means to enforce it, then it may allow ship owners to cut comers, thereby saving on equipments and maintenance (Stopford, 1988). Depending upon the circumstances, any of these factors may be sufficient to motivate ship-owners to seek a commercial advantage by changing their flag of registry. The FOC generates revenue for the host country in the form of fees, transactions and services provided to ships which augment foreign

68

maximize revenue, and minimize costs.39 Therefore keeping in mind the competition in

the market, a ship owner carefully chooses a flag for his ship--a convenient flag from the

open registry country. The use of open registry thus came to be known as 'Flag of

Convenience'(FOC).40 This system became popular after the World Wars41 and was

introduced with the assistance of the United States. There were politico-economic

imperatives.42 The FOC registry had doubled over the past years and more than fifty

exchange, given the paucity of their financial resources, which is a significant income. 39 The economics of running a merchant ship depends on crew costs, maintenance standards, and taxation

level-all of which depend on the laws governing ship's registration. Due to interdependence between legal regulation and ship operating economics, the choice of registry has become a major issue for ship­owners. Economics became the decisive factor that determines the flag of ship it flies (Sakhuja, 2003).

4° Flag of Convenience has otherwise been called 'flag of necessity', 'free flags', 'flags of opportunity', 'piratical flag', 'facilitating flag', 'shadow flags', 'cheap flags', 'flag of accomodation', and so on (Metaxas, 1985 p.l4). Changing registry is not a new issue but has a long history, ship-owners from time to time for various reasons have changed their registries, but this has gathered momentum during the Twentieth Century as taxation and regulations have come to play an increasing part in the ship­owners' commercial operations. The FOC system dates back to the Roman Empire (Stopford, 1988).

41 It was created by the Europeans and perfected by the Americans. During pre and post-Napoleonic war, certain European powers registered elsewhere in neutral parts of Europe or even abroad to avoid capture and seizure. Then came both American War of Independence and American Civil War during which Panamanian Registry was created. By the First World War, the practice had been perfected. The then allied traditional maritime nations registered in neutral territories, to avoid German torpedoes and capture. Ademuni-Odeke (1988), p.77.

42 In 1920s, when the United States Merchant Marine declined both in size and in tonnage carried, while its foreign competitors were expanding, the American ship-owners were given greater freedom to transfer their ships to foreign registry, prior to that such transfers were prohibited under the Shipping Act 1916. This Act was amended in 1920 allowing such transfers, with the full approval of the US authorities American ships were transferred to Panamanian Registry and sailed under the Panamanian flag (Metaxas, 1985 p.l 0). US ship-owners saw registration under the Panamanian flag as a means of avoiding the high tax rates in the US, while at the same time registering in a country within the stable political orbit of the US. Between World War I and II, permission to transfer was obtained easily. In 1940-41 when the Neutrality Act forbade US ships from sailing to belligerent ports, the Administration encouraged the transfer of American ships to the Panamanian and Honduran registry (Stanford Law Review vol.5, 1953, p.797). Shortly afterwards, Panama adapted its laws to attract ship-owners from anywhere in the world, and thus the two international open registers were established (Stopford, 1988). Thus, Panama and Honduras became the chief recipients of vessels not only from America, but also from European countries (Argiroffo, 1974). (also see 'Under Two Flags-Foreign Registry of American Merchantmen,' a note in Stanford Law Review, vol. 5, 1952-53, pp.798-813). Later Liberia joined the two countries as a home for American Shipping, after the Second World War, when the US government sold off Liberty ships to private ship owners, anxious to avoid operation under the American flag because of stringent laws and high running costs. The cost of running a tanker under the American flag is 25% higher than under foreign flag, higher labour costs are perhaps due to the higher American standard of Jiving, American flag vessels are required to get their repairs done in the US, which is double the world market or pay 50% duty on all foreign repairs. The US tax lawyers on behalf of the ship-owners approached Liberia to set up an advantageous regime for ship registration, and the registration conditions in Liberia were developed specifically to attract the US ship-owners, to register under that flag on the payment of an annual fee. Later Costa Rica came up with its open registry in 1953, Lebanon in 1960, Cyprus in 1966, and Somalia and Singapore in 1968 (Metaxas, 1985 p.J7), and many countries started to follow their example and set up open registry. Among 30 FOC registries, Bahamas, Liberia and Panama are known to possess large merchant fleets accounting for about half the

69

percent of world shipping is registered under FOC.43

4.1. b. Open Registry

Time and again this issue of open registry caught the attention of the international

community. This issue was discussed in various international forums, first in the labour

forum (Internationsl Labour Organisation (ILO)) in the 1930s and in 1940s,44 and then in

the technical forum (International Maritime Organisation (IMO)) in 1959-60, and later in

an economic forum-UNCTAD for a very long time from 1965 till 1986, when the

UNCTAD came up with a Convention on Registration of Ships (Ademuni-odeke, 1988).

total percentage of global merchant shipping tonnage. The FOC posed many unsolvable shipping problems: 1) International conventions relating to merchant shipping would not apply to Liberia, Honduras, and Panama tonnage, unless these countries ratify those conventions. This is irrespective of the fact that their ship-owners are nationals of the states, that have ratified those Conventions. 2) The expansion and existence of flags of convenience fleet, it is thought, exerts a considerable downward pressure on freight rates and puts at a disadvantage those ships registered in high-tax countries (Agarwal, 1973). Flag hopping has become common practice these days, ship owners tend to switch registry at the first sign of a crackdown by authorities for engaging in activities involving gun running, drug smuggling, transporting illegal cargo, or human trafficking.

43 Nearly 60% of tankers transporting oil worldwide operate under FOC (Sakhuja, 2003). This growth has been of concern to several countries, labour unions and federations. This system was opposed by several countries. Labour unions in the US, Europe, Australia, and Japan have accused shipping companies resorting to FOC registry and take advantage of lax laws, thereby compromising on safety regulations and violating labour Jaws. They accused FOC countries for being safe havens for tax evaders and unhealthy ships.Sakhuja, (2003) http://www.itf.onz.uk/seafarer/foc/Body foc .. htm.

44 In the past, when ships were owned and registered in the same country, they were. also crewed by people from that country, who could turn to their own national trade unions, not only for the establishment and assurance of decent working conditions and wages, but also in the event of difficulties. On international FOC vessels, however, seafarers no longer have this basic right. Hence on board regulation is arbitrarily set by company policy, whose main goal is profit making. The use of international open registers give ship-owners greater freedom in their crewing arrangements. The system has been opposed by the seamen's unions, particularly the International Transport Workers' Federation (ITF). Thus, the ITF appealed to the ILO in 1946 to caiTy out an investigation into the social conditions and safety of seafarers in the FOC vessels, and the ILO thorugh its Joint Maritme Commission CaiTied out the investigation and prepared a report in 1947 which achieved very little (Metaxas, 1985, p.53). In 1954 the ITF again asked the ILO to take action, the Joint Maritime Committee again examined the question in 1955, and it was placed in the agenda of the 1958 ILO Conference. In the meanwhile, the ITF organized a worldwide boycott of the FOC vessels in December, 1958. The ITF produces a recommended wage scale and issues a blue card to the master of ships employing crews paid on this scale. If the master cannot produce the blue card, the unions may attempt to black list the ship (Stopford, 1988). The boycott led to a series of legal disputes in the American comts, which culminated in a decision of the US Supreme Court in February, 1963 which left an important consequence on the conflict between the labour unions and the FOC ship-owners. The Court baiTed the US National Labour Relations Board from exercising jurisdiction over ships under foreign flags, even though the owners might have financial ties with the American Companies. This decision was a setback for the labour unions against the FOC ships. Further, activities of the labour unions were concentrated on indirect pressure through the ILO and other bodies. Thus the ILO came up with two Recommendations in 1958 i.e., Recommendation No. 1 07-the Seafarers Engagement (Foreign vessels) Recommendation, 1958, and Recommendation No. 108-the Social Conditions and Safety (Seafarers) Recommendation, 1958 (Metaxas, 1985 p.55).

70

A brief examination of the deliberations of the international community on this issue is

dealt with in the following sections.

In 1958, the United Nations called the first United Nations Law of the .S€a

Conference (UNCLOS-1),45 which eventually finalized four treaties. 46 The Treaty on the

High Seas, one of the four treaties, defined the high seas and established the rights of the

vessels flying a particular flag to proceed without interference from other vessels. This

convention also took the first step towards establishing on an internationally accepted

basis, the terms on which, nationality could be granted to a merchant ship and the legal

status of that ship.

Article 5 of the 1958 Convention states that:

"Each state shall fix the conditions for the grant of its nationality to ships,

for the registration of ships in its territory, and for the right to fly its flag. Ships

have the nationality of the state whose flag they are entitled to fly. There must

exist a genuin~ _ _link between the State and the ship; in particular, the State must

effectively exercise its jurisdiction and control in administrative, technical and

social matters over ships flying its flag."

This paragraph was the end-product of a heated debate about whether countries

such as Liberia, Panama, and Honduras had the right to establish open registries. In 1957,

Liberia, Panama, Honduras, and Costa Rica taken together had over 13 million GRT of

shipping under their flag. Against this background, the UK Chamber of Shipping was

alarmed and said, 'it is about time something was done about it' (Metaxas, 1985 p.48).

Under customary international law, ships were regarded as part of territory of the

flag state-an extension of the country or floating island. Registration, therefore,

operated as a bridge between the ships and the mainland and extended nationality rights

to the ship. Vessel registration serves as a legal institution linking a ship to a State and

indicating that State as the State of nationality. The flag state or the state of registry, has

the right to exercise jurisdiction over the ship, is responsible for it, and has the right to

45 Entered into force on 30 September 1962. 46 Dealing with: High Seas; The territorial seas and Contiguous Zone; Continental Shelf: and the

Conservation of Fisheries.

71

protect it.

International lawyers, Philip Jessup and Max S0rensen, have noted that the --- ------- ··---- ~- ------·~.-v ~-- ' '

genuine link theory applied by the International Court of Justice (ICJ) with respect to an

individual in the Nottebohm Case,47 could easily be utilized internationally to determine

the national character of corporations and ships. In the opinion of Watts (1957), a flag

state should not be allowed to "protect" its ships, until it has been established that there

exists between them, a "strong link" or a "real and effective link" or at least an "effective ··-.......

link." The 1958 convention also provides that: "in particular, the State must effectively ....___ ____ ""')

exercise its jurisdiction and control in administrative, technical and social matters over

ships flying its flag" (Art. 5). In case a flag state does not assert sufficiently effective

control over the ship in any of the matters such as, administrative, technical or social

could be challenged; but the convention no where specifies the meaning of "effective"

'jurisdiction" and "control", or for "administrative, technical and social matters."

Moreover, the Convention also leaves it unspecified as to who is to apply the requirement

and what sanctioning consequences are to be attached to failure to conform (McDougal,

1960). The customary laws also do not provide a reliable guidance; it is again left to

every state unilaterally to determine the applicable standards and appropriate sanctions

(McDougal, 1960). Active jurisdictional control requires a meticulous and consistent

application of enforcement measures. The phrase "in particular" in Article 5( 1) injected a

dichotomy into the meaning of genuine link; namely, legal and functional. Legally, all

that is required of a flag state to establish genuine link is the conferment of national

character on a ship. However, the flag state has a secondary duty, functional in nature, to

effectively exercise jurisdictional control over the internal affairs of the ship. Unlike the

legal component, the functional is not a precondition for the recognition of national

character. The functional is an implied duty accepted by the flag state vis-a-vis the

international community. Control over ownership is neither relevant nor necessary to

exercise this functional duty (Tache, 1982). The functional duty falls within the

discretionary authority of the flag state. In the absence of an internationally accepted

standard, any attempt to dictate the functional component would amount to interference

47 Nottebohm Case (second phase), Judgement of April 6, 1955, JCJ Report 4. Also AJ/L vo/.49, 1955, p.396.

72

in the internal affairs of a State (Tache, 1982, p. 306).

Here, the right of flag state to grant nationality to whomsoever it chooses to, was

not questioned, nor that the flag states have failed to issue required document is

questioned, but rather doubt the inability, unwillingness, or failure of some flag states to

accept the broad corresponding international obligations and duties as a flag state.

By the late 1950s, the Panamanian and Liberian fleets had reached 16 million

GRT and international open registers were becoming major issue for the established

shipping states. Inevitably the question was raised: 'has a country such as Liberia have

the right to offer registry to a ship-owner who is not a national of that country?' This

issue was formally discussed under the technical forum-Inter-governmental Maritime

Consultative Organisation (IMCO). This question was put to test in 1959, when the first

Assembly of the newly formed IMCO met in London to elect 14 members for its

Maritime Safety Committee (MSC), as specified in Art 28(a) IMCO which provided that:

the Maritime Safety Committee must consist of 8 largest ship owning countries and the

reminder from nations with an important interest in maritime safety, or supplying largest

number of crews, or carrying largest number of berthed and unberth_ed passengers, or of a

major geographical area. At the time of electing 8 largest ship owning nations on 15

January, 1959 the Assembly did not elect Liberia and Panama though they were third and

eighth largest ship owning nations respectively because they were open registry or flag of

convenience countries, and there was no genuine link between the country and the ship-

owner.

Initially the eight nations elected were: the US, the UK, Norway, Japan, Italy,

Netherlands, France, and West Germany. It was, however, objected that Liberia, which

ranked third in world tonnage, and Panama, which ranked eighth, should have been

elected instead of France and Germany. The dispute was finally submitted to the ICJ for

an advisory opinion in 1960, whether the election was in accordance with the 1948

Convention of IMCO. It was argued by the European ship-owners that for a ship to -register in a country, there had to be a 'genui~e link' between the registration and

ownership, and that in the case of international open registry flags this link did not exist.

Predictably Liberia, Panama, India, and the US took the opposite view. The European

73

argument was not accepted. The Court did not deal with the issue of open registry or flag

of convenience but it considered the natural meaning of Art. 28(a) and by 9 to 5 vote the

court held that, the Assembly cannot refuse membership to Liberia and Panama because

of the fact that both these countries fall within the first 8 largest registered tonnage. The

court said categorically that the Assembly, by not electing Liberia and Panama to the

MSC, had failed to comply with article 28(a) of the IMCO convention. As a result,

international open registry flags were legitimized in international law.

Later, the concept of the need for a 'genuine link' came to be recognized in the

1982 UN Convention on the Law of the Sea (UNCLOS III), but again the convention did

not define the term 'genuine linlc ' 48

Ships are mobile and can be bought and sold while on the high seas. Similarly

their cargo too can change hands while the ship is still transporting them. Transfer of

registration from one flag registry to another is also done while the ship is on high seas.

Some FOC countries offer on-line registration without any verification of the owners to

establish link between owner and the flag state. Ships operate in international waters,

outside the jurisdiction of nation-states. Though governed by the internationally accepted

UNCLOS, there exist no apparatus to monitor various international conventions

governing activities on the high seas, and therefore their enforcement became weak

which became even more difficult when ships operated under the FOC. Under the FOC

regime, shipping companies do business in places where their ships never even visit and

under whose rules they ostensibly operate. The crew contracts specifically state that, they

are subject to the laws of the country in which the ship is flagged.

Although the concept of the genuine link had been embodied in the 1958 Geneva

Convention and the 1982 Law of the Sea, its components had never been identified. Thus

the concept formed a sound basis for discussion and decision making within the

UNCTAD, and it was left to the UNCTAD Secretariat to define the term 'genuine link'

and to deduce the necessary conclusions and recommendations.49 The debate over

48 Article 91 of UNCLOS III stipulates the requirement of a 'genuine link' between the ship and the flag state, which implied that every shipping company must therefore register its ship under a flag, i.e. in a State.

49 This issue came to be discussed under the UNCT AD for a very long time from I 965 till 1986, when it

74

\ J ' '\' )' ~,, ~-

genuine link had become one of 'economic link' in this forum. The economic link

essentially consists of economic pre-condition for registration, and effective control is

only possible if there is economic link between vessel and the State.50 Thus, the .·-------· --'

UNCTAD Convention on Registration of Ships came into being in 1986. But the matter ....___.______ . -- _ _, ______ ... . . is still not clarified and a legal vacuum lingers. A brief examination of the 1986

Convention is essential because as and when this convention comes into force, there

could be some clarity on this issue.

The aims of this convention were to introduce new standards or responsibility and

accountability for world shipping generally and the FOC operations in particular. Articles

8, 9 and 10 which, inter alia, provide for participation by nationals of the flag state in the

ownership, manning and management of ships-thus establishing the key economic link

between the ship and the flag state which have constituted the missing link in the hitherto

legally oriented practice of genuine link. But a major loophole was created by Article 7

which makes the 'owners~~p' and 'm~ing' _3p_tional. It was justified stating that an

element of flexibility was introduced to take account of the different conditions

prevailing in flag states: that some countries might lack sufficient manpower among their

nationals in the crews of ships flying their flag; while others might not have sufficient

capital to participate effectively in ship-ownership. This Convention which was intended

to curb the FOC registry ended up legitimizing its continued existence through the Article

7 (Ademuni-Odeke, 1988).

Another important provision in this convention is Article 5 which requires the flag

states to establish a competent and adequate national maritime administration for

registration of ships. This was aimed at the existing practice of FOC vessels, e.g. Liberia

which has always had its registration office in New York (USA).

The developing countries were unhappy about this 1986 Convention. The main

thrust of their criticism was that it favours the traditional maritime power, the FOC ---- --~·-·---·-operators, and its beneficiaries, To the beneficial owners and true managers, the treaty

50

. ·- ----------·· -came up with a Convention on Registration of ships. The UNCTAD Shipping Division carried out detailed study of the issue and indicated that the FOC be 'gradually and progressively' phased out (UNCTAD, TD/B/AC/168). The economic link was initially proposed by the International Law Commission GLC) in 1950-55, before the 1958 Geneva Convention which provides merely a legal link as opposed to economic link.

75

has legitimized their ability to exploit the glaring inequality that has for long existed in

international shipping (Ademuni-Odeke, 1988). Though there are three international

instruments all covering various aspects of FOC operations and the search for genuine

link, yet none has confronted the issue at its roots. While the legal vacuum remains, the

compliance of international standards by sea going merchant vessels are being dealt with

administratively in each country through Port State Control (PSC) measures.51 Countries

have entered into regional Memorandums of Understanding on Port State Control (MoU

on PSC) to curb the menace caused by the FOCs.52

'------ -···- ~ ---Port State Control (PSC) implies that the Port authority of a jurisdiction inspects

ships visiting its ports. If it was found that the ship has not complied with the

international standards prescribed in the International Conventions, the ships could be

impounded. Arrest of ships cause great loss to the ship-owners and therefore they are

compelled to comply with international standards, even if their flag state has not made

the ship-owners obliged to do so.53 Thus the maritime nations have dealt_with- the legal

gap with respect to FOCs and the problems caused by those ships in the trade.

4.1. c. Registration of Chartered/Rented ships

'Rental of ship with crew' is one of the sub-sections, in the maritime transportation

51 PSC measures are intended: a) to increase maritime safety, to prevent the operation of substandard ships. For that purpose an improved and harmonised system of port State Control and strengthening co­operation and exchange of infrormation, b) to inspect foreign merchant ships visiting the ports of its state, c) to monitor these inspection activities and its effectiveness throughout the region,through a Committee appointed under the MoD of PSCs, and d) to consult, co-operate and exchange information among the port authorities.

52 There are several MoDs on PSCs, some of them as follows: 1) Memorandum of Understanding on Port State Control in the Asia-Pacific Region, signed between the Maritime Authorities of Australia, New Zealand,Canada, Papua New Guinea, Chile, Philippines, China, Russian Federation, Fiji, Singapore, Hong Kong, China, Solomon Islands, Indonesia, Thailand, Japan, Vanuatu, Republic of Korea, Viet Nam, and Malaysia. 2) West and Central Africa Memorandum of Understanding on Port State Control (Abuja Mou), signed between the Maritime Authorities of Angola, Benin, Cameroon, Cape Verde, Congo, Cote d' Ivoire, Gabon, Ghana, Guinea, Equatorial Guinea, Liberia, Mauritania, Namibia, Nigeria, Senegal, Sierra Leone, South Africa, The Gambia, and Togo. 3) Memorandum of Understanding on Port State Control for t..!:Jf_l.nd~ Region, signed between the Maritime Authorities of: Australia, Bangladesh, Djibouti, Eritrea, Ethiopia (Observer), India, Iran, Kenya, Maldives, Mauritius, Mozambique, Myanmar, Oman, Seychelles, South Africa, Sri Lanka, Sudan, Tanzania, and Yemen.

53 My field trip interview with Capt. Deepak Kapur, Nautical Advisor, DG Shipping, Bombay, informed that these days the administration is not bothered about the FOC ships any more; they are not bothered whether a particular ship has 'genuine link' with its flag state or not, or even if the UN convention on Registration of ships comes into force or not: they have found a solution to the problem through the Port 11 State Control (PSC) measures. J

76

services m the MTN.GNS/W/120 classification list of the GNS. Many countries

undertaken commitment in this sector, without considering the market structure and legal

issues relating to this particular sub-sector. 54

A ship-owner places his entire ship or some principal part thereof at the disposal

of a merchant who is called the charterer, either for a duration of a voyage, or series of

voyages (voyage charterparty), or for a given length of time (time charterparty). There

are two kinds of charterparty:55 a) charterparty not by way of demise 56 and b) charterparty

by way of demise, also known as Bare Boat Charter Demise (BBCD). From the ship­

owners' point of view, the main difference between these types of charterparty is the

degree of ship-owner's involvement in the shipping operation, the division of cost, and

the extent to which the cargo to be transported is specified in the contract.57

54 Refer chapter III. 55 There are no international conventions governing charterparties but are treated as forms of contract and

are subject to usual requirements of law of contract. 56 Time charter and voyage charter fall in this category. There is also Consecutive Voyage Charter Party,

which means a ship undertaking series of voyages and presenting itself with dispatch and expedition for a second voyage immediately after she has discharged the cargo of the first voyage. If the ship gets some cargo at the port of discharge and makes a trip to some other port before it comes to pick up the cargo for a second voyage, it would not be doing a consecutive voyage. Therefore, in a consecutive voyage, a charter ship will have to take its chance in getting some immediate cargo from the port of discharge to the port of loading, and whenever this is not available it has to ballast. The cost of ballasting back will be reflected in the freight rates, which will be worked out on the basis of the ship carrying the cargo only one way (Ram, 1969 p.l33).

57 Under Voyage Charter Parties, the possession and control of the ship is not transferred to the charterer. A single-voyage charter is generally used by the shipper who has a specific cargo to ship by sea and does not wish to become involved in the shipping operation. The shipper who is not conversant with the shipping trade and does not want to get into it, would always prefer a Voyage Charter.Whereas, under Time Charter, the ship-owner lets out the vessels to a charterer for a period of some months or few years. In Time Charter, the contract between the owner and the charterer is for the use of ship and ship's crew for a specific period of time, that may range from few months to few years. Under this type of Charterparty, the ship-owner places the ship along with the crew and equipment, at the disposal of the charterer, for which he is required to pay more. The charterer decides the type of cargo and the voyage. The charterer is responsible for supplying the ships with the bunkers and for the payment of cargo handling operations, port charges, pilotage, towage, and ship's agencies. The technical operation and navigation of the ship remain the responsibility of the ship-owner. The possession and control of the ship are not transferred to the charter and the ship-owner exercises these rights through the master and crew who are employed by the ship-owner. The time charter transfers many of the expenses and commercial responsibilities to the charterer from the ship-owner. During that period, the ship-owner continues to pay the operating costs of the vessel (i.e. crew, maintenance and repair), but the charterer directs the commercial operation of the vessel and pays all voyage expenses (i.e., bunkers, port charges, and canal dues) and cargo handling costs.Time Chartering is usually resorted to when the charterer desires to operate a vessel for a period of time, without undertaking either the financial commitments of ownership, or responsibilities of navigation and management of the vessel. While under voyage charter, the owner undertakes to provide a vessel for the carriage of specific goods on one or several voyages between the named port; whereas under time charter, the owner undertakes to place the vessel at the

77

A point of distinction between time charter and voyage charter is the basis for

calculating hire or freight. In the case of voyage charter, freight is paid on the cargo

carried and is directly proportionate to the volume of cargo. In the case of time charter,

the volume of cargo has no relation to the charter hire which is fixed on the basis of

carrying capacity (deadweight tonnage) of the ship, and is directly proportionate to the

period of charter. One usual clause in the time charter is that, the charterer shall not be

required to pay hire for such time as is caused by breakdown of machinery, or repairs, or

other factors which are attributed to the owner; such clause is known as "off-hire"

clause. 58

Under Demise or Bare Boat Charter Parties, 59 the opposite end of the spectrum is

reached from the voyage charter, in terms of the involvement of the ship-owner in

operating the ship. It contemplates arrangement between the ship-owner and the

Charterer, analogous to the arrangements between a landlord and tenant for leasing real

estate property for long term. The Charterer employs the Maste: and the crew60 with ~

the fixed and variable expenses in connection with the operation and is in complete

control of th~ ship during the entire period covered- by the Charter. Under this

arrangement, the ship-owner hands over the vessel to the charterer who manages the

vessel and pays all operating and voyage expenses, and the Master and the crew are

servants of the charterer, and the possession and control vests with the charterer.

The Bare Boat Charter meant the charterer stepping into the shoes of the owner

and discharging all functions of the owner. A Charterer who has to move large quantity

of goods continuously for a long period of time, thinks of a Demise Charter because he

disposal of the charterer for a period of time, during which the charterer would be free to employ the vessel on his own account. The charterer takes the substantial part in the operation of the vessel and becomes liable for the costs which are directly incidental to the voyages on which he employs the vessel, such as cost of bunkers, port charges, loading and unloading charges etc., while the owner meets the operational costs such as wages, provisions, stores, insurance, repairs, survey, and also other fixed costs like depreciation, interest charges etc.

58 The two standard forms of time--charterparty in common use for purposes of the Indian trade are the Bimco Uniform Time Charter (Code name: Baltime) and the New York Produce Exchange Time­Charter (Code name: New York Produce). Parties have the option of using standardized Time Charter Party Forms such as: "The New York Produce Exchange Form," "Forms of 1921, 1931 and 1946," "Baltic International Maritime Conference Form," and the "Baltic and White Sea Conference Form."

59 Demise Charter is British terminology whereas in the US it is known as Bare Boat Charter. The bare boat charterparty commonly used in India is the standard "Barecon" charterparty (Singh, 1979).

60 As a matter of convenience, the Charterer may take all the crew member already employed by the ship­owner, and assume responsibility of paying them.

78

does not want to invest large capital in building or buying ships as, this capital can be

used better elsewhere by him. There may be tax reasons too. The Demise Charter hire

could be considered as his expenses and a Charterer may have certain advantages by

operating in such manner. In times of war, Governments who require control of large

number of shipping tonnage had been chartering quite a number of ships on Demise

Charter, because requirement is only temporary, and there is no need to acquire ships for

permanent requirement. Sometimes, bareboat charter serves as "hire purchase" contract

i.e., contract for the purchase of a vessel on installment basis. Under such a contract, the

owner/seller retains formal ownership and thereby security in the vessel, until the full

purchase price is paid. Bare Boat Charter hire is relatively low and the Charter hire is

settled on a monthly basis (in Time Charter it is payable in advance). The cost of marine

and cargo insurance is paid by the Charterer, but the Hull insurance is still paid by the

owner of the ship, because his interest in the ship is not yet lost.

If the charterparty is a charterparty by way of demise, the master and the crew are

servants of the charterer for the duration of the charterparty; consequently, where the

goods of other shipper are shipped on board the ship, the bills of lading are signed by the

Master as the servant of the charterer, not of ship-owner; and each contract of

affreightment is between the shipper and charterer. In such case, the charterer is the

carrier of the goods shipped and is liable accordingly to the owner of the goods. As

regards the charterer's goods shipped on the ship, the charterer is carrying his own

goods. 61

There IS no international convention governing charterparties, although a

charterparty document is of a truly international character.62 There are number of terms

61 In a charterparty not by way of demise, the master and crew are servants of the smp-owner: and the ship-owner is the carrier both of goods of the charterer and those of other shippers. The bills of lading are signed by the master as agent of the ship-owner, and the contract of affreightment is made between the shipper and the ship-owner. Both under the Voyage Charter and Time Charter, the owner takes part in the management of the ship. In a Demise Charter, his interest is only in receiving the hire payment and getting back his ship in good condition at the end of the lease period. All obligations arising out of the ownership of the ship are transferred except the reversionary rights of owner.All the Charter Parties invariably provide for a survey both at the time of delivery and redelivery. The Demise Charter also provides for periodical joint inspection of the ship, because the ship-owner still has interest in the prope11y, and is anxious to ensure that his property is not damaged or spoiled beyond reasonable limits.

62 The terms and conditions of charterparties had been evolved over a period of years in keeping with the growth of maritime commerce and shipping industry. A detailed charterparty provides clear guidance

79

such as "lay time," "lay days,"63 "dispatch," "demurrage," "notice of readiness," "safe

port" etc.,64 which are commonly used in the charterparties.65 Bare Boat Charter Demise

on the allocation of liability. The charterparty usually contains several stipulations as to: a) the name of the ship, b) nationality of ship, c) class of the ship i.e. sailing ship, steamship etc., d) registration class of the ship at Lloyd's, e) carrying capacity of the ship, f) registered tonnage of the ship, g) position of the ship on the date of the charterparty, h) that the ship will be ready to load by a given date, i) that the ship will proceed forthwith to the port of loading, and j) ceasser clause. Organisations such as, the UK Chamber of Shipping and the Baltic International Maritime Conference (BIMCO) in Copenhagen have played significant roles in evolving internationally accepted standard charterparties. In the modem era, Charter market occupies a central place in the organization of maritime transport. The Baltic Exchange in London facilitates the chaiter business-a ship-owner with a vessel for hire, the charterer with cargo to transport, an agent/broker to mediate between the two; all of them come together to complete a deal-it acts as a clearing house and an established shipping centre. Now a days, the stipulations in the Charter party are standardized, there are different standard forms available in respect of different commodities, and to cater to the peculiar conditions of the trade. These standardized forms are given short title or code names such as: Entrocon, Baltime, Gencon etc. The charterer selects the charterparty form that is most appropriate to his business and the negotiations proceed on the basis of parties accepting to enter into the contract in one of the standard form (Ram 1969, Stopford, 1988).

63 The time allowed to the charterer for loading and discharging a ship is called "lay days." Lay days are reckoned either by running days or working days. Running days are consecutive days, running from one date to another without any break or exception. "Working days" are those days on which it is usual to work at the port, Sundays and holidays are not being counted as lay days. "Weather working days" are all working days on which the weather allows work being done at the port.

64 In a voyage charter, the time spent by the vessel at the port is of particular importance to the ship-owner because the freight is fixed only with reference to the quantity of cargo carried, and any undue detention during which he continues to incur fixed overhead charges such as depreciation, insurance, interest on invested capital, wages etc., has an effect of reducing his calculated profit. He is therefore anxious to limit the vessels' stay in port to the shortest possible time. An important clause in voyage charter party is the one stipulating the maximum time to be allowed for cargo loading and discharging operations, i.e., the 'Jay time'. The provisions of the charterparty usually state the Jay time is to commence at a specific time after notice of readiness has been given. These dates are usually stated in the charter party .If the 'lay-time' at the port specified in the charter party is seven days but the time counted in the port is ten days, the owner submits a claim for three days demurrage to the charterer. Demurrage is payable at a daily rate, the rate being levied pro-rata for any period less than a day. Demurrage is not payable for extraneous causes specifically defined in the charter party e.g,. riots, strikes etc. Conversely, if the ship spends only five days in the port, the charterer will submit a claim for two days 'despatch' to the owner. The rate for 'despatch' and demurrage will be given in dollars per day in the charterparty.In order to give an incentive to the charterer to try to bring actual loading/discharging time below the laytime and thereby effect savings to owner, the voyage charter party usually provides for payment of "despatch" money to the chaiterer for the time that is thus saved. In other words, despatch money is opposite of demurrage and is a reward payable to the charterer for completing loading and discharging, faster than stipulated under the charterparty. Customarily, despatch money is fixed at 50% of the agreed rate for demurrage. Under the voyage charterparty, it is the duty of the ship-owner to send the ship to the agreed or usual place of loading. He must then give notice to the charterer that the ship is ready to load. When these conditions are fulfilled, the vessel is an "arrived ship", and the "lay-days"usually begin, and the charterer will be ordinarily bound to load the cargo. It becomes the duty of the charterer to: procure the stipulated cargo, bring the cargo to the loading place, load a "full and complete" cargo, and load in the stipulated time. The obligation of the charterer is absolute, and is excused only where his failure to load the cargo is due to the ship-owner himself, or where it is expressly covered by the charter party, or where the chaJ1erparty had been frustrated (The usual exceptions that protect the charterer are: strikes, Jock-outs and labour disputes; riots and civil commotions; accidents for which charterer is not responsible: ice, frost. fog, snow and storm). In war time, loading is illegal if the port of destination is controlled by enemies of the charterer's state, or if a ship-owner is a subject of a state at war with the

80

is another factor that contributed to the problem of flag of convenience, because the Bare

Boat Charterparty provides for a registration which is a legal arrangement, whereby the

nationality of the Bare Boat Charter is allotted to the ship, and is evidenced by flying the

flag of that State during the life of the charterparty. Hence in practice, this ship holds two

registrations; the primary registration when the ship was registered for the first time,66

and also the secondary registry when it becomes a Bare Boat Charter Demise of another

country. Numerous States offer this vessel registration option. States (shipping

companies) which cannot buy a ship outright opt for Demise Bare Boat Charterparty. It is

a hire purchase arrangement, in which at the end of the contract the State becomes the

full owner of the ship under Demise Bare Boat Charterparty.67

In the GATS negotiations, some countries have specifically taken commitments in

the "tramp shipping services" and the "rentals of vessels with crew." Hence, the

negotiators must consider, in the forthcoming negotiations, their commitments in the light

of legal issues discussed earlier, involved in this sector.

4.2 Norms Governing Liner Services

Liner Services are governed by two distinct legal regimes to address two distinct

charterer's state .The weight of the cargo to be carried is specified in the voyage charter and if the charterer fails to deliver the contracted quantity or "full cargo", the charterperty often contains provisions, that the charterer will pay freight at agreed rate on that portion of the ships stowage space which he has not filled. This is known as dead freight which the ship owner may claim on the quantity short delivered.

65 With the years of experience, ship-owners and charterers know what these terms mean but even so, in the absence of an agreed definition, disputes have often arisen in regard to their interpretation. The courts or arbitration tribunals of different countries have sometimes given different meanings to these terms and the courts of the same country, a different or same level of jurisdiction have given different meanings at different times. Some international bodies such as the CMI and ICC are evolving common terms such as "incoterms." International contracts between the shipper, carrier, consignee, multimodal transport operators, insurers, etc., contain several abbreviations such as C.l.F., F.O.B etc. These are the terms used in the transport document, insurance document and other documents used in the export and import of cargo. These terms were devised for mercantile convenience, which are the products of mercantile customs, later got assimilated into maritime law. Over a period of time these terms came to be interpreted differently in different jurisdictions which caused great amount of misunderstanding. An international business association, the International Chamber of Commerce (ICC) made attempts to standardize the rules of interpretation of these terms. The first set of rules, the INCOTERMS (International Rules for the Interpretation of Trade Terms), was published in 1936. Since then the ICC has periodically introduced new terms and revised existing tem1s to accommodate new modes of transport system and emerging trade practices.

66 If a ship is sold to another country then the first registration is cancelled, and country which bought the ship registers the ship as such, which then becomes the primary registry.

67 When the Bare Boat Charter registry acquires the ship at the end of the charterparty, then the secondary registry become the primary registry, and the original primary registration gets cancelled.

81

issues or problems that were encountered by this segment of maritime service at different

points in history. The first issue is relating to the bill of lading and the other issue is

relating to the liner conference system. Some countries have taken commitment

specifically in liner services.68

4.2. a. Regime Relating to Bill of Lading

The Liner ships are liable for any loss or damage to the goods during the carriage.

They issue bill of lading-the contract between the shipper and the common carrier

evidencing the goods shipped.69 A small shipper, who may move a single parcel of few

kilo grams of goods or few tons, has to depend on a common carrier or the liner shipping

company for its transportation. When goods are received into a shed a "dock receipt" or

"wharfinger's receipt" is given for such goods, and the goods are retained in the shed

until required for loading. When goods are received alongside, a "mate's receipt"70 is

given. When a mate's receipt is issued, the shipping company will not issue bill of

lading, until such time, as the mate's receipt is given in exchange.71

Goods sent through ships are normally sold in transit, which required a negotiable

instrument like the bill of lading. Bill of lading plays a vital role in the financing of the

sale of goods in international trade by virtue of its negotiability. Goods sold by other

modes are normally not sold in transit; hence in other modes of transportation, the need to

issue bill of lading is absent. Bill of lading-a mere receipt for the goods by the ship­

owner, changes into contract of carriage upon the endorsement and transfer to consignee

68 Refer Chapter III. 69 Bills of lading sets out the terms of the contract. It is the prima facie evidence, that the goods stated

therein to have been delivered to the carrier have in fact been delivered to the carrier. Bill of lading, as a document of title, enables the holder to obtain delivery of the goods at the port of destination. The shipper "delivers" the goods by merely transferring the bill of lading. The possession of bill of lading is equivalent to possession of goods itself. It is called the semi-negotiable instrument also. Under Cost Insurance Freight (CIF) contract, the seller is entitled to payment on tendering the bill of lading which could be taken to the banks and financial institutions as security and encash the bill of lading. The seller of the cargo wants his money as soon as possible after the goods had been put on board the ship.

70 A "mate's receipt" is a temporary form of receipt given by the mate of a ship, for goods which have been received on board. This receipt is subsequently handed to the ship-owner or his representative in exchange for the bills of lading.

71 Goods are tallied into the vessel by tally clerks, who check and keep list of all cargo stowed in the vessel. Tallying is done by recording in books, on cards. or on sheets. The holder of the mate's receipt is prima facie entitled to be issued with the Bill of lading. Where bill of lading is not issued, the holder of the mate's receipt is prima facie entitled to claim delivery of goods. But the mate's receipt is not a document of title.

82

(Ramberg, 1992). The international carriage of goods by sea does not just involve a

contract between the owner of the ship and the owner of the cargo. Each shipment is

supported by a complex web of contracts, including contract of sale, contract of carriage,

insurance contract, and contract with banks for letter of credit etc. At the centre of the ·-- -------- -- ·---·~--- - - ~

web of contract lies the bill of lading (Howard, 1993).

In a common carrier operation, the ship-owner (the carrier) issues a bill of

lading;72 the details are usually filled in by the shipper before presenting the goods to the

ship. After duly filling the sets of bill of lading, the shipment or goods are brought

alongside-within the reach of ship's tackle, customs entries are made in a document

known as "bill of entry" and the duties payable are paid, and goods are put on board and

each copy of the bill of lading is signed and dated on behalf of the ship-owner by the

master of the ship. It is common practice to issue bill of lading in five or more parts/sets73

which are signed on behalf the ship-owner by the master of the ship. One of them is

retained by the master of the ship to form part of the "ship's papers" and for the

preparation of ships "manifest,"74 and the remaining are delivered to the shipper. Of

which, one is sent by the shipper to the consignee of the goods shipped; another is

retained by the shipper; the third one is to insure goods against marine and other risks for

obtaining policy on insurance thereof; and the fourth one is presented to the bank to open

'letter of credit,'75 with the strength of the bill of lading he withdraws the amount covered

72 Airway bill is issued in case of air transport. It is issued by the carrier in three parts: one part is marked "for the carried" and signed by the consignor; another part marked "for the consignee" and is signed by the consignor and the carrier, and is accompany the goods; and the third part is to be signed by the carrier and delivered to the consignor. Airway bill is governed by Warsaw Convention 1929 and amended in 1955.

73 The practice of issuing a set of three original bills of lading of the same tenor may be traced back 1539 A.D. (Mitra, 1972).

74 The list of cargo on board the ship. This manifest must contain full particulars of marks, numbers, quantity, contents, shipper and consignee, with such additional particulars as may be required by the Consular authorities of the country to which the goods are being transported.

75 In international sales, because of the long periods during which the cargo is in transit and the location of the seller and the buyer in different countries, problems arise when it comes to payment, since the simultaneous exchange of goods for money is not possible. Ideally, exporter would prefer to be paid for the goods as soon as they are put on board the ship, and the importer or the buyer would wish to delay payment till the arrival of goods, which would enable him to ascertain that he has not received sub­standard goods. A letter of credit can be described as a document, that substitutes the credit and guarantee of a commercial bank for the credit of a buyer. Sellers and buyers separated by thousands of miles obtain the services of commercial bank, who know them in their respective countries, to stand guarantee between them to facilitate their transactions. A seller in Country A who enters into a contract to sell goods to buyer in Country B, wants to make sure that he gets paid as soon as the delivery is made

83

by the letter of credit from his bank.

Most of the modem problems relating to the bill of lading have a historical

backdrop; in the past two centuries, several legal regimes came into being to govern the

clauses in the bill of lading. The problem relating to the clauses in the bill of lading

emerged during the British era, when it was governed by the Common Law. Later in

history, when the US emerged as a maritime super power, it sought to alter the common

law regime through the Harter Act, which had affected the British ship-owners and thus a

compromise was reached through an international convention in the form of the Hague

Rules 1924. Later in history most countries under the colonial regime got independence

from the former colonialists, which changed the political and economic structure. These

newly independent countries found,tne legal norms enshrined in the Hague Rule 1924

were detrimental to the development of shipping and foreign trade of their country, and

they sought to change the law through the UNCTAD by signing the Hamburg Rule in

1978. The following pages, peep into the history and examines how these legal norms,

governing the clauses in the bill of lading evolved, and what necessitated the need for

change from one regime to another, and how it affected the maritime services trade.

The common carrier or the liner shipping company issues bill of lading as a

receipt for goods accepted for sea transport. Small shippers do not have the ability to

negotiate terms in the bills of lading and they accept the bill of lading as stipulated by the

ship-owner. As a result an average shipper had to be at the mercy of the common carrier

or the liner company. Big shippers enter into charterparty76 but small shippers who

wanted to transport small quantities of shipment had to depend on the common carrier or

liner shipping companies for transportation. The common carriers issue bills of lading,

which laid down the rights and liability of ship-owner, in case of damage or loss of cargo

entrusted him for transportation.

The common carriers in the middle ages received goods for transportation and

to the ship, and he does not want to wait until such time, the goods are transported and reach Country B,

which may take two to three months. Hence the contract between the seller and the buyer, a clause in the contract of sale is included which requires the buyer to open a letter of credit in a commercial bank (preferably in a commercial bank of a seller country having business/branch in the buyer country) for the value of the contract, payable to the seller on delivering the goods and producing documents to establish that the seller has delivered the goods.

76 Refer para 4.l.c for a detailed discussion on charterpa11y.

84

undertook the responsibility to transport it without loss or damage, this position was well

accepted for very long time in history (Ram, 1969). Laws of Oleron77 dealt with the

hiring of ships for sea voyages; safe keeping and delivery of cargo carried on ships etc. It

was a very comprehensive law, at the same time it reflected the medieval harshness. This

law provided that if any damage was caused to the cargo, then the ship-owner and his

pilot "shall be obliged to make full satisfaction of the same and if not lose his head"

(Haight, 1997). It could be noted here that the law of Oleron placed absolute liability on

the ship-owners.78

This principle of absolute liability was upheld in common law countries, till early

19th century. The carriers, who were the earliest to org~ze themselves, therefore started "'--------~~~- ~,... -- ... ~·--- •• & --- ·-· ..

adding number of exceptions to the above obligation in the bill of lading thereby avoiding

their liability. The burden of proof came to be shifted in the course of time from the

carrier to the shipper.

Under Common Law, the ship-owner was absolutely liable for the safety of goods

while they remain in his custody, that meant that the ship-owner was accountable to the

cargo owners for all the loss and damage even if there was no negligence on his pat1

(Bartle, 1963). It was held that the reason being that the carrier was in total control of the

goods and had the total knowledge of the circumstances in which cargo was damaged and

the cargo owners were not in a position to know what happened to their goods once it left

the shore (Riley v. Home (1828) 5 Bing. 217). This position was well accepted in those

times, that a common carrier that received certain goods for transportation undertook the

responsibility of transporting it without any loss or damage (Ram, 1969).

The ship-owners later, contracted out the responsibility, first, for genuine causes,

such as-loss/damage caused by an act of God,_E_public_e.n~Jlly,_inherent vices of the ---·-· goods, fault of the shipper or in sit~illiOQ_'Yher~~goods-had ·been made the subject of

~----- .. _ .. '

77 Laws of Oleron are "admitted to be the foundation of all European Maritime Code." The Laws of Oleron were promulgated about 1150 A.D. by a Medieval Ruler from the Island of Oleron, off the southwest Coast of France. This medieval code of maritime law, Roles d'Oleron was compiled in the 12th century for mariners in the Atlantic (Encyclopedia of Americana). They soon became the basis for maritime regulations for all Northern Europe. Laws of Oleron dealt with the hiring of ships for sea voyages; safe keeping and delivery of cargo carried on ships; selling and hypothecation of ships and cargo; contribution in case of jettison; liability for collision between ships and the duties of pilots.

78 The Monarch simply promulgated a maritime code and everyone obeyed because, as Haight Jr. ( 1997) puts it, they wished their heads to remain attached to their shoulders.

85

'general average sacrificet79 (Common law exemptions or law of torts). Then later

claimed such exemption for unjust causes, such as--carriers own negligence or the un-- --

seaworthiness80 of the vessel. S~~h bills of lading were described as a "surrender .____ .

instrument" granting the carrier a position of virtual irresponsibility.

Legal recognition of this economic conflict between cargo owners and ship­

owners did not come until about middle of the 19th century, which was the beginning of

the age of steam propulsion and iron ships.81 At common law, the carrier was considered

a bailee of the goods entrusted into the custody and was completely responsible for the

safe delivery against all risks (McDowell, 1954). By the end of 191h century, the courts

started recognizing the fact that there must be something to limit the carriers' liability

(Liver Alkali Co. v. Johnson (1874) L.R. 9 Ex.338) and provided for certain exceptions

to the absolute liability, such as, act of God and Queen's enemies, and also made

provisions that the ship-owner can limit his liability in the bill of lading. Later, this

became a general maritime law principle, which both common law and civil law

countries recognized and accepted. By then it came to be held that, a carrier was

absolutely liable for cargo damage unless proved that: 1) the carriers' negligence had not

contributed to the loss and 2) one of the four excepted clauses (act of God, act of public

enemies, shippers fault or inherent vice of the goods) was responsible for the loss. If one

of the four exceptions applied, the carrier was liable only if it had been at fault, but in all

other cases it was liable without fault. It could be seen here that the law evolved from

absolute liability (no fault liability) to strict liability (fault based liability) by the end of

the 19th century (Sturley, 1991).

But the British courts applied this principle only in the absence of an agreement to

79 The principle of the law of General Average is that, when any part of the cargo or of the ship is deliberately sacrificed in order to preserve the ship and cargo as a whole, all the parties whose goods were preserved by the sacrifice shall contribute to the loss suffered by the owner of the goods sacrificed. The loss is known as general average loss and the contribution is known as general average contribution.

80 A ship is deemed to be unseaworthy, if she is in such a state as to imperil lives or cargo at sea. A vessel may be rendered unseaworthy due to variety of causes among which the British Merchant Shipping Act, 1894, names three principal ones: l) overloading or improper loading: 2) defective condition of the hull, equipment or machinery; and 3) under-manning of the ship.

81 Prior to that the operations of wooden sailing ships were family based and town based, where the cargo were owned at least in part by the ship-owner himself, and the ships were partly owned by the owners of cargo. The voyage was described as a joint venture by the ship-owners and the cargo-owners. Large manufacturing plants were yet to be built.

86

the contrary between the parties and the British courts upheld that the ship-owners could

limit his liability in the bill of lading. The powerful British ship-owners invariably

inserted clauses in the Bills of lading exonerating themselves from any liability and the

British courts upheld the concept of "Freedom of Contract", whereby the shipper and the

carrier could agree to allocate risk in whatever proportion, including the one in which the

carriers assumed virtually no liability even for their own negligence. The ingenuity of the

ship-owner resulted in frequent insertion of clauses exonerating himself from liability in

respect of cargo on board the ship. This affected the rights of third party such as a bank,

or endorsee of the bill of lading, who landed up with goods lost, short landed, or damaged

for which the carrier had exonerated himself from responsibility by specific terms in the

bill of lading. Most European and commonwealth countries eventually followed the

British example. Majority of ship-owners were from Great Britain and they were rich and

powerful and hence they easily exonerated themselves from any liability, what-so-ever

for transporting the cargo.

The US Harter Act 1893

In the US, on the other hand, cargo interests were stronger, and bill of lading

contract provisions freeing the carrier from liability for negligence, were held to be

against public policy because they lessened the incentive to care for the cargo properly;

hence freedom of contract was stricter. The US Federal courts permitted to limit their

liability in many circumstances, but carriers could not exonerate themselves from the

consequences of their own negligence or their failure to provide seaworthy ships. The

pattern of sea trade generated by the US and its involvement in the maritime industry is

very different from that of Europe because in the early twentieth century the US had only

a small fleet trading overseas and depended heavily on the fleets of other nations to carry

its foreign trade (Stopford, 1988).

The British stood supreme in shipping in the 1800s, had possessed almost half the

aggregate world tonnage of merchant vessels (Couper, 1972). The British courts were

securing their interest by upholding the "freedom of contract" principles for the ship

owners. The attitude of the organized and powerful British ship-owners (the P & I

87

Club )82 called for the United States to step in to protect the interests of the unorganized

shippers. The immediate need for the statute was a decision of the US Supreme Court in

Liverpool & Great Western Steam Co. v. Phoenix Insurance Co.,83 that dramatically

altered the shipper-carrier relationship. Powerful and organized British ship-owners84

responded to the US Supreme Court decision by inserting 'forum selection clause'

(London) and 'law selection clause' (British Law) in the bill of lading, which defeated

the American court's decision invalidating the ship-owners' negligence clause.

Moreover, the British Courts were protective of ship-owners in upholding exculpatory

clauses. Hence, the US Congress acted to protect the American public policy by enacting

the Harter Act 189385 for the regulation of exoneration clauses. The US congress through

Harter Act intervened in the contractual relations between cargo owners' interest and

ship-owners' interest. It was said to be the forerunner of all cargo liability regimes. This

was the time when 87% of the US cargo was carried by foreign flag ships, chiefly by

British ships (Sweeny, 1993). Moreover, because of the exculpatory clauses in the Bill of

Lading, the American cargo owners could not claim for the loss or damage to their cargo,

due to the common law principle "right to contract" or "freedom of contract." The British

Courts upheld the concept of "freedom of contract," whereby the shipper and the carrier

could agree to allocate risk, in whatever proportion, including the one in which the carrier

assumed virtually no liability even for its own negligence.

Harter Act was a compromise or package deal between conflicting economic

interests i.e. compromise between the common law rule of full liability and the

82 The first modem P & I Club--the Steamship Owners' Mutual Protection and Indemnity Association­was formed in 1874.

83 129 U.S. 397 ( 1889). Facts of the case: Cargo carried aboard the British ship Montana from New York to Liverpool was lost when the vessel went aground near Holyheadwales. The subrogee cargo insurer sued the carrier to recover the damages allegedly caused by the carrier's servant's negligence. The carrier defended on the basis of a bill of lading clause exculpating the carrier from liability for its own negligence. The court came forward to protect the cargo interest, which was relying on the British ships to carry on the US foreign trade.

84 The British ship-owners organized themselves as P&I clubs and Liner Conferences. The first conference of liner shipping service (the Calcutta Steam Traffic Conference) was created in 1875.

85 In 1892, a Congressman Michael Hru1er of Ohio introduced a bill, which came to be known as Harter Act, that strongly favoured the cargo interest.In its original form, the bill strongly favoured cargo interests. This bill was viewed as a trade protection measure, particularly for grain and flour (cargo) interest. Senate Commerce Committee cleared the bill; there were amendments to every section. The net result was a compromise between cargo and carrier interests, although the prime purpose remained the protection of American cargo interest from British Ship-owners.

88

contractual practice of no liability (Sweeny, 1993). The Act made it unlawful for the

owner of a vessel transporting goods from or between ports of the US and foreign ports to

insert in any bill of lading or shipping document any clause, covenant, or agreement

relieving the carrier from liability for loss or damage arising from negligence, fault or

failure in the loading, stowage, custody, care or proper delivery of the merchandise. The

Harter Bill dealt with carrier's exculpatory clauses in the bill of lading. While introducing

the bill it was stressed that, it "seeks to give our citizens some protection against foreign

ship-owners" (presumably the British ship-owners) (Sweeny, 1993). Harter Act 1893 was

the world's first legislative attempt to allocate the risk of loss in ocean transportation

between carrier and cargo interests.

The Harter Act prohibited: a) Any contract provision lessening the ship-owners'

obligation to exercise due diligence to prepare the ship properly for her voyage and make

it seaworthy, and b) The ship-owner from contracting away liability for his employees'

negligence in the loading, stowage, care, custody or delivery of the cargo but if the

damage or loss caused to the cargo was due to 'nautical fault' by the master or the crew

of the ship then the ship-owner was exempted from liability. But this exemption was

applicable only if he had previously discharged his duty of due diligence in providing a

seaworthy ship.

Other countries where cargo interests were strongly followed the US lead and

unilaterally enacted Harter style domestic legislation governing exoneration clause in

bills of lading were: New Zealand's Shipping and Seamen Act 1903, Australia's Sea­

Carriage of Goods Act 1904, Canada's Water Carriage of Goods Act 1910, and French­

Morocco's Maritime Commercial Code 1919. Similarly Japanese commercial code

invalidated agreements exonerating a ship-owner from liability for damages caused by

ship-owner himself, or willful act or gross negligence of the crew or any other employee

or by the fact that the ship is unseaworthy (Sturley, 1991 p.6).

New Zealand, Australia, and Canada were the overseas Dominions of the British

Empire, where the cargo interest was powerful enough to move their government to enact

legislation similar to the Harter Act. They were large exporters of raw materials. These

countries believed shippers were not being treated fairly by the carrier interest in the

89

mother country. But the ship-owners were politically powerful in Great Britain. In

response to cargo interests' complaints on this subject, the overseas dominions pressured

the Imperial government to co-ordinate Harter-style legislation for the entire British

Empire. In 1917, the Dominion's Royal Commission, after hearing evidence from the

shippers and ship-owners in the UK, the self-governing dominions recommended such

legislation. In 1920, the British Prime Minister in consultation with colonial authorities

and the Dominion governments, appointed a committee to consider the matter. In

February, 1921 the Imperial Shipping Committee issued its report. It unanimously

concluded, "that there should be uniform legislation throughout the Empire on the lines

of the existing Acts dealing with ship-owners liability."

Prior to this, the International Law Association (ILA)86 in 1882, at its Liverpool

Conference prepared a draft of Model Bill of Lading; the guiding principle behind the

draft was the need for a compromise between cargo and vessel interests. The central

element of this compromise was that the carrier should be liable for negligence "in all

matters relating to the ordinary course of voyage" such as stowage and care of the cargo,

but should be exempt from liability for "accidents of navigation" even though loses might

be attributable to the negligence of the crew. In addition, the draft introduced the concept

of carriers' obligation to exercise "due diligence" to make the vessel seaworthy, and

provided for £100 package limitation in the absence of declaration of higher value. This

model Bill of lading came to be known as "Conference Form" which never achieved

general acceptance. Hence the ILA temporarily abandoned the Conference Form in 1885

and proposed a set of rules known as "Code of Affreightment;" this too had little impact.

The Hague Rules 1924

The conflicting position relating to risk allocation among major maritime nations

became a serious issue in the early twentieth century. There was lack of uniformity in the

laws of various nations with regard to the Bill of Lading which was adversely affecting

international trade, with the merchants and the businessmen unwilling to accept bill of

lading due to unreliability and uncertainty. It meant that the general maritime law no

86 The International Law Association then known as the Association for the Reform and Codification of

the Law of Nations was founded in 1873.

90

longer provided for uniform risk allocation. They felt that if a set of rules which most

nations would agree to abide by could be drawn up and enacted into the national system

of laws, then, whenever a dispute arouse, the international rules would be upheld by

national laws which would restore the confidence in the bill of lading.

In the absence of such a convention, international shipping is often regulated by

divergent rules of various national systems. Ships of various nationalities travel from port

to port carrying goods and passengers. They incurred liabilities in the course of their

voyages and were subject to the jurisdiction of foreign States, when they entered the

waters of those States. They were liable to be arrested for the enforcement of maritime

claims, or seized in execution or satisfaction of judgment in legal action arising out of

collisions, salvage, loss of life or personal injury, loss of or damage to goods and the like.

They are liable to be detained or confiscated by the authorities of foreign states for

violating their customs regulations, safety measures, rules of the road, and health

regulations and for other causes (Thommen, 1968).

The maritime claims and 'maritime lien'87 made ships subject to arrest to satisfy

87 A "maritime lien" is a claim or privilege upon a maritime res (the term res signify a thing or an object (Concise Law Dictionary, 2007)) in respect of service done to it or injury caused by it. A maritime lien travels with the res into whosoever possession it may come, it is unaffected by change of ownership or registration. There can be no maritime lien upon a res which is not a ship or her apparel or cargo. A maritime lien only attaches to the particular res in respect of which the claim arises and not to any other property of the owner. Maritime Lien is very unique, and very different from contractual lien. It is known as the right in rem i.e. a right enforceable against the whole world as opposed to right in personam i.e. against a particular person (or the owner).The owner may be far away, his financial standing unknown and the courts of the country of registry may be inefficient or expensive to approach. All these factors have led to the concept of "maritime lien" by which the injured party is enabled to make the vessel herself available as security for his claim. The claims which are usually accepted as maritime lien are wages and other sums, (due to the officers and crew of a vessel in respect of their employment on the vessel) public charges (like the tonnage dues, harbour dues and pilotage dues etc.), salvage, contribution to general average contribution, claims in respect of loss of life or personal injury, claims for damage etc., arising out of tort. The seller of a ship may have a possessory lien for the unpaid purchase price and a ship repairer may have a similar lien for repairs done on the vessel. Maritime lien is a common law concept and in many countries including India, there is no specific legislation dealing with maritime liens. India has been following the laws of the UK in this respect and courts in India, having admiralty jurisdiction, are competent to deal with cases pertaining to maritime liens. The municipal laws of the maritime countries on maritime liens and mortgages, differ from country to country. Attempts have been made at the international level, to unify the customary rules relating to maritime liens and mortgages. An international convention on the unification of certain rules relating to maritime liens and mortgages was adopted in 1926. It has not been ratified by India and also not ratified by major maritime countries like the UK, US, Japan, W.Germany, Netherlands and USSR (Singh, 1979 p. 35). An amended convention was adopted at Brussels in 1967, and even this also was not ratified and not in force.

91

outstanding claims. A ship may be arrested under an authority of a local court for any

maritime claim. This hazard to ships moving from port to port, among many factors,

cried out for international unification of maritime law. The argument based on 'freedom

of contract' in the imperial setting was unable to contain Harter style legislation in the

British dominions and the ships were facing arrests in those ports under this legislation. It

became clear that uniformity in the laws relating to bill of lading have to be attained

through an international treaty process.

The subject of "International regulation of foreign bills of lading" was raised in

the Comite Maritime International (CMI)88-an unofficial descendent of ILA (Sweeny,

1993, p.29) by the US Maritime Law Association in 1912; it, nevertheless did not yield

any result. 89 The ILA held its next conference at the Hague in September, 1921 to arrive

at uniform rules regulating the shipper-carrier relations. The Maritime Law Committee

met in separate session and unanimously adopted the "voluntary code" which came to be

known as the Hague Rule 1921. The ILA Diplomatic Conference in Brussels, 1922

transformed the voluntary Hague Rule 1921 into mandatory form, and adopted the same

in the "International Convention for the Unification of Certain Rules Relating to the Bill

of Lading," which was signed in Brussels in August, 1924 at a conference attended by 26

nations.90 These rules deal with contractual relationship between the carrier and the

shipper. Essentially, they established the carriers' responsibilities and liabilities, and also

his rights and immunities under the contract of carriage. The countries which had adopted

the Hague Rules have given statutory force to these rules by national legislation called

"Carriage of Goods by Sea Act" (COGSA).91

The ship-owners were interested in limiting their liability. Hague Rule is basically

88 The CMI grew out of ILA in 1896. In 1897 several national "Associations of Maritime Law" therefore joined together to create the Comite Maritime International and persuaded the Belgian government to sponsor the first diplomatic conference on Maritime Law, held in Brussels 1905. The CMI has produced over twenty Brussels conventions involving maritime law, drafting conventions embodying a uniform law in a particular area.

89 But the same resurfaced when the "Voluntary Clauses for bills of lading" had been prepared in 1921 by the ILA and the British Maritime Law Association. The British Maritime Law Association brought the issue into the ILA after the Imperial Shipping Committee recommendation in February, 1921.

90 The Hague Rules 1921 were given effect by the 'International Convention for the Unification of certain Rules relating to Bills of lading in 1924. League of Nations Treaty Series, vol. CCX, at 157. The Hague Rule came into force in 1931.

91 The UK Carriage of Goods by Sea Act 1924, The Indian Carriage of Goods by Sea Act 1925, and The US Carriage of Goods by Sea Act 1936.

92

a law limiting the liability of ship-owners. Narmada Khodie (1977) argues that the first

beneficiary-the ship-owners-had struggled to get this rule passed which conferred the

right to limit liability.

The maritime nations of the world were invited to adhere to these rules and

introduce legislation in their own countries to implement them, and countries legislated

Carriage of Goods by Sea Act (COGSA) incorporating the Hague rules in their domestic

legislation.92 Hague Rules came to be accepted universally, even countries which did not

become party to these rules enacted domestic legislation to give effect to the Hague

Rules-the Carriage of Goods by Sea Act (COGSA). For instance, neither India nor the

Soviet Union is party to the Hague Rules. However, the Carriage of Goods by Sea Act,

1925 was enacted in India to give effect to the Hague Rules. The Soviet Union has

incorporated in its Merchant Shipping Code of 1929 some of the important provisions of

the Hague Rules (Thommen, 1968).

The Hague Rules established a mandatory legal regime governing the liability of a

carrier for loss of or damage to goods carried under a bill of lading. It covered the period

from the time the goods are loaded on to the ship until the time the goods are discharged.

At common law, the carrier's warranty of seaworthiness was an absolute one, in that it

was liable if the ship was in fact not reasonably fit for the voyage in question, even if she

used all reasonable diligence to ensure that she was. The absolute warranty of

seaworthiness is replaced by the Hague Rules. Under this Rule the carrier is only obliged

to exercise due diligence to make the vessel seaworthy, before and at the beginning of the

voyage, and the carrier was not liable if the ship became unseaworthy during the course

of the voyage. Under the Hague Rules, the carrier is liable for loss or damage resulting

from its failure to exercise due diligence to make the ship seaworthy, to properly man,

equip and supply of the ships, or to make its storage areas fit and safe for the carriage of

goods.93 However, the Hague Rules provided a long list of circumstances that exempt the

92 Australia passed the legislation on the lines of Hague Rules in the same year; followed by India in 1925, Newfoundland in 1932, Canada in 1936, New Zealand in 1943, and Ireland in 1948. Most of the British colonies and European countries implemented the Hague rules either by legislation or ordinance or by simple adherence to the convention.

93 Article III of Hague Rules provides: " The carrier shall be bound, before and at the beginning of the voyage, to exercise due diligence to:- (a) Make the ship seaworthy; (b) Properly man, equip and supply the ship; (c) Make the holds. refrigerating and cool chambers, and all other parts of the ship in which

93

carrier from liability.94

Under the Hague Rules, the maximum liability of the carrier for loss of or damage

to goods was limited to £100 per package or unit, or equivalent of that sum in other

currency, unless the nature and value of such goods have been declared by the shipper

before shipment and inserted in the bill of lading. The monetary units, however, are to be

taken as gold value. The latter stipulation gave rise to disputes and litigation because the

UK sterling rate fell and it was no longer equivalent to that of gold value. The British

ship-owners and marine insurers, in order to circumvent this clause, entered into a

"Gentleman's Agreement" known as Gold Clause Agreement under which the limit of

liability was fixed at "£200 sterling lawful money of the UK" instead of "£100 gold."

Some of the Indian shipping companies were parties to this agreement and were governed

by this limitation amount (Singh, 1979 p.9).

Hague Visby Rules

The Hague Rules served their purpose reasonably well, but in the course of time

certain weakness became apparent. The Hague Rules had to be amended twice since their

adoption, first in 1968 known as the Hague-Vis by Rules95 to distinguish them from

original rules,96 and it was amended again in 1979-the additional protocol. These

amendments dealt with the amount and method of fixing the financial limits of liability

per unit of cargo under the Hague Rules. Per unit limits of liability were expressed in

terms of a unit of account based on a value of gold, chiefly the gold franc limit for unit

goods are carried, fit and safe for their reception, carriage and preservation." 94 Article IV(2) of Hague Rules provides: "Neither the carrier nor the ship shall be responsible for loss or

damage arising or resulting from:- a) Act, neglect, or default of the master, mariner, pilot or the servants of the carrier in the navigation or in the management of the ship, b) fire, unless caused by the actual fault or privity of the carrier, c) perils, danger and accidents of the sea or other navigable waters, d) Act of God, e) Act of war, f) Act of public enemies, g) arrest or restraint by princes, rulers or people or seizure under legal process, h) quarantine restrictions, i) Act or omissions of the shipper or owner of the goods agents or representative, j) strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or general, k) riots and civil commotions, I) saving or attempting to save life or property at sea, m)wastage in bulk or weight or any loss or damage arising from inherent defect, quality or vice of the goods, n) insufficiency of packing, o) insufficiency or inadequacy of marks, p) latent defects not discoverable by due diligence, and q) any other cause arising without the actual fault or privity or servants of the carrier but the burden of proof shall be on the person claiming the benefit of these exceptions, to show that neither the actual fault or privity of the carrier, nor the fault or neglect of the agents, or servants of the carrier contributed to the loss or damage.

95 Protocol signed at Brussels on 23 February, 1968 which came into force on 23 June, 1977. 96 The Hague-Vis by rules were incorporated into the Jaws of the UK by the Carriage of Goods by the sea

Act 1971, but this Act was not finally brought into force until June 1977 (Ridley, 1978).

94

liability-the Franc Poincare.97 It altered the limitation of liability of the carrier at a

higher monetary limit of 10,000 Poincare Francs per package or unit (US $ 662) or 30

Poincare Francs per kilogram (US $ 90 per pound) of the gross weight of the goods lost

or damaged. Poincare Franc is notional monetaryunits consisting of 65.6 milligram of

gold of millesimal fineness 900 (Asser, 1973, Singh, 1979). This practice involved the

conversion of the gold franc into the national currencies of the Convention States. This

required the establishment of an official parity for gold expressed in their respective

national currencies. This posed difficulties for those states whose currencies were not

convertible into gold, and or where there was no official parity between gold and the

national currency or the parity which had been maintained had become obsolete. Due to

inflation and devaluation of currency, traditional maritime powers were dissatisfied,

because the 1968 Protocol had not provided a mechanism, to adjust to the effects of

worldwide persistent inflation. Another problem with the 1968 Protocol was that, not all

the trading nations however ratified it; and the trades concerned with carriage of goods

from countries where this protocol was not ratified, the earlier rules continued to apply.

The gold and currency crisis however created serious doubts as to the continued

stability of such gold clauses. Floating exchange rates, highly fluctuating free market

gold prices presented difficult problems for the courts, which were called upon to convert

a particular amount expressed in terms of gold into their own currency. The issue,

whether the number of gold Francs would be convertible into national currency, on the

basis of the market value of gold was not settled.

Hence in 1979, the Belgian government called another diplomatic conference to

add a protocol to the 1968 protocol. This conference abandoned the gold franc and

expressed the amount of unit limitation of carrier liability, in terms of the artificial unit of

the IMF the "Special Drawing Rights (SDR)."98 It is a fictitious unit of account based on

97 The Gold franc referred to in the Warsaw Conventions is the so called franc Poincare named after then French Prime Minister under whose government, the gold value of the franc was set at 65.5 milligrammes of gold of millesimal fineness nine hundred. The Poincare Franc has been used in all gold clause limitations of liability provided for in multilateral conventions concerning transportation by sea or air, concluded after 1924. (Asser, (1973-74), see also Ridley (1978) p. 189).

98 The SDR was preferred chiefly because it provided a uniform standard, accepted by the international financial community and administered by exceptionally competent international agency-the International Monetary Fund (IMF). The fact that the SDR administered by an international organization is of special importance because it ensures a certain measure of continuity and uniformity

95

the principle of basket currencies to guarantee a certain degree of stability on the face of

monetary fluctuations.99 The amounts determined were 2 SDR or$ 2.62 per kilogram and

667 SDR or$ 873 per package, whichever was greater. This protocol came into force in

1984. There was a push towards a third protocol to the Hague Rules, an effort which the

CMI was contemplating but the Belgian government which was sponsoring all the

diplomatic conferences to the Hague regime indicated, that it would no longer sponsor

diplomatic conferences for the CMI (Sweeny, 1991).

The Anachronism of the Hague Rules

In the subsequent decades, the international political and economic scenariO

changed; this led many countries to question the principles that underlay the Hague

Rules. In the 1960s and the 70s, independent nation states that were not in existence

when the Hague Rules were negotiated, urged a change in these international maritime

principles, because of the fact that the overall allocation of responsibilities and risks

under the Hague Rules heavily favoured the carriers at the cost of the shippers, which

was inequitable. Several provisions of the Hague Rules were regarded as ambiguous and

uncertain, which was said to result in higher transportation costs. The Hague Rules were

appropriate for 1924 but not appropriate in the technologically advanced era of shipping.

The Hague Rules were developed prior to fundamental changes in ocean transport: the

development of ships powered by steam or oil; precise and complete navigational charts;

of interpretation and application. which would be of great practical value to the national courts, that are called upon to convert a particular limitation of liability into their local currency. In determining the exchange rate, an illogical assumption is being made, that is, a particular currency retains its historic gold value regardless of unofficial exchange rate fluctuation; every change in the rate of exchange between that currency and another currency would entail a corresponding change in the gold value of that other currency alone. This method is followed by the IMF in determining the exchange rate in terms of SDRs on the basis of representative rate of such currency for spot delivery for the US dollar whose value is fixed at its par value; for currencies in respect of which no such representative dollar rate can be readily ascertained the IMF applies the representative dollar rate can be ascertained; both the value of the SDR and the par value of the US dollar are expressed in terms of gold: since the gold values are presumed not to be affected by unofficial exchange rate fluctuations, a fixed relationship exists between the dollar and the SDR. The same method can be followed to establish the "official" gold value of any currency other than the US dollar. The same approach is recommended for the replacement of the gold franc as a standard of value for limitations of liability specified in the transport conventions ( for more details refer: Asser, T.M.C. (1973) .

99 However, this would also have a disadvantage i.e., the equivalent in currencies would not be fixed in view of their devaluation or the revaluation, which would mean continuous up-dating of currencies on the basis of SDRs. Further, whereas recourse to SDRs seem to be a simple matter for the IMF member states, and for the non member states; on the contrary, it would seem that reference to gold franc has to be maintained.

96

navigational aids keyed to satellite and radio beams; sonar and radar; radio

communication with other ships; weather stations etc. There were also fundamental

changes in the cargo handling method due to containerization.

The developing countries sought to reform certain inequities under the Hague

Rules, they asserted to reform the antiquated in-egalitarian Hague Rules provisions. The

Hague Rules were formulated in the era, when the cargo was carried in wooden sailing

ships. By the time the Hague Rules actually came into force in 1931, the maritime

industry moved to a new era--era of steam propulsion and iron ships, and there were also

further technological developments in shipping such as containerization. It was admitted

that the Hague Rules did not anticipate the economic and technological development that

were to happen (Frederick (1991). The need for a thorough revision of the Hague Rules

was recognized by many, but these proposals were defeated in discussions within the

CMI (Honnold, 1993).

The Hague Rules were drafted chiefly by commercial interests and the rules were

arrived at through commercial compromise. Various private groups, for instance the ILA,

CMI, and the ICC100who represented commercial interests rather than countries,

formulated the Hague Rules. In the opening remarks, the chairman of the 1921 Hague

meeting, Sir Hemy Duke, said: "in any convention in which nations were represented

they would vote by nations. We represent interests ... and votes are given by individuals."

This conference was termed as a non-political conference (Frederick,1991 p. 93).

Prior to the Second World War, a few maritime powers controlled the bulk of

international trade, and international shipping tended to be controlled almost exclusively

by a few maritime powers. The state of affairs largely reflected the international

economic relations-colonialism and the balance of power. The post-war period of 1947-

64 witnessed the birth and the struggle for independence of some 75 States. These new

nations watched with deep concern the decline in the terms of trade, which were being

further aggravated by the serious impact of rising freight rates and the inadequacy

associated with the existing institutional mechanism in shipping (UNCTAD, I 985). Their

shipping problems ranged from complete dependence on foreign flag ships for the sea

100 International Chamber of Commerce.

97

transport of their international trade, to those countries partly dependent and struggling to

expand their national merchant marine.

The Hamburg Rules 1978

The Hague Rules heavily weighted in favour of the earners which enjoyed

extensive immunities, even in cases where logically, the liability should have been borne

by it and as a result legal protection available to the cargo interests was inadequate. An

UNCTAD study had also pointed out the gaps, loopholes, uncertainties, and ambiguities,

which had been exposed in the light of the actual experience of the working of the Hague

Rules and sought to revise the Rules to re-allocate risks, rights, and obligations between

shippers and carriers, so as to remove the existing imbalance favouring the ship-owners.

The newly independent developing countries efforts led to the framing of

Hamburg Rules, 1978. 101 The purpose of the Hamburg Rules was to establish a modem

and uniform international legal regime to govern the carriage of goods by sea. It was

intended to replace the regime based on the "Hague Rules of 1924." The Hamburg Rules

were negotiated under a totally different era; where on the one hand, there were several

decolonized countries emerged in the maritime trade, and on the other, shipping

technology advanced rapidly which replaced the old system of cargo handling with

''containerization.''

The War devastated the great European powers and diminished both their

maritime strength and ability to conduct international trade. This decline in control of

commerce also occasioned a drop in contractual bargaining leverage (Frederick, 1991 ).

At the same time, newly independent developing countries became conscious of the

adverse impact, on their balance of payment outflow of foreign exchange in payment for

invisible transactions; 102 the major one of which was shipping. Hence, they increased

101 UN Doc. A/Conf89!13( 1978) the final Act of the UN Conference on the Carriage of Goods by Sea. The UN Convention on the Carriage of Goods by Sea 1978 (Hamburg Rules) was adopted on 31 March 1978, at the universal diplomatic conference convened by the General Assembly of the United Nations, at Hamburg and were negotiated under the aegis of the United Nations Commission of International Trade Law (UNCITRAL). Sixty-eight States voted for the Convention and three abstained and none voted against. The Convention entered into force on I November, 1992 after the 20m ratification. The convention is based upon the draft prepared by the UNCITRAL.

102 Balance of Payment (BOP) data are usually organized in two standard accounts: the Current Account and Capital Account. The Current Account is divided into "merchandise" and "invisibles." Invisible

98

their investment in shipping and insisted on a greater role in the decision-making process

that governed commercial maritime rules. As the developing countries began to build

their fleet, they felt that the Hague Rules and other traditional maritime laws affected the

development of shipping industry in their countries and impaired the balance of payment

position of developing states, so as to ensure continued poverty and perpetual under­

development (Sweeny, 1975).

Uncertainties in the Hague Rules produced two expensive consequences for the

developing nations; firstly, the Hague Rules obligated the owner of the goods to insure

against contingencies, that the bills of lading failed to anticipate or otherwise left vague,

so that both the carrier and shipper insured against ill-defined risks, but companies in the

developing world were financially less able to shoulder this burden and secondly,

ambiguities in the Hague Rules or their failure to anticipate technological developments

occasioned disputes between shipper and carrier that required arbitration and/or litigation.

Hence the developing countries believed that the international maritime rules themselves

inhibited their economic growth (Frederick, 1991). Hence they pressed for greater

participation in making the type of maritime rules that determined liability in maritime

transactions. This development had tremendous repercussions for the international

maritime rule making process.

The developing countries joined together as G-77 and drew up the Algiers

Charter, 103which advocated further study of international legislation on shipping104

account comprises cost of services, income and transfer payments (i.e. payments and remittances unrequited or without quid pro quo or without any repayment obligations). For more details refer chapter I.

103 I Proceedings, New Delhi 315-17, UN Doc. TD/197 (1966). 104 The developing countries pressed for reform within the context of existing UN organs. This choice of

forum arguably reflected both a distrust of the network established by the traditional maritime powers and their confidence in the UN organization. At the inaugural session of the UN Conference on Trade and Development (UNCT AD) 1964, the developing countries raised the issue of international shipping legislation. In 1968, the UNCTAD created a Working Group to study the question. The western countries responded that UNCTAD was not technically qualified in this subject, and proposed to entrust the matter either to the CMI or to the UNCITRAL. The developing countries initially rejected the proposal and pointed out that UNCITRAL had been created only recently. UNGA Res. 2205, 21 UN GAOR (supp), at 115. UN Doc. A/7134 (1966) passed resolution-creating UNCITRAL, a world-wide representative body with the mandate to reduce barriers to international trade resulting from conflicting and inadequate laws. Following its establishment, it created a Working Group on shipping consisting of 21 states, representing each region and legal system. The UN Committee on shipping responded by creating a working Group that first met in 1969. The developing countries achieved their aims in setting up the study group, but the western nations nevertheless diluted its impact by pressing successfully for

99

(Basnayake,1979). But the Western Powers succeeded in moving discussion away from

UNCTAD to UNCITRAL.105 At that time, the developing countries accounted for 64.7%

of all maritime shipment (in terms of weight) but owned only 7.6% of world's maritime

fleet (Haji, 1972). This disparity had a dramatic impact on balance of trade. The IMF

estimated that the deficit created by shipping costs alone produced approximately 1/3 of

the developing world's entire balance of payment deficit. Moreover, by creating need for

double insurance, the Hague Rules exacerbated their financial difficulties.

The question of revising the Hague Rules was first raised by the delegation of

Chile at the first session of UNCITRAL in 1968.106 At about the same time, the law

relating to bills of lading and the carriage of goods by sea had come under study within a

working group of the UNCTAD. 107 The working group recommended that the work be

undertaken by the UNCITRAL. 108 By 1976, the UNCITRAL had finalized and approved

the text of the draft convention on the carriage of goods by sea. Thereafter the General

Assembly convened the diplomatic conference at Hamburg which adopted the Hamburg

Rules in 1978.

The Hamburg Rules sought to establish a uniform legal regime governing the

rights and obligations of shippers, carriers, and consignees under a contract of carriage of

goods by sea. The central focus of the Hamburg Rules are: 1) the liability of a carrier; 109

2) the liability of the shipper; 110 3) the documents issued by the carrier such as bill of

an expansion of the Working Groups' component members' (from 21 as originally proposed to 33). The larger group worked more slowly and modified the intent of the original study group, which had been dominated by developing countries (UNCITRAL II Year Book 1971 at 9,12 (1972).

105 From UNCITRAL's first session, the developing countries favoured international legislation on shipping (UNCITRAL Year Book 1968-70 at 71, 83 (1971) Chile's proposal). The UN General Assembly passed Resolution 2421 (XXIII) authorizing UNCITRAL itself to undertake study of this type of reform.

106 The UNCITRAL considered this question in its second session in 1969. 107 The working group concluded that the rules and practices concerning bills of Jading, including those

contained in the Hague Rules as amended by the Visby protocol, should be examined and where appropriate, revised and amplified, and that a new international convention should be prepared. The objective of that work would be to remove the existing uncertainties and ambiguities in the existing Jaw and to establish a balanced allocation of responsibilities and risk between cargo interests and the carriers. (UNCITRAL Year Book 1988 vol. XIX, UN Doc. A/CN.9/306).

1os E ventually, the UNCITRAL was called upon by the General Assembly to perform the preparatory work and in 1971 the UNCITRAL decided to proceed accordingly (UNCITRAL Year Book 1988 vol. XIX, UN Doc. A/CN.9/306).

109 With respect to: a) for loss of goods, b) damage to the goods, and c) for delay in delivery. 110 for: a) Joss sustained by the carrier, b) the damage to the ship, and c) in respect of dangerous goods.

100

lading and non-negotiable transport documents; and 4) the jurisdiction and arbitral

proceedings.

The Hamburg Rules were a major victory for the developing countries. It was

firmly built on realities of modem shipping and thus came to be in harmony with the

needs of modem trade. When the Hague Rules were drafted, many of the problems such

as containerization, combined transport, custody at intermediate transfer points, persistent

worldwide inflation, widespread use of non-negotiable contracts of carriage had not

arisen.

The Hague-Visby-SDR regime has preserved the 19th century carrier defenses of

negligent navigation and management which could not be found in any other transport

law. The negligent navigation defense of Warsaw Convention (Art.20 (2)) was removed

in the 1956 protocol (Art. 10) in Air Law; no equivalent to negligent navigation appears

in the rail or road conventions. The preservation of these obsolete defenses, in the Hague

regime, is not only a provocation to organized shipper groups but also a major obstacle to

effective multimodal carriage of goods. The defense of negligent navigation and

management is not recognized in the US Harter Act. The Hague Rules have the virtue of

age but not the virtues of predictability or efficiency, 111 and in Hamburg Rules such a

defense is absent. The Hamburg Rules were the product of the science of comparative

law, but they have not yet been construed by any court.

Hamburg Rules have a broader scope of application because they apply to all

contracts of carriage by sea (Art 1(6) and Art 2) and not merely bills of lading. They

govern the rights and obligations of the parties to the contract of carriage, regardless of

whether or not a bills of lading was issued because increasingly these days, more and

more cargoes are being carried under non-negotiable transport documents called the "sea

waybills" rather than under bill of lading. Non-negotiable instruments avoid certain

problems that arise in connection with the use of bill of lading, such as the arrival of the

goods at their destination before the bill of lading reaches the consignee. If the Bill of

Lading or any other document provide evidence that the Hamburg Rules would apply to

111 Anyone who reads the dozens of American Court decisions every year on the question of whether a

container is a package, could not say the Hague Rules make law predictable (Sweeny, 1992).

101

a particular contract of carriage, then the application of the Rules will not depend upon

the nationality of the ship, the carrier, the shipper, the consignee, or any other interested

person. It does not apply to charterparty unless a bill of lading is issued under the

charterparty .112

The Hamburg Rules hold the carrier responsible while the goods are in his charge

at the "port of loading, during the carriage and at the port of discharge" (Art 4). The

Hamburg Rule prescribes a mandatory liability regime which cover the period from the

time the carrier takes on the goods in his charge at the port of loading until the time the

carrier deliver the goods at the port of discharge. Thus the Hamburg liability regime

extend beyond the actual carriage; to the extent the carrier keep the goods in its charge in

the port before they are loaded and after they are unloaded. 113 The Hamburg Rules

approach adopts the same rule that are being applied in all other modes of transportation

which are embodied in international conventions for carriage by road, rail, and air.

Liability, under Hamburg Rule, is based on the principle of presumed fault or

neglect. That is, the carrier is liable if the occurrence that caused the loss, damage or

delay took place while the goods were in his charge, and he may escape liability only if

he proves that he, his servants, or agents took all measures that could reasonably be

112 Whereas the Hague Rule applied only to bill of lading issued in a contracting State, Hague Rules and Hague Visby Rules do not apply when a transport document other than a bill of Jading is issued in connection with the carriage. For Jetter of credit or resale during transit does not require negotiable documentation, hence the Hamburg rules give more protection to third party purchasers.Moreover, the Hague Rules apply only to outbound shipments i.e. at the place of loading. In shipments from a non­Contracting State to a State that has adopted the Hague Rules, the consignee in the Contracting State who receives the damaged goods often needs to attach the ship or assets of the carrier in its own state. This problem is overcome by article 2 of Hamburg Rules, which makes the convention applicable either "the port of loading or port of discharge" is in a contracting State. This is considered to be one of the most important advances made by the Hamburg Rules.

113 The liability regime of the Hague Rules and the Hague Visby Rules commences when the goods are loaded unto the ship and ends when they are discharged from the ships i.e. 'Tackle-to-Tackle'.Tackle­to-tackle is the period from the time when the goods are loaded on to the time when they are discharged from ships. This means that the carrier's liability under the Hague Regime does not apply, if the damage or loss occurs while the goods are in the custody of the carrier prior to loading or after discharge. It left a legal vacuum before and after the tackle-to-tackle period, hence no party could be held responsible for damage to cargo during such period although the carrier had "charge" of the cargo before and after the voyage.In modem shipping practices carriers often take and retain custody of goods in port before and after the actual sea carriage. It has been estimated that most loss and damage to goods occurs while the goods are in the freight yard, due to weather, theft, etc. Hague rules were outdated even in 1924 itself, because the Harter Act of 1893 made the carrier liable for negligence in the "custody, care or proper delivery" of cargo "in its charge." As a result there were conflicting international rules governing carriers' responsibility during this important period while the carriers have custody and control of the goods.

102

required to avoid the occurrence and its consequences. 114 The only exemption allowed

under the Hamburg Rules is that it excuse the carrier from loss caused by 'measures to

save life' or 'reasonable measures' to save property at sea. The Hamburg Rules provide

for mandatory liability for delay in delivery of goods. The financial limit for such liability

is two and a half time the freight payable for the goods delayed.

The Hamburg Rules, have mandatory provisions on jurisdiction and arbitration;

accordingly the claimant may institute action at one of the following places: the place of

the defendant; the place where the transport contract was made; the port of loading; port

of discharge; or any other agreed place. 115

Hamburg Rules provide for shippers' responsibilities also; the shipper is expected

to provide accurate particulars of the goods shipped by him i.e., marks, numbers, weight,

and quantity in the bill of lading. If inaccurate details are provided as a result of which

the carrier suffers losses, the shipper must indemnify him for the losses suffered. The

shippers' duty to indemnify subsists even if the bill of lading is transferred to the

consignee (AI1 17). In case of dangerous cargo he should inform the carrier of the

dangerous nature of the goods and the precautions that need to be taken. If they become

actual danger to life and property the carrier may unload, destroy or render them

innocuous, and the Hamburg Rules do not place him under obligation to pay

compensation except where there is obligation to pay 'general average' (Art. 13(4)).

114 The Hague Rules provided that the carrier is liable for loss or damage resulting from his failure to exercise due diligence to make the ship seaworthy, to properly man, equip and supply the ship or to make its storage area fit and safe for the carriage of goods but the Rule provided for the 'nautical fault exception' which free the carrier from the faulty navigation or management of the ship.The justifications for these 'nautical fault exceptions' were : the cargo was carried in wooden sailing ships, its course were subject to winds, charts were not available, if available were not reliable, no navigational aids were available, ship-owner could not communicate with the ships at sea.

115 The Hague regime does not provide for rules on jurisdiction and arbitration and the parties were free to make contract as they pleased. Hence this aspect was left to be governed by a clause in the standard bill of lading, which invariably required any claim to be brought at the "carrier's place of business." This caused diverse interpretation of Hague Rules and many courts invalidated the carriers forum clause in the bill of lading, which lessened the liability of the carrier and placed heavy litigation cost on the consignee. As a consequence an agreement was entered between the shipper and ship-owner-the 1950 British Maritime Law Association Agreement-which provided that the members of the agreement will not bring any action in any court except those of UK (Ridley, 1978 p. 202). Such an agreement and a clause in the bill of lading are unfair for the cargo owner. Cargo loss or damage is not discovered until the cargo is unloaded at the port of destination, which may be thousands of miles away from the place of business of the carrier. This places the burden on the claimant to transport the evidence to a distant foreign tribunal and most times, the heavy cost of litigating in a distant forum may make it impractical to press claims.

103

Under the Hamburg Rules, the liability of the carrier is limited to 835 SDR per

shipping unit or 2.5 SDR per kilogram of the goods whichever is the higher which is

equivalent to the limitation prescribed in the 1979 protocol to the Hague, that provision

. d. H b 116 was mcorporate mto am urg.

The Hamburg Rules do not make specific mention of electronic documents but it

provides that "the signature on the bill of lading may be in ... electronic means" (Art

14(3)). The electronic signatures are generally attached to electronic document. That

means that the Hamburg Rules accommodate paperless bill of lading also (Carr, 2005).

The Hamburg Rules were built on solutions developed long ago by rail, road, 117 and

air transport regime. 118 It also dealt with the problem of transshipment by separately dealing with

the responsibility of "contracting carrier"119 and "actual carrier."120 The Hamburg Rules provide

(Article I O(a)) that, the contracting carrier remains responsible for the entire carriage, even

though whole or part of the carriage is entrusted to another carrier-the performing

carrier or the actual carrier. The early pattern of transport along the agreed routes has

become obsolete with the onset of the container revolution. The earlier law relating to

carriage of goods by sea (both Hague and COGSA) prohibited transshipment; the cargo

was to be carried throughout the voyage in the same ship, unless special circumstances

make it impossible for the carrier to carry the goods in the same ship to the port of

discharge, and in the absence of express provision to the contrary in the contract of

affreightment (Ridley, 1978, p. 141 ). Trans-shipments were made at owners' risk.

Collection and distribution is arranged at trans-shipment centers which imply

that, the shipment do not reach destination port straight away, the cargo goes through

various ports before they actually reach the destination port. The Hague Rules do not

116 Warsaw Convention, for air transport, provides for 250francs per kilogram. 117 International Carriage by Road (Geneva), 1956 also known as C.M.R. Convention-Convention de

Marchandises par Route). Under the contract of goods by road, in the absence of any agreement to the contrary, it is the duty of the carrier to deliver the goods to the consignee. The carrier is not absolved from liability till the goods reach the consignee; he may deliver the goods to the second carrier or agent to be ultimately delivered to the consignee. Neither the second carrier nor the agent is held responsible (Jasper Ridley, I 978 pp.43-68).

118 International Convention concerning Carriage of Goods by Rail 1970 (also known as C.I.M. Convention-Convention lntemationale de Marchandises) came into force in 1975. (Jasper Ridley, 1978 pp.69-77).

119 One who makes the contract of carriage of goods by sea. 120 One to whom all or part of the performance of the carriage has been entrusted, they are also called

"performing carrier."

104

address problems that anse from trans-shipment, which lead to uncertainty and

conflicting rules in vmious jurisdiction along the cargo route. The owner of the damaged

cargo may not be in a position to ascertain the wrong-doer and hence he might have to

sue all the carriers and the cargo handlers in far-flung jurisdiction.

The 1978 Hamburg Rules were built on the existing rules developed in the road,

rail, and air transport. Container revolution led to transport arrangement by linking

various modes of transport-road, rail, and air. The conclusion of Hamburg Rules also

made it possible to conclude the International Convention on Multimodal Transport in

1980, because for a long time the preparation of uniform rules for inter-modal transport,

was stalled due to disparities between the ocean carriers and other modes of transport

h .I d d . 121 sue as ra1 , roa , an mr.

In those days cargo was stowed in the ships' hold, and was not carried on the

deck, if it was carried on the deck then it was carried "at shippers' risk." The Hague

Rules exclude live animals and cargo carried on deck from the definition of "Goods."122

The modem transport techniques involve stowing of containerized cargo on the deck.

Though the Hamburg rules came into force in 1992, they may not have achieved

the desired impact so to say: less than 2% of the US trade involves Hamburg countries

and the American vessel interest is significant enough bloc to impede its adoption by the

US Congress (Chandler, 1993). It is argued that substantive uniformity is attainable only

when various participants arrive at the consensus; the proponents of Hamburg Rules

failed to recognize reaction of the ship-owners, that their rights have been compromised

without receiving anything in return, and they resented having one-sided solutions

imposed upon them and resisted such an action (Chandler, 1993). But Fredrick (1991)

observes that though the developing countries asserted to reform antiquated in-egalitarian

Hague Rules provisions, their delegates were reluctant to impose, by their numerical

superiority, an international regime unacceptable to the industrial countries.

Consequently certain Hague Rules principles that are arguably disadvantageous to the

121 The terms "multimodal." "inter-modal.·· and "trans-modal" are used to mean the same. 122 Article I of Hague Rul~s: (c) "Goods'' includes goods, wares, merchandises and articles of every kind

whatsoever, except live animals and cargo which by the contract of carriage is stated as being carried on deck and is so carried.

105

commercial interests of the developing countries are still present in the Hamburg Rules.

It seems there is no way out of this impasse.

The political origins of the instrument had also played a dominant role in its

dismissal as an undesirable convention (Carr, 2005). Maritime lawyers could not solve

the Hague versus Hamburg problem, ship operators and shipper clients might have to

resolve it on their own (Sweeny, 1992). Both these rules are simultaneously in operation,

some countries are party to Hague, some are party to Hague-Visby, and some are party to

Hamburg. This is a major impediment in the maritime trade. While making commitment

in the GATS negotiations, countries should consider this impediment to trade and

deliberate how this problem could be addressed. The GNS negotiation had not touched

upon this problem. It would be good if they could negotiate these issues; especially the

developing countries must be aware of this issue while making commitment in this

sector.

The next major issue concerning liner shipping is the liner conferences system

and the UN Liner Code (a contentious issue that was hotly debated in the GNS Uruguay

Round negotiations). The MINCOMAR countries made sure in theGNS negotiations that

the UN Liner Code is not sidelined in the services negotiations; these countries

emphasized that the UN Liner code should be taken into consideration in the maritime . . . 123

transport services negotiatiOns. ·

4.2.b. Liner Conferences: Origin and Development

Ever since the steam ship began to replace the sailing vessel as the principal

carrier in overseas transport, the Industrial Revolution in Great Britain, and the opening

of Suez Canal contributed to the growth of Liner Shipping. Their effort to run regular

services was becoming difficult due to intense competition among themselves, because

there was more capacity than cargo available for transport, which led to rate cutting and

intense cut throat competition. The sailing ships were prepared to carry cargo at rates

well below those which were profitable for steamships, and this accentuated the decline

123 Ministerial Conference of West and Central African States on Maritime Transport (MINCOMAR) consist of Angola, Benin, Burkina Faso,Cameroon, Cape Verde, Central African Republic, Chad, Cote d'lvoire, Equatorial Guinea, Gabon. Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sao Tome, Senegal, Sierra Leone, Togo and Zaire.

106

in freight rates and subsequent fall in profitability, because of which the shipping industry

was threatened with self-destruction by rate wars and uncontrolled competition

(McDowell, 1954 ). Rate wars between liner companies were a characteristic of liner trade

in the 19th century. The newly emerging liner companies with their new and expensive

steamships did not want to ruin themselves, by competing among themselves by cutting

the prices. Hence they formed cartels and organised themselves for self regulation, which

came to be known as Conferences. 124 Steamship Conferences or Liner Conferences are

voluntary associations of competing international ocean common carriers, organized in

respect of each trade route, to limit rate-cutting and competition among the liner

companies that operate in that route. The ship-owners agreed to co-operate in fixing

economic freight rates, to limit the number of sailings, to grant no preferences or

concession to any shippers, and the Conference members undertook to sail on a given

date regardless of whether they had a full cargo.

The Emergence of Liner Conferences

Cartels were predominant feature of liner trade; the mam argument for

cartelisation in the liner shipping was to prevent "ruinous competition." There used to be

severe rate cutting in order to fill the empty hold of the ship with cargo. Ships have large

fixed costs and low running costs, so low that they constitute a fraction of total costs.

There was an irreversible incentive to cut price, which could end in extensive

bankruptcies and wasted assets. Hence the liner shipping companies started to regulate

themselves through cartels i.e. Liner Conferences. The primary obligation of conference

members is, to conform to the freight rates fixed by the Conference and not to charge any

shipper rates, other than those laid down in the schedule. The Conference had two main

aims: one, to regulate the traffic and two, to fix the carrying rate, in order to combat

competition from ship-owners who were not conference members or 'outsiders.' The

British ship owners were the originators of the Conference System. It was in the Indian

trade that the earlier combination of ship-owners was formed. The first conference which

was formed was the UK-Calcutta Conference in 1875.125 Calcutta seems to have been the

124 The first liner conference was organised in the UK-Calcutta trade route in 1875 and then later in China and Japan trade routs in 1879.

125 The steam ships after the opening of Suez Canal in 1869 and the freight market boom in 1872-3 enabled

107

main trading port in the early years. Seven British ship-owners operating a regular service

in this route at that time joined together and agreed among themselves: a) to regulate the

number of sailing that each would make and b) to fix minimum rate from all ports in the

UK to Calcutta and from Calcutta to UK ports regardless of the size of the consignment

or of the shipper (Deakin, 1973).

During the subsequent decades, the conference system which had been pioneered

in the Far East trade, was adopted worldwide by liner shipping in the China, Australia,

Africa, Brazil and Argentina and the US trade. By the early 1970s, there was a total of

more than 360 conferences and freight agreements (Stopford, 1988). They were

organically unrelated to each other and served a variety of liner trades. They were mostly

autonomous, with their own separate rules, range of operations, customs, and practices.

There is no supra national Conference, each Conference was a separate unit. Whereas, in

the Air Transportation sector there is one single cartel/association i.e. the International

Air Transport Association (IAT A) which regulates the commercial aspects of aviation.

There were three types of conferences: open conferences; 126 closed conferences

and outsiders. 127 The closed conference system restricted membership, set freight rates,

and often fixed the trade share of each members of the conference. The Conference

eliminated price competition among the member of the Conference but these cartels

were not all-embracing as they had to face competition from tramp ships, as well as from

non-Conference liners i.e. 'outsiders' against the Conference.

Dilemma of the Tramp Ships and Non-Conference Liners

The shippers (exporters and importers) found that the freights rates had become

ship-owners to offer a regular service for carrying general cargo in the Far East which was a prosperous route. There were a number of British shipping companies such as P&O, Alfred Holt. and Glen Line that were offering scheduled liner services to the Far East in the 1870s ( Stopford ( 1988).

126 A conference that sets freight rates without restricting membership is known as an open conference. Any ship-owner can join an open conference, so there is no control over the volume of shipping operating on the route. Open conferences are used in the US trade because the under the US anti-trust Jaws, agreements that restrict competition are illegal. However, the US Shipping Act. 1984 offers liner companies some immunity from anti-trust Jaws by permitting certain operating agreements and joint ventures. This immunity is dependent upon the agreements being approved by the Federal Maritime Commission (established in 1961 to supervise the regulation of liner shipping) (Stopford, 1988).

127 There are companies that set up liner services on a route without joining the conference; this has always been a feature of liner conference system. For e.g., the Soviet liner companies never joined any form of conferences.

108

higher after the formation of cartels/conferences. This Conference system was not

popular among the shippers of Manchester's Cotton Piece goods-the 'fine' cargo of

outward trade. They claimed that there was no incentive for them to go on using the

vessels of the ship-owners within the conference and in 1877 the merchant shippers of

Manchester threatened to charter their own vessels (they were powerful enough to do

this); the conference members were therefore forced to allow a rebate on Manchester

piece goods and to those shippers who regularly used Conference vessels (Deakin, 1973,

Ram, 1969).

The Conferences soon realized the need for securing patronage from shippers,

hence they started giving them concession to secure exclusive patronage of their goods.

The Conference also sought to do away with outside competition from operators of tramp

ships and non-conference liners. Tramps and non-conference ships were not bound by the

rate fixed by the conference freight rate. Tramps and non-conference ships would carry

cargo at a freight rates much lesser than the rate fixed by the liner conference; this led to

shippers using non-conference vessels for transport.

In order to secure exclusive patronage, the Conference introduced 'Deferred

Rebate System' in the year 1877.128 This meant that any shipper tempted by the reduced

rates offered by non-conference 'outside' operators stood to lose a very substantial sum,

if he accepted their service (Stopford, 1988). Thus the shippers were tied to the

conference liner services. Between 1877 and 1906, the deferred rebate system became the

pattern in Conferences organized in a number of trade routes. This effectively tied the

shippers to the Conference liners. Another method initiated by Conference to fight non­

Conference/outsider competition was the system of 'fighting ships.' The 'fighting ships'

were Conference vessels placed on the same day as the vessel of the competitor and

sailing to the same destination. These fighting ships indulged in rate-cutting with the

128 Under this system, large shippers agreed to give their exclusive patronage to the Conference Liners by shipping all their goods through them. The Conference Liners in turn charged them normal freight rates, which they charged everyone else; but in consideration of the exclusive patronage, the Conference agreed to return or rebate a portion of the freight to the shipper at the end of ce11ain period. Merchants who shipped with the conference regularly for a period of six months were given I 0 per cent rebate, but the rebate was not paid until a fu11her six months had elapsed, during which time the loyalty rebate was forfeited if the merchant used a ship owned by a firm that is not a member of the conference.

109

competitor and made it difficult for him to secure any cargo. Fighting ships were not

bound by the Conference tariff, as the only purpose of their sailing was to fight

competition. The conference members shared the losses of the fighting ships.

The political and legal independence of the developing countries brought a major

change to maritime industry as they sought to establish control of their trade. Before

independence most colonies were almost entirely dependent on the imperial powers for

the supply of shipping services. The problems started with independence because, almost

at once, the newly established nations were subject to the commercial pressures of the

international shipping industry. They found that they had no control over the freight rates

charged by the liner conferences that carried their trade, and this in tum gave rise to

concern that they were being exploited. Most Conferences were closed conferences i.e.

new liners were not allowed to be members. The developing maritime nations shipping

lines could not get membership into the existing Conferences. Even if they attempted to

join Conferences, they were not admitted and even if they were admitted in some

Conference route they were extracted entry fee as high as $10,000 (Bennathan and

Walters, 1972-73). Moreover the developing maritime nations' liners were driven out of

business by their deferred rebate system and the system of fighting ships practice.

From the outset the conference system was always the subject of controversy and

criticism on the ground that it was a monopoly. There was widespread dissatisfaction

with the working of the Conference system, which led to number of governmental and

inter-governmental enquiries into shipping Conferences and their activities.

The first legal challenge came in 1887, when the Mogul Line (an Indian liner

company) sought an injunction to stop the Far East Freight Conference from refusing

rebates to shippers using Mogul vessels. At that time, the Far East Freight Conference

had seven members. In 1885 Mogul Line had applied for admission to the conference, but

was refused because Mogul ships did not bear a full share of running regular services at

off-peak periods. This refusal led to a rate war during which the conference's Shanghai

agents issued a circular warning, that any shippers using Mogul ships would forfeit their

rebates. Mogul Line went to court and sought an injunction to stop the conference from

refusing the rebates, but the application was refused, confirming the legality of the

110

conference system (Stopford, 1988).

Some years later, a Royal Committee on Shipping Rings was appointed in Britain

in 1908 to investigate and report on the working of the Conferences, and their various

practices with special reference to the practice of the deferred rebate system. The Royal

Commission's Report that was issued in 1909 recommended that Conferences were

necessary for the shipping industry and ship owners organized in Conferences needed

some protection in the form of continuous shipper support, as guaranteed against periodic

competition from tramps and non-Conference lines. The Royal Commission also

portrayed that the deferred rebate system was a necessary and controlling factor in ocean

commerce.

This was the time when the British ship-owners were holding a dominant

position. Moreover, in the liner markets, Soviet lines were competing as non­

Conference/outsider. Soviet liners were consistently and systematically undercutting

conference freight rates, thereby undermining the commercial viability of all liner

operators in the liner markets (Bergstrand and Doganis, 1987). The deferred rebate

system thereafter continued to be the pattern among Conferences that operated to and

from the UK. 129

Thereafter in the US also there were complaints that the conference set freight

rates at levels which were injurious to their export. The operation of the Conference

system again came up for consideration in the US. The Department of Justice prosecuted

Liner conferences indulging its monopolistic activities in 1911, for violation of the

Sherman Anti Trust Act 1890 (Ram, 1969). The United States ordered an investigation

on the system of steamship conferences and their practices. This investigation was

undertaken by the US House Committee on Merchant Marine (popularly known as the

Alexander Committee). The Committee reported in 1914, which recognized the public

interest served by steamship Conferences, but recommended outlawing of the 'deferred

rebate system' as well as the system of 'fighting ships' that prevailed among

Conferences. The Report noted that, to terminate existing Conference agreements would

129 Many other studies have been carried out and have generally found that, the high fixed costs inherent in running a liner operation, the cargo volatility and trade imbalances necessitate some form of control on competition, if the companies are to offer a stable service (Stopford, 1988).

111

necessarily bring about one of the two results: a) the liners would either engage in rate

wars which would mean the elimination of the weak and the survival of the strong or b)

to avoid a costly struggle, they would consolidate through common ownership. Neither of

the above result could be prevented by legislation and both results would end up in being

effective monopoly. Moreover, steamship agreements and conferences were not confined

to the lines engaging in the foreign trade of United States. They were as universally used

in foreign trade of other countries as in the US (McDowell, 1954). Hence the Alexander

Committee recommendations were embodied in the US Shipping Act 1916, which

provided for shipping conferences' immunity from the national anti-trust laws subject to

a measure of surveillance through a regulatory agency responsible to the Congress-the

Federal Maritime Commission (FMC). This act firmly established the legality of the

shipping Conferences. The US government did not exercise any direct control over the

establishment of freight set by the Conference on import and export traffic of the US

(McDowell, 1954).

When the Shipping Act of 1916 made both fighting ships and deferred rebate

system illegal, a type of pre-rebate system came into operation. This system was known

as 'dual rate system.' Under this system conferences entered into exclusive patronage

agreements with shippers as in the case of deferred rebate system; but instead of getting

deferred rebate in return for their exclusive patronage, the shippers got their rebate in

advance, by means of special contract rate in the schedule, to which they became entitled.

There were two rates in the conference schedule; the normal rate was applicable to the

odd shipper, who occasionally used the conference, the concessional tariff rate known as

contract rate, which may be 10 to 20% less than the normal rate, was applicable to the

contract shipper, who entered into exclusive patronage contract with the conference. The

system created a set of shippers who paid less than the regular freight rates for exactly the

same services by virtue of their signing exclusive patronage contracts with the

conferences. The conferences could terminate the contract of a shipper, if he was caught

using non-conference lines and could, in addition, claim damages from him. 130

130 The dual rate system was first put into effect by a conference from North Atlantic to the UK in 1922, and by 1930 had become popular (Ram, 1969).

112

The dual rate system was challenged by one of the leading non-Conference lines

and the decision of the US Supreme Court in 1958 caused doubts on its legality.

Following this, the Special Committee on Steamship Conferences conducted a study on

the dual rate system in 1959 and made its recommendations in 1960. On the basis of this

recommendation, the US Congress amended the Shipping Act 1916 and legalized the

operation of the dual rate system in 1961 (Ram, 1969). This was the time when the US,

after the World Wars, became the owner of a large merchant fleet of over thousand war

built ships. And, moreover, their main competitor in the trade was non-Conference Soviet

liner ships.

After legalizing the dual rate system by the US by amending the Shipping Act in

1961, the ministers of shipping from a number of European Countries together with Japan

formed a loose association known as the Consultative Shipping Group (CSG), which had

then subsequently made various pronouncements. In 1963 the ministers concluded that:

a) Conferences were indispensable, b) but there must be a means to ensure fair practices,

and c) that means should be provided by the Conferences themselves rather than by

Government interventions (Farthing, 1972-73 ).

In the UK, a Committee of Enquiry under Viscount Rochdale was appointed in

July, 1967 to look into shipping policy in general. Rochdale Committee Report concluded

that, ship-owners are benefiting from operation of restrictive agreements relating to trade

to and from the UK, at the same time members of the conference should collectively

accept a published Code of Conference Practice (Ademuni-Odeke, 1988).

Thereafter, the members of the Consultative Shipping Group (CSG), meeting in

Tokyo in February, 1971 also attended by shippers and ship-owners, underlined the

importance of the Liner Conference system, but at the same time laid down guidelines for

the preparation of a Code of Conference Practice which should ensure that the

Conferences observed certain principles of fair trading. This Code emerged as

CENSA 131 ICES 132 Code. Over the years, the debate was not whether conferences should

be regulated or not, but what should be the manner of that regulation. The CENSA/CES

131 Committee of European National Ship-owners Association. 132 European Shippers Council.

113

Code stood for the principle of self-regulation. This Code was popular only m the

developed world.

After the Second World War, the newly independent developing countries

struggled to develop an international convention confirming their right to participate in

the transportation of their own trade. They wanted a worldwide regime for liner shipping

because their commercial interests were in the hands of developed countries ship-owners.

It became one of the major political issues of the 1960s and 1970s.133 Their effort to

break into shipping market failed owing to lack of experience and met with little

sympathy from liner conferences. This led to political action by the 'Group of 77' (a

pressure group of developing countries within the UNCTAD) which eventually resulted

in the UN Code of Conduct for Liner Conferences. 134

This Code was a compromise between the developed and developing nations on

the matter of Liner Conferences. The developed countries claimed that shipping was a

private enterprise where market forces and competition best determined the conduct of

business. The developing countries were of the opinion that, shipping was a strategic

industry with great impact on their capacity to trade; there was a prior role for

government in the development and control of international shipping.

Till the Second World War international shipping was controlled exclusively by

few maritime powers and it was not subject to international economic regulation, whereas

the international trade had been subject to international regulation under the GATT. The

post-war period of 1947-64 witnessed the birth of some 75 new states after prolonged

struggle for independence (UNCTAD, 1985). Majority of these new nations had no fleet

of their own and their international trade majorly depended on foreign flags. Some

developing countries had very few national fleet and were struggling to expand their

133 The issue was raised at the first UNCTAD conference in Geneva in 1964 and the consultation debate was further developed at the second UNCTAD conference in New Delhi in 1966. By 1972, when the third UNCT AD conference met at Santiago de Chile, a draft Code of Conduct of the Liner Conference System was issued to delegates, and in the ensuing debate obtained almost total support from the Group of 77, though it met with strong opposition from many of the developed countries. 134 The conference was held in two parts in late 1973 and early 1974, and the Convention on the Code of Conduct for Liner Conferences was adopted by a vote of 72 to 7, with 5 abstentions. It came into force on 6 April, 1983. Problems were encountered by the EEC countries in ratifying this convention on the understanding that there would be free competition in trade between them ..

114

national merchant marine. Their dependency on foreign vessels brought about adverse

effect on their Balance of Payment position.

The impetus for the Liner Code came from the developing countries, which found

it difficult during the 1950s and 1960s, to gain entry to the conferences that carried their

trade; their lack of experience in the liner business made it difficult to press their case.

The UN code covered four major areas of liner shipping in which the developing

countries were particularly interested: 1) Conference membership: One of the major

problems faced by developing countries was that they had no right to become members of

the conferences serving their trade. The Code provided the right to automatic

membership for 'national shipping lines' of countries whose foreign trade was being

served. 2) Right to carry cargo: The best-known aspect of the Code was the cargo-sharing

formula, which states that unless mutually agreed: a) the group of national shipping lines

of each of two countries, the foreign trade between which is carried by the conference,

shall have equal rights to participate in the freight and volume of traffic generated by

their mutual foreign trade and carried by the conference. b) third country shipping lines,

if any, shall have the right to carry a significant part, such as 20%, in the freight and

volume of traffic generated by that trade. 3) Freight Charges: The Liner Code required

shipping conferences to consult shippers over the rates charged for the carriage of cargo,

the system of sub-charges and the method of dealing with currency fluctuation. This puts

the conference in the position of having to justify rate changes. 4) National line

participation: To ensure that the national lines of developing countries are fully involved

in major policy decisions, the Code requires the consent of the national lines to all major

conference decisions affecting the countries serviced.

The developed countries made every effort to forestall the UN Liner Code; but

among developed countries France, Belgium, and the Federal Republic of Germany

supported the UN Code and expressed their desire to join the UN Code, which presented

the EEC with a dilemma because the UK, the USA, and the Denmark were against the

UN Code. Finally a common position on the UN code was sought to be achieved in the

EEC in the form of Regulation 945/79-the "Brussels Package" which required the

members States to adopt the UN code, subject to certain modifications that the UN code

will not apply among the EEC and OECD members.

115

The UK, EEC, and the OECD accepted the UNCTAD Code based on the

realization that any continued opposition would be futile. The UK and other countries in

the EEC agreed to the UN Code because: 1) owing to the realization that in the absence

of the Code, an increasing number of developing countries would seek to take even more

damaging unilateral action to reserve cargo to their own ships. 2) Some members in the

EEC were adamant that they intended to ratify the UN Code whatever the view of their

partners. 3) To combat the incursion of Soviet liners, often operating outside the

Conference. 135 To the Soviets, the UN Code was seen as a tool to tame and weaken

imperialist shipping (Ademuni-Odeke, 1988).

The EEC and the OECD were successful in weakening the Code's fundamental

provision, because the Code applied only to liner services operating within a conference

and on route between countries that are contracting parties to the convention. It was not

applied to non-conference operations. Since the US has not ratified the code, and is not

likely to do so, it could not be applied to any trade touching the US. Neither was it

applied between the EEC countries, owing to the modified 'Brussels Package.'

Developing countries had great hope on the UNCTAD Code, while it was being

negotiated; they hoped that it would bring about some order in the ocean trade once it

came into force. But soon their hope faded way, as the Code took several years before it

came into force. b1 the meanwhile even before the UN Code came into force an Indian

government official, in October, 1978 concluded that the UN Code was "thus far all

practical purposes dead." 136(Trivedi, 1980 p. 143).

The UN Liner Code had also become insignificant due to the structural changes

that had taken place in the general and liner shipping services. Surplus liner tonnage and

the weakening freight market had resulted in making in-roads for non-Conference

operators in the liner trade. Containerisation and the new concepts of multi-modal

transport, involving integrated chains of sea and land transport, based on a single bill of

lading or multi-modal transport documents have become increasingly popular, especially

135 One speaker in House of Lord's commented: "There are many people who think that these poor developing countries ... out to be allowed to carry cargoes in own-ship ... but , of course, they are ships chartered from the Russians and chartered at very their special rates for very special purposes (Ademuni-Odeke, p. 1 9).

136 Mr. Trivedi was then Minister of State for Shipping and Transport, India.

116

in the developed countries. The old liner routes and traditional conference operators were

being replaced by new trunk and freedom systems. Traditional shipping lines were being

replaced by consortia of shipping lines, which pool their vessels and exchange slot

charters. The combination of all these factors has resulted in conferences losing the near

monopolistic hold on liner trades which they had in the 60s and early 70s and their share

of the trade started dropping significantly. The secretariat office, situated at Mumbai, of

the KARMAHOME Conference, the oldest Liner Conference, was closed down in

September, 2007. 137 Nevertheless, the UN liner code is important as far as the African

countries are concerned. There are several under-developed countries that do not have

their own merchant fleet to carry their in-bound and out-bound cargo.

Later development in the transport technology brought about containerization,

which led to inter-modal or multimodal transport system. This development did not affect

tramp services in a major way, but it changed how the liner services functioned. Cargo

handled through large standard-size steel containers with the help of giant cranes became

prominent sight in the modem 20th century ports. Container shipping lines have assumed

new land transit responsibilities by offering door to door service, as distinguished from

port-to-port service. This has resulted in the modem combined transport system also

known as multi-modal transport system. This system implies the acceptance of

responsibility by one pmty for through international movement of goods by different

modes of transport, one at least of which is by sea, and is covered under GATS

multimodal transport services negotiations.

4.3 Evolution of Rules Relating to Multi-modal Transportation

The advent of containerization has facilitated the development of international

inter-modal transport. This system of transport has given rise to the emergence of a new

entity-the multimodal transport operator or combined transport operator, who enters - _.,.. --- - ... ._.....;.

into a contracr-witlnhe shipper for thed;-~;-~~ door movement of goods over different

modes of transport. It has also necessitated the introduction of a multi-modal transport

document or combined transport document which cover different modes of transport over

137 This information was obtained during my field trip to Bombay, when I had gone to the Secretariat of KARMAHOME Conference office, and interviewed the Secretary Mrs. Kulshreshta.

117

which the goods moved. This document laid down the respective rights and obligations of

the multimodal transport operator, the shipper/consignees, the insurers, and banks.

At present, each form of transport is governed by separate international

conventions. The Hague Rules and Hamburg Rules govern the bills of lading pertaining

to carriage of goods by sea. The Geneva Convention, 1956 (CMR) governs the ; '

internation& transp_9_rt _9ocument. for the carriage of goods by road; the Berne Convention

1952 ~~I~) gQ".'efl_!s !h~ _l_!a!_l~P?rt_docl!ment for the carriage of goods by r~il; and the 1 Warsaw Convention 1929,138 as modified by the Hague Protocol of 1955 governs the -·--· -·-transport document for the carriage of goods by air.

The main rules on contract of carriage for the various modes of transport have

shown that there are considerable differences in nearly every respect. Even where

principles are same, they often are expressed in a different manner. This makes it

extremely difficult for lawyers not particularly familiar with a specific type of transport

to evaluate meaning and importance of the legal rules. This situation is completely

detrimental, when it comes to combined transport operations. Moreover, there are no

internationally agreed rules on contracts, which provide for the obligation of the carrier to

carry goods by means of different modes of transport. The attempts for international

unification of rules have however, failed.

As rules and regulations governing the responsibilities and liabilities of the carrier

differ under those conventions, it has been found necessary to lay down uniform

international regulations to govern inter-modal transport operators. Such regulations to

cover not only the responsibilities and liabilities of the combined transport operator but

also other matters pertaining to the combined transport document, customs formalities

etc. In the absence of such rule, combined transport documents or rules pertaining to

such documents, have been prepared by individual carriers themselves or by shipping

conferences or by freight forwarders. Some international organizations like the Baltic and

International Maritime Conference and the International Chamber of Commerce have

also come up with model combined transport documents which are being used in

138 Convention for the Unification of Certain Rules Relating to International Carriage by Air, Warsaw, 1929.

118

international inter-modal transport.

There are no international rules pertaining to combined transport documents.

Hence there is a "legal chaos" as to whom to sue in case of delay in delivery, loss or

damage to goods, where to sue, time limits for initiating action, or the basis and extent of

the forwarders/carriers liability (Carr, 2005).

There are two main areas which reqmre regulation as far as multi-modal

transportation is concerned. One relating to the documents issued m multi-modal

transportation and the other relating to the multi-modal transport operators (MTOs). The

United Nations and its specialized organizations have made an attempt to bring about

order in these two sectors, which have not come into force as yet, as a result there are

different kinds of multi-modal transport documents that are available. In the following

pages an attempt has been made to study the UN conventions and other related laws

relating to multimodal transport documents and multi-modal operators. GATS seeks to

cover multi-modal transportation as the "fourth pillar" and some countries have made

additional commitment in their national schedule of commitment.

4.3.a. UN Convention on the Multi-modal Transport of Goods 1980

Combined Transport Document is issued by the combined transport/multi-modal --operators; often, a through bill of lading is issu~~. and services of sub-carriers such as

railways or road transport are hired by the combined transport operator. It is a common

feature that a single intermodal bill of lading and the quotation of a single joint rate is

offered to the shipper by the multimodal transport operators. Intermodal services offer ----·--------- .......... ------~-------shippers new routing options and cost-saving potentials, not necessarily in terms of lower

freight charges, but rather in terms of lower inventory-caiTying costs, reduced packaging,

less damage and pilferage, and lower administrative costs by not having to arrange

segmented transportation with various modal carriers (Thuong, 1985).

The developed countries strongly supported the need for an international

convention in the field of combined transport, as this system was already introduced on a

large scale in those countries. There were several attempts by the international --119

community to unify the rules relating to combined transport bill of lading. 139 The lack of

a uniform liability regime for multimodal transportation inevitably affects commerce due

to uncertainty in respect of its legal framework. The existing legal regime is sort of patch

work regime, which impedes the introduction of a single multimodal waybill/transport

document, for the container transportation operating across different modes. The mode

specific liability arrangement is not appropriate for the modem transportation scenario, 140

and this creates uncertainty as to whom to sue in case of damage or loss to the cargo.

Finally, the UN Convention on Internatio!lal Multimodal Transport of Goods was

st}\d on 24 May ~80. It was designed t~ introdu~e a ,:~~~orm liability scheme. ~ liability of the multimodal transport operator, therefore, was not dependant on

establishing during which mode of transport the loss or damage occurred. It adopted a

scheme whereby the multimodal operator was responsible for loss, damage, or delay in

delivery while the goods were in his control=that.is from _tp~_time he !a.Js.es t_he g()~9-~ in

his charge to the time of delivery (Art 14). The basis of the multimodal operators'

liability was one of presumed fault or neglect. To escape liability, the burden is on the w• • -- __.._ • ____.....,

multimodal operator to show that he, his servants, agents, or any other perSO!J.S oLwhose -----services he made use of, for the performance of the multi!!]oda.J t!ansport s:o111ract (Art.

15) took all measures that could reasonably be required to avoid the occurrence and its _____ _. __ .,...._ -·· .. - .. _ .... - ... "" ~ - .,_. ~ :~ ,......,.

consequences (Art 16). It adopted a complex network scheme for compensation by ...___---------__.., drawing a distinction between multimodal transport involving a sea trajectory and

multimodal transport not involving sea trajectory. Where there is a sea carriage, liability

amount was limited to 920 SDR per package or other shipping unit or 2.75 SDRs per ,____ kilogram of gross weight of goods lost or damag~d_(Art 18(1)). In the absence of a sea

limb, liability was set at the maximmn-~f-~-~3 SDR~er kilogram of gross weight of

- -------------139 The CMI draft convention known as the Tokyo Rules 1969 and the UNIDROIT Draft Convention

1965. Both these conventions were combined and a composite draft presented to the IMCO at an IMCO Conference on International Container Traffic held at Geneva in 1972 which was adopted as TCM convention (Convention of International Combined Transport of Goods). The developing countries expressed that they had no experience in the field of container traffic or Combined Transport. The draft TCM Convention had been drawn up without consultation with them. They felt that the experience of the developed countries could not be a guide to developing countries, where economic conditions and the pattern of trade are different. They expressed the need for a comprehensive study of the economic implications of the proposed convention for developing countries under the auspices of the UN body like the UNCTAD.

140 WTO doc.G/CIWI33 dated 2 December, 1998.

120

goods lost or damaged (Art 18(3)). However, where loss or damage occurred on a mode

of transport where application of a mandatory national or international convention

provided for a higher limit of liability than that set in Art 18 of the Multimodal

Convention, the multimodal transport operator's liability amount is to be calculated by

reference to that international convention or the national law.

The UNCTAD Multimodal Convention of 1980 was worked out immediately

after the Hamburg Conference, carried by the hope that the new multimodal convention

might diminish the differences between the respective sets of unimodal transport rules­

this hope had not proved justified till now because the convention has not attracted thirty

ratification /accession to come into force. Because this convention was seen as overly

consignor friendly and it was drafted by the same international organization which

drafted the Hamburg Rules may have been a major contributory for its unpopularity

(Carr, 2005).

4.3.b. FIAT A Bill of Lading and the UNCTAD/ICC Multimodal Transport Document 1992

Differences between national laws seem to be too great and appropriate solutions -- "-- ....... _ -to cover all interests involved probably could not be found. Therefore, the International

Forwarding Agency and Transport Association (HATA) decided to work out general

conditions which created the so-called HATA Bill of Lading-::-<Ldocument embodying

li(!bility of multimodal carriers. Forwarders were aware that their interests lie in the ~_:--------_+ - --- '

unification of rules regarding combined bill of lading in the field of multimodal

transport-which is mostly operated by them. The HATA bill of lading was considered

to be provisional solution to face the existing situation but the national courts are not

bound to accept this rule forming general conditions.

Over the years several attempts were made, 141 the International Chamber of

Commerce (ICC) prepared a set of standard contractual terms for incorporating them into

commercial contracts which were later adopted by the UNCTAD. Thus it came to be

known as the UNCT AD/ICC Rules for Multimodal Transport Documents 1992,142

. 141 ICC's Uniform Rules for a Combined Transport Document 1973, as amended in 1975. 142 ICC Publication No. 481. The Rules adopted by the ICC EKecutive Board on I 1 June, 1991 came into

effect on I January, 1992. The UNCT AD/ICC Rules are also called the UNCT AD/ICC Standard Trading Conditions.

121

though it had more success through their acceptance by transport operators. They are only

contractual in nature and are not mandatory, and hence not effective means of achieving

international uniformity. 143

Under the UNCTAD/ICC Ru1~s, the _fo::_warder' s maximum liability is limited to 2

SDR per kilogram, which corresponds to the Hagu~~ V_isby _R_ules. -1_nd in the claim -----------involving error or omissions) maximum liability is set at 75,000 SDRsl In the event of

' - --- ·-- ---- - .J delay in delivery, the compensation is set at twice the charges for the relevant transaction.

These Rules allow the parties to agree to a higher limit but this may require the payment

of additional charges. The forwarder will be liable for a higher amount only if it has been

agreed in writing (cl. 27(D)). The forwarder is not liable for loss or damage caused by

specific events, such as, strikes, lock-outs, stoppage, or restraint of labour that could not

be avoided despite the exercise of reasonable diligence (cl.25(A)). He is presumed to be

at fault in the event of loss or damage and the burden is cast on him to show that, it could

not be avoided despite the exercise of reasonable diligence. Lack of reasonable diligence

is likely to be treated as negligence (Carr, 2005, p.408).

A comparison of the carrier liability framework of the UNCTAD/ICC Rules and

the Multimodal Convention indicate there is much that is common. It is indeed odd why

there is reluctance on the part of nations to adopt the Mul_t_imoQ&_~_~n_v~ptjop,_when the

UNCT AD/ICC Rules are heralded as great success. At best, it is political apathy towards _

a document drafted by an international organization-UNCT AD which openly promotes:jj'; ,. \ -' I

the interests of developing countries and the least developed countries (Carr, 2005). · --------..... ........ __ __._... ----- -" ~~-"'- ---........ ~ .. . ·- - ..-... .

The Multimodal Convention if adopted will herald a new era of predictability. To

some extent, this has been achieved by the use of UNCT AD/ICC Rules in standard terms

devised by freight association144 for use by their members.

Much of the cargo in international trade is still transported by sea, and bills of

lading continue to play an important role as a transport document. There are number of

conventions governing the bills of lading (responsibilities and liabilities of ship-owners)

143 UNCTAD Doc. TDIBICOM.3/EM.2012 dated 15 July, 2003. 144 International Federation of Freight Forwarders Association (FIAT A), Negotiable Multimodal Transport

bill of lading (also called the FIATA bill of lading), and British International Freight Association (BIFA).

122

are in force-the Hague Rules, Hague Visby Rules and the Hamburg Rules, causing

uncertainties in the international trade. Now, the emerging new practices in relation to

transport documents in the form of electronic bills of lading and electronic waybills, as a

result of developments in information technology also compound the uncertainties.

4.3.c. Electronic Bill of Lading

The opening of internet for public use heralded groundbreaking worldwide

economic development. The internet provided ready platform for commerce to flourish.

The information and communications technology revolution has been creating new

means of conducting business through the so called "e-commerce." The issue of using

paperless documents has been in discussion since the 1980s.

New technological developments always raise important issues and the legal

framework, to establish the rights and liabilities of the various actors involved in the use

of that new technology, which called for harmonization and certainty at the global level.

International Conventions are the most effective ways to achieve harmonization but they

have their shortcomings. Fuelled by politics, differences in legal systems and legal

understanding etc., international conventions face interminable delays at the drafting

stage. After the draft text is agreed, it may take years to go through the bureaucratic

process at the country level for it to be ratified. For the convention to come into force, it

require certain number of ratifications and further, the conventions may or may not attract

widespread ratification due to their inflexibility .145

Of late, the United Nations Commission on International Trade Law

(UNCITRAL) has been moving more towards drafting modellaws. 146 States are free to

adopt the model law verbatim or may amend it to suit their needs, or use it as a

framework for drafting their legislation. This level of flexibility increases the chance for

widespread adoption, albeit at the cost of a high degree of harmonization. Widespread

adoption should also contribute to certainty about the legal force. It must be noted that a

model law does not have the same legislative weight as a convention and perhaps does

not bring the same level of unification. But it does away with many of the delays and

145 States might want to opt out of ce11ain provision, but that may not be possible after the ratification. 146 Model Law on Electronic Signatures was approved by UNCITRAL on 5 July 2001, and the Model Law

on Electronic Commerce was adopted in 1996.

123

bureaucratic measures associated with conventions. States are free to adopt the model law

as it stands or base their law using the model law as a starting point (e.g. Indian

Information technology Act, 2000). This model law had worldwide impact and many

legislations have either adopted it or drawn inspiration for their own law from it.

The UNCITRAL Model Law is to apply to all commercial activities including

transportation of goods by air, sea, road, and rail. It applies to both domestic and

international commercial transactions conducted electronically. 147 Its objective is to

promote legal certainty. Part II of the Model Law focuses particularly on e-commerce in

carriage of goods. Transportation of goods is central to international sale of goods,

transport documents in the form of bill of lading play a central role in the sale/purchase

chain. It facilitates the use of electronic transport documentation by providing a legal

framework. The provisions are meant to apply not only to transport documents found in

the maritime sector, but also to those used in the context of road, rail, air, and multimodal

transport such as airway bills, bills of lading, multimodal transport documents, and

charterparties.

These days contracts are being concluded electronically. The electronically

concluded contracts are being recognized widely in many jurisdict_ions, largely as a result

of United Nations Commissio~ on International Trade Law (UNCITRAL)!. Model Law

on Electronic Commerce, UNCITRAL Model law on Electronic Signatures, and CMJ

Rules on Electronic Bills of Lading, and BOLERO Rules. These rules have made ------------ ---electronic bill of lading a reality.

In the mid-1980s, the International Association of Independent Tanker Owners

(INTERT ANKO) in association with Chase Manhattan Bank experimented with an

electronic system known as SEADOCS. The bill of lading was lodged with the Chase

Manhattan Bank, which functioned as central registry to effect the transfer of bill of

lading. The system did not take off because it was not economically viable.

The International Maritime Commitee (CMI) came up with a proposal, where the

carrier (instead of the bank) was to be responsible for effecting the transfer of bill of

147 The states, adopting the EC Model Law, have the flexibility to restrict its applicability to international commerce.

124

lading. Once the carrier receives the goods from the shipper, the carrier sends a 'receipt

message' of goods to the shipper, containing the ~sual details found i~ th~ bill of lading, .......___~-- ·-

~ ~~

and the 'private key' to be used. Once the shipper confirms the 'receipt message' he ---------~-~-- ---·

becomes the holder. The holder of the 'private key' has all the right associated with a

paper bill of lading i.e., naming the consignee, transferring it to the bank, or claiming the

delivery. The private key plays a crucial role in imparting identity as well as

identification as a 'technically appropriate form such as a combination of numbers and/or

letters, which the parties may agree for securing the authenticity and integrity of a

transmission.' The 'private key' is unique to the holder and upon transfer the new holder

is given a new key. The carrier is obliged to notify the holder of the place and date of the

intended delivery of goods. Upon notification, the holder is expected to nominate a

consignee and to give delivery instructions to the carrier with the verification by the

private key.

Unlike a paper bill of lading, electronic bills of lading require a third party to ~-- ... -- . ... .. -.........-·~,.,.,.

effect a transfer. Under the CMI Rules, the carrier plays an important role in transferring .._ ____ ----. the bill of lading. To effect a transfer, the shipper (transferor) has to inform the carrier of

the details of the proposed new holder (transferee). Once the carrier confirms the

notification message, the carrier will issue a new private key to the new holder. Once the

holder has accepted the right of control and transfer, the carrier will then issue a private

key to the transferee, and cancel the private key issued to the shipper. Change in the

medium, from paper to paperless electronic bill of lading does not affect the rights and

obligations and liabilities of parties under the national and international laws. The success

of the CMI rules will depend upon whether merchants are ready to relinquish their

control over the bill of lading and entrust the carrier with information to effect a transfer.

The CMI rules are freely available to all. They do not require membership of a close

network.

Later, the EU set up a pilot project in the mid-late 90s called the BOLERO

project, to study the feasibility of electronic bill of lading. It resulted in the formation of

BOLERO International Ltd. It is a closed network available to those who subscribe with

BOLERO taking on the role of a trusted third party providing a platform for secure

exchange of bills of lading. The subscribers are subject to BOLERO rule book, which

125

provides the legal framework for paperless transactions. The BOLERO title registry plays

a vital role in respect of bills of lading; it is a data base of information relating to bills of

lading which is centrally operated. Transfer is effected by a combination of notification,

confirmation, and authentication through digital signatures. It is not very clear how

widely this system is used, though the BOLERO website indicates that major banks,

shipping companies, and traders are their members.148

4.3.d. UN Convention on Liability of Operators of Transport Terminals (OTT Convention)

During forwarding and other transport related activities, a great deal of damages

occur. During the whole of transport operations damage, pilferage, and loss of goods are

caused, while the goods are either temporarily stored or charged and discharged. Most ,-------~ - - -- --· .

conventions on carriage of goods by a single mode or transport include, the loading and

discharging operations in the scope of mandatory liability of the carrier except the Hague

Rules, in which the liability begins "when the cargo crosses the ships' rail and ends at

inverse moment. This fact is remedied by the Hamburg Rules, which made the carrier

liable as long as the goods remain under the control of the carrier, but it was not accepted ------~-- ~- ---

by major maritime powers.

Forwarding agents in some states play an important role in orgamzmg

transportation. This role is increasing because multimodal transportation of industrial

goods very often needs specific knowledge of many facts and legal provisions such as

capacity of foreign transport systems, import restrictions, and or currency restrictions etc.

The forwarding agents do not actually perform carriage i.e., they do not own or operate

transport carriers but just arranges and coordinate to provide for it; in many jurisdictions - ~ ---·- ------- ·- --~-- -·- . --

he is liable like the carrier.

The law of forwarding agents inspite of its great practical importance is not

unified by an international convention. Differences between national laws seem to be too

great and appropriate solutions to cover all interests involved, probably could not be

found. The forwarding agents' activities not only include collecting and forwarding

goods, but also choosing and appointing the carrier for carriage.

Majority of cases of loss of or damage to the goods in transit occur not during the

148 www.bolero.net

126

actual carriage but during transport related operations such as: loading, unloading, or ~ > • ·-·· --~ .. ----_

~~

storage of goods, before and after the carriage. Yet, those operations are not subject to

harmonized mandatory liability rules. The rules in national legal systems governing the

liability of terminal operators differ widely, both as to their source and content. In some

legal systems the operator is liable for the goods; but in some other legal systems, he is

liable for his negligence i.e., if he did not take reasonable care of the goods under his

custody.

When the consignor hands over goods for carriage to a terminal operator, the

carrier's liability may not begin. At the place of destination, the carrier's liability may

end when the carrier hands the goods over to a terminal operator, who will sometime

later, hand over the goods to the next carrier or to the consignee. It is quite usual that the

consignor hand over goods to the terminal operators several days before the actual

loading operations. , /~--~,~ ~

Hence another convention was adopted-the Convention on Liability_ of@

Operators of Transport Terminals in International Trade. 149 Also known as OTT ,---Convention, this convention was intented to fill the gap between the period of carriage of

goods left out from liability. However, this convention also has not come into force as

yet. It is based upon a draft prepared by the UNCITRAL and on earlier preparatory work

by the International Institute for the Unification of Private Law (UNIDROIT). It sought

to establish a uniform legal regime governing the liability of operators of transport

terminal for loss of, or damage to goods or for delay in the terminal. Transport terminal

operators perform one or more of the following transport-related operations-warehouse,

depot, storage, terminal, port, and dock, stevedore services at the railway station, airport,

or seaport.

For the convention to apply, the transport-related services must be performed by a

person, who falls within the scope of the definition of the "operator of a transport

terminal." The operator of the transport terminal is defined as (Art. l(a)): "a person who,

in the course of his business, undertakes to take in charge goods involved in international

149 United Nations Convention on the Liability of Operators of Transpmt Terminals in International Trade of Aprill9, 1991.

127

carriage in order to perform or to procure the performance of transport-related services

with respect to the goods in an area under his control or in respect of which he has a right

of access or use. However, a person is not considered an operator whenever he is a carrier

under applicable rules of law governing carriage." The convention applies only if the

transport-related services constitute a commercial activity i.e., "in the course of his

business". If transport-related services are performed with respect to goods involved in

domestic carriage, the Convention does not apply; it applies only in the case of "goods

involved in international carriage" (Sekolec, 1992).

Nevertheless, national laws on forwarding are very divergent and render the legal

situation in the various countries unclear. The divergencies are considerable and

extremely important for the practical work: it makes great difference whether a

forwarding agent is liable only for negligence in choosing an appropriate carrier on

behalf of the shipper or whether he is liable for acts and omissions of that carrier in

respect of damages caused by him. Most conventions referred to, confine to or

concentrate their rules on two elements of contract of carriage: a) liability for damages

caused to the cargo, and b) documentation. All the other elements of contract such as: a)

conclusions of the contract, b) possibility of avoidance, c) claims for damages in case of

non-delivery of a conforming ship, d) acquiring of rights following from the contract by a

third party (the consignee), e) possibility of transferring a title to the goods by assignment

or by transfer of bill of lading, and f) documentation are in most legislations ruled by

general provisions or stipulations which are divergent in each national legal system. It

can be said that large part of the law of transport is not unified.

Once the Hamburg and the OTT convention come into force, then there would be

a comprehensive and virtually seamless international set of legal principles governing

liability for loss or damage or delay to goods carried in international transport. As of

now, liability rules pertaining to goods in international trade are in a chaotic state.

4.3.e. UNCITRAL Convention on the Contract of International Carriage of Goods

Wholly or Partly by Sea 2008.

128

In the meantime, the UNCITRAL informed of the gaps in the existing

international legal framework in respect of bills of lading and seaway bills, their relation

to the rights and obligations of the seller and the buyer and the parties providing

financing, and the uncertainties caused by the emergence of electronic communication,

asked the secretariat to solicit views and possible solutions from States and international

organizations, representing with an interest in international carriage of goods by sea. An

invitation was extended to the CMI and they were charged with the task of obtaining and

analyzing views from interested parties. In the year 2000, a transport law colloquium

jointly held by the secretariat of UNCITRAL and CMI, produced a report identifying the

issues and submitted them to the Commission in 2001. It resulted in setting up of the

Working Group on Transport Law and the Secretariat was charged with the preparation . ---- - --.... -----~--~ -... .~ .....

of draft solution for the consideration by the Working Group. The secretariat produced

the Preliminary Draft Instrument on the Carriage of Goods by Sea in April, 2002. 150 Later

it was adopted as the ~onvention on the Co~tract of International Carriage of Good.s. \ · ~ ' Wholly or Partly by Sea by theJJ~CITRAL in its 41 51 session on July 2008. 151 This is '

·~ --. .... -~--...... ~ . - - ~ - - ·-

intended to replace the existing Conventions such as the Hague Rules of 1924, the Hague

Visby Rules and its Protocols of 1968 and 1979 and also the Hamburg Rules 1978. This

convention also deals with the issue of door-to-door transportation (the container

transportation by sea and land) and current variation of documentation (such as bill of

lading, sea waybill or electronic documentation). It will require 20 ratifications for this

Convention to enter into force (Schelin, 2009).

4.4 Port Services

Transportation is an organic whole in which the port operations are an integral

part. Both import and export cargo moves through a number of operations in the port. So

far as the import cargo is concerned, after it's unloading and shore handling, care has to

be taken in transit shed until it is delivered. Similarly, export cargo has to be handled

from port gate upto the transit shed, from transit shed to ship's hook to ship's hold

(Trivedi, 1980).

150 UN Doc AICN 9 WG 1/l/WP 21. 151 UNC/TRAL, Report of the 41" Session, 4, UN Doc. A/63117 (16 June-3 July 2008).

129

Port dues are levied on the vessel for the general use of port facilities, including

docking and wharfage charges, and the provision of basic port infrastructure. The actual

level of port costs depend on the pricing policy of the port authority, the size of the

vessel, the time spent in port, and the type of cargo loaded or discharged. The service

charge covers the various services that the vessel uses in port, including pilotage, towage

and cargo handling. Port related charges represent a major component in voyage costs

and include a wide range of fees levied against the vessel, and or/ cargo for the use of the

facilities and services provided by the ports.

Generally, in all countries port administration is undertaken by the respective

government entities. In order to meet the investment needs, private port operators are

encouraged to invest in port operations, but otherwise port operation and management is

a sovereign function of most governments. The Convention on the International Regime

of Maritime Ports, 1923 and section 25 of UNCLOS III, deal with the issue non-

discriminatory acess to use of port.

Since port services are integral part of transportation, they are included in the

GATS negotiations on maritime transportation services, as one of the four pillars of

maritime services. The nature of port services are such that they are a sovereign function

of any country which cannot be liberalized. Thus in the GNS negotiation, it was

concluded that this sector cannot be liberalized and courtiers were asked to take

'additional commitment,' to give reasonable non-discriminatory access to foreign ships in

their port services.

5. Concerns of Developing Countries

The maritime customs 152 are the primary sources of merchant marine law; one of

the leading doctrines in maritime customs is the concept of the__freedom of the seas, --~

which was been evolved as the most sacred custom of the sea, on which the traditional

maritime powers relied heavily during the 18th and 19th centuries (Mahalu, 1984). The

freedom of the high seas and equality of flag which have been established by long

standing usage and custom, and which are duly respected by all maritime countries, form

152 The maritime practices evolved by great European maritime powers for over hundreds of years forms the basis of customary maritime law.

130

part of the international law incorporated, first, in the Geneva Convention on the High

Seas 1958. Later, the UNCLOS III provided for six freedoms of the high seas,153 first

among them is the freedom of navigation, which is now, a pre-emptory norm of the law

of nations. Freedom of navigation means freedom of ships of all nationalities to operate

on the high seas. It is the backbone of the merchant shipping trade and a cornerstone of

international trade and therefore indispensable for shipping. Every nation is free to travel

to every other nation and trade with it. Such commercial intercourse is based on the

understanding that through the law of nations, navigation is free to all persons what-so-

ever.

These freedoms are enjoyed by all nations on a basis of equality as no sovereign

state can claim jurisdiction over the high seas. But in practice, the history of laws of the

seas have been dominated by power politics resulting in competition between the exercise

of State authority over the sea, and the idea of freedom of seas, inter alia, 'Mare Liberum

vs. Mare Clausum'. 'Mare Liberum' (Free seas) was written by Dutch Jurist Hugo

Grotius 154 in 1609, in order to defend his country's right to navigate in the Indian Ocean

and other Eastern Seas 155 over which the Spain and Portugal asserted commercial

monopoly as well as political domination (Anand, R.P. 1983). It led to confrontation with

English and Scottish jurists who fought to refute it and 'Mare Clausum' (Closed Seas)

emerged as European State practice (Anand, 1983). But the situation regarding the extent

of jurisdiction on the sea changed in the 191h century with the evolution of the philosophy

of free trade and the development of steamship (Dixit, 2002).

The history of the last four centuries is replete with illustration of the merchant

marine that conferred political supremacy to various nations. For three centuries prior to

the middle of 19th century, it was sea power not only of the armed navy but also merchant

ships which constituted the spearhead for political domination, which the then emerging

153 I) freedom of navigation 2) freedom of overflight 3) freedom to lay sub-marine cables and pipelines 4) freedom to construct artificial islands and other installations permitted under international law 5) freedom of fishing 6) freedom of scientific research.

154 Hugo Grotius, commonly known as the father of international law, published a treatise "Mare Liberum" whereby he pleaded for complete freedom of the high seas for mutual benefit. He argued that the seas can neither be seized nor claimed by occupation, and hence were free to all nations. Such freedom held good in respect of both navigation and fishing.

155 Dutch held maritime supremacy at that point of time.

131

industrial powers of the West established in far flung areas of the world. History

illustrates how the Merchant marine played its role in the maintenance of political

suzerainty.

India had suffered invasions from the North on land for practically over thousands . . __....._-.--

of years, yet the final conquest and dominion of India by foreign powers was from the

sea. The British established their dominion over India through sea power. The East India

Company recognized the primary need for a direct link between India and the West. A

titanic struggle was waged in the British Parliament for establishing such a link. It was

the successful culmination of this Parliamentary struggle and the ultimate recognition by

the British Government, of the role of Merchant Navy in maintaining political dominion,

which led to the construction of the Suez Canal and the grant of Royal Charter to the

P&O Steam Navigation Company. The grant of Royal Charter itself emphasized the role

of merchant marine. It is said and perhaps with great justification that, the First World

War was essentially won by the merchant navy of the Allied powers (Trivedi, 1980).

Both her commercial prosperity and political power (of Britain), for over a century,

largely rested on the navy and the mercantile marine.

The scenario changed after the First World War, with the massive effort by the

US in constructing the 'Libe!!J':..._ships-;-as·the War progressed, the US launched ships -----every day. During the Second World War, Great Britain suffered heavy losses in North

Atlantic within the first few months of the War from the operations of the German U­

Boats. And the US emerged as supreme power in the world. The first Merchant Shipping

Act of the US enacted in 1916 in its preamble, specifically recognizes the importance of

the Merchant Navy for the foreign sea-borne, commerce of the US in times of peace and

war (Trivedi, 1980).

The end of World War II has marked the commencement of a new era, the emergence of

several dependent colonies as independent nations. These newly independent nations were

either undeveloped or underdeveloped. In the wake of independence these colonies

realized that political independence is a myth without economic independence and

development. Impelled by this theme, these nations have started participating in

international trade, by exporting finished and unfinished goods to developed countries. A

132

Majority of these nations did not have their own merchant vessels to carry on overseas

trade. Consequently, they were relying on the merchant fleet of developed nations. In

order to enjoy freedom of navigation on the open seas, the countries ought to possess

their own merchant ships or fleet, or else such concept holds no meaning.

The imperialistic nations supplanted colonialism with neo-colonialism. Neo­

colonialism was defined as a situation in which, "the state ... is, in theory, independent

and has all outward trappings of international sovereignty" but )¥here "its economic

system and thus its political system is directed from outside."156 ) (

The newly independent countries' endeavor was to build national merchant

marine, which was in sync with the principle of freedom of navigation, which was

thwarted by the neo-imperialist and neo-mercantilist policy of the traditional maritime

powers. New imperialism of the late 19th and 20th centuries found encouragement in the

idea, that the state had an obligation to intervene to help business, to provide

employment, and to encourage foreign trade. This is also called the neo-mercantilism

which is closely tied up with promoting domestic prosperity. 157

The establishment of merchant marine in the developing countries for transporting

their own foreign trade meant, reduction of the share which was exclusively enjoyed by

the established traditional maritime nations, until then. There are many methods of

control that were used to maintain such imperialism~ one of the main tools that was used

was the 'international law.' 158 International law worked as a double edged sword, in the

hands of traditional maritime powers, which, on the one hand, hindered the development

of merchant marine in the developing country and, on the other hand, encouraged their

own domestic business and foreign trade.

The maritime customs159 are the primary source of international maritime law,

participation of developing countries in the development of maritime customs was simply

not possible (Mahalu, 1984). New States had to observe the rules of the customs as they

came, regardless of their commercial interests. They have thus to streamline their

156 International Encyclopedia of the Social Sciences 157 Collier's Encyclopedia 158 International Encyclopedia of the Social Sciences, Vo1.7. 159 The maritime practices evolved by great European maritime powers for over hundreds of years form

the basis of customary maritime law.

133

maritime dealings in such a way that they had to fit within the requirements, established a

couple of hundred years ago. These rules did not grant them any maritime advantage.

Developing countries as new states and their coming into their sovereign positions

found that, there already existed a strongly established maritime legal order, which had

been in practice for hundreds of years, "and a system which at one time protected and

enhanced colonial powers against them" (Mahalu, 1984), and they continue to serve the

traditional maritime powers. Now the developing maritime nations have to accept the

norms in their established form and work within that framework.

The contents of international law of merchant shipping reqmre a brief .

examination, as far as potential shipping interests of the poor states are concerned. The

legal regime has basically two characteristics: firstly, it has a national characteristic

which is related to its foundation, origin, and growth under the municipal law of the

maritime state. The welfare of the ship e.g., crew employment regulations, activities

carried on in the vessel, fall under the jurisdiction of flag state (Mahalu, 1984).

Secondly, the relationship between the ship-owner and the shipper are governed by

municipal law. At the same time in case of conflicting commercial and legal interest

between citizens of different countries, the private international law or the Conflict of

Law is applied. Sometimes there is streamlining of such different legal interests into one

single multilateral instrument, such as, the Hague Rules, 1924, the Hamburg Rules etc.

Public international law provides certain rights and duties on the subjects (the

Sovereign State) of international law._gights: to own vessels, PJ.Qtectiop qf the vessels, --··--~ ... ~ ----- - -·-

their movement on the high seas, and on the territorial waters of foreign cQuntries.

Duties: provide·-navigational aids (ports, light house etc.), observe safety rules, anc_l

provide right of innocent.pa;;~ge to merchant ships. It is in this way that the municipal -- ----··--· -·-···

law together with private and public international law forms the legal order in merchant

marine activities (Singh, 1962).

The nature of international shipping law has created dissatisfaction among the

developing countries. The sources of such dissatisfaction are rooted in their colonial past,

an era that denied them a concrete independent status in the then existing international

arena. International shipping became the monopoly of the colonial powers with respect to

134

the foreign trade of these territories. The development of shipping as an industry in these

territories was, thus, delayed to the extent that, even after independence reliance on

foreign shipping in the carriage of their trade had been intensified. In the 1980s the

developing countries' share in sea-borne trade was 61%, but they own less than 8% of the

fleet. This position denied the developing countries a chance to effectively develop a

maritime international law to reflect their treasured values-that they must possess

genuinely owned tonnage (Mahalu, 1984). With little or no tonnage their ideals or values

in merchant shipping remained purely theoretical aspirations.

Every aspect of maritime activity, issues and problems are addressed by or

regulated by some treaty law, customary law, ~u~i9p~~U~:V· or self-regulatory laws. The --- . ---·---- ---- ' ~

large portion of these laws had originated at the time, when the developing countries

were not in existence, and as such their interests had not been taken into account. In

particular, the law and practices relating to bills of lading, registration of ships, and

limitation of ship-owners' liability were unsatisfactory from the standpoint of developing

countries. The developing countries strived hard under the auspices of the United Nations

and its specialized agencies to change/ modify these laws; they could not be successful in

doing so.

This study reveals that at least in six areas, the traditional maritime powers have

thwarted the principle of freedom of the seas, to help their strategic and economic

interests for the furtherance of imperialism; the same principle at some point helped them

to attain sea power.

5.1 Ship-owners' Liability Regime

It shows how the rules pertaining to bills of lading are tilted to favour the ship­

owners' interest and not the cargo-owners; the cargo owners are from the developing

countries who were using the services of ships from the traditional maritime nations.

Majority of these nations, even today do not have their own merchant vessels to cany on

overseas trade. Consequently, they are relying on the merchant fleet of developed

nations. The main hurdle in the development of such trade is the rules regulating the

relations between ship owners and cargo-owners-The Hague Rules and its Protocols. To

that extent maritime law favours carrier interest over cargo interest, it is inimical to less

135

developed countries because, by and large, less developed countries do not have

substantial merchant fleet. Developing maritime nations expressed their dissatisfaction

with the Hague Rules, 1924 which did not safeguard the interest of the cargo owners

because it was a product of traditional maritime powers. The developing maritime nations

as shippers felt that, this rule had a tendency to serve the interests of the ship-owners at

the expense of cargo owners or the shippers. Hence they pressed for the Hamburg Rules

1978 under the auspices of the United Nations which was not accepted by the traditional

maritime powers.

5.2. Monopolistic Practices of Liner Conferences

The rate war, fighting ships, deferred rebate system, and dual rate system-all of -- -- ---·~...--.- -- --. - - - -- .

them had effectively blocked the establishment of merchant fleet in the developing

countries, for transporting their own export trade which had the effect of reducing the

traditional maritime countries' share in the trade. Shipping is of vital importance to

developing maritime countries because of its potential to save foreign exchange by

carrying its own cargo, and also to earn foreign exchange for the country by carrying the

cargo of other countries.

Liner Conferences are product of the colonial trading institutions. Co-operative ,.. ----- - --~-~ ~p ---~~- -·-

system of sharing of pooled international trade through a system of conference was

invented by the British. From the time of its establishment in 1875, the Liner Conferences

illustrated the power of the traditional ship-owners. This monolithic structure of closed

door monopoli~s_ dominated every ~j~t:_lr.fide route of the ocean .. Developing countries --- . --- ---------national liners were not admitted to the existing Liner Conferences. The Conferences

unilaterally fixed freight rates; generally, there was refusal to hold meaningful --- -~ - 4

~- - - ----- -- - ---- -consultation with shipp~rs _ _from developing countries. Shippers were tied to the

--· -- ___ .,._ -

Conference Liners through the Deferred Rebate System, Fighting Ships, and Dual Rate - .- ---- ------ --------- _. ~ Systems~ that deprived the developing countries' liners/ships of ~~go. In the ------- ·-- .- -- ·- - -- --- -. - -- - --- ---- -· chartering/tramp trade, if there is demurrage there is also despatch but under the

Conference system, there is only one way surcharge and it did not provide for freight

rebate. The conferences never brought the freight rates down. This sabotaged the

legitimate aspirations of developing countries to have their own merchant marine.

136

All developing maritime countries which had undergone colonial rule, on

attaining independence, tried to expand their national merchant fleet. This was necessary

with a view to achieve economic independence, to provide for the security of the coastal

line, to improve balance of payment position, to augment regional/ international trade,

and for reasons of national pride and prestige etc. But their efforts were constantly

thwarted by the monopolistic practices of the foreign shipping conferences through their

controlling discriminatory freight rate structures.

One classic example is India; with a vast coastline India should have had a strong

navy and an adequate mercantile marine, but unfortunately both are abse~t, !ai_D~nts . --- --- ·-----·--·· --- ·-

Trivedi (1980). It was not that, India was unaware of the benefits of participating fully in

the country's maritime trade and the necessity of building an adequate and efficient

mercantile marine. The enterprising Indians did make repeated efforts in this direction,

102 Indian shipping companies with a total nominal capital of more than £150,000,000

came into existence during the fifty years prior to independence. However, less than 10

alone survived, due to the freight wars and monopolistic practices of the foreign shipping

conferences. "No other industry in_th~s country nor has shipping in any other country had

to wage a more strenuous struggle for existence or face heavier odds, than the Indian '--·-·-·- ---~- --- - -~- ---- -

shipping during the imperial reign" (Trivedi, 1980). Established foreign-shipping

interests thro~gh their cart~l:._:::the liner conferences, had constantly thwarted the growth

of national shipping. Indian companies which endeavour to develop shipping lines were

financially shattered, went into liquidation due to the conference practices (refer chapter

IV for detailed discussion). Indian shipping just managed to survive a bitter freight war

waged by shipping interests of traditional maritime powers.

After independence some developing countries' liner ships could become

members of the Conferences. Any attempt to confront the system would not yield much

result but could be persuaded to act in the best interests of the trade of the developing

nations (Trivedi, 1980 p. 62). Hence they pressed for a Code of Conduct for Liner

Conferences.

The developing countries' efforts through the UNCT AD to regulate the liner

conferences was also forestalled by the EEC 'Brussels Package.' The developing

137

countries' concerns and priorities included the reduction of transport costs and the

establishment and expansion of their national merchant fleets. UNCTAD-I led to an

intensive debate on shipping that eventually led to the institutionalisation of shipping

questions in an international forum. It was the initiative of the secretariat combined with

forceful individual delegates from developing countries, that in reality led to the

establishment of the Committee on Shipping on 29 April, 1965. At the Second Session of

UNCTAD, held in New Delhi in 1968, it was asserted by developing countries that a

large portion of the existing body of international shipping legislation had originated at a

time, when the interests of the developing countries had not been taken into account.

In 1969 member States established a Working Group on International Shipping

Legislation (WGISL) within UNCTAD. The mandate of this group was to review the

economic and commercial aspects of international shipping legislation and practices in

the field of shipping. This was to be done from the standpoint of conformity with the

needs of economic development, in particular those of developing countries, in order to

identify areas where modifications were needed, and as the basis for drafting legislation

or other appropriate actions. It was through this body that international conventions,

model rules, norms, and standards were evolved into law or practices that influenced the

functioning of international shipping.

The UN Conventio!l on a Code of Cond~c_t for Liner Conferences, sought to give

developing countries the right to carry a proportion of their own trade (the so called

40/40/20 formula- 40 per cent to be carried by ships from the exporter country, 40 per

cent for the importer country, and 20 per cent for third parties), to participate in the

conference system and to reduce some of the adverse practices, such as loyalty ties,

arbitrary imposition, and increase of freight rates, and to institutionalize consultation and

arbitration machinery in which the role of the Government was recognized. After ten

years of elaboration and negotiations, the Code was adopted in 1974 and entered into

force nine years later in 1983. It was the first international legal instrument to govern the

economic and commercial aspects of liner shipping companies.

But the road to success was not that smooth, the UK, the EEC, and OECD

opposed the Code from the beginning, because of the effect it would have on their

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merchant marine. Within the EEC, some countries like the France, Belgium, and Federal

Republic of Germany were in favour of the UNCT AD Code. The developing countries

and the socialistic countries wanted specific regulatory rules and procedures based on

balanced rather than unilaterally imposed consideration or 'self-policing' method

proposed in the CENSA/CES code.

There was an effort to forestall the UNCT AD Code by the EEC and OECD

countries through the "Brussels Package." The Brussels Package, 1979 was a

compromise arrived in the form of EEC Council Resolution 954/79 for bringing about

compromise within EEC and OECD countries. This regulation required member states to

adopt the UNCTAD Code subject to certain modifications. The proposed modifications

provided for a regime, for the disapplication of the UN Code's cargo sharing provision in

the intra-OECD trades. The result of the Package is that, as long as all OECD countries

acceding to the Code disapply its cargo sharing provisions, then 75% of the world's liner

conference trades will remain free of cargo sharing provision of the UNCTAD Code.160

This move effectively disarmed much of the Code and deprives it of its most important

provision. As a result of this fundamental modification of the Code's provisions,

calculations suggest that the Code's cargo-sharing will apply in practice to only about

25% of the world's liner trade (Ademuni-Odeke, 1988).

5.3. Registration of Ships and Flag of Convenience

In the 171h century, when England struggled to develop her national merchant

marine, she was constantly in fear of foreign competition from Spain, Holland, £l!ld

France; commercial rivalry manifested in frequent naval warfare. Thus England adopted ---a shipping policy, which would not only secure trade for British merchants but also

provide her with British ships manned by British seamen, and also wanted to reserve all

imports from Europe and the entire trade to British owned ships. To enforce that it was

thought necessary to pass a law requiring registration of certain ships, their owners, and

sufficient details, whereby they might be identified. So that foreign ships picking up

British trade and masters swearing falsely that their vessels were British owned be

prevented (Agarwal, 1973). The Navigation Act, 1660 known as the 'Charta Maritima' in ---- ·-

160 The EEC and the OECD between them own about 75% of the world liner shipping.

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that it was designed to shape the merchant shipping policy of the nation, made for the

first time, provisions relating to the registration of merchant ships. All foreign-built161

and English owned ships were r~q~ired to b~_reg~stered under this Act, and it was enacted

that unless these ships were registered, they were not entitled to any of the privileges of a '---

British ship. However, the place of foreign-built ships was gradually taken up by British­

built ships by subsequent enactments. The Navigation Act, 1662 was enacted to

encourage British ship building. This Act provided for State bounty for seven years and

was offered to persons building ships of certain specifications. This Act also provided a

premium for building strong vessels, by giving a rebate of one-tenth of the customs duties

on the first two voyages. Further, all foreign-built ships bought after October, 1662 were

subject to all the duties to which it demanded five percent ad valorem duty on all foreign­

built ships. Thirty ye-ars later, allfo~eign-built ships were excluded from trading, so that~ ---- - _, -~ ----market for British-built ships might be created (Agarwal, 1973). By 1775 the British built

ships dominated British shipping. These ships also gained a reputation of being solid

ships, to such an extent that, they were given preference over the ships of all other

countries in the matter of insurance. Thus England was now prepared to exclude almost

entirely, any foreign-built ships from British shipping (Agarwal 1973).

After the First World War, the US gained supremacy in merchant marine, which

encouraged open registry or flag of convenience in the 1920s. But when the European

traditional maritime powers discovered that, the open registry countries were holding

more tonnage than themselves, the matter was hotly debated. However, when they

realized that they had strategic political and economic interests they preferred status quo.

The newly independent countries aspired to have their own merchant fleet,

because their international trade was dependent on foreign ships, which could provide

their services at a competitive rate because of the FOC registry, which allowed them to

cut corners and make profits. The UN, to embody the developing countries' aspirations,

made every effort to bring about change in the international maritime law with respect to

registration of ships in 1986, but it did not come into force because of lack of support.

The shipping companies from the traditional maritime nations were more powerful than

161 At that time British shipping consisted chiefly of foreign-built ships (Agarwal, 1973).

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the governments of the countries where their ships were registered. These shipping

companies from the traditional maritime countries are so influential, that they even

brought about change of government in the open registry countries.

5.4 C.I.F and F.O.B Contract

h I . h h . f h C I F 162 d F 0 B 163 There are certain loop o es m t e mec anJsm o t e . . . an . . .

contracts that have been exploited by traditional maritime entities for discriminating

purposes. Under this C.I.F. Contract, a seller (exporter) of goods agrees to sell goods to a

buyer ii~po~~) at the buyer's named port of destination (for instance an American s~ller - -----...__ -~ ·----- ~ - -

might sell goods to Indian buyer "C.I.F Mumbai"). In this contract, the seller arranges

cargo space in an appropriate ship sailing towards Mumbai port, make aii insurance

contract for the goods being transported against the usual sea perils during the voyage,

and have the goods put aboard. For all these the seller is entitled to be paid. This signifies

that the buyer is paying not only for the goods sold to him but also for the insurance fro!)l

the sellers' place to the named port of destination and the carriage charges i.e., the freight ------------L -- -- ----• - " ,.. for getting the goods delivered at the nam~d port. ---------~--- -~--

Under Free on Board (F.O.B) contract, the seller puts the goods safely on board,

pays the charges of doing so, and gives up possession of the documents to the ship. There

is no further contractual liability on the seller as soon as he delivers the goods to the

carrier; his obligation ceases at that point.164

The developing countries we~e _of~ell forced_ to ac:cep! C.I.F. prices for their

imports and F.O.B prices for their exports.165 The importers have to pay higher amount in

the CIF contract. Looking at it from the developing countries' perspective, it amounts to

162 C.I.F. stands for Cost, Insurance, and Freight. The price of goods in the CIF contract includes the freight and insurance. The price to be paid by the buyer under this contract is higher as it contains three elements: I) the price of good, 2) freight-the transportation cost, and 3) insurance cost. The sellers profit in the CIF contract is substantially higher than in the FOB Contract.

163 F.O.B. stands for Free On Board. 164 There are no definitions concerning FOB contracts, hence there are many variants to the contract. It was

in Pyrene and Co v. Scindia Navigation Co Ltd, that Devlin J categorised the different variants of FOB Contracts (Carr, 2005): I) The buyer nominates the ship and the seller puts the goods on board for the account of the buyer, procures the bill of lading, and endorses the same to the buyer. 2) The seller arranges the ship and puts the goods on board, procures the bill of Jading and endorses to the buyer. 3) The seller puts the goods on board, takes a mate's receipt and gives this to the buyer or his agent, who then takes a bill of lading. In FOB sales the property passes when the goods cross the ship's rail (Pyrene and Co. V. Scindia Navigation Co Ltd), and risk also passes with the property.

165 GAIT doc. MTN.GNS/24, para. 86.

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loss of foreign exchange.

Under the C.I.F. Contract the consignor/seller has the right to choose the carrier

and under F.O.B Contract the buyer/ consignee gets the right to choose the carrier; e.g., if

an Amercian want to sell goods he enters into a C.I.F. agreement, whereby he chooses the

ship which would invariably be an American flag ship and then he arranges for the ---·- .--- -insm~~~..Ame.rjJ;an -i~~r~mce cor£P.'!11Y-:..Along with price of the goods that he is

buying, the Indian buyer is forced to pay for the American's insurance and also freight to

American's ship. At the same time, when the American wants to buy some goods from

India, he enters into F.O.B. contract, in which the American buyer himself nominates a

ship which would invariably be an American flag ship. Here the seller is asked to put the

goods into a ship nominated by the American buyer, which is obviously detrimental to

the Indian shipping industry or for that matter any developing countries' shipping

industry.

In both the cases, the developed countries invariably choose their national flag

carriers. International trade practice under this mechanism of FOB purchases and CIF

sales by the developed countries, goes totally against the interests of the developing

countries' flag vessels. Developed countries they buy under F.O.B. whereby they get to

choose the vessel and they invariably choose their national vessel. On the other hand,

they sell under C.I.F. contract which deprives the buyer from choosing a vessel; this in

effect involves loss to the consignees' national flag vessels, not only in terms of the

freight but also of insurance premiums and the consequential loss of foreign exchange.

Hence the developing countries' flag vessels are deprived of carrying their inbound and

outbound trade.

5.5. Flag Discrimination:

After the two World Wars, the maritime countries which had built up powerful

merchant navies, by the adoption of every form of discrimination in favour of their own

shipping, now sought the authority of the UN for a declaration, that there should be

absolute free trade in the field of shipping and that in future all forms of discrimination

should be voluntarily banned, so as to enable the shipping services of all member­

countries to participate in the development of international trade. A draft convention was

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circulated by the Economic and Social Council of the UN Conference held in 1946, in

Washington, which required governments "not to adopt measures for the protection of

their national shipping," but instead to promote the free availability of shipping "without

discrimination" (Jog, 1969). This new proposals were sought to be foisted on backward

countries; it would be impossible for such countries in the early stages of development to

face competition without giving protection to their own shipping industry. This proposal

was criticized on the ground that, it was like "the giant calling on the dwarf to run a race

on equal terms" (Trivedi, 1980). Discrimination was the very means by which the British

and the US maritime industries reached the dominant position in the maritime world. The

non-discrimination is, now, proposed to keep the dominant position and to thwart the

development of shipping in the developing countries.

The British Navigation A_~t of 1651 prohibited: "no goods whatever of th~

growth, produ~ _or manufacture of Asia, Africa or America should be imported into ---·---- ·-- - .

England or Ireland or any of the plantations, except directly in ships belonging to English ------- -- . -~ -· - ~- - ... - - -- -subjects, of which the master and _greater number of the crew were English men" (Rao, ---·- ·-------- --· ·- -- ~ 1965 p.38). It served to protect the English shipping from foreign shipping. The

reservation to coastal trade, mail subsidies, construction subsidies, differential cost

subsidies, and import duties-all have been introduced to protect their growing merchant

marine by the British, in their trade while they were a growing maritime industry.

During the First World War, the US had run a major ship-building programme.

Faced with the problem of disposing of the surplus ships, the Shipping Board offered

them for sale to private owners; in doing so it became involved in shipping subsidy

programme that was to persist for much of the next fifty years.

The US Merchant Marine Act, 1936 aimed to compensate for the uncompetitive

US shipping through a system of direct public construction and operating subsidies. The

Act made every effort to protect the jobs of American seamen by severely limiting the

number of aliens, who could be employed in US flag vessels and regulating the hours,

conditions of work, and the minimum wages of the crew members. It also legislated the

practice that all American exports financed in whole, or part, by any instrumentality of

government should be caJTied in the US flag vessels. As a result of this programme, by

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1939 the US fleet was, according to Lloyd's register, the second largest in the world, with

13.9% of the gross registered tonnage. The period after World War II (1939-45) has been

described as the heyday of American maritime supremacy; the US merchant marine

carried a large part of the world's commerce. However, by the mid-1950s, the European

nations had rebuilt their merchant fleets, a process that the US aided by selling abroad at

bargain prices many of the vessels that had been built during the World War II.

During the post-war era, the US economy was overwhelmingly powerful m

industrial and transportation technology, and it is significant that many of the major

technical developments in the shipping industry emerged from the US-containerization,

intermodal transport system, and integrated bulk shipping are the most striking examples.

Despite their technical lead, the US ship-owners and ship-builders depended upon

subsidies and the Jones Act to survive foreign competition. Moreover, the US pattern of

sea trade was very different from that of Europe because: 1) The US was self-sufficient in

food production whereas the European continent imported food items and hence need not

depend on seaborne trade for food supply. 2) The US did not have the history of

established imperial trading links that played such an important part in the growth of

European liner shipping. 3) High American labour cost, the tax laws and restrictive

maritime legislation encouraged the US owners to register their ships outside the US

(Stopford, 1988)

The principle of equality of all flags and equal freedom to all ships irrespective of - -- -- .,._

nationality of all flags, and equal freedom to all ships irrespective of nationality is now

firmly established in relation to freedom of navigation. Moreover, the Convention of

1923 on Maritime Ports has recognized that, the contracting states shall be treated on a

footing of absolute equality in all that concerns the use of their ports. Thus it is contented

that the ships of the national flag must not be given a treatment superior to ships flying a

foreign flag, in respect of cargo allocation or freight rates, since that would result in 'flag

discrimination.' This principle presents complicated problems in relation to developing

maritime nations as far as cargo lifting is concerned. The plea of flag discrimination in

relation to cargo lifting raised by those states that have built up mammoth merchant fleet

in the past, and prohibiting the development of merchant fleets in the colonies, and their

continued dependency on foreign flag, raised controversial issues which constitute an

144

unresolved problem of maritime international law (Singh,1962). Removal of

discriminatory practices in the field of shipping would have the effect of freezing the

status quo in shipping.

All of the above discussed issues remam to be resolved which resulted in,

"continued reliance on former colonial masters and other foreigners for vital (maritime)

services instead of self-help in this crucial area of international trade ... it is rather ironic

to continue reliance on the very people one wishes to break away from!" (Ademuni­

Odeke, 1988). They wanted their interests to remain protected and prolonged by these

customary laws. For that purpose they wanted it to be rigid and in unbending form

(Mahalu, 1984 ).

5.6. Customary Maritime Law

Complication arises when there is lack of compromise between the rich and the

poor with respect to certain aspects of the interpretation of the norms. The fact that

traditional maritime powers cling to the rigidity of the norms and the desires of the poor

States to see flexibility in interpretation of the norms, deepened the conflicts (Mahalu,

1984).

There was an all out demand for a new maritime order under the UN General

Assembly Resolution 3201 (S-VI) and 3202 (D-VI), a demand that was part and parcel of

the New International Economic Order (NI£0). 166 The NIEO and the Economic Charter

gave a moral challenge, they set forth a plan for the comprehensive alteration of the

world economic system. The moral claim was that disparities in income between States

were unjust and caused by unfair economic arrangements, the lingering effects of

colonialism and the depredations of multinational corporations (Scott & Brokaw, 1983).

It was difficult to do away with a established customs; several attempts were

made in the UN General Assembly (UNGA) to spell out certain new rights and

obligations, in response to demands forwarded by the developing countries, with the hope

of letting these new rights and obligations develop into rules of international customary

law. A number of reformatory resolutions of the UNGA which tend to overlook the

166 The basis of NIEO was announced in 1974, in a UNGA declaration, and supported by two resolutions: The Charter of Economic Rights and Duties (CERDs) and the Declaration of Principles

145

importance of practice before a custom comes into maturity, and emphasize only on the

moral awareness of the international community of its divergent problems. The

developed countries were always reluctant to interpret and see the UNGA resolution as

embodying any legal force, because the developed countries were not prepared to forego

or change a position that assured them of prosperity.

Even after several attempts by the UNGA, the developing countries' aspirations

could not be embodied as customary international law. Hence they tried to create treaty

law-the second most important source of international law. Treaty law reflects the

current needs of the signatories concerned and it bears an endorsement in an expressed

form, to their new rights and obligations as negotiated and agreed by the parties. Treaty

law make an attempt to bridge a gap whenever customary law has not been able to bring -·· -solution; it simply introduced rights and concepts in accordance with the mutual and

--- -----obvious interest of the international community (Mahalu, 1984). Treaty has the tendency,

therefore, of reflecting new needs and includes the possibilities of being flexible to adopt

to new situations through its reviews or re-negotiations.

The UNCLOS III represented the first formal codification and implementation of

the essential ideas underlying the NIEO, which called for large scale redistribution from

developed world to the third world. UNCLOS III is part and series of demands made by

the Third World Group 77 on the developed countries (Scott & Brokaw, 1983).

There was a move to revise the laws, under the auspices of UNCITRAL and

UNCTAD, relating to international shipping which was an undisguised attempt to strip

the carrier interests of their privileges (Khan, 1973). The contribution of these two

organizations to the development of clearer laws and practices in the field of international

shipping, promised to attract world-wide appreciation but this could not be materialized

as yet.

6. Summary

Maritime transport services have a long history, who-so-ever had a maritime

supremacy ruled the world. It is like a scepter who-so-ever held it became the ruler of the

world. Hence, every country's aspiration is to have its own merchant marine and to have

a position in the world order.

146

The developing countries' aspirations to build their own merchant marine could

not be materialized. They are still dependant on traditional maritime countries' ships f~r ,. - ~ ~ ----- -

the transport in their -international-tiade:-The developing countries must take this

opportunity and carefully strategize their negotiating agenda and push forward their

demand, as once again the matter of international transportation has been put forth for

negotiation in the trade forum-the WTO, which has universal representation. It is an

opportunity for developing countries to realize their aspirations by recasting the existing

norms in this forum. The negotiations on 'transportation services' are going on under the

auspices of GATS; it is an umbrella agreement, agreement relating to specific service

sectors that are sought to be negotiated separately, to accommodate specificities relating

to that sector, and annexed to the General Agreement which would form an integral part

of the GATS.

It could be concluded that, this sector is governed mainly by international laws

such as: UN~~\\! __ ~! th~-~ea __ \UNCLOS), th~ Hague Rules 1924, and the Hague-Visby

Rules, the Hamburg Rules 1978, the UN Liner Code, the UN Convention on Multi-modal

Transport of goods, the UN OTT convention; and several other private international law

conventions and various national laws.

Since there is no separate annex on maritime transportation services, as of now,

which means that the maritime sector, just like all other services has not specifically dealt

with by an annex, would be fully covered by the General Agreement on Trade in Services

(GATS). Effort to secure a separate maritime annex could not be concluded. Hence the

next chapter makes an attempt to analyze the GATS framework, to see if the GATS

provisions could be applied to maritime transportation sector as it is, and seeks to suggest

some modalities for negotiations concerning 'annex on maritime transportation.'

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