Guangzhou Maritime Court Report on Trials 2012
Foreword
In 2012, the international shipping market suffered a continued downturn due to the subsequent impact of the global financial crisis. From January to August 2012, the average Baltic Dry Index number (BDI) was 934, which fell about 3 percent compared with 2011. In order to cope with the instabilities of the shipping market, the Ministry of Transport of the People’s Republic of China promulgated the Circular on Promoting the Smooth and Orderly Development of the International Ocean Shipping Industry in China in August 2011. The Circular puts emphasis upon responding to the challenge and seizing the opportunity and highlights the importance of implementing effective policies aimed at the troughs of the shipping industry so as to support the development of the ocean shipping industry from the following aspects; promotion of the adjustment of the industrial structure of international shipping industry, establishment of favorable administrative service environment, strengthening of honest operation of the enterprises and the maintenance of fair and orderly competition, to further strengthen the management of the international ocean shipping market and to guide the smooth and orderly development of the shipping industry.
A rapid increase of admiralty and maritime disputes is the first reflection of the downturn of shipping industry in the maritime judicial field. Throughout 2012, the number of new cases heard by this Court totaled 2525, which was an all-time high, and the number of various types of cases increased substantially. The second reflection lies in the arrears of loans and wages of crew members together with a number of cases relating to ship arrest and auction. Such cases are mixtures of maritime disputes and livelihood issues, the existence and development of the enterprises and the interests and rights of laborers. Therefore, unstable factors, even if mass disturbance, may arise due to slight careless in dealing with such cases.
In coping with the new situation and problems relating to the shipping economy and admiralty and maritime cases, this Court adopted monitored the situation closely by streamlining the adjudicatory forces, handling cases in a similar manner and strengthening mediation so as to complete the judicial work effectively and efficiently. As a result, the growth rate of closed cases was higher than that of accepted cases and unsolved cases. In addition, this Court maintained a sound momentum with the rate of changing the original sentence being kept at a low level. In the mean time, this Court exercises judicial power in a flexible manner so as to protect the people’s livelihood and to protect the rights enjoyed by the disadvantaged groups, such as the crew members and employees and the legal interests and rights of the creditors such as banks. When resolving the disputes properly, this Court maintained an open, fair and just judicial reputation.
During 2012, this Court, in light of the legal issues found in the course of trials, provided the relevant authorities with judicial suggestions for improving their work in the form of written judicial suggestions. With regard to some typical and universal legal issues, such as the legal issues relating to the exploitation and management of the sea, and the loan on mortgage of a ship, we have made evaluations and provided corresponding guidance. Especially for the sectors where the shipping and trading disputes are likely to arise, we provide some focused suggestions for relevant enterprises to take precautions against the prevailing risks. Such suggestions are compiled in this Report and we hope that it may serve as a guidance for relevant enterprises to conduct their business according to law and to promote the healthy development of shipping industry.
Table of Contents
I Basic Information on Maritime Trials
The Number of new cases increases substantially
The Number of cases of disputes over damages for pollution decreases substantially
Acceptance and hearing of maritime administrative cases
Foreign interested party voluntarily submits relevant disputes to this Court
II Regulating the use and administration of sea areas according to law
—Problems relating to the administration of sea areas and solutions we propose
Issues of administration according to law in the course of the administration of the right to use sea areas
Matters relating to the disqualification of relevant administration staff in the course of the examination and approval of the right to the use of sea areas
Strengthen the costal residents’ awareness of use the sea areas according to law
Issues of dumping sludge and garbage in the course of ocean engineering
III Regulating the shipping financial service according to law
—Problems pertaining to loan on mortgage of ships and solutions we propose
Issues of exorbitant valuation of the ships for mortgage
Issues that financial institution neglects the maritime lien
Matters relating to the protection of financial claim in the course of the implementation of preferential policy for fishing industry
IV Regulating the Freight Market
—Problems in carriage of goods by sea and solutions we propose
Domestic importers shall be prudent in signing trade contract and be cautious of frauds
Attention required of sea carriers in the transport of ferrosilicon
Problems in the inspection of damaged goods by the carrier and the consignee
V Regulating the Forwarding Business
— Problems in the forwarding business and solutions we propose
Problems regarding cargo damage where container seals are intact
Problems regarding the reimbursement of expenses paid by forwarders
Actual shipper has the right to obtain shipping documents
VI Regulating the Seafarer Labour Market
— Problems in seafarers’ contracts of service and solutions we propose
Some seafarers still work without a labour contract
Collusion in seafarers’ claims for wages
Disputes arising out of seafarers’ contracts of service may be brought to court without first being referred to arbitration
I. Basic Information on Maritime Trials
In 2012, we implemented sound strategy for maritime trials so as to secure our status as a nation-wide pioneer court and a world-renowned court. Through bringing the judicial function into full play, the trials have shown a good momentum of “three increases and one decrease”: 2525 new cases were heard by this Court in 2012, which is a 79.08% increase over last year. The number of cases closed increased 111.12%, totaling 2582. The case settlement rate is 89.25%, which is a 12.38% increase over last year. The number of the unsettled cases total 311, which is a 15.48% decrease over last year.
Among new cases, 1235 were lawsuits at the first instance, 378 were cases on maritime enforcement, and other types of cases total 912. Lawsuits at the first instance included: 368 cases of disputes over labor contract of the crewmembers, comprising 29.80% of the cases at the first instance, 241 contract disputes dealing with carriage of goods by sea, comprising 19.51%, 146 cases regarding contracts related to the leasing of containers, comprising 11.82%, 105 cases of disputes over shipping agent contract, comprising 8.50%, 206 cases regarding contracts related to ships (including sale and purchase, financing, building, charter, agent, mortgage, operation management and operation loan), comprising 16.68%, 39 cases of disputes over the provision of marine stores and spare parts, comprising 3.16%, 28 cases regarding ship collisions comprising 2.27%, 15 cases regarding maritime personal injury, comprising 1.21%, 10 cases of disputes over contract of channel and port dredging, comprising 0.81%, 9 cases of disputes over insurance contract, comprising 0.73%, and 68 cases of other types of disputes, comprising 5.51%. Among the 1235 cases at the first instance, 402 concerned foreign, Hong Kong, Macau or Taiwan interests, comprising 32.6% of the cases at the first instance.
Chart No.1: cases heard in 2012 which were at the first instance
Other types of cases mainly concerned disputes over maritime special procedure and total 912, including: 346 cases of application for maritime injunction, comprising 37.94% of total number of the procedural cases, 250 cases of application for registration of maritime claims, comprising 27.41%, 177 cases of application for ship arrest, comprising 19.41%, 64 cases of application for auction of the goods carried by the ship, comprising 7.02%, 31 cases of application for preservation of property before the institution of an action, comprising 3.40%, 9 cases of declaration of death in maritime casualty, comprising 0.99%, 7 cases of application for maritime evidence preservation, comprising 0.77%, 5 cases of application for ship arrest and auction, comprising 0.55%, 4 cases of application for service by publication, comprising 0.44%, and 19 other procedural cases, comprising 2.08%.
Chart No.2: procedural cases heard in 2012
Chart No.3: Comparison of cases heard from 2010 to 2012
Chart No.4: Comparison of cases heard in each month of 2010 to 2012
Through analysis, the cases heard by this Court in 2012 were found to have the following characteristics:
—The Number of new cases increased substantially. The new cases heard by this Court in 2012 witnessed an increase of 79.08%, which hits the historical high since the foundation of this Court in 1984. Among these cases, lawsuits at the first instance witnessed an increase of 61% over last year, procedural cases increased by 165.88% over last year and the cases of enforcement increased by 26% over last year. Cases that increase substantially include: disputes over labor contract of the crewmembers (an increase of 27 times), disputes over contract of leasing containers (an increase of 20 times), disputes over contracts related to ships (an increase of 1.6 times) and the cases of application for registration of maritime claims witness an increase of 5.5 times.
—The Number of cases of disputes over damages for pollution decreased substantially. While other types of cases witnessed an increase to a certain degree, the cases of disputes over damage for pollution decreased substantially. Throughout 2012, new cases for dispute over damage for pollution heard by this Court totaled 3, which is a decrease of 93%. In this Court’s opinion, this type of cases may have decreased substantially due to the fact that the laws and regulations pertaining to ocean pollution improve gradually and the punishment intensity has been strengthened which deters the illegal pollution discharge. In addition, a number of cases for disputes over damages for marine pollution were successfully settled through administrative mediation and pre-pleading mediation and were not submitted to the court for trial.
—Acceptance and hearing of maritime administrative cases. In December 2011, Guangdong Higher People’s Court issued a circular designating that this Court shall have jurisdiction over the maritime administrative cases, cases of maritime administrative compensation, cases of disputes over pollution to the sea areas and seaward inland river areas resulting from land-sourced pollutants and cases of disputes over ocean exploitation. In 2012, we have heard 5 maritime administrative cases with 2 of them closed, where respectively the interested party refused to accept the decision made by the governmental authority on revoking the certificate of the right to use sea areas and dissatisfaction on the governmental act to issue the certificate of the right to use sea areas to a third party.
—Foreign interested parties voluntarily submitted relevant disputes to this Court. From hearing cases involving foreign, Hong Kong, Macau and Taiwan interests, we have earned the trust of the litigants both at home and abroad through fair trials and by providing a first-rate service. At the time when large enterprises of port and shipping are concluding a contract and foreign enterprises are carrying out maritime business, they voluntarily choose this Court to have jurisdiction over their disputes. In respect of the cases at the first instance heard by this Court over 2012, the litigants choosing this Court to have jurisdiction over the disputes through agreement totaled 15, among which there were 4 cases in which one or both of the parties concerned were foreign enterprises. We heard and settled the cases in a timely manner, and the litigants submitted themselves to the judgment and resolved the matters accordingly. In addition, we have concluded a case where the litigants filed a parallel proceeding to this Court and the court in the Netherland due to that agreement that this Court has jurisdiction over the disputes has been made in the clause on the back of the bill of lading. Thanks to the great effort of this Court for mediation, the plaintiff withdrew the action filed with this Court and eventually the court in the Netherlands, and the case was settled through mediation.
II. Regulating the use and administration of sea areas according to law
—Problems relating to the administration of sea areas and solutions we propose
(1) Issues of administration according to law in the course of the administration of the right to use sea areas
A maritime administrative case involved the holder of the right to the use of sea areas being dissatisfied with the government decision to revoke the certificate. Mr. Chen obtained the certificate of the right to the use of sea areas in 2003 and built shrimp pond in such sea areas for marine aquiculture for many years. In 2011, part of the shrimp pond was occupied for the reinforcement project of the sea wall and the bureau of water resources destroyed the shrimp pond by force without reaching agreement on the compensation for such occupation with Mr. Chen. The river basin administrative bureau applied to the competent government authority for revoking the certificate of the right to use sea areas on the ground that the government authority has not notified it when issuing such certificate. The government authority determined that the issuance of such certificate is illegal on the ground of the existence of defect in the course of the application for such certificate filed by Mr. Chen and decided to revoke the certificate according to the provisions as stipulated by the Regulations of Guangdong Province on the Supervision of Administrative Law Enforcement of the People’s Government at all levels and the Regulations of Guangdong Province on the Accountability System for Administrative Law Enforcement. Mr. Chen was dissatisfied with the decision and filed an administrative litigation to the court. After hearing the case, the court held that the facts found are unclear, the evidence is insufficient and there existed a lack of legal ground for the government to make such a decision to revoke the certificate, and thus rendered a judgment to rescind the decision made by the government.
The issuance of certificate of the right to the use of sea areas falls into the category of administrative license, and the implementation procedure of administrative license shall be subject to the provisions stipulated by the Administrative License Law of the People’s Republic of China. Administrative license is administrative actions which the licensee could benefit from. The administrative license obtained by citizen, legal person or other organizations according to law is under the protection of law. Therefore the revocation of the administrative license, which could have great influence on the interests enjoyed by the licensee based on such license, shall strictly abide by the provisions provided by relevant laws and regulations. The administrative authority may, only under circumstances provided in Article 69 of the Administrative License Law of the People’s Republic of China, annul an administrative license according to the request of the interested party or according to its functions, or according to the provisions as stipulated in Paragraph 2 of Article 8 of the Administrative License Law of the People’s Republic of China, providing “in case the objective circumstances that the administrative license rests on change greatly, and in order to meet the demand of public interests, the administrative organ may modify or withdraw the effective administrative license. The damage caused to the properties of citizens, legal person or other institutions accordingly shall be compensated for by the administrative organ in accordance with the law.” There is a lack of legal ground for the government authority to revoke the certificate of the right to the use of sea areas which has become effective for several years, merely on the ground that there are some defects to the documents submitted by Mr. Chen for the application for such certificate, thus it is in violation of the credit benefit protection principle. What’s more, the Regulations of Guangdong Province on the Supervision of Administrative Law Enforcement of the People’s Government at all levels and the Regulations of Guangdong Province on the Accountability System for Administrative Law Enforcement, based on which the revocation was made, are the internal supervising regulations of administrative organs. These regulations are made for the purpose of punishing and limiting the illegal acts of the public servants when discharging their duties, but not the administrative counterpart. Therefore, it is improper for the government to adopt such regulations to annul the administrative license.
Following the development of marine economy of Guangdong Province, cases that the right of marine aquiculture or the right of the use of sea areas is revoked ahead of time due to the occupation of the sea areas resulting from the aquiculture planning, adjustment of marine functional zone, construction project and valley development, which causes the aquatic product farmers unable to continue their business, may emerge constantly. In case the interest of the fishermen and aquatic product raisers could not be protected and the government authority or the organization in charge of the construction project remove or occupy the culture facilities without paying corresponding compensation, antagonism between the aggrieved masses and the government may easily be triggered, and mass disturbance may even arise therefrom.
We recommend as follows: (1) the local government and the maritime administrative department shall perform the official duties in strict compliance with law. Since a number of laws and regulations are involved in marine administrative management, great attention shall be paid to the scope of validity of such laws and regulations in order to adopt the laws correctly. (2) Government authorities shall strengthen the protection of the right to the use of sea areas obtained according to law. Government authorities and the administrative departments have responsibility for protecting the right to the use of sea areas legally obtained by citizens. Protection of the right obtained by citizens according to law shall be strengthened and the effective administrative license shall not be modified without reasonable grounds. (3) Article 30 of the Law of People’s Republic of China on the Administration of Sea Areas provides that “in case the right to the use of sea areas is withdrawn prior to the expiration of the term of use for the purpose of public interest or the security of the state, appropriate compensations shall be made to the right holder.” Paragraph 2 of Article 26 of the Regulations of Guangdong Province on the Management to the Use of Sea Areas provides that “where the right to the use of sea areas is withdrawn prior to the expiration of the term of use, corresponding compensation shall be made to the right holder pursuant to the tenure of use and the situation of the exploitation of such sea areas”. Therefore, in case the right to the use of sea areas is withdrawn prior to the expiration of the term of use for the purpose of public interests and security of the state, the government shall properly deal with the issues by means of making compensation for the right holder according to relevant laws and regulations.
(2) Matters relating to the disqualification of relevant administration staff in the course of the examination and approval of the right to the use of sea areas
An administrative case involved a villager being dissatisfied with the issuance of certificate of the right to the use of sea areas to a third party by the government authority. In the case, the third party and the staff member of the maritime administrative department who was in charge of the application for such certificate are in a conjugal relationship, and such staff member signed on behalf of the said department for the approval of the registration and the approval of the change of right holder of the sea areas. The plaintiff has conducted petition activities for 3 years prior to filing litigation to this Court. After visiting the maritime administrative department, discipline inspection department and people’s government at the local level and the above one, the conflict was escalating continuously instead of being settled.
Paragraph 2 of Article 38 of the Law of the People’s Republic of China on the Administration of Sea Areas provides that “the maritime administrative department and the staff members thereof shall not engage in the production or management relating to the use of sea areas”. According to such provision, no limitation has been made to the near-relatives of the staff members, and no clear provisions could be found on the disqualification of the manager who has an interest with the applicant in the course of the examining and approving of the right to the use of sea areas. However, in accordance with paragraph 2 of Article 70 of the Civil Servant Law of the People’s Republic of China, when a civil servant performs his duty in case any of the interests of his near-relatives or husband/wife is involved, he shall withdraw. Therefore, the said staff member did not withdraw from handling the administrative examination and approval which is in violation of the provision as stipulated in the Civil Servant Law of the People’s Republic of China. Thus the villager was challenging the fairness of the administrative examination and approval.
Fairness and justness are the basic principles for civil servant to perform the official duties lawfully. Where a staff member has an interest in the matter, the fairness and justice of the administrative action would be questioned by the administrative counterparts, which may cause the administrative counterparts to appeal to the central authorities for help. We recommend that: (1) the local maritime administrative department shall study the Civil Law in more detail, and the discipline inspection department shall strengthen the supervision on the law enforcement. (2) The provincial maritime administrative department may establish a withdrawal system in the examination and approval of the right to the use of sea areas so as to regulate the maritime administration and to build up the public credibility.
(3) Strengthen the costal residents’ awareness of use the sea areas according to law
An administrative case involved a villager who was dissatisfied with the issuance of certificate of the right to the use of sea areas to a third party by the government authority, the villager leased the “ancestral sea areas” without obtaining the right to the use of sea areas. He occupied such sea areas after the user obtained the right to the use of sea areas and leased to other person separately. Upon examination, the court held that the plaintiff is neither the owner nor user of the sea areas involved in the case and he is not the holder of the contract for the managerial right to such sea areas. Therefore his legal interests have not been affected by the issuance of certificate of the right to the use of sea areas to a third party and he shall not be deemed as proper plaintiff. The court overruled the claims filed by the plaintiff. From this case we may learn that some of the coastal residents in Guangdong province are ignorant of the law and the traditional concepts of “one owns the sea areas in front of his door” and “ancestral sea areas” are deep-rooted.
The Law of the People’s Republic of China on the Administration of Sea Areas provides the basic system of state-owned sea areas, paid utilization of sea areas and the examination and approval of the right to the use of sea areas. According to this law, any entities or individuals have the right to apply for the utilization of the sea areas, and have an obligation not to usurp on, buy or sell or by any other means transfer sea areas. Prior to the use of sea areas, one shall apply for the right to the use of sea areas according to law. The right to the use of sea areas legally registered shall be under the protection of laws and may not be infringed upon by any entities or individuals. The villager in the aforesaid case is obviously in violation of the laws and regulations. The right to the use of sea areas held by the village collective is involved in the subject case as well. In accordance with Article 22 of the Law of the People’s Republic of China on the Administration of Sea Areas, if any sea areas have already used for aquatic breeding under the management and administration of rural collective economic organizations or villagers’ committee prior to the implementation of this Law, and if it is in conformity with the functional divisions of the sea and approval of the local people’s government on the county level has been obtained, the right to the use of sea areas may remain with the rural collective economic organization or villagers’ committee, so that the sea areas may be contracted by the members of the collective economic organizations for aquatic breeding. Time limit has been prescribed by law for the village collective to apply for the confirmation on the right to the use of sea areas which has already been used. According to Article 40 of the Regulations of Guangdong Province on the Management of the Use of Sea Areas, which has become effective on 1st March 2007, for the projects in the sea areas without obtaining the certificate of the right to the use of sea areas prior to the implementation of this Regulations, relevant interested party shall go through the formalities of the certificate within 6 months after this Regulations becomes effective.
Therefore, we recommend that: 1. villagers’ committee or rural collective economic organization that is qualified for the use of sea areas shall actively exercise its rights and take the initiative to apply for the approval of the right to the use of sea areas to the local people’s government; 2. Provincial maritime administrative departments shall arrange the local people’s government and the maritime administrative department to carry out general survey on the use of sea areas by villager collective in order to solve the issue left over from the past; 3. The people’s government at all levels, especially the local government in the coastal regions, shall strengthen the legal promulgation and education on the management of the use of sea areas, so as to guide the coastal residents to use the sea areas according to law and to solve the disputes through legal means.
(4) Issues of dumping sludge and garbage in the course of ocean engineering
In a case of dispute related to building contract of wharf, the plaintiff, which is not a qualified construction company, but one affiliating to a qualified construction company, is the subcontractor to the transportation of waste materials generated from the excavation project which is part of the building project of the wharf. However, it subcontracted part of the project to the defendant at a later stage. During the construction project, the cutter suction dredger owned by the defendant failed to satisfy the construction requirements, and cannot transfer the sludge to the dredging reclamation area as agreed by the contract. Consequently, the defendant employed another party to dump the sludge to the anchorage by ships, which resulted in fines imposed by maritime safety administration. With regard to the offshore engineering construction, the phenomenon of multi-level contracting and illegal subcontracting exist ubiquitously and the problems of marine environment pollution arising due to the illegal execution of work by the actual constructor emerged as major issues.
The Administrative Regulation on the Prevention and Treatment of the Pollution and Damage to the Marine Environment by Marine engineering Construction Projects prescribe strict obligations on pollution prevention borne by the construction entity. For example, the construction entity shall, when applying for the construction project, submit an environment impact report, follow-up environment impact assessment shall be carried out where violation to the laws and regulations is found during the construction and corrective measures shall be adopted accordingly, corresponding fines would be imposed on the constructor who violates the laws and regulations, and in case of any pollution damage the polluter would be required to eliminate the hazard of the pollution and compensate the losses arising therefrom. Regardless of the relationship of contracting, multi-level contracting and subcontracting, the construction entity shall be responsible for the prevention of pollution to the marine environment caused by the marine engineering projects. According to Article 49 of the aforementioned Regulations, in case the construction entity cause erosion, siltation or damage to the territorial sea base points and their surroundings, the marine administrative department of the people’s government at or above the county level shall order it to stop the construction and operation, and to make restitution; if the construction entity fails to make restitution within the time limit, the marine administrative department may designate an entity with corresponding qualification for restitution, and the construction entity shall assume the fees incurred therefrom, as well as a fine of up to double the fees for restitution.
We recommend that: 1. the construction entity of the marine engineering project shall be the party which is directly responsible for the engineering project, and no matter how many times the construction project has been subcontracted, it shall be responsible for the supervision on the construction of the project being subcontracted. In case of any conduct of dumping the sludge and garbage freely by the actual constructor, it shall timely stop. 2. The marine administrative department shall strengthen relevant supervision on the marine engineering project construction. In case of any conduct of dumping the sludge and garbage freely by the construction entity, it shall take legal actions against the party who is directly responsible for the construction project so as to protect the marine environment.
III. Regulating the shipping financial service according to law
—Problems pertaining to loan on mortgage of ships and solutions we propose
(1) Issues of exorbitant valuation of the ships for mortgage
In a case of dispute over a loan on the mortgage of ships, with the bank as the plaintiff, the borrower, a shipping service company, obtained a loan in an amount of 100 million RMB from the bank with 27 ships owned by it as the pledge. The value of the ships was assessed by a property assessment institute and the estimated value of the 27 ships was 200 million RMB. Due to poor management of the shipping service company, the 27 ships were sold by the court through judicial sale to repay the loans. After going through the auction procedures, the aforesaid ships were sold only at the price of 40 million RMB.
With regard to the cases of disputes over loans on mortgage of ships which were entertained by this Court, we noticed that the estimated value of the ships served as pledge was too high on the whole, and after entering into the judicial auction procedures the price of the ships was on the low side. Many factors contribute to the phenomenon that the auction price of the ships is much lower than the estimated value. In addition to the objective cause of the downturn of the freight market, the following factors gave rise to the failure of the estimated value of the ships to truly reflect the change of the market price: firstly, the mortgagors intentionally raise the estimated value of the ships so as to get high loans. Secondly, the property assessment institute participating in the assessment of the ships is not good at the assessment of the value of ships, but only adopted the traditional assessment method for asset price to assess the value of the ships and failed to take into consideration the factors that could have influence on the price of the ships. Thirdly, due to the professional nature of the assessment of the value of ships, there are just few professional institutions engaging in the assessment of the value of ships in Guangdong province. Further, most of these institutions are not qualified for the assessment of asset price and could not meet the demand of the financial institutions for the assessment of the price of ships.
We recommend that: 1. the bank’s supervising department shall strengthen the supervision on the mortgagors so as to plug up loopholes and to avoid non-performing loans. 2. The financial institution shall employ qualified ship assessment institution for the value assessment of the ships served as pledge. Under the circumstance that most of the ship assessment institution is not qualified for asset price assessment, it may entrust professional ship assessment institution and asset price assessment institution to jointly carry out the assessment, so as to ensure that the estimated value of the ship can basically match up to the market price. 3. Ship assessment institutions should, pursuant to business development, hire and train some qualified personnel for asset price assessment and to obtain the qualification for asset assessment so as to meet the market demands.
(2) Issues that financial institution neglects the maritime lien
In respect of a case that the ship owned by a shipping service company was sold by this court through auction procedure, the auction price of the ship is more than 500 thousand RMB, but the crew’s wages which are entitled to the maritime lien reached to more than 300 thousand RMB. Therefore, deducting the auction fees and other maritime liens, the bank, as the mortgagee, only got indemnification for tens of thousands RMB.
In recent years, in dealing with the auction of some ships involved in the loan on mortgage of ships, we noticed that after paying the auction fees and relevant claims entitled to the maritime liens, there is very little auction sale of the ships left for indemnifying the credit of the financial institution. In addition to the above-mentioned analysis that the auction price of the ship is much lower than the estimated price, the reason lies in that the financial institution fails to take the maritime liens into consideration when lending money. The regulations on maritime liens are prescribed in Article 21 to 30 of the Maritime Code of the People’s Republic of China, i.e. a maritime lien shall have priority over ship mortgage. The establishment and existence of the ordering of such claims are not essentially based on any possession, registration or agreement; therefore it has the so-called secretive nature. Once the ship under mortgage is arrested and sold by the court through auction due to maritime disputes, the maritime liens, such as the crew’s wages and the tonnage dues, would have the priority of compensation, thus the credit of the financial institution, as the mortgagee, would possibly not be completely indemnified.
We recommend that, financial institutions, when engaging in business of ship mortgage, give adequate consideration to the unpredictable risks which may be generated from the maritime liens and request the debtor to provide other securities for the performance of debt other than the ship mortgage. In addition, financial institutions should also supervise all the aspects concerned, including the status of vessel insurance, ship survey and operation of the ship ,so as to timely discern any problems and to take safeguards measures in respect of maritime liens.
(3) Matters relating to the protection of financial claim in the course of the implementation of preferential policy for fishing industry
In a case of dispute over loans of mortgage on ships where the rural credit cooperatives filed a lawsuit against the ship owner, due to the fact that the rural credit cooperatives, as the mortgagee, failed to accurately provide relevant documents proving the qualification of the shipowner, the judicial proceeding could not be started and the financial creditor’s right could not be fulfilled by means of judicial proceeding.
For the purpose of the implementation of preferential policy for the fishing industry, the rural credit cooperatives provide small loans to a great number of local fishermen, which made great contribution to the development of the local fishing industry. However, in the course of hearing such type of cases, we noticed that the qualification of the borrower has not been strictly examined by the rural credit cooperatives, fishing boat serving as a pledge without a full set of license, and the value of the fishing boat is too low and no adequate security has been provided for the performance of debt, which left many loans unable to be recovered and harmed to the financial creditor’s right.
We recommend that, financial institutions, when implement the preferential policy for fishing industry, strictly examine the qualification of the borrower and the fishing boat on mortgage, so as to take precautions against relevant risks on the loans and to bring forth new ideas on the security pattern according to law. For example, the pattern of “diesel fuel subsidies + fishing boat mortgage + commercial loan” could be adopted, where the borrower may, of its own accord, open an account at the credit cooperative which provides the loan for the special fund of diesel fuel subsidies. Prior to paying off the loans, the special fund of diesel fuel subsidies shall only be used to repay the loans, which may reduce the risk of mortgage on ships to a certain degree.
IV. Regulating the Freight Market
— Problems in carriage of goods by sea and solutions we propose
(1) Domestic importers should be prudent in signing trade contracts and be cautious of fraud
In a dispute arising out of a contract for carriage of goods by sea, a large Chinese state-owned enterprise engaged in import and export had entered into a contract with an American trading company for the sale of copper scrap at the amount of over 2 million USD through letter of credit. When entering into the sales contract, the state-owned enterprise was aware that the American company as exporter of the solid waste did not have a registration certificate issued by the General Administration of Quality Supervision, Inspection and Quarantine under the State Council of China. When the subject container arrived in the port of destination, the contents were found to be earth and rocks etc. rather than the goods. Consequently the state-owned enterprise as consignee suffered total loss. Then it claimed against the carrier on the grounds that the carrier had issued an incorrect bill of lading which resulted in the cargo loss. The court tried the case and held that the goods at issue had not been inside the container before loading in the port of departure, and accordingly the cargo loss did not take place during the period of responsibility of the carrier; the carrier’s issuance of the incorrect bill of lading, which was a tort, was not the cause of the consignee’s payment of the letter of credit. The court accordingly dismissed the state-owned enterprise’s claims.
International trade involves a number of elements, such as buying, selling, payment and transport, and features many legal complexities. However, contracts of sale and contracts of carriage are independent of each other. If a fraud happens in the buying and selling, the liability may not be shifted onto the carrier and the victim of such fraud may only claim against the other party to the contract of sale. Nevertheless, it is difficult to claim against an overseas seller. Furthermore, with respect to international trade where solid waste and other special subject matters are imported, Article 16 of China’s Administrative Measures for the Import of Solid Waste says “the State requires for the registration of overseas suppliers of solid waste that can be used as raw materials. Overseas suppliers exporting such solid waste to China shall obtain the registration certificate issued by the General Administration of Quality Supervision, Inspection and Quarantine under the State Council.” In the above case, the state-owned enterprise as importer should have carefully examined the registration certificate of the overseas supplier; however, it entered into the sales contract with the overseas seller although it was fully aware that the seller did not have the required certificate, which gave rise to a hidden danger.
Our suggestions are: 1, before signing a contract of sale with large value of subject matter, the domestic buyer as importer should investigate the credit of the overseas seller to avoid trade fraud; 2, with respect to international trade of special subject matters such as solid waste, importers should get familiar with applicable laws, rules and regulations of China and the exporting country so as to reduce disputes and avoid losses.
(2) Attention required of sea carriers in the transport of ferrosilicon
In a case of cargo damage under a contract of carriage of goods by sea, the carrier accepted booking to transport ferrosilicon and a batch of compartments of intercity train with internal combustion engines to Europe from a port in North China. The compartments were loaded on the upper tweendeck space, while the ferrosilicon was loaded on the lower tweendeck space. There were chinks in the partition between the upper and lower spaces. As there was no continuous ventilation on the carrying vessal during the transport, the ferrosilicon loaded on the lower tweendeck space, which produced phosphine in suitable temperature and humidity; the gas then expanded to the upper tweendeck space through the chinks in the partition and reacted with the copper or copper alloy parts of the train compartments. The compartments were only covered in a film on the top; the phosphine entered the carriage from the lower space and was prevented by the film which formed a relatively enclosed environment. As a result the phosphine concentration increased and the reaction intensified, eventually leading to the damage of the compartments. Subsequently the consignee claimed against the carrier for the loss of the train at an amount over RMB100 million.
China is a big exporter of ferrosilicon, and exported ferrosilicon is mainly carried by sea. Ferrosilicon is classed as dangerous goods and is subject to the special conditions set forth in the International Maritime Dangerous Goods Code (hereinafter referred to as the IMDG Code). After the 29th amendment to the IMDG Code came into force, China’s Ministry of Transport issued the Notice on Specifying the Requirements for Ferrosilicon and Other Dangerous Goods in International Shipping (No. [1999] 154) 1999, providing that IMDG Code“relaxes the requirements for the shipping of ferrosilicon and other dangerous goods. In order to facilitate marine transport and promote China’s foreign trade, we hereby state the provisions and detailed requirements of the 29th amendment to IMDG Code with respect to ferrosilicon and other dangerous goods as follows: 1, when ferrosilicon (silicon ≥ 30%-90%) or ferrosilicon UN No. 1408 on page 4343 of IMDG Code is shipped in packing (including intermediate bulk containers and containers) and if the foreign trade authorities are provided with a certificate showing that the ferrosilicon has passed the Type 4.3 test set forth in Clause 33.4.1.4, Part III of the UN Recommendations on the Transport of Dangerous Goods, Manual of Tests and Criteria, it can be shipped as general goods.”
Although ferrosilicon may be shipped as general goods after a test certificate is obtained, during prolonged sea transport it is prone to produce phosphine and other toxic, corrosive gases in humidity; such gases corrode copper and copper alloy parts and may result in poisoning and explosion. For these reasons, we suggest that sea carriers should prudently stow and store ferrosilicon, with particular attention to avoid mixing with incompatible goods. Ferrosilicon should be stowed away from copper or copper alloy goods or equipment containing such metals. Furthermore, when stowing and carrying ferrosilicon, carriers should ensure the watertight integrity of the hold and maintain proper ventilation.
(3) Problems in the inspection of damaged goods by the carrier and the consignee
In a dispute arising out of a contract for carriage of goods by sea, the subject container was shipped from Malaysia, transhipped in Hong Kong and arrived in Guangzhou. The consignee took delivery of and transported the goods to its own warehouse, then opened the container and found the goods damaged. The consignee subsequently claimed damages against the carrier; whereas the carrier defended that the damage of the goods was found in the warehouse but not during the period of its responsibility and therefore it was not liable for compensation. As the consignee could not prove any evidence that the damage had occurred during the period of responsibility of the carrier, the court dismissed its claims.
In another dispute arising out of a contract of carriage of goods by sea, the container arrived in Guangzhou and damage of the goods was found during port tallying. The consignee then requested the carrier to conduct a joint inspection, but the latter ignored such request. Later the consignee and the shipper reached consensus on the disposal of the goods, namely by returning the goods to set off the residual value. After the consignee had claimed damages against the carrier, the carrier alleged that the goods did not suffer total loss and there was residual value, and it did not agree with the way the consignee disposed of the goods. As the consignee provided sufficient evidence to prove the amount of the damage of the goods, the court supported the claims filed by the consignee.
In similar disputes, carriers usually defend by alleging that the damage of goods did not occur during the period of their responsibility. Article 46 of the Maritime code provides that “the carrier is responsible for goods carried in containers throughout the period during which it is in charge of the goods, starting from the time it has taken over the goods in the port of loading till the goods have been delivered in the port of discharge. The carrier is responsible for non-containerized goods throughout the period during which it is in charge of the goods, starting from the time the goods are loaded on board till the goods are discharged. During the period the carrier is responsible for the goods, the carrier shall be liable for any loss of or damage to the goods, except as otherwise provided for in this Section.” The claimant needs to prove that the damage occurred during the period of responsibility of the carrier, and counterevidence is required if the carrier denies such allegation. Accordingly, we suggest that consignees should, when finding any damage to the goods when taking delivery, send a written Notice of Loss or propose a joint inspection in accordance with Section 5 (Delivery of Goods) of Chapter IV (Contract for Carriage of Goods by Sea) of the Maritime Code. The carrier and the consignee should each reasonably facilitate the cargo damage inspection. If one party proposes an inspection but the other party refuses to cooperate, the proposing party should commission a qualified inspection agency to identify the damage and the amount thereof to facilitate future claims.
V. Regulating the Forwarding Business
— Problems in the forwarding business and solutions we propose
(1) Problems regarding cargo damage where container seals are intact
Nowadays, containerization plays a significant role in the carriage of goods by sea. Containers have become a major vehicle for the carriage of internationally traded goods by sea except for bulk oil and bulk cargo, such as crude oil, coal, mineral sand and grain. Nonetheless, containers induce increasing legal issues and disputes. A typical problem is cargo damage where container seals are intact. In such case, the shipper or consignee alleges cargo shortage or damage found in the port of destination, whereas the carrier states that it accepted a sealed container, was unclear of the condition of the cargo inside and has put a notation on the bill of lading declaring that the carrier would be exempted from any liability as long as the container is delivered with the seal intact.
As goods are invisibly loaded in closed containers, carriers often put notations on bills of lading so as to avoid possible future liability. Such notations include SLAC — Shipper’s Load and Count, SLCAS — Shipper’s Load, Count and Seal, STC — Said to Contain, SBS — Say by Shipper, and FCL — Full Container Load. In trial practice, there is a general consensus on the validity of such notations: with respect to full container load (FCL) and sealed by shippers, the validity of such notations is supported. As container ships are highly mechanized, the loading time is short in each port and it is thus difficult for carriers to exactly identify the marks, number, volume, weight and condition of the goods inside containers with an intact seal; therefore carriers are allowed to have reservations about the condition of the goods. With respect to less-than-container load (LCL), the validity of such notations will be determined depending on whether the container freight station loads on behalf of the carrier or the shipper. Containers loaded by the container freight station for and on behalf of the shipper will be deemed as loaded by the shipper, and the added “Unknown Clause” is valid; if the container freight station loads for and on behalf of the carrier, the “Unknown Clause” added by the carrier would be inconsistent with the fact and therefore such clause shall be found invalid. Thus it can be seen that where containers are loaded by the shipper, the shipper or consignee cannot prove the condition of goods merely by the descriptions on the bill of lading. Moreover, from the factory to theport of loading and to theport of discharge, container cargoes are transported by at least two modes, namely road and sea transport. Where the shipper commissions a road carrier and a sea carrier respectively for each section of transport, the shipper will be faced with great difficulties in claims if it is impossible to determine the section where the cargo damage occurred.
We advise the shipper, when delivering the goods to the carrier, to try to collect other evidence to prove the condition of goods , such as the weight of goods and the apparent condition of the container. A sea carrier is generally liable for FCL from yard to yard. We advise the shipper to load the goods in the factory, seal the container, and then weigh the container in the presence of a third party witness; to record whether the container is in apparent good condition and whether there is any damage to or dent in the container. When the container arrives in the port of loading, the shipper should weigh the container again with the weighing equipment of the port, and keep the equipment interchange receipt (EIR) from the port as evidence for the apparent condition of the cargo container upon delivery to the sea carrier. When the container arrives in the port of destination, the shipper should weigh it again before discharging and taking delivery of the goods, and should carefully inspect the apparent condition of the container as well as the goods inside. In case of any shortage of, or damage to the goods, the shipper can compare each record taken and it will then be easier to identify the section where such shortage or damage occurs and the fault of the carrier.
(2) Problems regarding the reimbursement of expenses paid by forwarders
In a dispute arising out of a forwarding contract, the forwarder arranged for the transport of goods as required by the principal and on behalf of the principal paid the freight to the carrier, as well as the detention and demurrage after the arrival of goods in the port of destination. However, the principal refused to reimburse the forwarder on the grounds that the forwarder paid the expenses without first obtaining its consent and that the expenses were unreasonable. Subsequently the forwarder brought an action to the court, and the court found that such expenses were necessary expenses incurred by the forwarder for fulfilling the commission and therefore should be reimbursed by the principal; eventually the court supported the claims filed by the forwarder.
The legal relationship between the forwarder and the principal is an agency relationship created under a contract. Although Article 398 of the Contract Law of People’s Republic of China provides that the principal shall prepay all expenses to be incurred in completing the commission, in actual forwarding practice prepayment by the principal is rare. In most cases the forwarder has to pay such expenses on behalf of the principal. The forwarder is entitled to recover such expenses from the principal only when the following three conditions are met: 1.the expenses are necessary for completing the commission and paid by the forwarder for the benefit of the principal and for the purpose of the forwarding contract. Specific considerations include: whether the expenses are incurred in relation to the commission; whether the expenses are inevitable in completing the commission; whether the principal’s interests will be affected if the expenses are not paid in time; whether the forwarder is at fault for the incurrence of the expenses. 2. The expenses so paid shall be reasonable and not in breach of the agreement between the forwarder and the principal, and shall not be excessively higher than the market standard or the losses foreseeable by the principal upon commissioning the transport. The forwarder may seek recovery of freight so paid from the principal subject to the amount they previously agreed upon. With respect to detention and demurrage, where the principal has not determined the rates in advance or afterwards, consideration should be given to whether the rates accord to general market standards and whether the charge collector has taken proper measures to prevent any further losses. 3. Such expenses may only be paid to bodies entitled to such charges. The forwarder usually pays the expenses as per the carrier’s bills, but the carrier is not entitled to all charges. For example, demurrage should be paid to the port but not to the carrier. If the carrier claims for such charge, it must prove that it has paid the charge to the port.
We advise forwarders to observe the following principles before paying expenses on behalf of the principle: 1. to carefully examine the expenses against the above three conditions. As agents, forwarders are obliged to exercise due diligence instead of merely paying the expenses as per the carriers’ bills. 2. to request charge collectors for proof of expenses. For instance, before paying destination charges to the carrier, the forwarder should request the carrier to provide proof of charges incurred due to the retention of the goods in the port of destination as well as the local charging rates. 3. Before paying the expenses, the forwarder should try its best to inform the principal. It is the obligation of a qualified forwarder to promptly inform the principal of any expenses incurred in relation to the goods, which enables the principal to take timely measures to reduce losses; otherwise the forwarder might not be able to recover the expenses incurred due to further losses.
(3) Actual shipper has the right to obtain shipping documents
In a case of dispute arising from a forwarding contract, the plaintiff claimed that it was the seller under an international trade contract, and as agreed had delivered the goods to the carrier via the forwarder designated by the buyer. However, the forwarder had not handed over the bill of lading to the plaintiff, as a result, the consignee was not able to take delivery of the goods in the port of destination and eventually expenses were incurred as the goods were detained in the port. The plaintiff requested the court to order the forwarder to compensate it for all economic losses incurred due to the forwarder’s failure to hand over the bill of lading in time. On the other hand, the forwarder alleged that it was commissioned by the foreign buyer to arrange for the transport and not in any contractual relationship with the plaintiff, and therefore was not obliged to hand over the bill of lading to the plaintiff or to compensate for any losses incurred in relation to the goods under the contract. In accordance with applicable laws, the court held that the plaintiff as actual shipper had control over the goods. However, as the plaintiff did not provide any evidence to prove that it had instructed the forwarder to hand over the bill of lading or telex release the goods, its claims were eventually dismissed.
The above case involves a basic issue in FOB-based international trade contracts and the resulting carriage of goods by sea. Generally speaking, under the FOB condition in international trade, the foreign buyer is responsible for booking space while the domestic seller is responsible for delivering the goods as required to the vessel designated by the buyer. In accordance with Article 42(3) of the Maritime Code, the seller is the actual shipper whereas the buyer is the contractual shipper. In practice, the foreign buyer usually commissions a domestic forwarder to book space on its behalf. For convenience, the domestic seller often commissions the forwarder to deliver the goods to the carrier. Upon completing such commissions, the forwarder receives the bill of lading or other documents from the carrier. Should the forwarder hand over such shipping documents to the contractual shipper or to the actual shipper when it has received a commission from both parties respectively? As regards this issue, Article 8(1) of the Regulations of the Supreme People’s Court on Trials of Disputes Arising from Sea Freight Forwarding clearly provides as follows: “where the forwarding enterprise is commissioned by the contractual shipper to book space and by the actual shipper to deliver the goods to the carrier, the people’s court shall support the actual shipper’s request that the forwarding enterprise hand over the bill of lading, sea waybill or any other shipping documents obtained to it We advise the actual shippers to actively exercise their rights endowed by the law by requesting the forwarder to provide the shipping documents promptly after the goods are loaded on board, so as to have control over the goods and get the payment smoothly. If the forwarder refuses to hand over the shipping documents, the actual shipper should collect and preserve relevant evidence to facilitate future claims.
VI. Regulating the Seafarer Labour Market
— Problems in seafarers’ contracts of service and solutions we propose
(1) Some seafarers still work without a labour contract
In hearing a series of cases of disputes arising out of the seafarers’ service contracts of a shipping company in Guangzhou, the court found that hundreds of seafarers employed by the company did not sign a written labour contract and their wages were long overdue, mostly for years. Consequently, the series of cases featured the following problems: 1. the rights and obligations of the shipping company and the seafarers, in particular the payment terms of the seafarers’ wages and other remuneration, were unclear so that the seafarers’ legitimate rights and interests cannot be effectively protected. 2. the longstanding arrears of wages not only resulted in the meagre living of some seafarers, but also led to mass hostility. We have found similar situations when trying disputes arising out of the seafarers’ service contracts of other small and medium shipping companies. Some seafarers still work without a labour contract.
From our trials of such disputes, we learn that some small and medium shipping companies do not sign labour contracts with the seafarers they employ and fall in arrears of wages to these seafarers mainly for the following reasons: seafarers in these companies are legally illiterate as they mostly come from poverty-stricken and underdeveloped regions. Moreover, they are at a disadvantage in the labour relation as a result of the supply and demand in the labour market. Their claims are hence not fully and clearly established. On the other hand, some small and medium shipping companies for their own benefit are reluctant to sign labour contracts with seafarers and frequently fail to pay the wages fully and on schedule. In particular, when faced with operational difficulties, they often try to protect their own interests and ignore the seafarers’ interests.
We propose that labour authorities should strengthen the supervision and inspection of small and medium shipping companies within their jurisdiction with respect to the signing of labour contracts and payment of wages and remuneration, urge these companies to sign a written labour contract with each seafarer and fully pay the wages and remuneration on schedule, and legally punish any acts impairing the legitimate rights and interests of seafarers.
(2) Collusion in seafarers’ claims for wages
When a shipping company is in hard time and has its ship legally auctioned off by the court to pay off its debts, wages of the ship’s crew and other certain claims have a maritime lien on the ship and rank first in priority. The court’s determination of crew wages and other remuneration mainly relies on the plaintiffs’ requests and the defendants’ recognition. In trial practice, we find that some ship owners collude with their seafarers by offering to satisfy certain needs of such seafarers. In such cases, the seafarers falsely apply for registration of their claims of arrears of wages to the court and request the court to support their maritime lien and order the payment of the crew wages. Such practice seriously prejudices the interests of other creditors.
In trying cases involving suspected collusion, we strictly apply the rules of evidence in civil actions and render judgments based on clear facts and ample evidence. With respect to evidence review, we require evidence of the existence of maritime lien in addition to evidence of debtor-creditor relationship. With respect to court hearings, all litigant parties shall appear in court except in special circumstances.
We suggest that ship owners and seafarers should be honest and law-abiding, and refrain from false action or any other acts that impair civil litigation; any violator will be held legally liable in accordance with Article 112 of the Civil Procedure Law.
(3) Disputes arising out of seafarers’ service contracts may be brought to court without first being referred to arbitration
In a case of dispute arising out of a seafarer’s service contract, the plaintiff first referred the dispute to Shenzhen Labour Dispute Arbitration Committee in September 2010. Later he disagreed with the arbitral award made by the Committee and brought an action to this court in February 2011. The court entertained the case in compliance with the law.
In some similar cases, the plaintiffs first referred the disputes to arbitration and then filed a case to the courts when they disagreed with the arbitral award. This resulted in a prolonged period of dispute resolution and hindered the protection of the legitimate rights and interests of the seafarers. As provided in Article 8 of the Interpretation of the Supreme People’s Court on Several Issues Regarding the Application of the Special Maritime Procedure Law of the People's Republic of China and the Reply of the Supreme People’s Court to the Query Whether Domestic Cases of Disputes Arising out of Seafarer Labour Contracts Should be Referred to Arbitration before Litigation ([2002]MSTZ NO. 16), arbitration is not a necessary procedure before litigation for disputes arising out of seafarers’ service contracts (including seafarers’ labour contracts) and such disputes may be directly brought to a maritime court. The latter economizes on arbitral resources, shortens the time it takes to resolve a dispute, and more effectively protects the legitimate rights and interests of seafarers.
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