The prospect and potential to adopt the right of control of Rotterdam Rules into the new CMC

Zhang Hao,Yang & Lin Law Firm

[Abstract]The year of 2018 is the tenth anniversary of Rotterdam Rules, and it happens to witness a peak of amending CMC. In Chapter 10 of Rotterdam Rules, for the very first time, the right of control is studied in detailin the context of carriage of goods by sea, and it was completely and logically stipulated in thiswell-known international convention. It is advised that, to properly learn from Rotterdam Rules and incorporate the right of control into the new CMC is necessary and feasible. This propose is made in consideration of the advancement of those stipulations of right of control in Rotterdam Rules, the current incomplete and inapplicable provisions that are deemed as relevant to the right of control in China, the condition of Chinese exporting nowadays, as well as the need of higher flexibility of arrangement of carriage.

[Keywords]Rotterdam Rules, Chinese Maritime Code, right of control, B/L

I. Introduction

On December 11, 2008, the General Assembly of the United Nations adopted the UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (in the Preamble, it was recommended that rules embodied in this convention should be known as “Rotterdam Rules”) and authorized a ceremony for the open signature to be held on September, 2009[1]. Ten years have passed by now but the condition precedentof obtaining at least twenty instruments of rectification, acceptance, approval or accession has not yet been satisfied, and to be honest, it is widely regarded that Rotterdam Ruleswould not enter into force in the near future[2]. However, the progressiveness and beauty of the designing of Rotterdam Rules which is appraised of demonstrating the most updated developments and revolutions in maritime law is undeniable.

China entered neither of Hague Rules, Hague-Visby Rules or Hamburg Rules, but for the international carriage of goods by sea, the current governing law Chapter 4 of Chinese Maritime Code (hereafter referred to as “CMC”) is built on basis of Hague-Visby Rules and partly adopts Hamburg Rules. Highly appreciated and valued by the government, jurisdiction institution as well as the whole shipping and maritime law community, CMC is now expected to be amended and revised in the recent years. Although China has no plan to rectify, accept, approve or accession Rotterdam Rules, considering the advancement of those Rules and the history of China properly adopting international conventions, itis advisable for this newly amended CMC to absorb and refer to Rotterdam Rules[3], and such adoption may after all be a wonderful prospective for Rotterdam Rules.

In combination ofthe articles in Rotterdam Rules, the currently effective stipulations of CMC, and the shipping and trading practice nowadays in China, quite a number of systems in Rotterdam Rules tend to be unsuitable to be adopted into Chinese domestic law, for theymay overly burden the already disadvantaged parties orundermine Chinese shipping industry if incorporated, such as the abolishment of exemptions of navigation negligence and fire, extension of the period of seaworthiness, etc. but this is not the case for the right of control in Chapter 10 of Rotterdam Rules[4]. This essay would try to briefly introduce the right of control in Rotterdam Rules first, then discuss the necessities and feasibilities to adopt it into the new CMC.

II. Introduction and interpretation of right of control in Rotterdam Rules

1. Introduction of right of control

Some scholars believed the right of control is a novel invention of Rotterdam Rules[5], but this isnottotally correct since the histories of “right of control” could come back to 20^th century[6], and the similar legal systems could be spotted in many international conventions and domestic laws[7], although it has to be admitted those previous stipulations were not very practical, complete or legally logical. Without any doubt, Chapter 10 of Rotterdam Rules has been the first that successfully constructed a whole and applicable legal system of right of control[8].

It should be noted at the first place that, “right of control” and other similar concepts under whatsoever names in the context of carriage laws(no matter it governs the carriage of goods by sea, road, rail or air) are not the same with the resemble conceptions in the circumstance of trading laws which are usually called as “right of stoppage in transit”[9]. Those legal systems in trading law circumstance incline to put more emphasis on helping sellers who have already transferred the controlof goods to the carriers but are confronted with enormous risks to collect payment back, for instance, when the buyers are likely to be insolvent or clearly deny making the payment. The most typical ones include Article 44 of 1979 Sales of Goods Act in UK (“the right of stoppage in transit”), Article 2-705 of Uniform Commercial Code in U.S. (“Seller’s stoppage of delivery in transit or otherwise”), and especially Article 71 of 1980 United Nations Convention on Contracts for the International Sale of Goods (hereafter referred to as “CISG”). On the contrary, the right of control and similar conceptions in carriage law are about the contracts of carriage, while their application are divergent and rather blurry in different laws and conventions[10].

2. Introduction of right of control in Rotterdam Rules

Given that electronic transport records have not been frequently used bothdomestically and internationally for now, this essay would not discuss the relevant provisionsabout them. Briefly, the stipulations of right of control in Rotterdam Rules could be summarized as following:

(1)   Extent of right of control

The right of control in Rotterdam Rules islimited to: firstly, to give or modify instructions regarding the goods; secondly, to obtain delivery of the goods at a scheduled port of call or en route; thirdly, to replace the consignee.

(2)   To identify the controlling party and the transfer of the right of control

If there is no agreement otherwise by the parties, then: when a non-negotiable transport document that need not be produced to obtain the delivery is issued, the shipper is the controlling party unless other parties are designated; when a non-negotiable transport document that must be surrendered to obtain delivery is issued, the shipper is the controlling party and may transfer the right of control to the named consignee by transferring the document without endorsement; when a negotiable transport document is issued, the holder is the controlling party and may transfer the right of control by effectively and legally transferring the document via endorsement and so on.

(3)   The pre-conditions to exercise the right of control

There are several pre-conditions that must be satisfied in the same time: firstly, it could only be exercised within the period of responsibility of the carrier; secondly, the instructions must be reasonably executable at themoment they reach the carrier; thirdly, the instructions can not in any event interfere with the normal operations of the carrier.

(4)   The protection to the carrier

The exercise of the right of control tends to put extra liability onto the carrier, therefore, there are provisions to afford additional protections accordingly to the carrier: the carrier is entitled to obtain security from the controlling party for the additional expenses, loss and damages that could be reasonably expected in advance, and if no such security is provided the carrier can refuse the instructions, besides, the carrier’s liability for loss of or damage to the goods or for delayed delivery resulting from failure to comply with the instructions is subject to the limitation of liability of the carrier, also, the carrier is entitled with extra information and documents from the controlling party and the shipper to facilitate its works. Most importantly, the detailed, specific, clear and logical designing of the right of control itself is a natural protection to the carrier.

III. The necessity to adopt the right of control in CMC

1. The relevant stipulationsin China nowadays could hardly function due totheirincompleteness and inapplicability

In fact, the legislation about the right of control in China is not totally blank, and there are three stipulations that are regarded as relevant:

(1)   The first is Article 308 “the Consignor’s right of disposal prior to delivery” of Chapter 17 Carriage Contract in Contract Law of the PRC: “prior to carrier’s delivery of the cargo to the consignee, the consignor may require the carrier to suspend the carriage, return the cargo, change the destination or deliver the cargo to another consignee, provided that it shall indemnify the carrier for any loss it sustains as a result”.

(2)   The other two stipulations are not particularlydesigned to resolve the issues regarding the controlling of goods:Article 9 “the exemption of the carrier” of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law during the Trial of Cases about Delivery of Goods without Production of an Original Bill of Lading (hereafter referred to as “the Provisions”)[11] and Article 89 “Termination of the contract by Shippers before the sail” of CMC[12]

However, the above-mentioned stipulations are not only helpless on facilitating the performance of carriage contracts,instead, they may confuse the parties, complicate the dispute and create more difference of opinionsbecause of their incompleteness and ambiguity. One of the biggest loopholes in Article 308 of Contract Law of the PRC is that the controlling party is fixed as the shipper, which could lead to the issues such as: when a negotiable B/L is issued and then transferred, the legitimate right of the holder under the B/L of delivery in the discharging port may be hindered by the execution of this provision by the shipper, and; the party that enters into the carriage contract with the carrier and the party that actually delivers the goods to the carrier are both “shippers” in carriage of goods by sea, but it is not clear which one of them would have the right entitled by this article if they are not the same party.The Legislation Committee of the National People’s Congress of the PRC used to explain that the “shipper” in Article 308 shall be extended to the holders once the negotiable documents are legally transferred[13]. However, this explanation is not a law and has no binding force, as a result, the application of this article would depend on the individual discretion and interpretation of the judge.

Some courts tend to be cautious about application of Article 308 because of its shortcomings. For instance, there was a previous case in which the court held that, the consignee in Article 308 could only be the consignee named in the non-negotiable B/L, as on the negotiable ones the consignee keeps being uncertain until the delivery. Hence, the application of Article 308 should be interpreted as restrained to non-negotiable B/L[14]. Those problems derived from the fact that this article and this chapterof the Contract Law of the PRC are designed to govern all carriage contracts via the road, rail, air and sea, and the uniqueness of the carriage of goods by sea as well as the transport documents is not the key point that should be specially tendered.

On top of the flaws of Article 308 itself, its applicability is also a big issue: in China, there is a legal principle that the special laws, like CMC, are preferential than general ones such as the Contract Law of the PRC, upon which some people believe that Article 89 of CMC, rather than Article 308 of the Contract Law, should be applied when it comes to the right of control issues in carriage of goods by sea[15]. Nonetheless, Article 89 of CMC is substantially a stipulation about cancelaion of the carriage contract, which does not cover the essence of the right of control such aschanges of the consignee and delivery port. As for Article 9 of the Provisions, ithas the similar issue: it was not designed for the disputes over the right of control, but for the protection of the carrier when a charge of delivery without original B/L is made. Besides, Article 9 of the Provisions is limited to non-negotiable B/L; also, the Provision isnot a law and locates in a low legal hierarchy in China. All of those would restrain the function of Article 9 in resolving the cases about the right of control.

Besides, all those three stipulations are rather rough and do so little about extra protection of carrier, especially when compared with the detailed guidance and rules in Article 52, 53, 54 and 55 of Rotterdam Rules, which leads to an unbalanced relationship between the cargo interests and the carrier. The current condition is that, once the right of control under Article 308 is to be applied, the principle of fairness in Article 5 of the Contract Law of the PRC must also kick in so the carrier would not end up in a very disadvantaged situation.

On the other side, there were indeed several successful precedents about the execution of right of control based upon Article 308 in the carriage of goods by sea disputes, among which the most typical and recent one is the case (2017) Zui Gao Fa Min Zai No.412: the Supreme People’sCourt held that the shipper is entitled of the rights in Article 308 on condition that following the instruction of the shipper would not be unfair to the carrier, but in this case, the instruction from the shipper of returning the goods was sent too late, and to perform such instruction might interfere with the operation of the carrier. This judgement has been seen as a landmark precedent in application of Article 308, whereas, China is not a case law country, and the existence of such precedent could never replace the necessity of building up the right of control in legislations.

Nowadays, both the courts and the parties are seeking for a resolution limpingly from above-mentioned stipulations when it comes to disputes regarding the right of control.The execution of the right of control over the goods is essentially an alteration of the terms of the carriage contract. If there are no legislations that clearly and expressly give this right to one party, the alteration of the carriage contract could only be done, technically, via a supplementary alteration agreement between the parties. Given that the current legislations of the right of control in China are not powerful and functional enough, there is no wonder such right is rarely executed and the courts tend to steer clear of it[16] – it is not because such right is not needed in practice, but the majority of shippers are not aware of its existence, and the carrier is reluctant to help the controlling party to execute it since they are not clearly obliged to do so, whilst the court is in an awkward position if they apply such legislations..

2. To build up the right of control system in CMC may activate the right of stoppage in transit and assist its execution in the trading law

China is one of the contracting states of CISG, and the Supreme People’s Court once issued a notice to the Ministry of Foreign Economics and Tradeexplainingthat, without an agreement of choice of law otherwise between Chinese companies and foreign traders, CISG is automatically applied to the sale contracts made by parties of the contracting states. However, in spite that CISG is a widely entered convention internationally, it has been found that the right of stoppage in transit has never been really executed[17], which could be partly contributed to the lack of support in carriage law: the carrier is not bound by the sale contract and trading law, on the contrary, the carrier owes legal duties to the shipper, consignee and/or the holder, so there is no wonder the carrier is reluctant, and also not capable to carry out the instruction in favor of the sellers. If the right of control is incorporated into the new CMC, Chinese exporters could begin to rely on the combination of the right of control and the right of stoppage in transit to mitigate the risk when the overseas importers are losing credit or bankrupt.

Nonetheless, it has to be admitted that the right of control in Rotterdam Rules and the right of stoppage in transit in CISG could not be linked up perfectly for now: if the negotiable B/L is issued and then transferred, the legal holder of the B/L is the controlling party under the carriage contract, who, however, is not the unpaid seller under the sale contract[18]. All in all, the help by the carriage contract to the sale contract regarding the control over the goods may be below the expectation momentarily, but the development of legislation would not stop, and this inflict could still be expected to resolve in the future.

IV. The feasibility and benefit to incorporate the right of control of Rotterdam Rules into the newly amended CMC

1. To adopt right of control into CMC would not undermine Chinese exporting

It has been heatedly argued by some scholars and representatives of the cargo interests that adoption of the right of control of Rotterdam Rules into Chinese law is utterly infeasible. Such concern is brought up mainly because in Rotterdam Rules, the shipper refers to the party that enters into the carriage contract with the carrier, while the party documented on the transport document, namely, the “documentary shipper”, could never be the “controlling party”. But in China, there have been a substantial number of international trading concluded in FOB term, especially by the small and middle-sized Chinese exporters who are not capable of arranging the carriage or have to yield to the more powerful overseas importers. Those Chinse FOB sellers sometimes are documentary shipper, but more often, they are not even documented on the transportation documents. The objectors worry that, with the foreign FOB buyers/the contractual shipper made the controlling party by the law, they become more powerful and this may undermine the Chinese exporting.

But this is not the whole picture. Firstly, FOB term has several transformations now, and the party entering into the carriage contract is not necessarily the buyer[19]. Secondly, the non-negotiable transport documents that do not need a production to obtain delivery, such as Sea Waybill or D/O,is hardly used in international trade now, while the controlling party for negotiable B/L is the holder, therefore, only those FOB contracts which use non-negotiable B/L that needs to be produced to obtain delivery may be affected by the application of the right of control, however, this issue is not unsolvable: the right of control is not designed to obstruct the definition and function of the current “shipper” in CMC.Given the special condition of China, to adopt the system of right of control in Rotterdam Rules into CMC is not equal to completely copying all the stipulations of Rotterdam Rules. The current definition of the shipper in CMC could always be kept, and it is also possible to legislatethat once both kinds of shippers coexist, the shipper that delivers the goods to the carrier is prioritized and become the controlling party, so that Chinese FOB sellers who are not the carriage contract party could even get extra advantage from the right of control legislation.

Surely, the above opinion is not perfect. For instance, if the shipper that actually deliver the goods to the carrier is not documented on B/L, the controlling party and transfer of right of control could not be known by the carrier and the relevant third party, which may trigger some chaos. So there needs to be extra rulesto standardizedocumentation practice of B/L.Besides, once the FOB seller/ the party that delivers the goods to the carrier is made the controlling party, the FOB buyer would feel very unsecured, as a result, they may try to force harsh agreements that could restrict the sellers in the sale contracts.In addition, the Chinese FOB seller need to pay serious attention to the transfer of B/L when a negotiable B/L is issued, especially when the payment is not received, because the right of control would be transferred accordingly, and the holder is entitled with more power. Regardless of all those flaws to adopt the right of control, the law and the marine practice are always evolving, whilst those shortcomings are after all conquerable.

2. The benefit to incorporate right of control into CMC: to enhance the flexibility of the carriage of goods by sea

As UNCITRUAL pointed out, unlike carriages by other ways, the right of control in the carriage of goods by sea has never been paid enough attention. This is because the carriage of goods by sea was built upon the system of transport documents which, however,is sharply decreasing or even vanishingin the recent years[20]. The flexibility that is accompanied with the transfer and flow of B/L is inadequate to satisfy both the needs of trade and transportation in those days, as a result, the right of control comes on stage so that the controlling party could send instructions as entitled by the law. The real destiny of the right of control is to become a useful assistant and supplement of the B/L.

The advantage of incorporating right of control into new CMC hasactually been valued. In Article116 of the September draft of new CMC, it stipulates that:

“Within the responsibility period of the carrier stipulated in Article 67 of this Code, the carrier shall suspend the shipment, return the goods, change the discharging port or deliver the goods to other consignees upon the written requirement of the shipper, and the shipper shall reimburse the carrier for its losses and costs accordingly.

The carrier is entitled to refuse to follow the instruction by the shipper stipulated in the firstparagraph of this Article on condition that the shipper is noticed in time if one of the followings occurs:

(1) the carrier is not capable to follow the instruction of the shipper, or to satisfy the shipper would block the normal practice of the carrier; or

(2) the shipper does not provide any guarantee or assurance upon the reasonable calculation of the carrier that to follow the instruction of the carrier would bring about extra costs, expenditures, losses and damages; or

(3) the shipper does not return the B/L or the electronic transportation record that has been issued as demanded.

Within the responsibility period of carrier stipulated in Article 67 of this Code, the shipper could assign the right stipulated in the first paragraph of this Article to other party, while the assignee could further assign the right with the written notice sent to the carrier, and the reimbursement liability in the first paragraph of this Article shall be assumed by the assignee.

The goods is deemed as delivered in the destination when the it is delivered by the carrier following the instruction in the first paragraph of this Article.

Should the party deliver the goods to the carrier in the loading port be documented on the transportation document or the electronic transportation record as the shipper, the right stipulated in the first paragraph of this Article would be enjoyed by such party who should also take the responsibility of reimbursement in the first paragraph.”

This Article not only incorporates the essence and the majority of right of control of the Rotterdam Rules, but also mix it properly with the unique Chinese “shipper” definition. Such proposal, hopefully, could be passed in the final draft of new CMC.

Conclusion

With the effort of Rotterdam Rules, people began to value and think twice about the system of right of control in the carriage of goods by sea context for the first time. At the tenth anniversary of the Rotterdam Rules, namely, the year of 2018, the amending work of CMC is now encountering with a peak. Although China is unlikely to enter into Rotterdam Rules in the near future, it is advisable to adopt the suitable part of right of control stipulations in Rotterdam Rules into the new CMC, as there is an actual need of such adoption in consideration of the current situation of Chinese legislations, also, such adoption is feasible and likely to benefit the business of international trade and carriage of goods by sea. It is not exaggerated to say that, to incorporate the right of control of Rotterdam Rules into new CMC would be a decentprospect for both Chinese maritime legislation and Rotterdam Rules.