978-0132718974 Chapter 11 Solution Manual Part 1

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Transportaon

I. Text Materials

Trade Terms

Sales contracts involving transportation customarily contain abbreviated terms describing the

time and place where the buyer is to take delivery. The trade terms may also define a variety of

other matters, including the time and place of payment, the price, the time when the risk of loss

shifts from the seller to the buyer, and the costs of freight and insurance.

Virtually all domestic laws allow the parties to define the terms themselves, or to incorporate

definitions from foreign legislation or from a specific set of private rules. The United Nations

Convention on Contracts for the International Sale of Goods similarly allows parties to

incorporate trade terms of their choosing.

The most widely used private trade terms are those published by the International Chamber of

Commerce (ICC). Called Incoterms, they are well known throughout the world, and their use in

international sales is encouraged by trade councils, courts, and international lawyers. First

published in 1936, they are revised every 10 years—the current version is Incoterms 2010. Parties

who adopt the Incoterms, or any other trade terms, should make sure they express their desire

clearly. Parties should also refrain from casually adopting any particular set of terms. Parties

should be wary about making additions or varying the meaning of any particular term, except to

the extent that it is allowed by the rules they adopt or by judicial decision.

The parties’ failure to use any trade term at all can also produce unexpected results. Courts are

then left to divine the parties’ intent and to decide the case based on local commercial practice.

Case 11-1: St. Paul Guardian Insurance Company v. Neuromed Medical Systems & Support,

GmbH

Facts: Shared Imaging, a U.S. company, purchased an MRI system from Neuromed, a German

Issue: Did the parties intend for their shipping term to be the CIF Incoterm?

Holding: Yes.

Law: (1) The United States and Germany are both parties to CISG. (2) CISG Art. 9(2) provides

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Explanation: (1) This is an international sale governed by CISG. (2/3) The Incoterms provide the

Order: Motion to dismiss is denied.

A Note on the Incoterms – The Incoterms 1990 revision made several significant modifications

to the earlier terms, reflecting changes both in technology and in shipping practices that occurred

during the 1980s. According to the ICC, “The main reason for the 1990 revision of Incoterms was

the desire to adapt terms to the increasing use of electronic data interchange (EDI).” The second

major reason for the revision stemmed “from transportation techniques, particularly the

unitization of cargo in containers, multimodal transport, and roll-on roll-off traffic with road

vehicles and railway wagons in ‘short sea’ maritime transport.” Older terms that applied to

peculiar modes of land and air transport—such as free on rail (FOR), free on truck (FOT), and

FOB airport—were eliminated and the free carrier term was expanded.

Incoterms 2010 is classified into only two groups. The first group can be applied to any mode(s)

of transportation and includes Ex Works (EXW), Free Carrier (FCA), Carriage Paid To (CPT),

Carriage and Insurance Paid (CIP), Delivered at Terminal (DAT), Delivered at Place (DAP), and

Delivered Duty Paid (DDP). The second group can only be applied to sea and inland waterway

transportation and includes Free Alongside Ship (FAS), Free On Board (FOB), Cost and Freight

(CFR), and Cost, Insurance and Freight (CIF).

Incoterms 2010 also formally defined delivery as the point in the transaction where the risk of

loss or damage to the goods is transferred from the seller to the buyer.

“Free” Terms – “Free” means that the seller has an obligation to deliver the goods to a named

place for transfer to a carrier. National laws sometimes treat the “free” terms as interchangeable,

so it is important for contracting parties to identify not only the term but also the set of rules that

applies to their particular transaction.

FOB—Free on Board – It is a maritime trade term, and in most of the world its use remains

limited to seaborne commerce. The FOB (port of shipment) contract requires a seller to deliver

goods on board a vessel that is to be designated by the buyer in a manner customary at the

particular port.

The essence of an FOB contract is the notion that a seller is responsible for getting goods on

board a ship designated by a buyer. The seller continues to be responsible for the goods even after

the buyer’s chosen ship takes control of the goods at the end of its cargo boom and begins to hoist

the goods off the dock. The seller may remain responsible for the goods even after they are

loaded onto the ship if they remain unidentified to the buyer’s contract.

FAS—Free Alongside Ship – The term “free alongside” or “free alongside ship” requires the

seller to deliver goods to a named port alongside a vessel to be designated by the buyer and in a

manner customary to the particular port. “Alongside” has traditionally meant that the goods must

be within reach of a ship’s lifting tackle. This may, as a consequence, require that the seller hire

lighters to take the goods out to a ship in ports where this is the practice. The requirements of an

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FAS term are the same as those of an FOB contract. The seller’s responsibilities end upon

delivery of the goods alongside.

CIF—Cost, Insurance, and Freight – The most important and most commonly used shipping

term is cost, insurance, and freight. A CIF contract requires the seller to arrange for the carriage

of goods by sea to a port of destination and to turn over to the buyer the documents necessary to

obtain the goods from the carrier or to assert a claim against an insurer if the goods are lost or

damaged. The three documents that the seller (as a minimum) has to provide—the invoice, the

insurance policy, and the bill of lading—represent the three elements of the contract: cost,

insurance, and freight. The seller’s obligations are complete when the documents are tendered to

the buyer. At that time, the buyer is obliged to pay the agreed-upon price.

The CIF term is preferred by buyers because it means that they have little to do with the goods

until the goods arrive at a port of destination in their country. A CIF price quote also allows

buyers to compare prices from suppliers around the world without having to take into

consideration differing freight rates, since the seller pays the freight and insurance.

CFR—Cost and Freight – The cost and freight (port of destination) term is the same as the CIF

term except that the seller does not have to procure marine insurance against the risk of loss or

damage to the goods during transit. Because the insurance required under a CIF contract only has

to cover minimum conditions, buyers wishing to purchase more extensive policies will want to

use a CFR contract.

Case 11-2: Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd.

Facts: Phillips agreed to buy 25-30,000 tons of naphtha from Tradax for shipment from Algeria to

Issue: (1) Did the risk of loss pass to the buyer at the time of shipment? (2) Could the buyer

invoke force majeure?

Holding: (1) Yes. (2) No.

Law: Incoterms 1980 states that under a C & F term, the seller arranges and pays for the transport

Explanation: The risk of loss passed to the buyer at the time of shipment as the carrier selected

Order: Phillips must pay Tradax.

FCA—Free Carrier – The term applies to any form of transport (maritime, inland waterways,

air, rail, or truck). It requires the seller to deliver goods to a particular carrier at a named terminal,

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depot, airport, or other place where the carrier operates. The costs of transportation and the risks

for loss shift to the buyer at that time.

EXW—Ex Works – Under an ex works contract, a seller is obliged only to deliver the goods at

his own place of business. All the costs connected with transportation are the responsibility of the

buyer.

Transportation

The following is a typical example of how goods are transported by sea from a seller in Country

A to a buyer in Country B. Goods are picked up at the seller’s place of business by an inland

carrier and transported to a seaport for carriage abroad. The inland carrier will deposit the goods

in a warehouse or port depository for examination by customs officials and for consolidation with

other goods if the load is not large enough to occupy a ship by itself. A stevedore company or the

ship’s crew will load the goods. The crew will then stow the goods aboard ship, mark the goods

with leading marks, and issue a bill of lading to the shipper. At a seaport in Country B, the ship

will be directed by port authorities to tie up at a pier or to anchor at a moorage in the harbor.

When the buyer produces the bill of lading, the ship’s crew will unload the goods onto the dock

or, if the ship is anchored out, into a lighter for transfer ashore. The crew or a stevedoring

company will then deliver the goods to a customhouse or a bonded warehouse for inspection.

Once customs has inspected the goods and their related documents, and collected any import

taxes or duties, the goods will be released for entry into Country B. A local inland carrier will

then transport the goods to the buyer’s place of business.

When goods are transported by air, rail, or truck, much the same procedure is followed, except

that the carrier will issue an air waybill or similar non-negotiable receipt instead of a bill of

lading, and the transfer of goods will more commonly be done by the carriers without the

assistance of stevedores or other intermediaries.

In making arrangements for the transportation of goods, the buyer and seller will deal with a

variety of intermediaries, such as freight forwarders, warehousemen, port authorities, stevedores,

and customhouse brokers.

Freight forwarders are companies with specialized knowledge of international markets, finance,

transport, customs, sales law, and other related matters. In most countries they are licensed by the

government. Unless a merchant has a large staff dedicated to making shipping arrangements, the

use of a freight forwarder will save time and expense.

Unlicensed brokers and agents also are commonly available who perform much more limited

services (such as the booking of ocean freight or the handling of air cargo). A full-service freight

forwarder can help with or perform the following:

Obtaining quotations on CIF and C & F contracts

Determining the availability of ships and port facilities

Estimating costs based on gross weight, cubic feet, value, description of the goods, and the

port of destination

Booking space

Procuring export licenses

Reviewing letter of credit terms

Tracing inland shipments

Preparing shipping documents, including export declarations

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Preparing and authenticating consular invoices

Procuring certificates of origin from local Chambers of Commerce

Purchasing insurance

Presenting banking drafts and collecting payment

Inland Carriage

The first stage of transporting goods overseas almost always involves an inland carrier, either a

trucking or rail company, which moves the seller’s goods from the seller’s place of business to a

seaport or airport. Except for ex works contracts, it is common for the seller to arrange for inland

carriage, with the inland carrier transferring the goods to a freight forwarder at a seaport or airport

for the latter to arrange and oversee the shipment of the goods abroad.

In the absence of universal conventions, several regional agreements regulate transport by road

and rail. In Europe, road transport is regulated by the 1956 Convention on the Contract for the

International Carriage of Goods by Road (Convention relative au contrat de transport

international de merchandises par route, or CMR) and rail transport is governed by the 1980

Convention Concerning International Carriage by Rail (Convention relative aux transports

international ferroviares, or COTIF).

The CMR is representative of the conventions governing road transport. It applies whenever

goods are shipped between two countries, at least one of which is a signatory of the convention.

The convention requires a carrier to issue a consignment note. The CMR consignment note is not

a negotiable instrument. It is, nonetheless, prima facie evidence of the making of a transport

contract and of the receipt and the condition of the goods.

The convention also grants the consignee the right to demand delivery of the goods in exchange

for a receipt and to sue the carrier in his own name for any loss, damage, or delay for which the

carrier is responsible. However, up to the time that the goods are turned over to the consignee, the

shipper (consignor) has the right to order the carrier to stop them in transit, to change the place

for delivery, or to order them delivered to a different consignee.

If a road carriage contract involves the use of multiple carriers, each carrier is treated as a party to

the contract, and each is responsible for the entire transaction. Suits can be brought against the

first or last carrier or the carrier in possession at the time of the loss.

Carriers are liable for loss, damage, or delay up to the liability limit set by the convention, so long

as the consignment note states that carriage is governed by the CMR. The liability limit is 8.33

Special Drawing Rights (SDRs) per kilogram unless the consignor declares a higher value and

pays a surcharge. If the consignment note fails to include a reference to the CMR, the carrier will

be liable for any resulting injury.

The burden of proof rests on the carrier, which will be liable unless it can show that the loss,

damage, or delay was caused by the consignor or the consignee, by an inherent defect in the

goods, or “through circumstances which the carrier could not avoid and the consequences of

which he was unable to prevent.” A consignee has to notify the carrier within seven days of

delivery to assert a claim for loss or damages, and within 21 days to make a claim for losses

resulting from delay.

Transportation

The COTIF, which governs rail transport, contains in most respects the same provisions as the

CMR. The carrier’s liability for losses, however, is 17 SDRs per kilogram.

Carriage of Goods by Sea

Most goods are transported by a common carrier, that is, a carrier holding itself out as available to

carry goods for more than one party. Only a few shipments are large enough to require the shipper

to hire an entire vessel. The contract to employ an entire vessel is known as a charterparty.

Common Carriage – Where the owner or operator of a vessel is willing to carry goods for more

than one person, the vessel is known as a general ship or common carrier. Common carriers are

the subject of extensive municipal legislation and international conventions.

There are three types of common carriers:

A conference line is an association of seagoing carriers that have joined together to offer

common freight rates.

Independent lines have their own rate schedules.

Tramp vessels also have their own rate schedules, but unlike conference and independent

lines, they do not operate on established schedules.

Exporters who agree to ship all or a large share of their cargoes with a conference line receive a

discounted rate. Independent lines generally offer lower rates than a conference line’s

nondiscounted rates.

The Bill of Lading – A bill of lading is an instrument issued by an ocean carrier to a shipper with

whom the carrier has entered into a contract for the carriage of goods. The multilateral treaty

governing bills of lading is the International Convention for the Unification of Certain Rules of

Law Relating to Bills of Lading. This treaty is known both as the 1921 Hague Rules and the

Brussels Convention of 1924. The domestic laws implementing these conventions are typically

called Carriage of Goods by Sea acts. Many states have supplementary legislation that also

governs bills of lading in both municipal and international settings

A bill of lading serves three purposes:

It is a carrier’s receipt for goods.

It is evidence of a contract of carriage.

It is a document of title; that is, the person rightfully in possession of the bill is entitled to

possess, use, and dispose of the goods that the bill represents.

Receipt for Goods

A bill of lading describes the goods put on board a carrier, states the quantity, and describes their

condition. The form itself is normally filled out in advance by the shipper; then, as the goods are

loaded aboard the ship, the carrier’s tally clerk will check to see that the goods loaded comply

with the goods listed. The carrier is responsible only to check for outward compliance. If all

appears proper, the appropriate agent of the carrier will sign the bill and return it to the shipper.

Bills certifying that the goods have been properly loaded on board are known as on board bills of

lading or clean bills of lading.

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If there is a discrepancy between the goods loaded and the goods listed, the statement on the bill

is considered prima facie evidence that the goods were received in the condition shown in any

dispute between the shipper and the carrier.

If, at the time the goods are being loaded, the carrier’s tally clerk notes a discrepancy, a notation

to this effect may be added to the bill of lading. Called a claused bill of lading, such bills are

normally unacceptable to third parties, including a buyer of the goods under a CIF contract or a

bank that has agreed to pay the seller under a documentary credit on receipt of the bill of lading

and other documents. Such a notation, however, may be made on the bill only at the time the

goods are loaded. Later notations will have no effect, and the bill will be treated as if it were

“clean.”

Case 11-3: M. Golodetz & Co., Inc. v. Czarnikow-Rionda Co., Inc. (The Galitia)

Facts: The seller contracted to sell between 12,000 and 13,200 tons of sugar for delivery C & F

Issue: Was this a clean bill of lading?

Holding: Yes.

Law: The International Chamber of Commerce’s Uniform Customs and Practices for

Explanation: Buyer’s contention that because two banks and the buyer had rejected the bill as

being unclean is not a valid “practical” test for determining if the bill was clean or not. UCP Rule

Order: Seller is entitled to payment.

Contract of Carriage

Between the shipper and the carrier, the bill of lading is evidence of their contract of carriage.

Either may rebut this by producing evidence of other terms. However, the bill becomes

conclusive evidence of the terms of the contract of carriage once it is negotiated to a good-faith

third party. This is because the endorsee’s knowledge of the terms of the contract of carriage is

limited to what appears on the bill of lading.

Document of Title

Two kinds of bills of lading need to be distinguished: the straight bill and the order bill. A straight

bill is issued to a named consignee and is non-negotiable. The transfer of a straight bill gives the

transferee no greater rights than those of his transferor. An order bill, on the other hand, is

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negotiable and conveys greater rights. The holder of an order bill of lading, provided he has

received it in good faith through due negotiation, has a claim to title and, by surrendering the bill,

to delivery of the goods.

Order bills of lading may be made out to bearer or to the order of a named party. Bearer

instruments are transferred by delivery; order instruments by negotiation, that is, by endorsement

and delivery. In practice, bills of lading are seldom made out to bearer, as they are documents of

title that serve as the symbol or token of the goods described in the bill. The negotiation of an

order bill transfers title in the goods. Because the bill is negotiable, so too are the goods. This

enables the person named on the bill to transfer the goods while a ship is in transit.

A transferee who obtains an order bill of lading in good faith and for value paid is not a holder in

due course who is entitled to claim the goods from the carrier free of equities or free of personal

defenses. It means that should an order bill of lading be obtained by fraud and endorsed to a bona

fide purchaser for value, the recipient will not acquire title to the goods described in the bill. On

the other hand, if the same thing were to happen with a bill of exchange that was neither overdue

nor dishonored, the recipient would be entitled to the money or property described in that bill.

Because of this difference, an order bill of lading is sometimes described as only a

quasi-negotiable instrument.

Even when a bill of lading is properly endorsed and delivered, title to the goods will pass only

when the bill of lading is negotiated with the intention of transferring the goods. Bills of lading

are also distinct from bills of exchange because they additionally represent a contract for carriage.

Negotiation of an order bill of lading produces the unique result of a transfer of the right to

enforce the underlying transportation agreement.

Carrier’s Duties Under a Bill of Lading – A carrier transporting goods under a bill of lading is

required by the Hague and Hague-Visby Rules to exercise “due diligence” in:

Making the ship seaworthy.

Properly manning, equipping, and supplying the ship.

Making the holds, refrigerating, and cool chambers, and all other parts of the ship in which

goods are carried, fit and safe for their reception, carriage, and preservation.

Properly and carefully loading, handling, stowing, carrying, keeping, caring for, and

discharging the goods carried.

Carrier’s Immunities – Both the Hague and Hague-Visby Rules exempt carriers from liability

from damages that arise from any:

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;

Fire, unless caused by the actual fault or privity of the carrier;

Perils, dangers, and accidents of the sea or other navigable water;

Act of God;

Act of war;

Act of public enemies;

Arrest or restraint of princes, rulers, or people, or seizure under legal process;

Quarantine restrictions;

Act or omission of the shipper or owner of the goods, or his agent or representative;

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Strikes or lockouts or stoppage or restraint of labor from whatever cause, whether partial or

general; provided that nothing herein contained shall be construed to relieve a carrier from

responsibility for the carrier’s own acts;

Riots and civil commotions;

Saving or attempting to save life or property at sea;

Wastage in bulk or weight or any other loss or damage arising from inherent defect, quality,

or vice of the goods;

Insufficiency of packing;

Insufficiency or inadequacy of marks;

Latent defects not discoverable by due diligence; and

Any other cause arising without the actual fault and privity of the carrier and without the fault

or negligence of the agents or servants of the carrier, but the burden of proof shall be on the

person claiming the benefit of this exception 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.

These immunities are narrowly construed. If cargo is injured and the injury falls within one of the

exemptions, the carrier will nonetheless be responsible if the underlying cause was the result of

the carrier’s failure to exercise due diligence in carrying out its fundamental duties.

Case 11-4: Great China Metal Industries Co. Ltd. v. Malaysian International Shipping Corp.

Facts: Forty cases of aluminum can stock were consigned aboard the MV Bunga Seroja from

Issue: Was the loss due to a “peril of the sea”?

Holding: Yes.

Law: Determining if a loss is due to a peril of the sea is primarily a factual inquiry. Did the loss

Explanation: The trial court found that the ship was properly stowed. The trial court, having

Order: The carrier is not liable for the loss.

Liability Limits – Carriers have long attempted to set monetary limits on their liability in the

event that they are found liable for loss of or damage to a cargo. The permissible limits are now

established by convention. The Hague Rules of 1921 limit a carrier’s liability to (1) UK £100 per

package or (2) UK £100 per unit when shipped in “customary freight units.”

The limits do not apply if the parties agree to higher amounts. They also do not apply if the

carrier acted either (1) “with intent to cause damage” or (2) “recklessly and with knowledge that

damage would probably result.”

The low limits set in the Hague Rules have forced shippers suing in American courts to suggest

creative definitions for the terms package and customary freight unit as a way to obtain a

respectable recovery. Courts, not unsympathetic to their plight, have sometimes adopted these

suggestions.

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