ROTTERDAM RULES

REVIEW
Introduction

The development of the new Convention on Contracts for the International Carriage of Goods Wholly
or Partly by Sea, (the “Convention”), governing the carriage of goods by sea is now completed. It is
now called the Rotterdam Rules. The Convention is intended not only to replace the Hague/Hague-
Visby and Hamburg Rules but also the US Carriage of Goods by Sea Act 1936, and other domestic
and regional legislation relating to the carriage of goods by sea. Its text, which is sponsored by the
United Nations Commission on International Trade Law (“UNCITRAL”), was finalised by
UNCITRAL Working Group III at its 21st session held in Vienna between 14 and 15 January 2008. It
was considered by the UNCITRAL Commission between 16 June and 3 July 2008 in New York and
approved by it with a mandate for it to be sent to the UN General Assembly for adoption. Approval by
the 6th Committee of the 63rd Session of the UN General Assembly (the UN Legal Committee) took
place in October 2008 and a draft resolution was forwarded to the UN General Assembly in
November 2008 urging adoption. The UN General Assembly adopted the Convention on 11
December 2008. A ceremony for the opening for signature of the Convention was held on 23
September 2009 in Rotterdam.

A more detailed summary of the key provisions of the new Convention can be found in our
publication ROTTERDAM RULES KEY PROVISIONS which is available on our website together
with the full text of the Convention.

Overview

The Convention is designed to legislate not only for international maritime carriage of goods but also
for international multimodal carriage of goods, where a maritime leg is provided for in the contract of
carriage. It is best described as a “maritime plus” instrument, which explains much of the new
terminology in the Convention as well as changes to some of the traditional terminology and familiar
terms, so that for example, “bills of lading” and “sea waybills” now fall within the general term
“Transport Document” in this Convention.

If ratified, the Convention will significantly increase the liability of shipowners and maritime carriers
in respect of the carriage of cargo. In particular the long established exception of error in the
navigation or management of a vessel (the nautical fault exception) will be lost in its entirety. The
obligation to exercise due diligence in relation to the seaworthiness of a vessel has been extended to
the duration of the voyage rather than restricted to before and at the commencement of the voyage as
under the Hague/Hague-Visby Rules and the limits of liability per package or unit of weight have
been significantly increased beyond Hague-Visby, US COGSA and Hamburg Rules limits – see
Appendix attached. The liability of shipowners and other maritime carriers for the negligence of so-
called maritime performing parties such as sub-contracted sea carriers, stevedores and terminals will
be governed by the Convention.

Although it is not at present possible to quantify the financial impact of these increased liabilities,
there can be no doubt that shipowners and their P&I insurers will see a substantial increase in the cost
of cargo claims if the Rotterdam Rules are widely adopted.

The West of England Ship Owners Mutual Insurance Association (Luxembourg)

Managers: West of England Insurance Services (Luxembourg) S.A.
UK Branch: Tower Bridge Court, 226 Tower Bridge Road, London SE1 2UP
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Registered in Luxembourg - RCB 8963
The increase in liability for sea carriers will not be welcome for shipowners and operators, but the
Convention contains a number of new and positive features. Its scope will extend to door-to-door
carriage as well as tackle-to-tackle/port-to-port carriage and many of the beneficial aspects of existing
conventions and regimes are retained. Specifically, it retains the existing concept of network liability,
whereby liability and the applicable limits of liability for loss of and damage to the goods occurring
before or after the sea-leg will be determined by any unimodal international instrument compulsorily
applicable to the relevant mode of transport where the loss or damage occurs (as, for example, in the
Convention on the Contract for the International Carriage of Goods by Road (CMR)). This concept
was preferred to the alternative, which was originally supported by a number of states, of having a
regime of uniform liability under which the same scope and the same limits of liability for loss and
damage would apply irrespective of whether the loss or damage occurred on the sea or a land leg.
There was concern that, under this latter approach, it was likely that the limit of liability adopted
would be the highest of the relevant unimodal Conventions (e.g. the Convention Concerning
International Carriage by Rail (COTIF-CIM) – 17 SDR per kilo). There was also concern as to
whether a single liability regime could effectively be applied to modes of transport involving
fundamentally different risks.

The Convention has retained the concept of fault-based liability found in the Hague/Hague-Visby
Rules, although standards and burdens of proof overall are more onerous for the carrier. The new
Convention looks forward by making provisions for electronic commerce. It also allows parties
greater freedom of contract in the liner trade.

In the same way as in existing conventions it will apply to transport documents, such as bills of lading
and sea waybills, issued both in liner and in non-liner trades. In line with the Hague/Hague-Visby
Rules it will not, however, apply to charterparties whether used in liner or non-liner transportation.
The UNCITRAL Commission, after lengthy and protracted debate, ultimately declined to include an
express provision acknowledging/permitting the continuing use of “through transport” documents, but
expressly affirmed that this decision did not in any way signal a criticism of the practice. In other
words, through transport carriage and documentation ought not to be affected by the Convention and
will accordingly be subject to individual states’ national legislation.

The new Convention deals with jurisdiction and arbitration, and the relevant provisions are essentially
based on the overly restrictive approach of the Hamburg Rules. Under the Convention cargo owners
are effectively able to choose from a number of jurisdictions the court where they can sue the carrier
and exclusive jurisdiction agreements contained in contracts of carriage largely do not have primacy.
However the provisions are subject to an “opt-in” by States and it is most unlikely, for instance, that
European Union States will “opt in”. It is however very likely that the United States of America will.
The ability of cargo owners to choose from a number of jurisdictions is likely to lead to greater
uncertainty for carriers and insurers and increased legal costs, as the courts of countries unfamiliar
with such issues are asked to decide test cases arising under the Convention.

The new Convention is an ambitious project which seeks to codify almost all aspects of maritime
carriage. There seems little doubt that, if it is not ratified, the status quo of existing regimes will not
remain, the likelihood being that the EU and US would enact their own domestic legislation. Indeed
the European Commission, encouraged by the European Shippers Council, has made no secret of its
desire to develop a multi-modal transport regime applicable either to multi-modal carriage between
Member States or possibly international multi-modal carriage where the commencement of or
destination of the carriage is in a Member State. While advising the International Group of P&I Clubs
(IG), the International Chamber of Shipping (ICS) and the European Community Shipowners’
Associations (ECSA) that it remains open minded in its approach to the question of the desirability of
a European multi-modal convention and will consult fully before reaching any decision, the European
Commission has publicly attacked the Rotterdam Rules and stated that they do not conform with
European multi-modal expectations. It would seem therefore more likely than not that the
Commission will take steps to draft its own multimodal solution.
Such proliferation of national or regional regimes would inevitably lead to a lack of uniformity and
conflicts between liability regimes across the world. The cost of such a circumstance is impossible to
quantify but it would have to be taken into account when considering the full impact of the new
Convention’s increased liability exposure for shipowners and carriers. It is also reasonable to
conclude that the European Commission’s hostility towards the Rotterdam Rules is a strong indication
that any steps it may take to implement a multi-modal regime will seek even greater liability on
maritime carriers than that contained in the Rotterdam Rules.

ICS and other shipowner organisations such ECSA, BIMCO and the World Shipping Council (WSC)
are of the view that on balance the Convention is broadly acceptable from a carrier’s perspective. In
light of this, and their concerns at the likely proliferation of regional and domestic legislation if the
Convention is not widely implemented by major trading nations, they have adopted a policy of
actively encouraging administrations to ratify the Convention through their members, and in the case
of ICS their national shipping association members.

Outlook

Whether and when the draft Convention will come into force will, as usual, depend on the ratification
process and in particular, which states ratify in the early stages. The United States delegation has
participated very actively in the drafting process and it appears that a significant body of US carriers
and shippers support the latest draft (notably the WSC and the National Industrial Transportation
(NIT) League representing US shippers). Early ratification or incorporation into domestic law by the
US may cause a significant number of other states to follow suit. The number of ratifications required
in order for the Convention to come into force has been set at 20. If the Convention is to have any
real impact it will need to be adopted by a large number of states. In this regard it is worth noting that
approximately 90 states have ratified the Hague/Hague-Visby Rules but only 34 the Hamburg Rules
(the latest ratification being in 2008) and in the latter case no major trading nations.

Industry’s Contribution

The Clubs have worked in close co-operation with the ICS and BIMCO to put forward the industry
position at the meetings of the UNCITRAL Working Group III. The overall strategy has been to seek
to emphasise the importance of allowing carriers and cargo owners reasonable freedom to contract
into or out of the new Convention and to underline the need to have a liability regime which provides
a realistic allocation of risk between ship and cargo both in today’s terms and in the future. Greater
success has been achieved in limiting the mandatory application of the Convention than in resisting
the imposition of greater liability on the carrier. It should be noted that although carrier interests
argued strenuously for its retention, the loss of the nautical fault exception was perhaps almost
inevitable since the great majority of states (supported by cargo interests) have long considered it
outmoded in light of modern navigational and communication aids. Apart from this, however, the
catalogue of exceptions has remained virtually unchanged and indeed, it has been expanded to now
also include “hostilities”, “armed conflict”, more topically, “terrorism” and “piracy” and, importantly,
an exception for “reasonable measures to avoid or attempt to avoid damage to the environment”. It is
nonetheless true however that Governments continue to view the bargaining position of the average
carrier as stronger than that of the average cargo owner and it has proved difficult to persuade them
not to modify existing liability regimes accordingly.

The standard for P&I Cover

Club cover for liability in respect of cargo is based on the relevant contract of carriage being subject
to terms no less favourable than the Hague/Hague-Visby Rules. The Club’s Cargo Rule (Rule 2,
Section 16 proviso (a)) provides as follows:
 “……..there is no cover in respect of liabilities which would not have been
payable by the Member if the contract of carriage had incorporated the Hague
Rules, the Hague-Visby Rules, or similar rights, immunities and limitations in
favour of the Carrier. There is no cover in respect of liabilities arising under the
Hamburg Rules unless the Hamburg Rules are compulsorily applicable to the
contract of carriage by operation of law.”

Club cargo cover is based on the liability regime set out in the Hague/Hague-Visby Rules, principally
because it is recognised that this has for a long time been the accepted standard according to which
the majority of carriers by sea and cargo owners contract commercially, when contractual terms are
not imposed by law. Further, the Hague/ Hague-Visby Rules have been ratified or, (as in the case, for
example, of the United States Carriage of Goods by Sea Act 1936) adopted, as the basis for domestic
legislation by a substantial number of states and, in particular, by major trading states.

It is worth remembering in this respect that when the Hamburg Rules came into force, following
ratification by 20 states, the Clubs did not substitute them for the Hague/Hague-Visby regime as the
standard for cargo cover, partly because those states ratifying the Hamburg Rules have not to date
included major trading nations and partly because there was no commercial appetite within the
shipping industry for doing so.

The Rotterdam Rules have been open for signature since 23 September 2009 and will enter into force
12 months after ratification by 20 states. The issue which will arise is to what extent P&I cover should
be available for liabilities incurred by Members pursuant to the Rotterdam Rules.

The provisions of the new Convention would normally become compulsorily applicable by law in the
relevant state where that state either ratifies the Convention and the Convention has entered into force
or enacts its provisions by other means into its domestic law (e.g. US COGSA). Under the terms of
the current Club Rules, the Club would indemnify a Member in respect of cargo liabilities arising
compulsorily by law under the new Convention, even if those liabilities would not have arisen if the
contract of carriage had been subject to Hague/Hague-Visby Rules or similar rights and immunities in
favour of the carrier. This is currently the position in respect of liabilities arising under the Hamburg
Rules.

The position would be different if the Member were to voluntarily incorporate the provisions of the
Rotterdam Rules into a contract of carriage. Applying the same principle as applies to the voluntary
incorporation of the Hamburg Rules into contracts of carriage, the Club would not expect to cover
liabilities arising under the Rotterdam Rules in excess of those which would be covered pursuant to
the Hague/Hague-Visby Rules nor where the contract of carriage is on terms less favourable to the
carrier than those in the Hague/Hague-Visby Rules

At this stage it is not clear which states, and particularly which major maritime trading nations, will
ratify the new Convention, or otherwise incorporate it wholly or in part into their domestic law.
Equally, it remains to be seen to what extent carriers will want to adopt the Rotterdam Rules as the
standard for their carriage terms, and there may be differing opinions from those engaged in liner
shipping as opposed to other sectors. Whether and, if so, when the Group Clubs will consider it
appropriate to replace the Hague/Hague-Visby Rules with the Rotterdam Rules as the standard for
P&I cover, in terms of their voluntary incorporation into contracts of carriage, is likely to depend
mainly on how ratification and incorporation of the new Convention into domestic law progresses
and, of course, on the views of the Clubs’ membership as a whole. It will be important for the Clubs
to keep the matter under regular review.

In the meantime, as is the case today, a Member wishing to be covered for liabilities which he has
voluntarily accepted and agreed beyond the normal standard of the Hague/Hague-Visby Rules, may
ask his Club to arrange cover for the additional liabilities on special terms by agreement.
Appendix – Comparative Limits

Convention and US COGSA Limits SDR unless shown otherwise

Hague/Hague- Hamburg CMR COTIF/CIM Montreal US Rotterdam
Visby COGSA
(Road) (Rail) (Air)
Package 666.67 835 $500 or 875
Limit Customary
freight
unit
Weight 2 2.5 8.33 17 17 3
Limit