Contract of Carriage

Contract of Carriage: The Ultimate FAQ Guide

Today, I will take you through another important freight term called contract of carriage.

So, if you want to learn what it is, when to use the freight term and how it affects shipping business, read this guide.

Let’s dive right in.

What is Carriage?

Carriage is the movement of goods from one point to another by the carrier. This can be done by air, sea, road or even rail.

Figure 1 Types of cariers

Type sof carrier

What is the meaning of Contract of Carriage in International shipping?

 

Contract of carriage is the contract that defines the legal responsibilities of the user and the carrier.

The carrier in this case can be an ocean carrier, air cargo carrier, freight trucking carrier etc. The user can either be the consignee or consignor.

A standardized contract of carriage is included in all the contract terms and the conditions of the carrier.

It is also referenced in the terms and the conditions to guide the forwarder.

A contract of carriage will state the physical person known as the carrier who agrees to move goods they are given to another physical person.

The physical person to whom the goods belong is referred to as the sender.

The carrier does this while receiving payment in return from the sender using the suitable means of transport agreed.

 

What is the purpose of a Contract of Carriage?

 

The carriage contact is used to set the minimum standards of the liabilities and responsibilities of the carrier.

It defines the duties, liabilities and rights of the passenger and the consignee to the contract. An example is the damage or loss of the cargo in transit.

It seeks to address issues such as the acts of God and including other relevant clauses such as force majeure.

What are Elements of the Contract of Carriage?

For a contract of carriage to be valid, it must include the following formal and basic requirements. They include:

  • A summarized description of the expected service that the contracting party expects as the carrier promises.
  • Amount that is being charged to the sender by the carrier for the service being rendered together with the payment terms.
  • References of the sender. They include the first and last name of the company’s manager and the address of the head office for the company.
  • References of the carrier. This is the name of the company together with the head office address of the company.
  • Destination which the goods are being taken to by the carrier.
  • Departing place of the carrier. This can be the same place where the goods are being taken to. However, it must be indicated.
  • Point of arrival for the goods or the destination. It must have the exact and detailed address.
  • References of the one receiving the goods. This is their exact address and their names.
  • The planned arrival date and time of the goods by the carrier. This should include the specific drop-off address for the goods.
  • State and value of goods for the carrier to make plans in taking cautions on the type of transit. The type of transit may include truck, aeroplane, train or train. Packaging and also type of loading should be considered well in advance by the carrier.
  • Overall weight of the goods is also put in consideration for the carrier to make plans of adjustments in their driving, navigation or piloting.
  • Place of issue and date of the contract of carriage. This is to show that all parties have the knowledge of the terms and conditions before the date of departure of goods.
  • Inventories and the information on the conditions the cargo received at the point of departure by the carrier. This is to discover any damage that might be there before the start of the journey.
  • Role of the carrier in making comprehensive inventory for the number of the goods delivered to the recipient and their condition. This makes sure that nothing was damaged during transit by the carrier.
  • Legal and customs security information as per the type of goods, the destination as well as the route used by the carrier. It helps them get informed and anticipate any transport complications that may occur.
  • Legal terms and conditions to cover the parties from any incidences arising during transportation. The terms should also cover the payment terms in situations where the services do not match the fixed price.
  • To close the contract of carriage, the two parties must approve and append their signatures to the contract.

The above points on the contract of carriage are very important.

They will help make it easy in identifying the sender, the carrier, the goods to be moved, the means and the recipient too.

They also point out all the legal obligations of the parties to the contract of carriage.

 

What are some Common types of Contract of Carriage?

 

There are four types of carriage of contract. They include:

This is a document that is issued by a carrier in acknowledgement of receipt of goods.

Air Waybill

The air waybill is also called a consignment note. It is a receipt that is given by the international airline.

It is evidence for the existing contract of carriage. It should not be mistaken with ownership of the goods. It is also not negotiable.

Figure 2 Airway bill

 Airway bill

Charter Party

This is a maritime contract that is entered by the charter and the ship-owner for the hiring of a ship or yacht.

The ship is hired for carriage of cargo or passengers while the yacht is hired for purposes of pleasure.

What is the Relation between the Bill of Lading and the Contract of Carriage?

A bill of lading is issued by the captain or carrier. A bill of lading will serve as:

  • It serves as the document of title
  • Proof of the end of the contract for transportation.
  • Receipt of the goods by the carrier

The bill of lading will dictate the legal relationship between the carrier and the holder of the bill of lading. The terms and conditions are also not applicable to the one holding the bill of lading. The carrier-charterer relationship will only be guided by the terms of the contract of carriage.

What are the Parties to a Contract of Carriage?

 

The transportation of merchandise from the seller to the buyer by sea will involve various parties. Below we explain their various roles in the shipping and transportation chain:

The Buyer and the Seller

These are the two parties that contract each other for the goods to be delivered to the agreed destination at the agreed time.

The seller can either be the manufacturer, the producer or an agent acting on behalf of the manufacturer or the producer.

Also, the two must agree to the terms of trade that will determine the type and the terms on the shipping documents.

 

Freight Forwarder

A freight forwarder acts as the transport intermediary. They operate in the liner trades organizing the exportation of goods on behalf of other parties. They then forward them to the carrier.

The freight forwarder advises on the routes, arranges for carriage with the carrier and assists or prepares the customs documents.

The freight forwarder can also make entry of customs; arrange warehousing of goods and packaging before shipment as well as their insurance.

They also offer consolidation services thus offering the most cost-effective transport in one unit instead of having several parcels in different vessels.

Carrier

This is the party that contracts the shipper to transport goods via sea.

Sometimes In the liner trades, shipping services are offered by non-vessel owning carriers.

In such instances, when the seller’s agent or the seller makes the contract, the carrier may not necessarily be the one doing the sea carriage.

Sometimes the ship is chartered and will be commercially operated by the charterer.

The information of the legal carrier depends on the details contained on the sea waybill or bill of lading.

Consignee

This is the party that is being sent the goods by the shipper. They can be the purchaser of the goods or any party who is acting as the importing agent on behalf of the buyer.

The Receiver

The receiver is the party who will receive the goods brought by the carrier at the delivery point or the port.

Some of the consignees will pick the goods directly from their carriers. Most consignees in liner trades however work with clearing agents to help customs and other formalities.

The agents also help them in the transportation of goods to the final destination. In case there is damage to the goods or there is a loss of goods, the receiver is supposed to notify the carrier.

The Notify Party

The notify party is the one who is supposed to be notified by the carrier once the ship arrives. This is to enable them to arrange for the collection of goods.

The notify party can be the receiver or the consignee.

The Banks

The banks create a link in the transportation chain during the payment of goods through the Letter of Credit.

Charterer’s Agent

The charterers will always require reliable agents in each port to help them in their cargo operations.

The charterer’s reserve every right in the nomination of agents even will have to be visually appointed by the owners who also pay their fees.

The owners will always appear as the principal in all legal documents.

Apart from quickening the cargo operations, the agents of the charterer are supposed to attend to the owner’s business such as subs, repatriation and crew reliefs.

The charter’s agent will be able to sign the bills of lading in place of the master. This is after the master signs a letter of authorization for them to do so.

What are some Typical Carrier Liabilities and Responsibilities in a Contract of Carriage?

The carrier holds a very important part in the shipment industry. Some of the duties include:

  • The carrier in a contract of carriage is responsible for the safety of goods
  • They are supposed to make timely delivery of the cargo
  • The carrier is also supposed to inform the receiver of any ongoings during transit

What is does ‘Limitation of Liability’ mean in Contract of Carriage by Sea?

Limitation of Liability is the concept that allows the limiting of liability by the carrier for maritime claims.

The limitation of liability works regardless of the monetary value that the claim may have.

This means that there will be a set limit for the maximum compensation amount that the carrier may be required to pay.

Who regulates Carrier Limitation of Liability in Contracts of Carriage?

The carrier limitation of liability is governed by various conventions that have been put in place by the IMO (International Maritime Organization).

It is expressed by a unit of account referred to as the Special Drawing Rights (SDR) as labelled by the IMF (International Monetary Fund).

The SDR acts as an international reserve asset.

It was created by IMF back in 1969 in order to supplement the official reserves of its member countries. The currencies that are used include:

  • The Chinese Renminbi
  • The U.S. Dollar
  • The British Pound sterling
  • The Euro
  • The Japanese yen

The value of SDR is determined every day in the U.S. dollar according to the spot exchange rates that are normally observed during noon the London time. It is then uploaded on the website of the IMF.

What are the Responsibilities of the Consignor in a Contract of Carriage?

Figure 3 Consignor vs consignee

Consignor vs consignee

The consignor is the party who is responsible for physically tendering the goods to the carrier. This can be the person contracting for transportation services but may in some cases be someone different.

What are the Legal Rights and Responsibilities of Consignee in a Contract of Carriage?

The consignee is responsible for payment of all duties and transport charges that may apply.

They act as the importer of record for a given shipment.

They are also supposed to handle inbound deliveries

The consignee also receives signs shipments during delivery as well as inspecting the goods.

The carrier cannot complete delivery of goods before he/she receives approval from the consignee or their authorized representatives.

The consignee must also be physically available to pick the shipment from the carrier unless the bill of lading specifies otherwise.

What determines the Contract of Carriage?

The arrangements entered during shipping are defined by the contracts of carriage.

Some of the useful principles that determine a contract of carriage include:

A commercial invoice: It is normally referenced on the bill of lading. It acts as proof of the value declared.

The bill of lading: It is supposed to always conform to all the regulatory schemes. It, therefore, offers greater reliance to the involved parties and may take it to constitute the entire contract of carriage.

Evidence of the parties: Any pre-contractual arrangements can be used as evidence. They however may not have much impact.

What are some common Terms and Conditions of Contract of Carriage?

The contract of carriage comes with a set of terms and conditions. Some of them include:

  • The cargo cannot accept for carriage of excluded cargo unless it is put explicitly in writing.
  • The carrier should not sort out cargo not unless it is agreed in writing
  • The vessel transporting the cargo can follow any route and enter the ports in any succession
  • The freight charges shall be paid before loading unless the parties have agreed to the contrary

Some many other terms and conditions set the terms for every party.

Which are the Rules and Conventions that govern the Contract of Carriage of Goods by Sea?

Some of the popular rules and conventions used in the carriage are:

Under the Hague Rules, the shipper will bear the cost of damage or loss of goods unless there is proof that the vessel is manned improperly or unseaworthy.

They can also prove that the vessel could not be able to preserve and transport the goods.

The Hague -Visby Rule (1968) is an updated version of the Hague Rules. It states that a carrier has far more bargaining power compared to the shipper. So to protect the interests of the cargo-owner/shipper, the law imposes a minimum affreightment responsibility to the carrier.

US COGSA is an enactment of the original Hague Rule. It was made to increase the amount that the shipowners should compensate the cargo owners in case of damage while in transit. The amount was increased from GBP 100 for every package to 500USD on every package.

Hamburg Rules (1978) came up as an attempt to create a uniform legal base in the transit of goods via ship. This was brought forward by developing countries to have a level playing ground and has since been adopted by most of the developing countries. Other countries have instead adopted the more expensive Rotterdam Rules (2009)

The goal of the Rotterdam Rules (2009) was to modernize and extend the international rules that existed.

This was to arrive at uniform International trade laws in the carriage of goods by sea.

It established a comprehensive legal regime governing all the parties involved.

What do Carriers provide as evidence of carriage in relation to the Contract of Carriage?

In situations where more evidence is required in the contract of carriage, one can use the bill to serve as evidence.

The bill of lading can also be used as the receipt of the goods and the Document of Title for the goods.

What is ‘Notify Party’ in a Contract of Carriage?

The notify party is the party who should be notified once the ship arrives by the carrier. This is to enable them to plan on how the goods are going to be picked.

They can be the receiver or the consignee.

What does Breach of Contract of Carriage mean and when does it occur?

A breach of contract of carriage means defying the agreed terms and conditions of carriage as set out in the contract of carriage.

Breach of contract of carriage occurs when either of the involved parties is not or refuse to obey the terms of the contract.

There are popular rules and conventions used in the contract of carriage to govern how the breach of contract of carriage should be handled.

What are the remedies for Breach of Contract of Carriage?

Just like in other commercial agreements, the breach of contract of carriage is remedied through compensation of damages.

In some situations, injunctive relief may be offered e.g. when a carrier has refused to issue the consignee with the bill of lading.

In many instances, the parties will need money as a remedy.

They can also take the performance of services with monetary value as compensation for damages.

What are the Consequences of Errors in a Contract of Carriage?

Delayed shipments-As parties try to agree on the way to fix the issues arising, time will be lost. This means that the shipment will not get to the recipient in time.

Spoiled supply chain planning-As a result of a delay in shipment, the rest of the supply chain will be disrupted. This is due to the change of schedules and the waste of resources deployed in readiness for the shipment.

Detained shipments-Errors arising from a contract of carriage will mean that goods may never be transferred until the issues are fixed. The shipment will be detained in the process.

Loss of money-The associated businesses will undergo losses. The shipper will incur unplanned storage charges. The other businesses that rely on the detained shipment will also be blocked from performing.

Bad reputation-Depending on the party that caused the errors, they will end up creating a very bad reputation. This means that it may not be possible to work with them in future.

What is the difference between Contract of Carriage and Incoterms?

Figure 4 Incoterms 2020

 Incoterms 2020

Incoterms is a contract that defines the responsibilities and obligations that are subjected to the seller/exporter and the buyer/importer.

On the other hand, a contract of carriage defines the legal responsibilities of the consignor/consignee and the carrier.

At BanSar, we are here to handle all your shipping needs from China.

You don’t have to worry about the confusing freight terms.

Our team will handle everything for you – contact us right now.

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