The Commercial Shipping Ecosystem: Key Players, Contracts of Carriage, and Insurance

Although states regulate shipping to achieve economic, environmental, and health and safety objectives, it is the shipping industry that must navigate a complex web of regulations as well as ensure they have effective insurance plans to compensate shippers for lost cargos or to compensate others who may have been negatively affected by the ship operator. Compounding this situation is the fact that most of the world’s ships are registered in flag states that may not have the desire or financial resources to enforce standards or make ship owners accountable for their actions. Lastly, responding to certain marine accidents (e.g., oil spills) is often out of financial reach for most ship owners.

As such, a number of parties are central to modern commercial shipping. The carrier is the party transporting the goods or cargo. The consignee is the party (agent, company, or person) that receives goods once they reach their destination port (the “receiver”). The consignor is the party (agent, company, or person) sending the consignment (the “shipper” or “merchant”).

Classification societies provide technical and surveying services either on behalf of the ship’s owner so that the ship can be issued a “class certificate” (for insurance and operational purposes) or on behalf of flag states as a “recognized organization.” There are eleven globally recognized classification societies currently in operation.

Protection and indemnity (P&I) clubs are cooperatives run by shipowners or operators to provide third-party marine insurance to their members. The thirteen recognized P&I clubs are nonprofit and insure for risks that the conventional insurance market refuses to cover.

The liner trades utilize liner conferences (also termed “shipping conferences”) to fashion formal or informal agreements between shipping companies. These conferences enable the companies to set freight rates or cooperate on the movement of goods between ports while avoiding antitrust scrutiny. Not coincidentally, liner conferences formed shortly after the opening of the Suez Canal (1869)—an engineering feat that halved the shipping time on the Asia-Europe trade route and that led swiftly to massive overcapacity. Since then, the objectives of liner conferences have been to avoid overcompetition, to accommodate seasonal fluctuations in shipping demand, and to provide economic stability to shippers. Liner conferences currently involve up to forty separate shipping companies, and there are currently over 300 liner conferences in operation.

The Comite Maritime International (CMI), headquartered in Antwerp, Belgium, is a nongovernmental organization established in 1897 to oversee the codification of maritime law, commercial practices, and the promotion of national associations of maritime law. At present, the CMI is composed of fifty-one national maritime law associations.

Goods moved by ship are generally administered by the following three different contracts of carriage:

A bill of lading is a document that gives title (constructive possession) to the goods and the condition of the goods at the time of loading. Usually prepared by the consignor, the bill of lading will state the date(s) the goods were loaded and the ports of loading and discharge. Because the bill of lading is transferable, cargo may be sold many times during transit.

A charter party is a formal written contract between the carrier and the cargo owner for the exclusive use of a ship for either a period of time (“time charter”) or a port-to-port voyage (“voyage charter”). In a “demise” charter party (or bareboat charter), the charterer is responsible for providing the cargo and the crew, whereas with a “nondemise” charter party, the ship owner provides the crew and the charterer provides the cargo.

A waybill is a document outlining the terms and conditions of the contract of carriage, as well as a receipt for the goods loaded aboard the carrying vessel. Under a waybill, the shipper owns the cargo until delivery. Unlike a bill of lading, a waybill is non-negotiable and not a document of title. Moreover, under a waybill, a cargo cannot be bought or sold during transit.

In addition, there are two primary types of shipping contracts. A free on board contract is when the buyer pays for and arranges carriage. The seller’s duty is to load the goods onto the ship. Alternatively, a cost, insurance, freight contract requires the seller to pay for and arrange carriage as well as purchase an insurance policy on the goods, which will be assigned to the buyer.