Introduction

Historically, societies have always located near water, due partly to the fact that water

enables more efficient travel compared to going over land. Waterways are critically important

to the transportation of people and goods throughout the world. The complex network of

connections between coastal ports, inland ports, rail, air, and truck routes forms a foundation

of material economic wealth worldwide.

For Europe, maritime transport has been a catalyst of economic development and

prosperity throughout its history. Maritime transport enables trade and contacts between all

the European nations. It ensures the security of supply of energy, food and commodities and

provides the main vehicle for European imports and exports to the rest of the world.

As an economic activity, modern sea transportation involves not only profitability, but

imposes itself as an objective requirement in developing a human society based on

geographical, economical and political data. Thus, it is considered that for any country`s

economy, maritime transportation represents one of its most important linkages to the world

economy. In order to support this idea, we can consider the fact that, when a shipping

company is set up and organized, it immediately establishes a series of activities for cargo and

passenger transportation, on world`s rivers, seas and oceans. Cargo and passenger

transportation respond to the world economy`s needs, but the main purpose of establishing a

shipping company is represented by the financial efficiency of the investment, meaning

obtaining profit, in the short and also the long run.

Shipping companies are considered important components of a state`s economy, due

to the important role held in exporting and importing activities, for passenger and cargo

movement. Most important role played for an economy is that they reduce the distance

between producers and consumers, by realizing a series of connections between different

national or international ports, or between the origin country of the ship-owner and other

countries in the world.1

“Shipping is one of the world`s most important industries and in studying maritime

economics we are drawn into a discussion of the world economy as a whole. Seaborne trade

is, in a sense, at the apex of world economic activity.” 2

1Alexa, C.: „Transporturi şi expediţii internaţionale” , Editura ASE, Bucureşti, 2001, page 1;2Stopford, M.: „Maritime Economics”, 3rd edition, Abingdon, Oxon, 2009, chapter 1, page 2, paragraph 3.

3

This paper, “International Maritime Freight in Transportation”, aims to realize a

clear and precise evaluation of how shipping companies perform their activity on the

Romanian market, by highlighting their relationship with other businesses (through the

charter contract) and also the price applied to these contracts, meaning the freight.

For the case study I have chosen a private limited company, “BALKAN SHIPPING

AGENCY” LTD, one of the most active shipping companies from our country.

The paper has been structured as follows:

The first chapter presents general and particular aspects of marine transportation,

including characteristics, main advantages and disadvantage, but also its importance within

the world economy, its impact over the environment, and the effects over the international

trade activities.

The second chapter presents the types of charter contracts, their defining features, the

forms these contracts might take, the bill of lading, its uses and also a differentiation between

the bill of lading, as a transportation document, and the charter contract.

The third chapter is based on describing the international freight market, the ways of

establishing freight, its formation and the factors that influence it.

The fourth chapter is represented by the case study on BALKAN SHIPPING LTD,

comprising descriptions of the parties involved, the transportation route, cargo description,

freight calculation and documentation needed in order for the transportation activity to be

realized.

The paper ends with conclusions and recommendations on the Romanian market of

maritime transportation services.

4

C h a p t e r IGeneral Aspects Regarding Maritime Transportation

1.1. The Objective and the Importance of Maritime Transportation

Activity

Transport is the most important link in economic relations. It is involved in creating

products and delivering them to consumers, provides the link between production and

consumption, between different industries, between countries and regions. It affects the

development of the economy as a consumer of metal, energy, timber, rubber and other

products. More than 100 million people in a world work in the system of transport.

Sea transport is mostly used for external transactions. Only in some countries such as

USA, Russia, China, Canada, Turkey, France, maritime transport provides internal

transportation. This mode of transport is considered to be the largest carrier of freight

throughout recorded history (carries more than 80% foreign trade goods) and also the

cheapest and the most convenient, especially when displacing large quantities of merchandise.

Most of cargo of the maritime transport accounted for liquid cargo – oil and petroleum

products. Dry-cargo vessels have a smaller share. In their basic structure bulk is dominated,

then, general and secondary mass.

The main condition for safe operation of the world’s mercantile fleet is its constant

renewal, increase tonnage of vessels, increase engine power, increase speed, automation, and

improved environmental performance. Densities of vessels aged over 10 years are more than

1 / 3 of the world fleet and the ones aged over 25 years represent only 1 / 20. In developing

countries and countries in Eastern Europe there is a tendency to increase the share of older

vessels, which increases the risk of shipping3.

The structure of marine transport is dominated by specialized vessels – tankers, bulk

carriers, reefers, timbers. Tankers make up the greater part of half the world’s fleet, which is

associated with the development of world oil market.

Most courts are designed according to the navigation (navigation mode) and under a

certain type of cargo. Some ships are only for passengers, more ships are used to transport

passengers and cargo (cargo), but the bulk of courts specialize in cargo transportation. There

are four main types of marine vessels: 1) cargo ship (bulkers, liquid, combination) that

3„The importance of maritime transport in the global economy”, April, 2nd, 2010, available at http://www.nissoana.com/ , last accessed 30/06/2010.

5

perform certain booking or operate on regular routes, 2) cargo ship, 3) high-speed passenger

liners, which have two or three classes for passengers, mail and luggage compartment, 4) a

small number of comfortable high-speed vessels intended only for passengers and mail.

Merchant service is a set of ships, which together with their personnel is engaged in

commercial activities. Marine cargo ships have always been an important part of merchant

fleet and its main support in the financial sense. Thus, merchant ships may be divided into

several categories, according to their purpose and/or size, just like the above mentioned

marine vessels.

1.2. Particularities of Maritime Transportation, Advantages and

Problems

One of the most important characteristics of this means of transportation refers to the

specific environmental conditions in which it develops its activity – seas and oceans – that

require special safety measures. It is generally known that any maritime expedition is

naturally exposed to sea risks, the easements and the dangers of the unfettered force of nature.

This is the reason why, with the social-economic development of the countries, the

organizational improvement of these activities was imposed, through more efficient safety

measures of insuring the ships, the cargo, the passengers and the crew`s members, but also the

establishment of a more adequate legal framework to allow a normal development of the

marine sector.

No other transportation means can assure the movement of billion tons of cargo across

seas and oceans. Even if airlines succeeded to become leaders on the transoceanic passengers’

displacement, there still cannot be predicted a substitute means for transporting cargos. With

respect to the other means of transportation, ship transportation is characterized by high

loading capacity, but even the most recently designed ships have a relatively slow speed, even

though they travel at very long distances. Marine and river transportation realize connections

between different ports4 of the globe, in high efficiency conditions, the costs being lower

compared with land transportation. It is moreover recommended when moving small value

goods and shipping costs prevail over time needed for displacement.

As advantages5 of this means of transportation, we can consider the following:

4 Harbors (en)5 Beziris, A.: „Transportul Maritim – Probleme Tehnice si de Exploatare”, vol. 1, Editura Tehnica, Bucuresti, 1988;

6

- The most economically means, calculated even with respect to total costs incurred,

even to displaced tone, but especially tone per mile; it is then true that, the advantage

is highlighted especially on long distances – transoceanic shipments;

- Uses a developed range of ships, classical or specialized, with capacities from some

tone deadweight to over 100 000 – 300 000 tdw, which allow transporting large

quantities on long distances, without stopping between the loading and the destination

ports;

- Allows the movement of cargo and passengers almost in any area of the globe,

including ice areas and without water passage, and in better safety conditions;

- Even considering the long distances covered, the shipping routes require much less

arrangements for developing their activities, in comparison with land transportation;

- Allows the concentration in marine hubs, the largest international harbors, of huge

quantities of goods, which can be transported on the most diverse marine and oceanic

routes;

- Allows the receiving of different goods and quantities, in the same international

harbors, from various maritime routes, which are dispersed, according to their

destination, on the entire area of the served hinterland6;

- In certain situations, it can become a means of improving and offsetting the balance of

payments of one country, helping the external debt reduction of the developing

countries, through: establishing prices and delivery quantities which correspond to

both the interests of the producers and the importers, improving the access over the

less developed and developing countries, reaching commercial agreements for every

single basic product (UNCTAD decisions).

All in all, we can admit that the marine transportation, as an objective economic

necessity, is able to keep its advantages through an adequate organization in constructing

national and international fleets and harbors, with regard to all determinant factors of

efficiency.

By considering the development of the marine transportation activities up to their

complexity, A. Beiziris identified in his paper, „Transportul Maritim – Probleme Tehnice si

de Exploatare” (1988), the following problems or disadvantages:

6 The land or district behind the borders of a coast or river. The area from which products are delivered to a port for shipping elsewhere is that port's hinterland.

7

- The necessary investments needed for specialized modern ships construction, adapted

to technical standards at international level;

- Assuring the safety conditions before sea risks, through the quality of the construction

and the installation on board;

- Forming a qualified and specialized staff, corresponding to the high quality and value

of the available means, but also the economical characteristics of this sector, with

intense and variable international relations;

- The most important drawback is still represented by the fact that it`s speed is very

slow compared to all the other means of transportation.

The advantages and disadvantages of this means of transportation indicate that their

solution is close related to international economic and political factors.

1.3. The Development of Maritime Transportation

The marine transportation activity is one of the most internationalized activities and

for studying its advance is necessary to take into account the evolution of the world

economy7.

The first reaction of a ship owner or a charterer after an important event (for example:

a nuclear accident in Russia or an increase in oil price), is to weight its effects over the marine

transportation market. The most important increases in freight prices were generated by

political conflicts, the most noticeable being the closing of the Suez Channel in 1956 and

1967. Besides the political influence, neither the strategic influence of the marine

transportation activity can be neglected. As the sector faced deeper internationalization, the

new industrialized countries together with OECD (The Organization for Economic

Cooperation and Development) contributed to the maritime development.

For a better understanding of the economic and political factors that contributed to

the development of the marine transportation activities is necessary to look at the double

interaction between the development of the sector and the one of the world economy. One of

the principal reasons of the industrial revolution was building a cheap and fast means of

transportation. This is why, every day distances seem to be shorter and shorter. This progress,

from a world built up from isolated communities to a global community, is due to the

activities of the commercial marine transportation.

7 Batranca, G. „Consideratii Privind Fundamentarea Deciziilor in Transportul Maritim”, Editura AIT Laboratories, Bucuresti, 2004;

8

The increased importance of the marine sector determined the development of a

whole international cooperation, under the supervision of United Nation Organization, for :

- Assuring safety conditions for human life and the ships over the sea;

- Avoiding accidents and the organization of the marine rescue and assistance;

- Preventing the environmental pollution and especially the one of the marine

environment;

- Unifying the marine transportation legislation and methodology;

- Protecting the ship owners and the producers of goods;

- Establishing, for maritime trade, an adequate, fair, lasting and operational, legal and

economic framework, able to guarantee, based on international cooperation, equality

in the obligations and the rights of the parties involved.

1.4. Sea Transportation and the Economics

The idea of shipping as the catalyst of economic development is not new 8. Adam

Smith, often regarded as the father of modern economics, saw shipping as one of the stepping

stones to economic growth. In the third chapter of “The Wealth of nations”, published in

1977, he argued that the central economic force is a capitalist society in the division of labor,

and the extent to which this can be practiced depends crucially upon the size of the market. A

business working in a country town without links to the outside world can never, he argued,

achieve the high levels of efficiency because it`s very small market will limit the degree of

specialization.

Adam Smith saw shipping as a source of cheap transport which can open up wider

markets to specialization, by offering transport for even the most everyday products at prices

far below those that can be achieved by any other means. This proved to be a profound

insight. Economic development has gone hand in hand with sea trade for sound economic

reasons, a process which Adam Smith explains in the following way:

“As by means of water carriage a more extensive market is opened to every sort of

industry than what land carriage alone can afford it, so it is upon the sea-coast, and along the

banks of navigable rivers, that industry of every kind naturally begins to subdivide and

8 Economy Watch – Economy, Investment and Financial Reports, „Shipping Industry”, available at http://www.economywatch.com/world-industries/shipping-industry.html, last accessed 26/06/2010;

9

improve itself, and it is frequently not until a long time after that those improvement extend

themselves to the inland parts of the country ….”9

Adam Smith painted a graphic picture of the economic benefits offered by sea

transport in the eighteen century, as follows:

“ …. a broad wheeled wagon attended by two men and drawn by eight horses is about

six weeks time carries and brings back between London and Edinburgh nearly 4 tons weight

of goods. In about the same time a ship navigated by six or eight men, and sailing between the

ports of London and Leith, frequently carries and brings back 200 ton weight of goods. Since

such, therefore, are the advantages of water carriage, it is natural that the first improvement of

art and industry should be made where this convenience opens the whole world to a market

for the produce of every sort of labor.” 10

This is a labor productivity of 15 times. By exploiting economies of scale and

integrated transport system, shipping continues to demonstrate Adam Smith`s insight. Today,

a lorry carrying a 40-foot container from Felixstowe to Edinburgh might be competing with a

small container ship carrying 200 containers. Or a truck holing 40 tons of oil along our

congested highways competes with a coastal oil tanker carrying 4 000 tons of oil by sea. Ships

now travel at speeds that trucks can hardy match on congested urban roads and at a fraction of

the cost. No wonder that the oceans are the highways of economic development, an aspect of

the business that hardly changes over centuries.

1.5. Sea Transportation and International Trade

Sea transport or simply shipping is essential to the functioning not just of modern

society generally, but of the global economy in particular. For international trade, sea

transport remains the most economical mode of transportation that moves all kinds of goods

around the world. For example, shipping makes possible the bulk movements of raw materials

and primary commodities to sites of manufacturing, and manufactured products to their

markets. Moreover, the movement of forms of fuel and energy, especially petroleum and

natural gas, is also largely dependent on shipping. Without effective and economical sea

transport, therefore, the viability and efficiency of the world economy would be adversely

9 Adam Smith quoted in Martin Stopford, „Maritime Economics”, 3rd edition, Abingdon, Oxon, 200910 Martin Stopford, „Maritime Economics”, 3rd edition, Abingdon, Oxon, 2009, chapter 1, page 3, paragraph 3

10

affected. Indeed, economic growth has become closely related to developments and

improvements in sea transportation.11

In recent times, developments and advancements in sea transportation have had

profound impacts upon international trade. To take an important example, the conversion of

merchandising from break-bulk shipping to containerization now permits goods dispatched

from their point of origin to reach their intended destination more efficiently, and with much

less risk of damage to the goods. There are also clear benefits to exporters and importers when

sea transportation costs less while facilitating ‘Just-In-Time’ stock management. Presently,

traders can expect relatively safe, easy and economical access to international markets

through a combination of deep-sea and short-sea shipping that utilizes container

transshipment opportunities.

„Within the very broad area of sea transportation, short-sea has become increasingly

important because most trunk or deep-sea vessels do not call at small or “off-line” ports. At

such ports, the depth may be insufficient to accommodate large vessels, or the cargo amounts

are too limited to justify the use of large vessels. Instead, “feeder operators” provide separate

short-sea shipping services that mediate between small ports and large vessels. Since small

ports greatly outnumber major ports in the world, short-sea transport is an indispensable part

of the growth in sea transportation.”12

Due to the financial crisis and economic downturn, growth in the world economy and

in global merchandise exports decelerated in 2009 and it is expected by analysts to decline in

2010. The reduction in the global production and demand resulted in lower levels of trade and

undermined growth in maritime commercial activities. Downside risks, including the adverse

feedback between the financial sector and the real economy, made the outlook for maritime

trade uncertain. Climate change and the need to adapt to the international regulatory regime

for greenhouse gas emissions from international shipping are adding a further challenge to

maritime transport sector.

As mentioned earlier, after the economic downturn and sharp decline in world

merchandise trade, growth in international trade continued, but at a slower rate of 3.6 per cent

in 2008, as compared to 4.5 per cent in 2007, and even slower in 2009.

11 Pamela Tirschwell, “Sigmund Freud”, 200012 Business Intelligence Journal - August, 2009 Vol. 2 No. 2,” Short-Sea Transport and Economic Development in Penang”, Chang Kah Loon, (MPhil)

11

Consistent with the past trend, major loading areas were located in developing regions

(60.6 per cent), followed by developed economies (33.6 per cent) and countries with

transition economies (5.9 per cent). These facts are shown in the graph bellow:

Table 1.1. World Merchandise Trade (2000-2008)Exports

Countries Imports

2000-2008 2007 2008

2000-2008 2007 2008

5,00 6,00 1,50 World 5,00 6,00 1,502,50 5,00 1,50 North America 3,00 2,00 -2,500,00 2,00 -6,00 Canada 3,50 5,00 0,502,00 1,50 -5,00 Mexico 3,00 4,00 0,503,50 6,50 6,00 United States 3,00 1,00 -3,505,50 3,50 0,50 South and Central America 8,50 17,50 13,503,50 4,00 0,00 Europe 3,00 4,00 -1,503,50 3,50 -0,50 European Union (27) 3,00 3,50 -1,501,00 1,50 0,00 Norway 5,00 9,50 2,003,50 7,00 1,50 Switzerland 2,00 5,00 2,507,50 7,50 2,50 Commonwealth of Independent States* 17,00 20,00 16,50

10,00 11,50 5,50 Asia 8,00 8,00 4,502,50 2,50 5,50 Australia 9,00 11,00 10,00

20,50 19,50 8,50 China 16,00 14,00 4,00-4,00 -20,00 -11,00 Hong Kong, China 3,00 7,00 -2,0012,50 13,00 7,50 India 13,50 16,00 14,006,00 9,50 2,00 Japan 2,50 1,50 -2,008,00 8,50 4,50 Six East Asian Traders* 5,50 5,00 4,00

*Commonwealth of Independent States: a regional organization, whose participating countries are former Soviet Republics, formed during the breakup of the Soviet Union;*Malaysia, Republic of Korea, Taiwan, Penghu, Kinmen, Matsu and Thailand.

Source: WTO,”Growth in the volume of world merchandise trade by selected region and economy”(2000-2008), available at http://www.wto.org/english/res_e/statis_e/its2008_e/its08_world_trade_dev_e.htm, last accessed 30/06/2010.

Even though, over the years developing economies have increased their share of

imports, including finished consumer goods, and also parts and components used as inputs in

globalized production process.

All in all, after analyzing the decline in demand for consumption goods, as well as the

fall in industrial production in major economies and reduced energy demand, especially in

developed regions, we realize that deceleration of maritime trade volume affected all shipping

sectors.

12

The year 2009 has been difficult for the entire shipping industry and the majority of

the Baltic ports saw their cargo volumes fall. Finland and Germany recorded biggest losses,

but Sweden, Lithuania and Poland followed with considerable falls in their ports’ cargo

throughputs for the first three quarters of 2009. However, it seems that the end of the year has

borne witness to some kind of recovery, at least in Lithuania and Poland. In addition, Estonia

was able to boost its already positive growth during the last quarters. Preliminary data

suggests that Estonia was the only state in the Baltic Sea region to increase its cargo volumes

in 2009.

In 2009, Romanian was one of the countries that experiences one of the lowest volume

of merchandise traded in its major ports, as shown by the chart bellow.

Chart 1.2.Total merchandise traded in EU major ports (2009)

Source: European Commision, Eurostat, Statistic Database, “Maritime transport of goods – 3rd quarter 2009”, available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-QA-10-027/EN/KS-QA-10-027-EN.PDF, last accessed 28/06/2010.

1.6. The Effects of Sea Transportation`s Activity on the Environment. EU

Perspective

With the strategic importance of shipping to the EU economy - 2 billion tones of

freight are loaded and unloaded in EU ports every year - and the increase of the maritime

traffic going through EU waters (every year 1 billion tones of oil are transiting through EU

ports and EU waters), the EU is constantly developing and intensifying its maritime safety

13

policy which the aim to eradicate substandard shipping essentially through a convergent

application of internationally agreed rules.

As maritime oil disasters have proved, the environment is hit hard when ships carrying

dangerous cargo run into trouble. The European Commission is keen to improve the safety of

vessels carrying potentially polluting cargo, hence the decision to ban single hull tankers in

view of the risk of grounding. However, that does not prevent unscrupulous or negligent

operators and crews from illegally discharging polluting substances into the sea. To counter

this practice, measures were introduced in 2000 to improve port reception facilities for ship

waste and cargo residues. The directive aims to reduce marine pollution by ensuring that all

EU ports provide adequate waste reception facilities, and by collecting a fee from all ships

whether they use the facilities or not, under the polluter pays principle, which gives them an

incentive to deliver waste ashore rather than dispose of it illegally at sea.13 Some of the

greatest accidents with huge evidence over the environment are presented below:

On 12 December 1999, the Erika, a 25 year-old single-hull oil tanker carrying the

Maltese flag and chartered by Total-Fina, broke into pieces some 40 nautical miles off the

southern tip of Brittany, polluting almost 400 kilometers of French coastline. The damage

caused to the environment and the exceptionally high cost of the damage to fisheries and

tourism make the Erika oil spill one of the major environmental disasters of recent years.

On the 19th of November 2002, the tanker "Prestige" broke in two, after six agonizing

days since Wednesday, the 13th, when the ship sent the SOS signal at a few miles off the

Galician coast, north western corner of the Iberian Peninsula. The tanker, carrying some

77,000 tons of oil, sunk to the depth of 3,600 meters some 250 km off the Spanish coast, with

a large quantity of oil still on board.

The “Erika” and the “Prestige” accidents encouraged the EU to drastically reform its

existing regime and to adopt new rules and standards for prevention of accidents at sea, in

particular involving oil tankers. The EU considerably reinforced its legislative arsenal to

combat flags of convenience and give Europe better protection against the risks of accidental

oil spills. The third maritime safety package was born in November 2005, with the main

objective to restore the competitiveness of the sector while benefiting only those operators

who respect the safety standards, in particular by increasing the pressure on owners of sub-

standard ships.

13 European Commission, “Improving the competitiveness, safety and security in European shipping”, Maritime Transport Policy, 2006

14

More than three years later, with the adoption of the measures proposed in the third

maritime safety package, an important step has been achieved both on the improvement of the

effectiveness of existing measures to prevent accidents and on the management of their

consequences if the worse were to happen. With the Third Maritime Safety Package14, the EU

has completed this legislative arsenal covering all chain of responsibility of the maritime

sector.

14 It was adopted on 11 March 2009

15

C h a p t e r IICharter Contracts and the Bill of Lading

2.1. Main Characteristics and the Parties Involved in Shipping Contracts

Generally, ships are taken on the basis of charter contracts negotiated by brokers,

either on behalf of the charterer or the ship owner.

A charter contract is defined by the following characteristics15:

- It is a document, containing the rights, obligations and the responsibilities of each of

the parties involved (the charterer or the ship owner);

- Generally, it is prepared by the charterer`s broker, on the ground of the agreed terms

between the ship owner and the charterer;

- It is signed either by the charterer or the ship owner, either by their brokers, on their

behalf;

- It contains a suite of standard clauses, printed on different forms (usually referred to as

the printed text16), followed, moreover by additional clauses, called: addendum or

rider17 , clauses which best highlight the parties` requests;

- It can have as many blots, corrections and additions in compliance to the parties`

requests;

The parties are generally referred to as the ship owner and the charterer, even though

Contractual relationships could be more complex. When closing a charter contract with a

charterer who is not the ship owner, it is used the “dispondent owner” 18 denomination. On the

other side, there is the beneficial owner, who is the registered owner of a vessel who can

charter the vessel out to others.

Beside the ship owner and the charterer, the ongoing of the contract implies the

participation, without having the status of contractual parties, of the shipper and the

consignee. According to the Hamburg Rules, the shipper is the person with whom or in favor

of whom a transportation contract was signed. Also, a consignee is the person who was

delivered or who delivered the object of the transportation contract. Generally, the shipper is

15 Caraiani G., Sorescu M.: „Transporturi Maritime”, Editura Lumina Lex, Bucuresti, 199816 The printed text contains a number of clauses with or without blank spaces, which must be filled in by the contracting parties (e.g. the name of the ship, the cargo to be loaded, the freight);17 These clauses are frequently enclosed with the charter party, containing confidential terms which one doesn not wish to divulge to certain employees of one of the contracting parties;18 A person or a company which has a commercial control over a vessel`s operation without owning the ship.

16

also the exporter of the cargo to be transported, and depending on the delivery terms and

conditions, he can also be the charterer.

The receiver is the person or the entitled company to receive the cargo. This person

can or cannot be nominated in the contract, because he will prove his quality through the bill

of lading, submitted to the ship master at the arrival.

2.2. Forms of the Contract

Although the great majority of charter contracts are written, this is not compulsory.

Over time, due to different legal problems generated by the diversity of legal systems, it has

been imposed a series of standard contracts, whose clauses are printed on standard forms.

Almost each of these standard forms are numbered in order to ease the amendment of the

contract.

The American practices from the 70`s established two distinctive parts for these

standard forms: the first one contains numbered cassettes to be filled in and the second one, a

series of standard clauses. The advantage of the system was that the second part was to be

filled in only if the parties wanted to modify the standard clauses, otherwise it would have

been incorporated by reference. In practice, there a only few cases when the parties totally

agree the standard clauses, this is why the new forms gave up the division system in two parts.

Much more frequent are those cases when the parties have to negotiate in order to

reach an agreement regarding supplementary clauses for certain aspects, uncovered in the

standard contract. These supplementary clauses are known under the denomination of “rider”

or “adendum”, and their existence helps to the correct the interpretation, given by the general

context of the contract, in order to avoid isolated meanings. These new introduced clauses

have priority in interpretation when their content is contrary to the one given by the standard

clauses, because the first is considered to better represent the interests of the parties. From the

same reason, in case the standard contract is divided in two parts, the first one prevails

because of the specific data filled in.

Regarding the erased words, they are considered nonexistent. Even so, in certain cases

(a litigation for instance), they are taken into consideration, if only the clauses contained by

the contract would be meaningless without them.

In order to overcome these issues, the newest standard contracts contain a series of clauses

presented in more than one version, which give the parties involved the possibility of

17

choosing the most suitable clauses for specific situations, with the purpose of avoiding the

possible amendments.

All these standard contracts are the result of long negotiation between different groups

of charterers and ship owners, or they have been framed by organizations representing either

charterer`s interests, either the ones of the ship owners. The most representative standard

contracts are agreed, adopted or recommended by different organizations of associations.

A charter contract is considered agreed if it is negotiated and agreed by different

charterers` or ship owners associations. Standard clauses of this contract cannot be modified

or erased, without the previous agreement of the parties that agreed to them.

It is adopted by a charterers` organization if it officially sustains a contract agreed

under the above conditions or by another charterers` organization or association19.

A charter contract is recommended when there is no charterers` association with

whom a certain contract could be negotiated or when even if the contract has been negotiated

with a charterers` association, there is no possibility that all members of that association to

use it. Even if the recommended contract is desired to be used without modifications to the

printed amendments, this is not compulsory.

Besides these three terms, there is also used the term “approved”. A charter contract is

considered approved when it has been agreed, adopted or recommended.

2.3. Types of Charter Contracts:

A. Charter by demise / Bareboat charter

It is a rental contract, according to which the ship owner provides a discharged vessel

to the charterer, for temporary usage, in exchange of a so called “hire” – it is calculated

according to the usage period. The “bareboat” charterer disposes of the vessel, without the

crew and the specific materials and also assumes the maintenance expenses, current or

accidental repairs, supply, freight, anchorage, insurance, port duties and cross channels fees,

meaning all the financial expenses of the commercial and technical activities performed. The

ship owner is obliged to assure for the charterer the disposal of the vessel in proper technical

condition and also to present the registration documents, the certificate of origin and the class

certificate20. 19 It should be noted that a charter contract can also be adopted by a ship owners` association if it has been issued by another ship owners` association with the purpose of being used in a sector field, without being adopted by a charterers` association. 20By issuing this certificate, the clearing company grants to the charterers and to the insurance companies that the vessel is solid, sealed, durable and functional, from all points of view, fin order to perform the voyage. The

18

B. Booking Note

Is represents the booking of the necessary transportation space, in view of dispatching

a predetermined quantity of goods. It is also the most suitable for linear transportation.

This type of contract specifies the principal condition under which the transport is

performed:

- The quantity and the description of the goods dispatched;

- The loading and unloading port;

- The name and address of the sender.

Also referred to as “berth note”, it appears as a letter from the ship owner`s broker to

the charterer, which confirms the engagement of the necessary transportation space and also

the principal conditions for its performance. One or more copies of this letter have to be

signed by the charterer, to testify his agreement. Afterwards, this document has to be

sustained by the bill of lading.

C. Charter party21

It contains the contractual terms specific to tramp transportation and appears under

two forms:

- Voyage Charter Party – represents the rental of a vessel for a given number of voyages

(this number is mentioned, together with the duration of the contract). According to this

contract, the loading and unloading operations can represent the responsibility of both the

charterer and the ship owner. In this case, freight calculation depends on the quantity of

goods transported, or it represents a total sum according to the vessel`s capacity (lump

sum)22.

- Time Charter Party – defines the situations when the charterer rents the vessel for a

predetermined period of time. Loading, unloading expenses, fuel, channel and ports fees

are the responsibility of the charterer (as compared to voyage charter party, where they

could have been covered by the ship owner). According to “BALTIME”23, the ship master

is obliged to follow the charterer`s orders regarding the vessel`s operation. In this type of

contract, the full commercial responsibility fall on the charterer and the freight is a

function of the time the vessel is at the charterer`s disposal.

better the technical condition of the vessel, the higher the interest of the charterers, the lower the risks assumed by the insurance companies, consequently, the lower the premiums paid for insuring the vessel. 21The denomination comes from „carta-partita”, known in the Middle Age, when the transportation document was no more than single paper, cut in two pieces, each of them containg the integral text of the document and both the charterer and the ship owner being given one half;22Represents a single payment for the total amount due, as apposed to a series of periodic payments;231939 – Uniform Time Charter .

19

D. Bareboat or charter by demise

It refers to ship leasing arrangement in which the use of the entire vessel and all

associated expenses pass on from the ship owner to the lessee (charterer). If the lessee also

has the right to appoint own master and the crew, it is called a bareboat charter.

2.3.1. Main Clauses of Charter Party Contract

Generally, the charter party contracts comprise the following main clauses:

- The vessel`s denomination, its main characteristics and the useful capacity;

- Data referring to the commencement period of the voyage, the date when the vessel is

supposed to arrive at the loading port, the lay days, the last day admitted for loading,

and also the necessary period until reaching the destination port;

- The notification manner regarding the vessel`s arrival at the loading port;

- Cargo description;

- The intermediary ports, the loading port and the destination one;

- The freight, its calculation, the currency;

- Freight conditions, costs bearing for each of the parties involved;

- Loading/unloading norms, the lay day calculation.

2.4. The Bill of Lading

A bill of lading (sometimes referred to as a BOL or B/L) is a document signed by a

carrier (a transporter of goods) or the carrier's representative and issued to a consignor (the

shipper of goods) that evidences the receipt of goods for shipment to a specified designation

and person. The term derives from the verb "to lade" which means to load a cargo onto a ship

or other form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is

evidence of the contract of carriage of goods and it serves a number of purposes:

- It is evidence that a valid contract of carriage, or a chartering contract, exists, and it

may incorporate the full terms of the contract between the consignor and the carrier by

reference (i.e. the short form simply refers to the main contract as an existing

document, whereas the long form of a bill of lading (connaissement integral, fr.)

issued by the carrier sets out all the terms of the contract of carriage;

20

- It is a receipt signed by the carrier confirming whether goods matching the contract

description have been received in good condition (a bill will be described as clean if

the goods have been received on board in apparent good condition and stowed ready

for transport);

- It is also a document of transfer, being freely transferable but not a negotiable

instrument in the legal sense, it governs all the legal aspects of physical carriage, and,

like a cheque or other negotiable instrument, it may be endorsed affecting ownership

of the goods actually being carried. This matches everyday experience in that the

contract a person might make with a commercial carrier like FedEx for mostly airway

parcels, is separate from any contract for the sale of the goods to be carried, however it

binds the carrier to its terms, irrespectively of who the actual holder of the B/L, and

owner of the goods, may be at a specific moment.

2.5. Main Types of Bill of Lading

Through bill of lading - This bill states that the goods are consigned to a specified

person and it is not negotiable free from existing equities, i.e. any endorsee acquires no better

rights than those held by the endorser. So, for example, if the carrier or another holds a lien

over the goods as security for unpaid debts, the endorsee is bound by the lien. Although, if the

endorser would fail to disclose the charge, the endorsee will have the right to claim damages

for failing to transfer an unencumbered title. It is also known as a non-negotiable bill of

lading, but from the banker's point of view this type of bill of lading is not safe.

Order bill of lading - This bill uses express words to make the bill negotiable, e.g. it

states that delivery is to be made to the further order of the consignee using words such as

"delivery to A Ltd. or to order or assigns". Consequently, it can be endorsed by A Ltd. or the

right to take delivery can be transferred by physical delivery of the bill accompanied by

adequate evidence of a company's intention to transfer.

Bearer bill of lading - This bill states that delivery shall be made to whosoever holds

the bill. Such bill may be created explicitly or it is an order bill that fails to nominate the

consignee whether in its original form or through an endorsement in blank. A bearer bill can

be negotiated by physical delivery.

Surrender bill of lading - Under a term import documentary credit the bank releases

the documents on receipt from the negotiating bank but the importer does not pay the bank

until the maturity of the draft under the relative credit. This direct liability is called Surrender

21

Bill of Lading (SBL), i.e. when we hand over the bill of lading we surrender title to the goods

and our power of sale over the goods.

A sea waybill is a non-negotiable receipt issued by the carrier. It is most common in

the container trade either where the cargo is likely to arrive before the formal documents or

where the shipper does not insist on separate bills for every item of cargo carried (e.g. because

this is one of a series of loads being delivered to the same consignee). Delivery is made to the

consignee who identifies himself. It is customary in transactions where the shipper and

consignee is the same person in law making the rigid production of documents unnecessary.

A straight bill of lading by land or sea, or sea waybills are not documents that can

convey title to the goods they represent. They do no more than require delivery of the goods

to the named consignee and (subject to the shipper's ability to redirect the goods) to no other.

This differs from an „order” or „bearer” bill of lading which is possessory title documents and

negotiable, i.e. they can be endorsed and so transfer the right to take delivery to the last

endorsee. Nevertheless, bills of lading are "documents of title", whether negotiable or not,

under the terms of the Uniform Commercial Code.

2.6. Issues of the Bill of Lading and its Enforcement

In most national and international systems, a bill of lading is not a document of title,

and does no more than identify that a particular individual has a right to possession at the time

when delivery is to be made. Problems arise when goods are found to have been lost or

damaged in transit, or delivery is delayed or refused. Because the consignee is not a party to

the contract of carriage, the doctrine of privity of contract states that a third party has no right

to enforce the agreement. However, whether this is a problem to the consignee depends on

who owns the goods and who holds the risks associated with the carriage. This will be

answered by examining the terms of all the relevant contracts. If the consignor has reserved

title until payment is made, the consignor can sue to recover his or her loss. But if ownership

and/or the risk of loss have transferred to the consignee, the right to sue may not be clear in

contract, although there could be remedies in tort/delict (the issue of risk will have been most

carefully considered to decide who should insure the goods during transit). Hence, a number

of international Conventions and domestic laws specifically address when a consignee has the

right to sue. The legal solution most often adopted is to apply the principle of subrogation, i.e.

to give the consignee the same rights of action held by the consignor. This enables most of the

more obvious cases of injustice to be avoided.

22

Since bills of lading are most frequently used in trans border, overseas or airborne

shipping, the laws of whatever other countries are involved in the transaction covered by a

particular bill may also be applicable including the Hague Rules, the Hague-Visby Rules and

the Hamburg Rules at international level for shipping, The Warsaw Convention for the

Unification of Certain Rules for International Carriage by Air 1929 and The Montreal

Convention for the Unification of Certain Rules for International Carriage by Air 1999 for air

waybills, etc. It is customary for parties to the bill to agree both which country's courts shall

have the jurisdiction to hear any case in a forum selection clause, and the municipal system of

law to be applied in that case choice of law clause. The law selected is termed the proper law

in private international law and it gives a form of extraterritorial effect to an otherwise

sovereign law (e.g. a Chinese consignor contracts with a Greek carrier for delivery to a

consignee based in New York: they agree that any dispute will be referred to the courts in

New York (since that is the most convenient place — the forum convenience) but that the

New York courts will apply Greek law as the lex causae to determine the extent of the

carrier's liability.)

2.7. Bill of Lading Versus Charter Contracts

As a document, the bill of lading is more important than the charter party because the

negotiable bill of lading gives the right to receive the goods.

In fact the charter party is only a contract of affreightment that only represents the hire

of tonnage space; consequently, the charter-party does not represent the goods. For that,

another document is necessary that serves as proof of the actual loading of the goods and

consequently that can be considered as the implementing evidence of the contract of

affreightment. This other document is now exactly the bill of lading and for each transport of

goods there should, in theory at least, be a charter party and a bill of lading.

In tramp shipping, where only full cargos are transported, there will generally be a

charter party and a bill of lading. In the liner shipping one will generally not find a charter

party but only a bill of lading that.

The bill of lading does not replace the contract of affreightment but it is the

presupposition of it. The fact that there is a bill of lading creates the presumption that

previously a contract of affreightment was already concluded. This way of concluding

happens in the liner shipping tacitly, when the ship owner announces the sailing and the

23

destination of the ship, orally or in writing (e.g. via the press) and that the freight forwarder

binds himself to ship goods with that named ship.

In that case, the bill of lading is the confirmation and the written proof of the contract

of affreightment; the bill of lading is also the proof that the goods were loaded on board the

ship.

The bill of lading can be issued in two different manners:

1. Without a preceding contract of affreightment.

There is only a presumption of a contract of affreightment and the provisions which

govern the bill of lading, apply. If the bill of lading is negotiable then the Hague-Visby Rules

which are of public order apply; if the bill of lading is not negotiable then the bill of lading is

only a receipt.

2. For the implementation of a charter party that was signed by the parties

concerned.

a) If the bill of lading bears the words "Freight and all other conditions and exceptions

as per Charter" the terms of the contract of affreightment are incorporated in the bill of

lading, which means that those terms will in fact have to be applied, provided that they

are not in contradiction with the terms of the Hague-Visby Rules24.

b) The bill of lading does not refer to the charter-party. In that case the terms of the bill

of lading will prevail on those of the charter party.

"The terms of the contract may also be gathered from the charter, where there is one

provided that its terms either wholly or in parts are expressly incorporated in the bill of

lading, or the charterer is also the shipper, in which case the bill of lading as between

charterer and ship owner is usually merely a receipt"25.

An important difference between the charter party and the bill of lading lies in the fact

that the charter party is a gestation agreement i.e. that the contract is signed before it is carried

out; whereas the bill of lading is an actual agreement because the contract is only signed after

the goods have been really loaded on board.

C H A P T E R III

24 Wildiers, P.: “Le contrat d'affrètement maritime”, Anvers, Editions Lloyd Anversois, 1969, page 93.25 Scruton on „Charterparties and Bills of lading”, 2008, regarding the relation charter party/bill of lading.

24

FREIGHT IN INTERNATIONAL SEA TRANPORTATION

3.1. General Aspects Regarding Maritime Freight

Freight is the reward payable to the carrier for the carriage and arrival of goods in a

mercantile or recognized condition, ready to be delivered to the merchant.

There are more than one freight markets, thus demand and supply not only interact on

the general transportation market, but on the market of certain groups of merchandise and

vessels.

As in any other activity, from the collected freight, the ship owner has to cover his

expenses and also gain a certain profit.

Expenses related to vessels are divided in more categories:

a) Expenses corresponding to purchasing and maintaining the vessel. These costs are

strictly dependent on the value of raw materials and labor consumed for building the

vessel, but also on the supply and demand at the acquisition moment. For an efficient

use of the vessel, regarding its volume and its transportation capacity, it is very useful

to know the construction characteristics: DWT26, DWCC27, TRB, TRN, loading

capacity, maximum speed, the amount of fuel consumption at different speeds;

b) Expenses related to the direct operation of the vessel. These are reflected in everyday

operation costs, either displacing or not, for loading and unloading the cargo, fuel

supply, respectively the consumption of fuel per day, fuel acquisition price, the

number of crew members and their wages, insurance premiums;

c) Expenses indirectly related to operating the vessel and uncontrolled by the ship owner.

Total costs generated by the vessel also include the fees paid by the ship owner ,

which do not depend on the way the vessel is organized and operated, but on other

factors, like: norms specific to the state where the vessel is registered, agreements

between states, port administrations, channel administrations, agreements between

different transportation operators.

3.2. Cost Elements in Sea Transportation

26 Deadwight Tonnage: is a measure of how much wight a ship is carrying or can safely carry. It is the sum of the weights of cargo, fuel, fresh water, ballast water, provisions, passengers and crew;27 Deadweight Cargo Capacity: it gives the wught of the cargo that the vessel can carry and it depends on water temperature and the water (whether it is salt, brackish);

25

The pricing of cargo ships` services, like all pricing, is dependent on the forces of

supply and demand, but the factors affecting both supply and demand are probably more

complicated than in the case of most other industries and services. As in all forms of

transport, the demand for shipping is derived from the demand for the commodities carried,

and it is, therefore, affected by the elasticity of demand for these commodities.

The demand for sea transportation is affected both by direct competition between

carriers and, because it is a derived demand, by the competition of substitutes or alternatives

for the particular commodity carried. On any particular route, the ship owner is subject to

competition from carriers on the same route, and also from carriers operating from alternative

supply areas. For example, on some routes there is also competition from air transport for

high value to low weight ratio consignments, and in the coasting trade there is also

competition from inland transport.

The price eventually fixed depends largely on the relationship between buyers and

sellers. Where both groups are numerous, and have equal bargaining power, and where

demand is fairly elastic, conditions of relatively perfect competition prevail. Under these

circumstances, prices are fixed by the “haggling of the market” and are known as contract

prices. The market for tramp charters operates under such conditions, and the contract is

drawn up as an agreement known as a charter party.

The contract may be for a single voyage at so much per tone of the commodity carried,

or it may be for a period at a stipulated rate of hire, usually so much per tone of the ship`s

deadweight carrying capacity. The charter rates are quoted on a competitive basis in various

exchanges throughout the world. Foodstuff and raw materials in particular are traded in a

highly competitive world market, and their movement is irregular, depending upon demand

and supply conditions. It is quite usual for cargoes of these commodities to be loaded and

actually marketed during transit, the charterers instructing the ship to proceed to a certain

range of ports and determining the port of discharge while the ship is es route. In the case of

very long-term charters, takers or ore carriers, the rate of hire is fixed to give the owner a

reasonable return on his investment.

Under these conditions, the rate structure for tramp is a very simple product and

emerges from competitive interplay of supply and demand. From the economist`s point of

view, rates made in this way represent the most efficient methods of pricing, for where price

is determined under conditions of perfect competition, production is encouraged to follow

consumers` wishes, and price itself does not deviate to any great extent from the average total

26

cost. In this way the consumer is satisfied and production capacity most usefully employed.

The factors influencing the formulation of a fixture rate are detailed bellow:

1. Ship specification which would also embrace the type of vessel (bulk, carrier,

containership, oil tanker);

2. The types of traffic to be conveyed;

3. General market conditions: this is a major factor and generally an abundance of

available ships for charter tends to depress the rate particularly for voyage and short-

term charters;

4. The daily cost to be borne by the charterer;

5. The duration of the charter: generally, the longer the charter, the less it is influenced

by the market situation relative to the availability for ships and the demand for them;

6. The terms of the charter: as mentioned before, the ship owner and the charterer are

free to conclude a charter party of any terms;

7. The identity of cost to be borne by the charterer and ship owner must be clearly

established;

8. Responsibility for the survey costs of the vessel must be clearly defined as to whether

they are for the charterer`s or ship owner`s account.

Currency surcharge is another factor to be considered, as it arises when the freight rate

is related to a floating currency. Because of currency depreciation, a currency surcharge is

imposed in order to minimize losses that the ship owner or the charterer could incur in such

situations.

The tramp shipper markets goods of relatively low value, so he seeks the lowest

possible transport charge, as the freight percentage of the total value may have a direct

bearing on the salability of the commodity. He has thus a prime interest in the availability of

tramp shipping space at any particular time by reason of the fact that freight and chartering

rates will reflect variations in the economic forces of supply and demand. In a market

situation where there are plenty of vessels the shipper will be able to charter at a rate which

will be only marginally above the operating costs of the vessel. In the opposite situation, he

will be forced to pay more but there is a limiting factor in the price of the commodity at the

point of sale to the rate which the ship owner may receive. In these conditions, the premium

returns are earned by the operators of the most efficient ships. In weak market conditions their

relative efficiency ensures a small profit while others just break even. Where the market is

strong the proven reliability shown before will ensure that the services of such vessels will be

sought out before other opportunities are taken up.

27

In the liner trades the freight costs are more stable and controlled. The ship owner is able

to hold the rate at a fair level to show a profit margin, but he must be careful not to hold his

rates so high that they price the goods out of the market. At this point, joint cooperation

between shipper and carrier and other parties is needed.

3.3. Means of Establishing Freight

Freight can be established by various means, but generally the most frequent are the following:

a) According to the weight and volume of the cargo. In case freight is determined

according to the cargo`s weight, it is very important to specify whether it is expressed

in metric ton, long ton or short ton, as there are significant differences between them.

b) Lamp sum freight: according to this means of establishing freight, the charter pays a

certain amount of money, independent on the quantity of goods loaded. Generally, it is

used when the charterer is allowed to load maximum capacity or in case of oversized

cargoes.

c) World Scale reference: specific to oil tankers. This means easily allows freight

comparisons and also an efficient calculation of voyages.

d) Deadweight unit: it is mainly used in afreightment contracts28, when the vessel`s

capacity to be used is unknown.

e) As a percent of the cargoes value: in practice, this means is no longer used.

3.4. Factors Influencing Freight

A variety of factors influence freight transportation demand, some directly and others

as a result of changes in transport costs and rates and in the services offered.

Among those factors that directly influence freight transportation are the following:

1. The economical influence: the demand for transportation services is derived from the

level of economic activity. Trends and changes in the national or regional economy

affect manufacturing and distribution processes. As a derived demand, the most basic

influence on total freight demand is the volume of goods produced and consumed.

Expansion in a national or regional economy results in increases in overall freight

demand, while contractions in the economy result in reductions in freight demand. 28 The expression usually employed to describe the contract between a ship-owner and another person called the charterer, by which the ship-owner agrees to carry goods of the charterer in his ship, or to give to the charterer the use of the whole or part of the cargo-carrying space of the ship for the carriage of his goods on a specified voyage or voyages or for a specified time.

28

2. Industrial localization patterns: are critical in determining transport demand as

measured in ton-miles or other units that reflect length of haul. The spatial distribution

of economic activity also influences mode choice, with many commodities likely to be

shipped by one mode when distances are short and by another when distances are

longer.

3. Globalization of business: today, many companies manage worldwide production and

distribution system, and national economies are increasingly being integrated into a

global economy. As production facilities are shifted to locations around the globe

where goods can be produced more economically, the demand for world trade will

continue to increase.

4. International trade agreements: global production and distribution are also affected by

international trade agreements, quotas and tariff restrictions.

Other direct factors:

5. Just in time inventory practices;

6. Carrier-shipper alliances;

7. Centralized warehousing;

8. Packaging materials;

9. Recycling.

Among the factors that have an indirect impact on freight demand, by influencing

costs and services are the following:

1. Economic regulation and deregulation: deregulation in transportation industry was

driven by the desire to encourage greater price and service competition and to

increase opportunities to develop multimodal and intermodal relations among and

within various modes.

2. International transportation agreements: they often involve complex negotiations as

the nations involved seek to protect their interests and to create opportunities for trade

and economic growth. For example, where carrier entry or participation is restricted

in a particular market, rates tend to be higher.

Other indirect factors:

3. Intermodal operating agreements;

4. Single-source delivery of international LTL shipments;

5. Fuel prices;

6. Publicly provided infrastructure;

29

7. User charges and other taxes;

8. Government subsidization of carriers;

9. Environmental policies and restrictions;

10. Safety policies and regulations;

11. Effects in changes of truck size and weight limits.

3.5. International Freight Market: Organization and Functioning

The fixed freight level for different categories of vessel and cargoes depends on

market conditions, mainly on demand and supply, which is why this indicator is permanently

analyzed, in order to obtain possible market forecasts. This kind of data is periodically

published: monthly, weekly or even daily, through reports drawn by specialized institutions

belonging to this field.

Ship owners, shippers and charterers take great interest in statistics showing trends in

freight rates and charter rates. Three different unit of measurement are commonly used29:

voyage rate statistics, for dry cargo commodities, which are generally reported in $ per ton for

a standard voyage. In contrast, time charter rates are generally measured in $000 per day and

they are commonly reported for trips (round voyages).

The third and the most complex measure of freight rates is Worldscale. The concept

was developed during the Second World War when the British Government introduced a

schedule of official freight rates as a basis for paying the owners of requisitioned tankers. The

schedule showed the cost of transporting a cargo of oil on each of the main routes using a

standard 12.000 dwt tanker. Owners were paid the rate shown in the schedule or some fraction

of it. This system was adopted by the tanker industry and has been progressively revised over

the years.

The Worldscale index is published in a book which is used as the basis for calculating

tanker spot rates. The book shows, for each tanker route, the cost of transporting a metric ton

of cargo using a vessel on a round voyage. Worldscale is available on a subscription basis and

the annual fee entitles the subscriber not only to the Schedule itself but also to notices of all

amendments and the right to request rates for any voyage not shown in the Schedule.

Maritime transportation services are bought and sold on the international freight

market, compounded of all national freight markets. The relation between tonnage demand

and supply on the international freight market is determined in establishing the freight level.

29 Martin Stopford, „Maritim Economics”, 2nd edition, Taylor and Francis e-Library, 2003, chapter 3, page 93

30

Freight evolution is subject to the free interaction between supply and demand: for example, if

tonnage demand increases more than the supply of tonnage, freight level will increase.

This way of establishing freight level is much more obvious during economic growth

periods, when freight is several times more than in the recession periods. This aspect is

described by the BDI – the Baltic Exchange Dry Index - evolution, which is the major index

on the Baltic International Future Freight Exchange from London.

Figure 3.1.The Evolution of Baltic Exchange dry Index (2007-2009)

Source: InvestmentTools.com, available at http://investmenttools.com/futures/bdi_baltic_dry_index.htm, last

accessed 06/07/2010.

As we can see from the graph, last year was represented by a positive and unexpected

evolution of the BDI, soon after the 2008 crush (more exactly from 11.793 points reached in

May 2008, to 663 points registered in December 2008). Even if by February 2009, it exceeded

1.316 points, freight ware barely able to cover the operating costs of the vessels, the costs

related to the amount of fuel consumed and those related to the vessel`s crew.

By September 2009, the index started to maintain a stable level of 3.000 points, but

still analysts are not very optimistic. They consider that the upward evolution was supported

by circumstantial evidence, like winter harshness (which determined an increase in coal

demand) or pirate attacks (which brought a negative influence on transport routes including

the Suez Channel).

This year, freight level is expected to decrease, because, as compared to 2007, 20-30%

more vessels will be launched to water. The supply will increase, while transportation demand

still maintains its level.

C H A P T E R IV

31

CASE STUDY – PERFORMING AN INTERNATIONAL SEA TRANSPORT

4.1. Parties Involved

This paper`s aim is to realize an accurate analysis of the way a maritime transport is

performed, the relationship between parties involved and their influence on the Romanian

transportation market.

In order to realize this transportation activity, we need a producer company (DONAU

CHEM LTD), a consignee (AIGO LTD), a middleman (BOGFIL COM LTD) and the most

important, a shipping company (BALKAN SHIPPING AGENCY LTD) and a custom

operator (EUROEST OPERATIONS). Bellow, I will try to describe each of them, in order to

highlight their importance for the Romanian transportation and economic market.

4.1.1. The exporter (the producer company) – DONAU CHEM LTD: the company`s

object of activity is represented by the production and distribution of mineral fertilizers

(simple - urea, liquid fertilizers, ammonium nitrate, complex and liquid forms) and

intermediaries (ammonia, nitric acid), but also the production of spare parts and technological

tools. At this moment, the company is able to supply the entire range of chemical fertilizers

requested by the agricultural activities. I should mention the fact that the technologies

functioning within DONAU CHEM reach the standards of European factories.

The company`s headquarter can be found at the following address: 1, Portului Street,

145200, Turnu Magurele, Teleorman County, Romania, having the contact data: Phone: +40

247 416438, e-mail address: office@donauchem.ro .

4.1.2. The importer (the consignee) – AIGO LTD : AIGO is a global leader in providing

high performance adhesion and surfacing solutions, being the first manufacturer of synthetic

resins from melamine, phenol and urea. It is the specialist for film resins, insulation resins,

glues for the chipboard and plywood industries as well as for glues and hardeners for the

furniture industry and load bearing wooden structures.

The company is represented by highly qualified team works on innovative solutions

for clients with the aid of state-of-the-art laboratories, global know-how and future oriented

technologies and the high quality of products and services are attested by ISO 9001, ISO

14001 and Responsible Care certifications.

32

The company can be contacted at: 18F, No.397, Jiaozhou Rd.(No.1088,Wuding Rd.),

200040, Shanghai, or office@aigo.com.

4.1.3. The middleman – BOGFIL COM LTD: it is a custom agent, which offers complete

service on custom requirements: cargo declaration for export, primary custom declarations,

custom clearance and warehouse. It also fills EUR certificates, bills of lading and pays custom

duties at the clients` order. The middleman can also arrange for the carriers of the cargo (as in

the transport presented by this case study), even if this is not a necessary condition, because

the exporter is entitled of choosing his own transportation company.

DANAU CHEM LTD, the producer company presented by this study case, hires a

middleman because, under the negotiated terms, the delivery conditions fall under FOB

Incoterms 2000, which specifies that the exporter is in charged with export custom clearance.

The company can be contacted at: 22, Cobuz Street, 205200, Calafat, Dolj County, or

office@bogfil.ro.

4.1.4. The shipper - BALKAN SHIPPING AGENCY LTD: since 1997, BALKAN

SHIPPING is a member of Ship Agents and Brokers Association of Romania. The company

has 40 years of service to the shipping community worldwide, we have extensive experience

in all aspects of liner agency, ship broking, sale and purchase, ships agency, and bunkering

and freight forwarding. Nowadays the company developed overseas and created both branch

offices and subsidiaries in Germany, Greece, Belgium and Singapore.

The company`s headquarter is located at: 132, Mircea cel Batran Street, 900132,

Constanta, Constanta County.

4.1.5. The port operator – EUROEST OPERATIONS: it cooperates with the port authority

to move cargo through a port at a contracted minimum level of productivity. They may be

state-owned (particularly for port authorities) or privately run (like the one used in this case).

The work involves managing the movement of cargo containers between cargo ships, trucks

and freight trains and optimizing the flow of goods through customs to minimize the amount

of time a ship spends in port. Maintaining efficiency involves managing and upgrading

waterways, storage facilities, communication equipment, computer systems and dockworkers'

union contracts. The port operator also manages paperwork, leases, safety and port security.

EUROEST disposes of all necessary equipment in order needed in loading and unloading

activities and it is contracted by the producer company for loading the cargo exported to

China.

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The company can be contacted at: 16, Nicolae Grigorescu Street, 900636, Constanta,

Constanta County, or office@euroestct.ro.

4.2. Route description

This study will be based on analyzing the transport of chemical fertilizers (specifically

Carbamide) directly from Romania to China, following the route: Constanta (Romania) –

Istanbul (Turkey) – Port Kelang (Malaysia) – Nansha (China) – Shekou (China) – Ningbo

(China) - Shanghai (China).

As attested by the Statement of facts – time sheet ( see annex 1), cargo was ready to

be loaded at the 1st of July 2010, in Constanta port. The port operator is responsible for

loading the cargo and makes sure everything is settled until the departure moment.

Considering the fact that the producer company is located in Turnu Magurele and the

loading is made in Constanta, I want to clarify that the internal transport (from Turnu

Magurele to Constanta) is made by rail.

Regarding the external transport, “Xin Shan Tou” is the name of the ship, which will

be transporting the cargo from Romania to China. The moment the ship arrives to Constanta

port, it is berthed and loaded, thus ready for departure. After that, the estimated duration

period until destination is considered to be 21 – 25 days.

4.3. Cargo description

Carbamide (urea) or is an organic compound with the chemical formula (N H 2)2C O .

The molecule has two amine (-NH2) residues joined by a carbonyl (-CO-) functional group.

It serves an important role in the metabolism of nitrogen-containing compounds by

animals and is the main nitrogen-containing substance in the urine of mammals. Being solid,

colorless, odorless (although the ammonia which it gives off in the presence of water,

including water vapor in the air, has a strong odor), neither acidic nor alkaline, highly soluble

in water, and relatively non-toxic, urea is widely used in fertilizers as a convenient source of

nitrogen. Urea is also an important raw material for the chemical industry. The synthesis of

this organic compound by Friedrich Wöhler in 1828 from an inorganic precursor was an

important milestone in the development of chemistry.

It is a raw material for the manufacture of many important chemical compounds, such

as:

1. Various plastics, especially the urea-formaldehyde resins.

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2. Various adhesives, such as urea-formaldehyde or the urea-melamine-formaldehyde

used in marine plywood (the case of our importer company – AIGO LTD) .

3. Potassium cyanate , another industrial feedstock.

4. Urea nitrate , an explosive.

More than 90% of world production of urea is destined for use as a nitrogen-release

fertilizer. Urea has the highest nitrogen content of all solid nitrogenous fertilizers in common

use (46.7%). Therefore, it has the lowest transportation costs per unit of nitrogen nutrient.

Because it absorbs moisture from the atmosphere is has to be stored either in

closed/sealed bags on pallets, or, if stored in bulk, under cover with a tarpaulin. As with most

solid fertilizers, storage in a cool, dry, well-ventilated area is recommended.

Regarding the Romania – China transport, cargo (chemical fertilizer, urea, having the

custom code 31021010) will be transported in bulk, meaning that it is transported unpacked

and in large quantities. More specific the quantity of urea which will be transported is

1244,519 MT (according to Cargo Manifest document, see annex 2).

According to the Certificate of Quality (see annex 3), cargo is described as: prilled,

white colour, free flowing, free from harmful substance, product treated against caking. The

substance contains: 46.2 % Nitrogen, 0.93 % Biuret and the rest of 0.40 % moisture.

The Certificate of Quality also mentions the validity period of four months from

delivery date, only in case of adequate storage conditions: closed spaces, without humidity.

Concerning the quantity of urea transported, the Certificate of Quantity (see annex 3)

attests a net weight of 1244.519 MT. The total quantity of cargo loaded is also attested by the

Draft Survey Report, which calculates the exact quantity of cargo at discharge (see annex 5).

Cargo transported also has a box to be filled in the Commercial Invoice (see annex

4). Thus, we observe that minimum 90 % of the urea transported has a 1 – 4 mm

granulometry, and maximum 10 % less than 1 mm and more than 4 mm granulometry (it is

used in the qualitative and quantitative evaluation of the free-floating).

We can see from the commercial invoice that the unit price for urea is 208, 17 Euro,

meaning that the total value of transported cargo is 259071, 52 Euro. This unit price is one of

the determinants of the custom duties the exporter is obliged to pay.

4.4. Freight calculation

Sea freight calculations can be divided into two main components: break-bulk and

containerized. As the cargo transported by our company is bulk loaded, I will apply the first

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calculation method: in this case, cargo is measured along the greatest length, width and

weight of the entire shipment. Shipping lines quote bulk cargo per “freight ton”, which is 1

metric ton or 1 cubic meter, whichever yields the greatest revenue.

In order to determine freight level, the ship owner considers all factors which

determine the transportation cost and also the assumed profitability. Thus, freight level is

determined by: running expenses (operating expenses related to the vessel), including wages,

fuel costs, port taxes, charter commissions, costs depending on the chosen route, hazard risks

are also to be considered, together with the season when the transport is performed.

For this practical situation, freight level will be established according to the capacity

or weight of the transported cargo, represented by 1.244, 519 MT of chemical fertilizers. As

an additional clause negotiated between parties, freight costs will be computed according to

the delivered weight.

Considering the price per metric ton of cargo transported (208, 17 euro), transportation

cost has been agreed to 12 $ per metric ton loaded. This cost includes: expenses related to

vessel`s operation, crew member`s wages, fuel costs (calculated bellow), charter

commissions, expenses related to the chosen route (35 % for crossing the Bosphorus Strait)

and insurance.

As mentioned earlier, a very important determinant of freight level is the amount of

fuel consumed. The vessel`s activity is measured in a special unit measurement, referred to as

K. the number of K`s can be computed by the following relation:

K= (E+Q)*Km*Cs/1000, where

Q= the quantity of loaded cargo

E= unit equivalent (barge)

E= L*(B+2*To)*1,176, where

            L= unit length (barge length)

B= unit width (barge width)

T0= weight in accordance with the draft

Km= route kilometers

Cs (sector coefficient)= represents the degree of difficulty of the route.

For determining fuel consumption, the number of K`s is multiplied with a specific

amount of fuel, established by each of the companies. In this case, the coefficient is settled at

2.30 – 2.40 kilograms of fuel per K (the vessel`s activity measurement).

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In this case, we have:

E= 67.4(10.4 +2*2.00)= 67.4*7.2= 485.28

K= (485.28+ 1244.519)*1400*2.35/1000= 5691.03

It means that, the total fuel consumption needed for performing this transportation is:

K*Cs= 5691.03*2.35= 13373.92 kilograms

Past experience related to hazard risks influenced the international transportation and

insurance market, considering the fact that no transport is performed nowadays without

concluding an insurance contract: in our case, the importer will be responsible for insuring the

vessel and also the cargo transported.

Marine Insurance covers the loss or damage of ships, cargo, terminals, and any

transport or cargo by which property is transferred, acquired, or held between the points of

origin (Constanta) and final destination (Shanghai).

This contract offers coverage in the event of a marine loss. Marine loss is damage or

destruction of a ship's hull and the ship's cargo, as the result of the occurrence of an insured

peril (risk). Perils insured against include collision of the ship with another ship or object; the

ship sinking, capsizing, or being stranded; fire; piracy; jettisoning (throwing overboard of

property to save other property); barratry (fraud or other illegal act by a ship's master or crew,

resulting in damage or destruction of the ship and/or cargo), and various other liability

exposures. To be covered, an act cannot involve prior knowledge by the owner of the ship or

its cargo. Excluded are wear and tear, dampness, decay, mold, and war.

The cost of the insurance will also be included in the transportation cost (freight),

which at its turn, is part of the custom value, needed to be paid by the importer.

4.5. Documentation

This study case assumes that the producer company – DONAU CHEM LTD,

concluded an agreement with BALKAN SHIPPING AGENCY (internal and international

forwarding agency), in order to transport chemical fertilizers from Romania to China.

The port operator took care of receiving and loading the cargo, under the FOB

delivery, in accordance to the conditions imposed by Incoterms 2000.

Free On Board clause assumes that the seller delivers when the goods pass the ship's

rail at the named port of shipment – Constanta port. This means that the buyer has to bear all

costs and risks of loss or damage to the goods from that point. The FOB term requires the

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seller to clear the goods for export and makes the buyer responsible for all the costs incurred

after the cargo has been loaded on board.

In our case, the exporter will have to pay a pre established price, negotiated with the

middleman, for preparing the custom documents. Loading expenses also fall on the exporter`s

responsibility.

In the same time, the importer, AIGO LTD, will be responsible with concluding the

charter contract (see Annex 10) with the shipping agency, which is, in our case BALKAN

SHIPPING AGENCY.

For import cargo clearance, the shipper is requested to present the following documents:

1. The External Commercial Invoice

In order to transfer the property right from the seller to the buyer, an external invoice

has to be issued. This document is prepared by the exporter and it synthesizes all the relevant

clauses of the contract (see annex 4).

This type of primary contract includes the following elements:

1. Name and address of the seller, its identification data (legal form, object of activity,

phone number, registration number from the Trade Register Office);

2. Name and address of the buyer;

3. Issuance date and number of the invoice;

4. Commercial denomination of the cargo transported;

5. Packaging description;

6. Transportation cost (freight);

7. Means and conditions of payment;

8. Transaction value, by specifying the unit price and the total value;

9. The bank to which the payment will be made

10. Premium and insurance type

Besides the property right transfer from the seller to the buyer, the external invoice

shows the fact that the merchandise has been sold, thus it serves at obtaining the counter value

of the merchandise, by being part of the compulsory documents requested by the bank for

proceeding the import payment.

2. The Certificate of Origin

Represent a very important document in international transactions, because it verifies

the nature, the quantity of the delivered goods, but also the manufacturing place. It also

includes a declaration asserting the origin country of the goods.

This document has the following functions:

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1. Allows the importer to obtain some custom formalities; in this way, whenever partner

countries share agreements that provide preferential tariffs, the importer will first have

to demonstrate through the certificate of origin its right to a lower custom duty or even

an exemption.

2. Assures the compliance with the measures of commercial policies from the importing

country;

3. Assures the protection of certain intellectual property rights, as for example the origin

denomination.

The Certificate of Origin contains the weight and the type of the cargo, the quantity

transported, the invoice number, importer`s and exporter`s name.

3. The Certificate of Quality

Regarding the quality compliance, within international trade activities, a certificate of

quality is requested, together with other documents, by the exporter`s bank, in order to charge

the counter value of export. This document is issued by the producer company, but it can also

be attested by any institution specialized in quality control.

In order to collect the payment from the importer`s bank, the certificate`s content has

to correspond exactly with the provisions stipulated by the contract, on the quality of goods

4. The Transportation Document

In our case, due to the fact that the cargo is transported by water, the transportation

document takes the form of a bill of lading (see annex 6). It represents the evidence that a

valid contract of carriage, or a chartering contract, exists, and it may incorporate the full terms

of the contract between the consignor and the carrier by reference to the existing contract.

This type of document has to comprise the following mentions:

1. Name of the exporter;

2. Name and address of the consignee;

3. Cargo denomination and its weight;

4. Packaging type ;

5. Name of the vessel;

6. Name and complete address of the exporter, and also his signature;

7. Date and place the bill of lading has been issued.

5. Custom Declaration

It represents the act whereby a person indicates the wish to place goods under a given

customs procedure as provided for by the Community Customs Code (CCC) (Articles 4 (17)

and 59 to 78 CC). Generally, this task is performed by the owner of the goods or a person

39

acting on his behalf (a representative). It may also be performed by the person having control

over the goods. These persons may be individuals or companies, as well as in certain cases

associations of persons.

According to Article 201 CCIP, the declaration is to be presented to the official

customs office, authorized with supervising the place where the exporter is established and

the cargo is packed and loaded for the export transport.

One of the most important elements mentioned in the custom declaration is the custom

value of transported cargo (see annex 7). The custom value at export is the calculation basis of

the custom rights the Chinese company will have to pay when transportation reaches its

destination. Besides the custom rights, custom value also includes other taxes provided by the

national legislation of the importing country (China). According to the delivery condition,

other costs will be added: insurance, transportation costs – freight, expenses related to cargo

handling.

6. Master`s Receipt

It represents the proof that all transportation documents have been delivered to the

master (commander) of the vessel (see annex 8). It is the same for Mate`s Receipt, only that

the person who receives the documents is the vessel`s mate (deputy commander) (see annex

9).

7. The Letter of Credit

Right next to the condition of delivery from the commercial invoice, is the payment

condition, the name and the address of the bank which will be collecting the counter value of

the cargo transported, from the importer. The attached commercial invoice in this

transportation simulation mentions as payment method the letter of credit.

It is a binding document that a buyer can request from his bank in order to guarantee

that the payment for goods will be transferred to the seller. Basically, a letter of credit gives

the seller reassurance that he will receive the payment for the goods. In order for the payment

to occur, the seller has to present the bank with the necessary shipping documents confirming

the shipment of goods within a given time frame. It is often used in international trade to

eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

For a better interpretation of the process, I have added bellow the so called letter of

credit life cycle.

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It is very important to mention that letters of credit deal in documents, not goods. The

idea in an international trade transaction is to shift the risk from the actual buyer to a bank.

Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the

seller and is issued on behalf of the applicant, which is the buyer (the buyer is the applicant

and the seller is the beneficiary). The Bank that issues the LC is referred to as the issuing bank

which is generally in the country of the Buyer. The bank that advises the LC to the Seller is

called the advising bank which is generally in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the

required documents by the seller within the specified time frame. Note that the bank

scrutinizes the documents and not the goods for making payment. Thus the process works

both in favor of both the buyer and the seller. The seller gets assured that if documents are

presented on time and in the way that they have been requested on the LC the payment will be

made and buyer on the other hand is assured that the bank will thoroughly examine these

presented documents and ensure that they meet the terms and conditions stipulated in the LC.

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Conclusions and Recommendations

Last year, in February 2009, the Romanian Competition Council launched a very

useful investigation for better understanding the Romanian maritime market. The

investigation was mainly based on analyzing the functioning mechanisms of the transportation

market and identifying certain dysfunctional elements related to its non competitive character.

Thus, following this analysis, it was considered that a national strategy should be prepared

and applied to the maritime sector.

This strategy should be based on supporting Romanian ship owners, on stimulating

ship construction, by using bank loans, promoting the national flag and bringing to line the

national legislation to the one of the Community.

Entering the Romanian market of maritime transport services is rather difficult,

because of the large investment needed for building or acquiring a ship, to which one should

also add the lack of concrete support from the local authorities.

This market is considered to be a competitive one, due to the large number of shippers

as compared with the reduced volume of cargo available for transport. Domestic demand for

maritime transportation is represented by the economic agents belonging to energy sector,

extractive industry, agriculture and forestry, processing industries, but also to the construction

and trade sectors. In the same time, shipping supply at the Romanian ports level is represented

by foreign ship owners and foreign maritime companies. Unfortunately, the number of

national ship owners is so reduced, that it could not be taken into account. It is the same

situation for the vessels registered under the national flag.

Due to the low volume of transported cargo, the lack of stable ship owners, the

maritime transportation market is characterized by opacity and misleading information. In

over to overcome this issue, a very important role will be played by ship brokers and shipping

companies, because they best meet the requests of demand and supply.

Another specific aspect of the Romanian maritime market is represented by freight

dependence and practiced tariffs at the level of national maritime ports, but also freight level

and tariff policies adopted at global level. This is due to the lack of a national merchant fleet

and consequently a domestic freight market.

By analyzing the market of maritime services, a series of other connected markets are

regarded, as for example the services market that deals with loading and unloading activities,

navigation market or navigation market. As a result, there were also identified some issues

related to this connected markets.

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In this situation, it is best recommended the adoption of specific measures by the

Romanian Minister of Transport, in order to erase this problems generated by different legal

regimes applied to the same service.

As observed in Chapter 1, Chart 1.2.Total merchandise traded in EU major ports

(2009), page 13, on the services market related to cargo loading and unloading in the

Romanian ports, we deal with a very small number of port operators specialized in handling

certain categories of merchandise, which indicate dominant or even monopolistic positions on

this market. Only 1,5% of the total merchandise handled in the European Union`s major port

has been loaded or unloaded in the Romanian ports. Unfortunately, at this moment, there is no

sufficient evidence to support the practice of an anti competitive practice.

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