By Lorenzo CROCE, member of the Geneva Bar, LL.M.

 

Having already been significantly threatened by the inclusion of article 26 OECD Model Tax Convention in the new Double Imposition Conventions negotiated by Switzerland and the disclosure of 4000 UBS client names to the American Internal Revenue, Swiss banking secrecy is at risk of becoming eternally dead and buried in the next few months following a staggering new proposition from the Financial Action Task Force (FATF).

 

The FATF has just established a preliminary-draft in order to qualify tax crimes as predicate offences for money laundering. In short, if such a proposition should come about, this would mean that any person who has accepted a deposit, helped to transfer or manage funds in the knowledge or on the presumption that these funds were the result of tax offences, risks being prosecuted for money laundering in accordance with article 305 of the Swiss Penal Code. As for the financial intermediaries, they will be obligated to systematically declare suspected tax offences to the Money Laundering Reporting Office Switzerland (MROS).

 

Even though a formal decision has not yet been made, there is every reason to believe that this proposition will be adopted at the FATF plenary assembly at the end of 2011 within the scope of a partial revision of its standards. In light of the financial crisis, there is mounting international pressure, notably from the G20 countries. However, it must be stressed that this proposition is not aimed at combating organised crime. It is nothing other than a simple pretext. Under the pretext of fighting against money laundering, the true aim is a recovery of state funds by transforming the banks and other financial intermediaries into foreign tax officers. Therefore, no more need to pay out millions to buy CDs of stolen data!

 

However, this criminalisation of the economic world is neither desirable nor justified. One could admit that the channels worked for laundering capital are consistently the same as those used to try to conceal money from Inland Revenue, but the similarities between tax offences and money laundering stop there.

 

Money laundering involves reintroducing criminal money into the economic cycle through processes which aim to cover the source of the money.

 

Yet, as regards concealed funds from the Inland Revenue, these clearly have legal origins (revenue, wealth, succession, donation etc.). It is not a question of concealing illegal patrimonial values by imparting an apparent legal justification upon them, but rather avoiding the control by tax authorities of funds which have a legal source. It therefore appears doubtful that money resulting from tax offences could then be laundered.

 

Furthermore, in Switzerland only crimes, that is offences punishable with a prison sentence of more than three years, are likely to constitute predicate offences for money laundering. As a result, if the proposition made by FATF does indeed materialise, it would be necessary to establish tax offences in crime. Yet the seriousness of these offences, particularly tax evasion, is not comparable to that of other crimes connected to laundering. It is disproportionate to place money laundering resulting from tax offences on the same footing as laundering resulting from drug trafficking, terrorism or prostitution.

 

Whatever it may be, the implementation of this proposition runs the risk of creating significant difficulties.

 

First of all, it will be necessary to determine what is included under the term “tax offences”. In this respect, FATF has voluntarily refrained from elaborating on this notion – aside from the fact that it targets both direct and indirect taxes – leaving each country to decide for themselves what is to be understood by this term in relation to their domestic law. So what will Switzerland decide? Will it establish limited amounts or will it enact a catalogue of crimes? Will tax evasion be part of this and if necessary, where will the line be drawn between tax planning, legal practice and evasion? According to the Ambassador Alexandre Karrer, who is in charge of the Swiss case within FATF, “tax crimes must implicitly be reserved to significant offences such as a falsification of accounts or the embezzlement of money”. However, it remains doubtful that Switzerland will resist international pressure and it is possible that tax evasion will be considered as a predicate offence for money laundering.

 

The adoption of the new regulation will also pose problems in terms of investigations. In a practical sense, how can financial intermediaries ensure that the funds received from their client have been declared to the Inland Revenue? Will it be necessary for the client to sign a standard form or will they have to request a declaration certificate from the foreign tax authorities knowing that tax declarations are generally not granted until several years after the acquisition of revenue? Similarly, how can financial intermediaries lead the necessary investigation on funds which have been transferred from generation to generation?

 

There are so many questions which remain unanswered.

 

On an organisational plan, it will be, under all circumstances, necessary to hire and train a significant number of collaborators both at the level of the authorities and the financial intermediaries. This measure will lead to considerable supplementary costs which will be directly passed onto the client. This in turn runs the risk of eroding the competitive Swiss financial position as, unlike certain countries, Switzerland wants to be seen as performing well and there is no doubt whatsoever, that it will rigorously implement this new regulation.

 

We have seen that it is neither justified nor desirable to subject tax offences to articles 305bis and 305ter of the Swiss Penal Code as well as to the Swiss Federal Law concerning the fight against money laundering and terrorist financing in the financial sector. The new FATF proposition is solely aimed at allowing the acquisition of funds by the foreign tax authorities and not the fight against organised crime. What is even worse is the significant risk of weakening the system because of the tidal wave of communications to MROS which will probably happen. Furthermore, beyond the generated costs, this proposition is extremely complicated to implement, particularly for the financial intermediaries who solely have access to limited investigative means to exert their due diligence.

 

Ultimately, there are other effective solutions to actively fight against tax fraud. Indeed, Switzerland has already undertaken such measures by providing assistance, not only in cases of fraud but also in cases of tax evasion. Furthermore, the setting up of a discharge tax at the outset (“Rubik” project) is currently under discussion with Germany and England and would allow a definitive resolution of the problem while safeguarding the Swiss banking secrecy. It is therefore necessary to take advantage of this approach rather than abusively using the system of fighting against money laundering and the financing of terrorism.

By Lorenzo CROCE, member of the Geneva Bar, LL.M.

INTRODUCTION

The rules on carriage by sea, originating from customary practices, are today firmly grounded in legislation. One of these, a basic rule, specifies that the carrier should only deliver the goods to the consignee after production of the bill of lading.

 

However, as often, reality differs greatly from theory.

 

Indeed, with increased shipping speed, goods often arrive at destination before the bill of lading. The carrier is then faced with a dilemma: whether to await the arrival of the document or deliver the goods in violation of the contract.

 

Customary practice has imagined many solutions to this problem.

 

Our intention, in this paper, is to draw up a brief inventory of these. After recalling the presentation rule (I), we will examine, from a critical point of view, the introduction of the letter of indemnity (II), the seaway bill and the electronic bill of lading (III).

 

I) BILL OF LADING:CHARACTERISTICS AND PRESENTATION RULE

The bill of lading is a document specific to the trade of goods by sea. It has evolved over a long period of time and has become today the cornerstone of sea carriage. Indeed, the characteristics of the bill of lading have constantly evolved since it first appeared in the 15^thand 16^th centuries. Initially this document constituted a receipt for goods by the captain making it no longer necessary for the merchants to travel with their cargo. Then, in the 18th century, the bill of lading became a document of title. It was finally in the 19^thcentury, with the arrival of the first regular maritime lines, that it was fully recognized as proof of the carriage contract.[1]

 

Today the bill of lading can be defined as “a document which evidences a contract of carriage by sea and the taking over or loading of the goods by the carrier, and by which the carrier undertakes to deliver the goods against surrender of the document. A provision in the document that the goods are to be delivered to the order of a named person, or to order, or to bearer, constitutes such an undertaking.” (article 1 § 7 Hamburg Rules).

 

In the light of this definition the bill of lading has the following three characteristics:

 

Firstly, it is a receipt for the goods shipped. The issue of a bill of lading provides evidence that the carrier has received the goods and that the cargo complies with what it describes[2].

 

Secondly, although generally only signed by the carrier, the bill of lading is evidence of the contract of carriage. It establishes the conditions of the contract and the parties’ respective obligations[3].

 

Lastly, the bill of lading is a document of title. This is its most essential characteristic and also the most complex[4].

 

Upheld in 1787 by English case law (Lickbarrow v. Mason case), this function implies that the bill of lading and the goods are one and the same. As summarized by Lord Justice Bowen, the bill of lading is “[…] a key which in the hands of a rightful owner is intended to unlock the door of the warehouse, floating or fixed, in which the goods may chance to be.”[5]

 

In other words, the bill of lading is considered to symbolise the goods and its transfer leads to the transfer of the rights to the cargo, if such is the parties’ intention. Thus, it constitutes a title of ownership of the goods and its possession is the same as the possession of the goods.[6]

 

In addition, since it can be endorsed, the bill of lading can be traded in a commercial or bank transaction, for instance when a letter of credit is issued[7].

 

The corollary of this function is that the lawful holder of the bill of lading has the right to require the delivery of the goods from the carrier when these arrive at the port of destination without the need to provide evidence of ownership of the cargo[8]. From the carrier point of view, he should only deliver the goods to the holder of the bill of lading who produces an original of this (presentation rule). This is an obligation for the carrier. The latter should not be concerned with the ownership of the goods. If he delivers the goods without requiring the production of the bill of lading, he is in breach of the carriage contract.[9]

 

*****

 

The presentation rule is confirmed today in the majority of international legislations. Thus, article 1 § 7 of the Hamburg Rules, which defines the bill of lading, specifies that the carrier undertakes to deliver the goods against surrender of the bill of lading. Likewise, article 47 of the Rotterdam Rules indicates that, in the case of issue of a negotiable transport document (the Convention is implicitly referring here to the bill of lading), the holder of it has the right to claim the delivery of the goods by the carrier at the place of destination against surrender of the bill of lading and on condition that he properly identifies himself. The carrier refuses to deliver the goods if these requirements are not fulfilled.

 

In countries of Common Law, the presentation rule was already established in the 19^th century, based, in particular, on the theory of bailment and constructive possession[10]. Thus, in an English ruling in 1889 Sir Butt J. stated “[…] A shipowner is not entitled to deliver goods to the consignee without the production of the bill of lading.I hold that the shipowner must take the consequences of having delivered these goods to the consignee without the production of either of the two parts of which the bill of lading consisted.”[11]

 

With the adoption of the Carriage of Goods by Sea Act of 1992, the production principle is now codified in English law. In fact, according to article 2 “[…] a person who becomes the lawful holder of a bill of lading […] shall (by virtue of becoming the holder of the bill or, as the case may be, the person to whom delivery is to be made) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract”. Legal theory, based on this provision, considers that insofar as the consignee can take action against the carrier to exercise his rights based on the contract of carriage, he has, as a prerequisite to exercising these, the right to require the delivery of the goods[12]. It should be noted that Singapore opted for this same approach in the Bills of Lading Act of 1994.

 

As regards countries of Civil Law, we note that the presentation rule is widely adopted in domestic legislation. Thus, article 116 § 2 of the Loi fédérale sur la navigation maritime sous pavillon suisse and articles 49 and 50 of the Decret français (no. 66-1078) du 31 Décembre 1966 sur les contrats d’affrètement et de transport maritimes specify that the production of an original bill of lading is necessary to obtain delivery.

 

*****

 

An issue widely debated by legal writers was that of whether a straight bill of lading (issued in the name of a designated person) would be subject to the presentation rule or if, on the contrary, it could be considered, due to its non-transferable and non-negotiable nature, to be a document that does not need to be given to the carrier at the time of delivery[13]. Case law, not without some hesitation, ruled in favour of the first hypothesis. In a landmark decision, the English House of Lords ruled that a straight bill of lading was indeed a true bill of lading subject to the presentation rule[14]. Singapore had also adopted this approach in 2002 already, ruling that “once [the shipowner] issues a bill of lading…, whether it is an order bill or a straight bill, he must not deliver the cargo except against its production.The contrary view had much less support and most of it was recent and cursory” [15].It should be noted that this position is also adopted by other jurisdictions, in particular, by the courts of Hong-Kong[16], Australia[17] and France[18]. Only the United States appear to make an exception, but only in the event that the bill of lading contains no express surrender clause, which is rare in practice[19].

 

*****

 

As regards exceptions to the presentation rule, these are mainly of three types: firstly the parties have the possibility of contractually agreeing that the delivery will be made without production of the bill of lading[20]. The parties can also decide that if the bill of lading is not available at the time of the delivery, the consignee can provide other documents given by the shipper or the latter will pay an indemnity entitling the buyer to obtain the delivery of the goods (GAFTA 100) [21].

 

It also appears legitimate that a consignee of goods who has lost the bill of lading should be able to take legal proceedings to demand the delivery of the cargo[22].

 

Finally, the law of the place of discharge or the customary practices of the port sometimes allows delivery without the bill of lading[23]. The latter is, however, subject to restrictive conditions. Thus, “it must be reasonable, certain, consistent with the contract, universally acquiesced and not contrary to law.”[24]

 

*****

 

As we have seen, the principle whereby the bill of lading must be produced upon delivery of the goods is strongly stated both in national and international legal texts and case law. A carrier who accepts to deliver goods without a bill of lading violates the carriage contract and runs the risk of having to pay damages to the lawful holder of the title (see, for instance, articles 5 § 1 Hamburg Rules and 116 § 4 of the Swiss LNM).

 

In Anglo-Saxon law, the carrier will be liable not only in contract but also in tort (tort of conversion) [25]. The carrier will bear an even heavier liability since P&I Clubs generally exclude this type of risk from their policy[26].

 

However, in principle the carrier can be exempted from liability for delivery without bill of lading through the insertion of a specific clause in the carriage contract[27]. On the other hand, a general clause excluding liability for “misdelivery” is not sufficient in Common Law[28].

 

It is also worth noting that if the carrier releases the merchandise on the basis of a forged bill of lading, the latter is considered to be null and void and the delivery is also deemed to have been made without bill of lading[29]. In Common Law countries, the carrier remains liable in all circumstances for delivery against the surrender of a false bill of lading. According to English judges, the carrier is, in fact, expected to recognise his own bills of lading and ensure that these cannot easily be falsified[30]. French courts, however, appear to be more flexible in this respect stating that if the false bill of lading is practically identical to the original and the difference is very small, the carrier can be released from all liability[31].

 

*****

 

In practice it happens that the goods arrive at destination before the bill of lading. This frequent situation can be explained by the fact that generally, despite progress in the postal services, the bill of lading does not travel as quickly as the goods, especially in the case of travel over short distances. Also, the banks often need time to issue the letter of credit on which the bill of lading is based. [32]

 

The carrier, nonetheless, often finds himself forced to deliver the goods due to commercial pressure from the consignee, the perishable nature of the goods, parking costs or quayside areas full at the port. In the latter case, if the goods remain on board, the ship is blocked for a more or less long period.[33]

 

Thus the carrier finds himself in a difficult situation. If he delivers, he runs the risk of the lawful holder of the bill of lading taking action against him. In practice several instruments have been developed to solve this problem, in particular that of the letter of indemnity.

 

II) THE LETTER OF INDEMNITY:A SOLUTION FOR DELIVERY WITHOUT BILL OF LADING

We have seen that it frequently happens in practice that the consignee is not in possession of the bill of lading when the goods are delivered. To avoid the cargo being blocked, the carrier often accepts – but is not bound to do so[34] – to hand over the goods to the consignee in return for the surrender of a letter of indemnity.[35]

 

Nevertheless, by issuing this letter, the carrier violates the contract of carriage. However, this behaviour, in breach of the law, is unanimously accepted in practice. Furthermore, the validity of the letter of indemnity is recognized both by the courts[36] and legal writers.[37] Even the P&I Clubs provide their members with models of letters of indemnity to be used in the case of delivery without bill of lading[38].

 

The letter of indemnity constitutes an independent undertaking of the carriage contract[39]. The signatory undertakes, generally irrevocably and upon first request, to indemnify the carrier for all consequences of the delivery without a bill of lading[40]. The scope of this promise is very wide since it covers not only the refund of the value of the goods but also any damage suffered by the real holder of the bill of lading. As a general rule, the amount and the duration of a letter of indemnity are unlimited[41].

 

In addition to this undertaking, the recipient of the goods is also bound to provide the carrier with the bill of lading as soon as possible[42]. In fact, despite the letter of indemnity, the carrier’s obligations remain unchanged[43].

As a general rule, the letter of indemnity will be countersigned by a bank that guarantees the signatory. Whether the bank is jointly and severally liable with the signatory or subsidiarily liable will depend on the circumstances and the content of the contract.[44]

 

It results from the foregoing that the signatory makes an extremely heavy commitment, especially if he is not the recipient of the goods but only his agent (for instance the forwarding agent). In fact, in such a case he often is no longer in possession of the goods and, despite his right to take action against the consignee, he has no guarantee of success if the latter is insolvent. Great care must therefore be taken when drafting a letter of indemnity.[45]

 

The letter of indemnity is also a dangerous instrument since it is dependent on the signatory’s financial soundness. It is also costly for the latter insofar as it requires substantial funds to be frozen for an indefinite period.[46]

 

III) OTHER SUBSTITUTES FOR A BILL OF LADING

 

A) The seaway bill

We have seen that the letter of indemnity provides a solution, to some extent, to the problem of delivery without a bill of lading. This instrument, developed by customary use, can nonetheless be criticized insofar as it is uncertain and contrary to the law[47]. When it is not essential for the persons entitled to the cargo that the document should be a title to the goods, the parties can choose another type of carriage document: the sea waybill[48].

 

Recently created (1977), the seaway bill constitutes an interesting alternative to the bill of lading. Whilst resembling it in form, it differs by its functions. Admittedly, it has two characteristics identical to that of a bill of lading – it is a receipt for goods and evidence of the carriage contract – but it is not a title to the goods and is not a negotiable document.[49]

 

Just as for the bill of lading, it is for the carrier to issue the document that, as a general rule, contains the same information. The consignee’s name and the shipper’s name must, however, be expressly indicated. When the cargo arrives, the consignee only needs to provide proof of his identity to obtain delivery of the goods – no need for him to produce the document. Thus, by its non-negotiable nature, the seaway bill provides an efficient solution to the problem of deliveries without bills of lading. The recipient of the goods is no longer burdened with the formalities inherent to the use of the bill of lading.[50]

 

It should be noted that today uniform rules adopted by the Comité Maritime International (CMI) apply to the seaway bill[51].

 

As a general rule, the seaway bill will be used more particularly in situations where the issue of a bill of lading is not necessary, for instance in transactions where there is no sale associated with a carriage contract (removal of personal belongings, shipment between two companies part of the same group, etc.) or when the vendor and buyer know each other sufficiently well to waive the issue of a negotiable instrument[52].

 

On the other hand, although the seaway bill may be used in the issuance of a letter of credit, it does not offer the possibility of obtaining the bank as pledgee of the goods[53].

 

Thus, whilst the seaway bill is an alternative to the bill of lading, it does not completely replace it. Admittedly, the seaway bill reduces the burden and complexity of the bill of lading but it is not suitable when the goods are to be resold during carriage. The seaway bill must therefore co-exist with the bill of lading and not replace it.[54]

 

Finally, it is worth noting that the seaway bill also exists in electronic form thus eliminating any lateness due to the postal service. This e-document is called a Data Freight Receipt (DFR) and is widely used today.[55]

 

B) Electronic bill of lading

Over the last decades, players in the sea carriage sector have sought to reproduce electronically the functions of traditional paper bills of lading. The aims of this initiative are clearly to solve the problem of goods delivered without title and to limit the costs linked to the use of paper and the risks of frauds resulting from bills of lading in a hard copy form.[56]

 

Whilst the fact of making a bill of lading paperless does not, in principle, pose a legal problem in respect to the latter’s first two functions – receipt of goods and evidence of conclusion of a carriage contract – the same does not apply to its function as document of title[57]. Indeed, can an electronic bill of lading be considered to be negotiable? As State legislation stands at present, we are forced to say no. In fact, many legal systems link the rights of ownership of goods to the possession of a paper document. Consequently, only a modification to legislation would allow an electronic bill of lading to convey title of ownership.[58]

 

Admittedly, the 1996 Model Law on Electronic Commerce of the United Nations Commission on International Trade (UNCITRAL), in articles 16 and 17, gives functional equivalence to carriage documents whether these are in a paper or paperless form and offers States the possibility of harmonizing their legislation on the transfer of e-documents[59]. However, these provisions have not, to date, met with the success that was hoped for by national law makers. Therefore, today there is no uniform, global legal framework for recognizing the electronic bill of lading as a negotiable instrument.[60]

 

It follows from the foregoing that only contractual mechanisms without “legal guarantee” can be contemplated. Initiatives in this regard have been taken with the aim of developing systems allowing secure transfer of rights to goods by electronic messages, so-called EDI (Electronic Data Interchange). The first attempts, in particular the SeaDocs Registry and the Cargo Key Receipt were failures[61].

 

In 1990 the CMI adopted rules on electronic bills of lading. It is, however, a purely contractual system, the rules lacking force of law (rule 1).

 

The main characteristic of these rules resides in the fact that the carrier sends the shipper an e-document containing information similar to that of a paper bill of lading (rule 4 a)). The endorsement of this paperless bill of lading is by a secret code or “confidential key”, which is specific to each holder and non-transferable (rule 8 a). Only the key holder can demand the delivery of the goods, designate the consignee, transfer the rights to the goods and give instructions to the carrier (rule 7 a)). The holder is thus in exactly the same position as if he were in possession of an original bill of lading.[62]

 

However, the CMI rules, although appealing, have not been widely supported by professionals in the branch. They have been criticized for both the lack of a specific provision on the transmission of the rights of the carriage contract to the consignee and the lack of any duly specified security system. Moreover, doubts have been expressed concerning rule 7 d), which specifies that an e-transfer has “the same effects as the transfer of such rights under a paper bill of lading”. As pointed out above, it indeed appears doubtful that the parties would be able to contract out of the binding legal rules of certain States prohibiting the endorsement of titles by exchange of electronic data.[63]

 

*****

 

In 1999, a new pilot program for an electronic bill of lading was launched, the BOLERO (Bill of Lading for Europe) system. The latter, based on CMI Rules, allows its users (carriage companies, banks, forwarding agents, exporters, etc.) to communicate between each other via a central register using standard EDI messages. In other words, it is a secure platform for the exchange of e-documents. The BOLERO electronic bills of lading resemble the traditional bills in form and have exactly the same functions (receipt of goods, evidence of carriage contract and document of title). The cornerstone of the system is the register of titles: the latter establishes the detailed content of the bills and allows each holder, thanks to a secure system, to transfer the rights to the goods to another user.[64]

 

Although BOLERO offers numerous advantages by speeding up transactions and reproducing the traditional functions of the paper bill of lading, it is a closed system that only subscribers can use. Moreover, it has only been adopted by a limited number of people and is only operational if all the parties to the carriage contract are members of the association. Finally, its sophisticated technology prevents it from being easily used in third world countries.[65]

 

CONCLUSION

The bill of lading is the key element in the sea carriage contract. However, with the increased pace of trade, it is considered today to be an unwieldy instrument, unsuitable for certain situations. In particular, it appears difficult to respect the presentation rule, which stipulates that the carrier must only deliver the cargo when the bill of lading is handed over. Admittedly, in practice various solutions have been found to circumvent this problem, such as the issue of a letter of indemnity or a seaway bill. These mechanisms have, however, shown their limits and cannot fully replace the bill of lading.

 

No doubt the solution resides in the implementation of a true electronic bill of lading. However, this presents many problems. In particular, at the present time there is no harmonization or agreement on a secure EDI system and only limited contractual mechanisms are available (e.g. BOLERO). Moreover, the negotiability of the bill of lading is a non-negligible obstacle to electronic substitutes. Indeed, many countries do not recognize the electronic bill of lading as a negotiable document of title.

 

Whilst some states, such as South Korea recently, have incorporated the electronic bill of lading into their domestic legislation, many states, such as Singapore and the United Kingdom, have not yet taken this step.[66] Consequently, we still have a long way to go.

 

The entry into force of the Rotterdam Rules that contain specific provisions concerning the electronic bill of lading (chapter 3) will perhaps give new impetus to this.

 

BIBLIOGRAPHY

• ADYEL Karim, L’importance des fonctions du connaissement dans les opérations de commerce international par mer :

http://www.legavox.fr/blog/docteur-karim-adyel/importance-fonctions-connaissement-dans-operations-3272.htm.

• AIKENS Richard, LORD Richard, BOOLS Michael, Bills of lading, Informa 2006, London.

 

• BONASSIES Pierre, SCAPEL Christian, Droit maritime, 2^ème édition, L.G.D.J 2010.

 

• CHAN Felix W. H., NG Jimmy J. M., WONG Bobby K. Y., Shipping and logistics law (Principles and Practice in Hong Kong), Hong Kong University Press 2002.

 

• COMMISSION DES NATIONS UNIES POUR LE DROIT COMMERCIAL INTERNATIONAL, Annuaire, Volume XXXII : 2001, Publication des Nations Unies 2001.

 

• CONFERENCE DES NATIONS UNIES SUR LE DEVELOPPEMENT, Rapport du 31 juillet 2001 sur le commerce électronique et les services de transports internationaux :

http://www.unctad.org/fr/docs/c3em12d2.fr.pdf.

• DAVIES Martin, DICKEY Anthony, Shipping Law, Third edition, Lawbook 2004.

 

• DEBATTISTA Charles, Bills of Lading in Export Trade, Tottel 2009.

 

• FAYE Ngagne, La livraison sans connaissement, 2008 :

http://www.cdmt.droit.univ-cezanne.fr/fileadmin/CDMT/Documents/Memoires/FAYE_NEW_Memoire_-_La_livraison_sans_connaissement.pdf.

• GIRVIN Stephen, Carriage of goods by sea, Second edition, Oxford 2011.

 

• HILL Christopher, Maritime Law, sixth edition, LLP 2003, London, Hong Kong.

 

• MAJSTOROVIC Solenne, La livraison sans connaissement :

http://www.univ-lehavre.fr/enseign/fai/guenole/majstororovic.pdf.

• WILSON John F, Carriage of goods by sea, seventh edition, Pearson 2010.

 

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By Lorenzo CROCE, member of the Geneva Bar, LL.M.

Introduction

The archipelago of Tuvalu, a small country in the South Pacific whose average altitude is no more than 3 meters, risks being definitively wiped off the map in the next decades due to global warming[1].

 

According to the latest estimates by experts, the rise in temperatures will generate a rise in sea level of more than 1 meter by the year 2100[2]. Experts at NASA are even talking of 2.25 meters![3]

 

While the Kiribati Islands are seriously contemplating moving their inhabitants on to floating islands constructed on the model of giant oil platforms[4], numerous legal issues are raised. Among them that of determining the consequences of rising ocean levels on baselines and, more generally, on the delimitation of maritime zones.

 

This problem may appear insignificant compared to the humanitarian challenge but it is of undeniable importance since it brings in its wake a whole series of geopolitical and economic consequences, especially in the current context where natural resources are becoming increasingly rare.

 

In this article our intention is to present the implications of global warming for maritime boundaries and attempt to outline solutions to remedy this problem that, surprisingly enough, has been rather neglected by legal commentators. It should already be mentioned that at present there is no international convention that expressly regulates the issue or any consensus among the states.

 

This presentation requires a brief preliminary summary of the different types of maritime zones and their baselines.

 

I) Main concepts

According to the United Nations Convention of 10 December 1982 on the law of the sea (hereinafter “UNCLOS”), maritime zones can be divided mainly into six areas:

 

– The internal waters: these are located on the landward side of the baselines and comprise the maritime waters adjacent to the land territory of the coastal state (article 8 § 1 UNCLOS). These waters are subject to the full sovereignty of the coastal State[5].

 

– The territorial sea, with a breadth of 12 nautical miles from the baseline, is the zone of sea adjacent to the internal waters (articles 2 § 1 and 3 UNCLOS). It represents the seaward limit of the coastal state’s sovereignty and concerns its airspace, bed and subsoil (article 2 § 2 UNCLOS). Foreign ships only have a right of innocent passage (articles 17 et seq. UNCLOS) and are bound to respect the national legislation of the coastal state (regulation of maritime traffic, fiscal, immigration and environmental protection laws and regulations, marine scientific research, etc.) (article 21 § 1 UNCLOS).

 

– The contiguous zone is a belt of sea contiguous to the territorial sea stretching for 24 nautical miles from the baseline. Within this zone, the coastal state does not exercise its full sovereignty but has, notably, policing powers in relation to its customs, fiscal, sanitary and immigration laws and regulations (article 33 UNCLOS).

 

– The exclusive economic zone (hereinafter “EEZ”) adjacent to the territorial sea, is no more than 200 nautical miles wide (article 57 UNCLOS). The coastal state has sovereign rights on this zone in respect to environmental protection, scientific research, exploration and use of natural resources (article 56 § UNCLOS). The other states have the freedom to overfly, navigate, lay cables and pipelines on it (article 58 § 1 UNCLOS).

 

– The continental shelf constitutes the submerged prolongation of the coastal state’s land territory and stretches for 200 nautical miles from the baselines when the outer edge of the continental margin is less, or up to 350 nautical miles (or 100 nautical miles from the 2500 metre isobath) if it is wider (article 76 UNCLOS). The coastal state has sovereign rights over this area in respect to the exploration and exploitation of natural resources (article 77 § 1 UNCLOS). Other states benefit from the freedom of the high seas on the continental shelf[6].

 

– Finally, the high seas, which are not subject to the sovereignty of any state and which are located beyond the external limit of the EEZ, that is to say at a maximum of 200 nautical miles from the baselines (article 86 UNCLOS).

It emerges from the above that it is the baselines that serve to delimit the maritime zones[7].

 

Two situations need to be considered when drawing these baselines:

 

Firstly, when the coast is relatively straight, the baselines are drawn from the low-water mark, that is to say the line to which the water at the lowest tides of the year recede, as marked on large-scale charts officially recognized by the coastal state (article 5 UNCLOS). It results from this situation that the delimitations of the territorial sea and the other zones will be perfectly parallel to the coast[8].

 

Secondly, when the coast is too irregular to allow relatively straight baselines to be drawn (for instance fjords) or that there is a fringe of islands along the coast (inhabitable or not), international law authorizes the state to draw straight baselines based on the outermost points of the coast, such as caps or coastal islands (article 7 § 1 UNCLOS). As a result, there is a widening of the territorial sea and the internal waters[9].

 

The straight baselines must not, however, depart to any appreciable extent from the general direction of the coast and the sea area located within them must be sufficiently closely linked to the land domain to be subject to the regime of internal waters (article 7 § 3 UNCLOS).

 

It should be noted that if two states have adjacent or opposite coasts, the principle of equidistance from the baselines of each is applied when delimiting the respective territorial seas and contiguous zones, unless the states come to an agreement otherwise. Historical titles or other special circumstances can also be taken into account (article 15 UNCLOS).[10] As regards the determination of the EEZ and continental shelf, the principle of an equitable solution is applied (article 74 §1 UNCLOS).

 

Archipelago states (for instance, Indonesia, the Maldives, the Philippines, etc.) may, in certain conditions, draw so-called archipelagic straight lines linking the outermost points of the outermost islands and drying reefs of the archipelago (article 47 §1 UNCLOS). Within these lines, a special system applies with a specific maritime zone referred to as « archipelagic waters » (article 74 § 1 UNCLOS).

 

The low-tide elevations are not islands or rocks according to the definition of article 121 § 3 UNCLOS. They are defined as natural elevations of land surrounded by sea, alternatively uncovered and submerged by the tides (article 13 § 1 UNCLOS). The Convention specifies that straight baselines may be drawn to and from low-tide elevations if lighthouses or similar permanently uncovered installations have been constructed on them or that there has been international recognition of the drawing of such lines (article 7 § 4 UNCLOS a contrario).

 

Also, when they are located, partly or fully, at a distance from the continent or an island not exceeding the breadth of the territorial sea (12 nautical miles), the low-water mark on these elevations can be taken as the baseline for measuring the breadth of the territorial sea. Thereby, the extent of the territorial sea (only) can be enlarged significantly by the presence of low-tide elevations, constructed or otherwise, within this[11]. On the other hand, when a low-tide elevation is wholly situated at a distance exceeding the breadth of the territorial sea from the mainland or an island, it has no territorial sea of its own. (article 13 § 2 UNCLOS).

 

The UNCLOS Convention defines an island “as a naturally formed area of land, surrounded by water, which is above water at high tide” (article 121 § 1). The islands belonging to a state, whether they are isolated or in an archipelago, within the territorial sea or otherwise, have the possibility of drawing their own baselines. This implies that they can have their internal waters and their territorial sea (article 121 § 2 UNCLOS). On the other hand, only the rocks that can sustain human habitation or economic life of their own have the right to claim an exclusive zone or continental shelf (article 121 § 3 UNCLOS a contrario).

 

It should be noted that in the case of atolls or islands with fringing reefs, the baseline from which the width of the territorial sea is measured is the seaward low-water line of the reef (article 6 UNCLOS).

 

Finally, we note that an artificial island cannot, under any circumstances, claim a territorial sea, an exclusive economic zone or a continental shelf of its own (article 60 § 8 UNCLOS).

 

II) Consequences of the rising sea

Due to global warming, the face of the earth, as we know it today, will be substantially modified in the future.

 

Indeed, the rise in sea level due to the dilation of the oceans’ water under the effect of heat and the melting of land ice will generate an acceleration of coastline erosion and flooding of extensive low-lying coastal areas[12]. Moreover, islands will disappear and others will become uninhabitable, forcing exile on numerous populations.

 

Of course, these effects will not be the same throughout the globe and some regions will be more affected than others, such as South-East Asia due, in particular, to the presence of numerous deltas (Mekong delta, Chao Praya delta), low-lying coastal areas (the north of the Java and Sumatra coasts and the south coasts of Kalimantan will be the most affected) and low-altitude islands (Tuvalu, Kiribati, Marshall Islands, Tokelau, etc.).[13]

 

These considerable changes will have a significant impact on the delimitation of the maritime zones.

 

In fact, as we have seen, maritime borders are established on the basis of baselines which are themselves drawn on the low-water line. Thus, there is no doubt that a rise in sea level will lead to a modification to the contour of the baselines. Consequently, the maritime zones will no longer necessarily cover the same maritime areas as before.[14]

 

Likewise, the fact that low-tide elevations will be permanently submerged by the waters will lead to a significant reduction in the extent of the territorial sea and the internal waters of a coastal state[15].

 

Also, the total disappearance of an island or the loss of its possibility of sustaining human habitation or its own economic life – as this is defined by article 121 § 3 UNCLOS – will deprive it of the right to claim respectively a territorial sea or an EEZ[16]. The continental shelf should not, however, be concerned (see article 76 § 9 UNCLOS)[17].

 

Finally, as regards the atolls and islands bordered by fringing reefs, the extent of the territorial sea and internal waters of the latter will be reduced by the submergence of the reefs[18].

 

It is impossible to explain in detail here all the economic and geopolitical consequences that this will imply. We can, however, imagine the following: the loss of part of the sovereignty of a coastal state resulting from a reduction in the extent of its internal or archipelagic waters or territorial sea; the modification or disappearance of an EEZ generating a loss of exploitation of the coastal state’s natural resources (fish, minerals, oil, etc.); or even the modification of the rules governing passage through different maritime zones (for instance when a zone part of the territorial sea where the right of innocent passage applies becomes part of the EEZ where freedom of navigation and overflight applies). [19]

 

It goes without saying that these modifications will lead to political tensions, in particular as regards the freedom of navigation and access to maritime resources[20]. As an example, we can easily imagine the political consequences of a rise in the level of the sea on the passage of warships in the China Sea.

 

III) A lacuna in the law

How does the UNCLOS take global warming into account?

 

There is a legal vacuum here. In fact, UNCLOS contains practically no provision on the consequences of the sea level rise on the baselines, islands and low-tide elevations. In particular, the Convention leaves open the fundamental question of whether the maritime zones are shifting. [21]

 

Most legal commentators however reply in the affirmative[22]. They base their reasoning on two provisions of the Convention:

 

According to article 76 § 9 UNCLOS, “The coastal State shall deposit with the Secretary-General of the United Nations charts and relevant information, including geodesic data, permanently describing the outer limits of its continental shelf.” [Our highlighting]

 

Moreover, article 7 § 2 UNCLOS stipulates that “Where because of the presence of a delta and other natural conditions the coastline is highly unstable, the appropriate points may be selected along the furthest seaward extent of the low-water line and, notwithstanding subsequent regression of the low-water line, the straight baselines shall remain effective until changed by the coastal State in compliance with this Convention.” [Our highlighting]

 

Scholars, based on an a contrario interpretation of these two provisions, consider that insofar as the Convention only permanently fixes the outer limits of the continental shelf and the baselines of deltas, the borders of the other maritime zones (the territorial sea, the contiguous zone and the EEZ) can be shifted[23].

 

It results from the above that if baselines shift, these maritime zones will also shift. The same applies if an island or a low-tide elevation disappears following the rise in the level of the waters.[24]

 

However, this position appears to us to be open to criticism:

 

In fact, in addition to the costs that the coastal states must bear to adjust and correct their baselines, there is veritable legal insecurity in systematically modifying maritime borders[25]. The rise in the ocean level is, moreover, not a one-off event but, on the contrary, a long process. Ships will therefore have difficulty in determining exactly in which zone they are and to which rights they are subject (fishing rights, right of innocent passage, etc.).

 

Moreover, there is no doubt that this will lead to conflicts between countries concerning the exploitation of natural resources, especially between those with adjacent or opposite coasts[26]. The states at the “losing end” will not hesitate to spend billions to attempt to maintain the statu quo and defend by all means their baselines, islands and rocks[27]. In this connection, we can cite the examples of Indonesia that is planning to construct giant dikes around twelve islands in order to protect its territorial sea[28] or the case of Okinotorishima Island where the Japanese are spending colossal sums to prevent its erosion and thus claim an EEZ[29].

 

However, to our knowledge no court has, to date, specifically ruled on this issue at international level.

 

Nevertheless, it appears obvious to us that if such a case is referred before the International Court of Justice, it will apply the principle of equity as it has always done and did again recently in the case of Nicaragua v/Honduras (2007) where it used the method of drawing a bisecting line (instead of the equidistance line) due, notably, to the changing nature of the coast. Thus, in the field of maritime delimitation, it is indeed the search for an equitable solution that takes precedence and there is no reason for the courts to modify this approach in the future.[30]

 

Finally, we can legitimately wonder, in view of the legal incertitude that currently reigns and the costs that would be involved, whether a state really has an interest in modifying its baselines. We can be skeptical on this score. Moreover, in the vast majority of cases it would result in a reduction in the size of the coastal state’s maritime zones and not only in a simple shift.

 

We can, however, imagine situations where a country, other than the one directly concerned, would have such an interest. We can, in particular, think of cases where a country (the United States and China, in particular) would demand total freedom to navigate in a particular zone or that a state would see its territorial sea or EEZ increase due to the receding of the flat coast of another adjacent or opposite state.[31]

 

Concerning this last point, we note that although today many coastal countries have signed, sometimes but not always following decisions of the International Court of Justice, bilateral or multilateral agreements delimiting their respective maritime borders, it is doubtful that these will resist future climatic changes. Admittedly, article 62 § 2 let. a) of the Vienna Convention on the Law of Treaties, which specifies that “a fundamental change of circumstances may not be invoked as a ground for terminating or withdrawing from a treaty if the treaty establishes a boundary” would lead us to consider that a line delimiting maritime zones between countries signatories of conventions is definitive, but there is no certainty that this rule will persist in the special context of rising sea levels, in particular, in the event where the disappearance of whole islands or low-tide elevations is involved.[32]

 

We are consequently of the opinion that current treaties are based on fragile principles and that legal uncertainty contributes to maintaining tensions between states. Admittedly, we could always count on the mechanisms of the UNCLOS for settling disputes (part XV and appendices V to VIII UNCLOS), but will this be sufficient in this specific context?

 

IV) What solutions?

In view of the above, would it not be wiser to delimit once and for all the maritime zones?[33]

 

In this way the states could focus their efforts on the protection of the marine environment and humanitarian problems, in particular those of climatic refugees. In addition, this solution would offer the advantage of reducing the costs of adjusting maritime borders and avoiding legal insecurity. Finally, it would allow the current allocation of ocean resources to be retained and would be fairer and more equitable for the populations insofar all states will not be equally affected by the climatic changes.[34]

 

This solution, although appealing, raises a certain number of problems.

 

Firstly, from the legal standpoint, there is not, at the present time, any legal basis at international level for freezing the limits of maritime zones.

 

We could, admittedly, broadly interpret article 7 § 2 UNCLOS but the “travaux préparatoires” appear to rather indicate that this provision was intended to apply only to deltas[35].

 

Undoubtedly a better solution would consist in amending UNCLOS. However, this procedure would require the convening of a conference accepted by at least half the states party to the Convention and an agreement by consensus (article 312 UNCLOS). Moreover, certain states, of which the United States, have still not ratified it.

 

Alternatively, it would be possible to develop a new international custom. It would, nonetheless, be subject to the conditions of the practice of relevant states and the opinio juris, but once established it would have the merit of settling the issue definitively and uniformly.[36]

 

Another hypothesis would consist in allowing the states to claim historical rights on the relevant maritime zones. This so-called “historical waters” theory allows a state to declare that a maritime area is part of its internal waters if it has exercised its sovereignty over it clearly, effectively and without interruption during a considerable period of time with the consent of the international community[37]. Thus, in the case at bar, it would mean extending this rule to the other maritime zones (notably the territorial sea and the EEZ) in order to ensure for the States the persistence of their rights over these marine areas. This solution has, however, been widely criticized by legal commentators notably due to the fact that it is intended to apply only exceptionally in special situations and, unlike a new international custom, risks leading to unequal treatment if used on a global scale.[38]

 

Finally, a last possibility would be the conclusion of bilateral or multilateral treaties between the coastal states expressly providing for the immutability of maritime zones[39].

 

From a more practical point of view, the freezing of maritime zones also poses difficulties:

 

Firstly, many states have not yet published and filed with the Secretary-General of the United Nations, the maps of their maritime zones showing the straight baselines, the archipelagic baselines and the outer limits of the territorial sea, the exclusive economic zone and the continental shelf (articles 16 § 2, 47 § 9, 75 § 2 and 84 § 2 UNCLOS) (On 13 November 2012 only 56 states signatories of the Convention UNCLOS had done this.[40]) Also developing countries often do not have the enough resources for conducting the surveys and necessary scientific studies.[41]

 

Finally, there are today numerous disputes between certain countries concerning the current delimitation of their maritime borders. For instance we can cite the case of the Spratly Islands that are claimed by China, Taiwan, Vietnam, Malaysia, Brunei and the Philippines[42] or the Sino-Japanese conflict in the South China Sea[43]. These are all problems that must be solved before a consensus can be found on the freezing of maritime spaces.

 

Conclusion

We have seen that the rise in sea level, due to global warming, will generate major frictions between states concerning the delimitation of maritime zones. More than half a century of negotiations on the law of the sea is thus in jeopardy today. Undoubtedly, the best alternative would be to retain current maritime boundaries. But for this, changes need to be made, notably on the judicial front. Indeed, only dialogue between the states can allow a common position to be adopted. However, considering the recent escalade in tensions between states concerning the exploitation of marine resources (for instance in relation to the Arctic or the China Sea), it is doubtful that countries are ready to take the step. However, it is urgent ….

 

 

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