Facts

DHL Global Forwarding LLC (hereinafter – Claimant) was a freight forwarder of the cargo, large-sized tyres, under an agreement with Goodyear Russia LLC. In order to carry out transportation Claimant entered into a freight forwarding contract with ATP No. 99-SPb LLC (hereinafter – Defendant) on 16 January 2017. Defendant carried out the carriage involving a third-party carrier. In both contracts, freight forwarders assumed a guarantee of safe delivery of the cargo.

On 17 February 2020, a traffic accident occurred during the transportation. As a result, four of the six tyres transported were damaged. According to an expert opinion, these tyres were beyond repair.

Claimant paid the client, Goodyear Russia LLC, damages in full. In this regard, Claimant sued Defendant under the contract for the damages in the amount of the value of the tyres damaged and the transport costs to the place of their utilization reimbursed to the client.

Claimant’s position was that Defendant, freight forwarder, had failed to perform its obligations under the contract and shall pay damages. Defendant argued that Claimant had no losses because it did not own the cargo damaged.

Ruling of courts

The Commercial Court of Moscow found in favour of Claimant in full. The Ninth Commercial Court upheld the judgement and dismissed the appeal.

In support of its judgement, the court of the first instance referred to Art. 403 of the Civil Code of the Russian Federation (hereinafter – CC RF) on the liability of a debtor for the actions of third parties. Since Claimant had imposed the obligation to organise the carriage on Defendant and the cargo had been damaged, Claimant had to reimburse the shipper for the losses caused by that damage. The sum to be recovered is Claimant’s losses in consequence of the reimbursement of the costs to the shipper. Such losses were recoverable from Claimant’s counteragent, Defendant in the case. The court agreed to include in the damages not only the value of the cargo damaged but also the costs of their utilization. The court ruled to recover the costs of the tyres utilization as the requirement to their utilization had been based on the laws. Therefore, such costs were unavoidable and were caused by the cargo damage in the course of their forwarding by Defendant. The freight forwarder’s liability was determined under Art. 7 of the Federal Law No. 87-FZ dated 30 June 2003 “On Freight Forwarding Activities” (hereinafter – FL “On FFA”).

The Court of Appeal upheld these conclusions emphasizing that after Claimant had reimbursed the damages to its counteragent, Goodyear Russia LLC, it was entitled to recover the amounts paid from the freight forwarder carried out the relevant carriage.

Up to date, Defendant has filed a cassation appeal. In its turn, the Court issued the Ruling to suspend enforcement of the judgment due to the fact that DHL Global Forwarding LLC actually controlled by a foreign legal entity “suspended its activity in Russia” and therefore, in case the enforcement is reversed, Claimant will be unable to return the recovered amount to Defendant. At the same time, Defendant did not provide any counter securities.

Freight Forwarder’s obligation and guarantee of delivery

The nature of freight forwarding is determined by Russian law through the freight forwarder’s obligation to render or to organise rendering of agreed services connected with transportation at the expenses of the other party (cl. 1 of Art. 801 of the CC RF). The same clause contains some examples of such services, which may be provided under this contract: making in its own name or in the name of the client a contract of carriage, ensuring the shipment or receipt of the cargo and others. The above list is non-exhaustive.

Such a broad definition of the subject of the contract without its specification makes it impossible to establish the true nature of the relationship between freight forwarder and its client and to determine exhaustively the relationship which constitutes freight forwarding as an economic activity. In this regard, a freight forwarder may be a stevedore or a person who surveys a vessel before her departure and any other person whose activity is in any way connected with transportation. This situation is dangerous for law and order in the first place because the freight forwarder’s liability is limited. This, in its turn, creates a great temptation for a party of the relationship to call itself a “freight forwarder” and thereby limit its liability.

An attempt to resolve this problem was partially undertaken by the Supreme Court of the Russian Federation, which in its Ruling No. 26 dated 26 June 2018 “On Certain Issues of Application of Legislation on the Contract of Carriage of Goods, Passengers and Luggage by Road and on Freight Forwarding Contract” (hereinafter – Ruling No. 26) indicated that the qualification of the parties’ relations shall be based on the features of the contract rather than its name. Such instruction was given to determine the correlation between freight forwarding and carriage contracts. However, by virtue of cl. 47 of the Ruling of the Supreme Court No. 49 dated 25 December 2018 “On Certain Issues of Application of General Provisions of the Civil Code of the Russian Federation on Conclusion and Interpretation of a Contract”, this reasoning is applicable also to the correlation of freight forwarding and other obligations. These provisions shall be applied in order to avoid the unfair exclusion of liability by one of the parties to the binding relationship.

Therefore, not every “freight forwarder” is a freight forwarder within the meaning of the CC RF. This raises the question of the meaning of freight forwarding and its types. It is answered in cl. 25 of the Ruling No. 26 which distinguishes two types of freight forwarding: freight forwarding as a carriage under which the freight forwarder takes responsibility for delivery and simple freight forwarding under which the freight forwarder renders only the part of shipper’s functions. The main difference between these types is the scope of freight forwarders’ liability. In freight forwarding as a carriage, the freight forwarder takes responsibility for the safe delivery of cargo and is liable if it fails to do so. In the simple freight forwarding, the freight forwarder is not responsible for the safe delivery of the cargo and is liable only if the freight forwarder’s activities had actually prevented safe delivery of the goods.

There are two freight forwarders in the case under review, Claimant is a freight forwarder to the original shipper, Goodyear Russia LLC, and Defendant is a freight forwarder to Claimant. Both freight forwarders undertake to ensure the safe delivery of the cargo. Such an obligation (the guarantee of delivery of goods) is the main criterion under which the freight forwarding as carriage shall be determined. Therefore, both Claimant and Defendant were liable to their counteragents in the event of non-delivery or damage to the cargo.

Article 7 of FL “On FFA” as a rule determining the extent of freight forwarder’s liability

In view of the fact that the simple freight forwarder is not responsible for the safety of the cargo during its transportation, the following question arises: in what cases does Art. 7 of FL “On FFA” determining the extent of the freight forwarder’s liability to the client for loss, shortage or damage to the cargo apply to the freight forwarder relationship?

In answering this question, the court of the first instance referred to the Review of Judicial Practice in Disputes Arising out Carriage and Freight Forwarding Contracts (hereinafter – Review). Clause 9 of the Review established that freight forwarder is liable under Art. 7 of FL “On FFA” if it has actually performed the functions of transporting the cargo, i.e. has given a guarantee of its safe delivery. In other words, a freight forwarder is liable for the safe delivery of the cargo, if it acts as a freight forwarder as a carrier or contractual or actual carrier. The above also follows from the fact that Art. 7 of FL “On FFA” actually contains the limits of the carrier’s liability (Art. 169 of Merchant Shipping Code of the Russian Federation, cl. 7 of Art. 34 of Statute of Road Transport).

It should be noted that in the event of culpable damage the liability of the freight forward as a carrier is not limited. This conclusion is based on the general principle of no limitation of liability for culpable damage.

In other cases, the limitation of freight forwarder’s liability should be determined by analogy with the rules applicable to similar relations if the “forwarder element” is removed from them. Basically, such rules are the provisions on mandate, commission, and agency contracts, since true freight forwarding is an intermediary contract¹. Such a conclusion is also consistent with the international understanding of that obligation².

Since in the case under review both Claimant and Defendant had assumed the guarantee of safe delivery of the cargo, they were liable to their counteragents as the freight forwarders as carriers under Art. 7 of FL “On FFA”.

The extent of the freight forwarder’s liability and transportation costs

The statutory limitation of the freight forwarder’s liability under Art. 7 of FL “On FFA” is generally the actual (documented) reduction in the value of the cargo as a result of the damage thereto. Accordingly, in the event of the destruction of the cargo, the actual decrease in its value is 100%. In this case, the freight forwarder’s liability is limited to the full value of the cargo. The wording “actual value” is legally questionable. In practice, the calculation of such value is based on the market value of similar goods which necessitates the use of adjusters to confirm the losses incurred. The actual value of the damaged cargo is determined at the moment after damage to this cargo and before its repair. Otherwise, the freight forwarder’s liability would be unreasonably reduced since, after repair of the cargo, its value would in many cases be equal to or close to its original value.

At the same time, it is not always possible to establish the actual value of the damaged cargo. For example, if minor damage to the cargo makes it completely unusable, it is not clear whether the full cargo value shall be recovered or the value of its repair taking into account the difference between the price of original and repaired goods. The same reasoning applies if the shipper cannot sell damaged goods to a third party and is forced to repair them in order to fulfil its obligations to its counteragent. A separate issue arises with unique goods for which the market does not exist. Consequently, the market value of these goods cannot be ascertained. All this leads to the fact that, in practice, in many cases, the freight forwarder does not compensate the difference between the original value of the cargo and its value after damage, but the cost of repairing such cargo. It is essentially a reduction in the purchase value of this cargo since such cargo is sold at its original price, but the seller receives less profits due to the costs of repairs (e.g., Resolution of the Commercial Court of Moscow District dated 20 November 2019 in case No. A40- 7651/2018, Resolution of the Commercial Court of Moscow District dated 03 March 2016 in case No. A40-55240/2015, Ruling of Ninth Commercial Court of Appeal No. 09AP-55308/2016-GK dated 05 December 2016 in case No. A40-24662/16).

This raises the problem of determining the value of such repairs and other costs incurred by a party in the repairing or utilization of the cargo. It is not clear whether the “reduction in the actual value of the cargo” includes the costs of cargo transportation from the place of damage to the place of repair and back and the additional costs of transportation of the repaired cargo to its final destination.

In the case under review, the court answered this question by stating that not only the full value of the damaged tyres is recoverable but also the cost of their utilization. In our view, this decision seems fair since the person incurred the relevant costs as a result of the freight forwarder’s activity. The refusal to reimburse them would create a situation where the cargo was damaged but the costs of restoration of violated rights were not reimbursed. This situation contradicts to the general civil law principle of full compensation for the losses caused (Art. 15 and 393 of the CC RF).

The liability of freight forwarder’s counteragents for payment of compensation in excess of the liability limits

Related to the issues discussed above is the problem of the extent to which the freight forwarder’s liability limitations apply to its counteragents.

One position on this issue is that the freight forwarder’s limited liability extends to its counteragents. This is due to the fact that when the freight forwarder pays a contractual amount of damages are excess of the liability limitations under Art. 7 of FL “On FFA”, freight forwarder does not use all means to reduce its own losses. In other words, in the relationship between the freight forwarder and its counteragent, who provide services connected with the particular carriage, the freight forwarder facilitates an increase in the amount of its own losses. Accordingly, the liability of its counteragents shall be reduced in proportion to such a fault by the amount exceeding the liability limitations under Art. 7 of FL “On FFA” (Art. 404 of the CC RF).

This reasoning is questionable as the freight forwarder’s liability shall be determined in accordance with the obligations it fulfils. Consequently, since the limited liability under Art. 7 of FL “On FFA” applies only to the freight forwarder as a carrier, this limitation shall apply only to those counteragents who carry out the carriage. In other words, the limited liability under Art. 7 of FL “On FFA” shall apply only to the freight forwarder as a carrier, contractual or actual carrier. In other cases, freight forwarder’s counteragents do not perform the carriage and they shall not be subject to the limitations of the carrier’s liability under Art. 7 of FL “On FFA”. Otherwise, it is to the advantage of the parties to the carriage process in their relations with the shipper to create a “stray company” in the form of freight forwarder and thereby automatically limit their liability by the reduction of the actual value of the cargo.

If the freight forwarder acts as a commission agent only performed legal acts in its own name in the interest of the client, the liability of its counteragents shall be determined under the rules on the liability of the third parties in commission relations (Art. 993 of the CC RF).

The general conclusion from the above is that the limitation of the freight forwarder’s liability under Art. 7 of FL “On FFA” applies to its counteragents only to those situations when they carry out the carriage.

In the case under review, the court was correct in holding that Defendant’s liability had been limited. Defendant was the freight forwarder as a carrier and its liability was determined under Art. 7 of FL “On FFA”.

It should also be mentioned that the person liable to the client for damage to the cargo is a freight forwarder undertaking an obligation to deliver the cargo safely (cl. 27 of Ruling No. 26). Therefore, the person who had suffered damage by the carrier’s actions hired by a freight forwarder is a freight forwarder itself. The argument of the counteragents of such a freight forwarder and persons who damaged the cargo to the fact that “the damaged cargo was not the freight forwarder’s property but that of the original client” is irrelevant since it is a freight forwarder who bears the losses caused by such damage within the meaning of the Ruling No. 26.

Suspension of the enforcement of the judgement in the Court of Cassation

By virtue of cl. 1 of Art. 283 of the Commercial Procedure Code of the Russian Federation, the court of cassation is entitled, at the request of the persons involved in the case, to suspend the enforcement of the judgements passed by the commercial courts of the first and appellate instances, if the applicant justifies the impossibility or the difficulty of reversing execution or has provided the counter security.

In this case, Defendant did not provide the counter security and did not justify that the reversing execution would be difficult. Claimant is a Russian legal entity and has posted on its website that it works as usual. Against this background, the court’s logic for the suspension of the enforcement is that, as Claimant’s founder is registered in Germany, the award in favour of such Claimant shall be suspended. This decision is an example of explicit judicial involvement in politics. This is highly undesirable from the perspective of the principles of the separation of powers and independence of the judicial system. The purprose of the court is to be impartial regardless of who faces the trial. Only impartiality and independence of the court may ensure a balance in human relations.

One can only hope that, as time passes, such motives of the courts will remain only in textbooks and will disappear from the practice.

Conclusions

The judgement on the merits of the case under review represents a positive trend in judicial practice towards a correct understanding of the legal nature of freight forwarding. At the same time, this case demonstrates some ambiguity in the legislative regulation of freight forwarding activities, at least as regards the determination of the freight forwarder’s liability on the basis of “reduction of the actual value of the cargo”. Identifying of the true nature of freight forwarding and determining whether “freight forwarding” is freight forwarding in a particular case will avoid considerable abuse of rights by freight forwarders and their counteragents.

The parties of the relevant relationship should also guide the courts in the understanding of the “true” freight forwarding. The intermediary nature of the freight forwarding activity in case a freight forwarder does not assume a guarantee for the delivery of the cargo should be specified in the contracts. This would make it possible, for example, to apply the provisions on the mandatory assignment or third parties’ liability in commission relationship. Such regulation would be consistent with economic nature of true freight forwarding and lead to fair judgements, including against the freight forwarder’s counteragents who actually carry out the carriage. ■

Notes