Dmitry Ryzhov,

1. Introduction

Prior to the reform of the Freight Forwarding Act, the status of freight forwarder functioned as a general legal status available to participants in the logistics market. This follows from Article 801 of the Civil Code of the Russian Federation, which treats freight forwarding as encompassing a non-exhaustive range of services for organising carriage, effecting settlements, or storing goods, broad enough to allow almost any logistics activity to be characterised as freight forwarding.

The commercial appeal of that status was underpinned by advantages such as limited liability for loss of cargo, a shorter limitation period for bringing claims,¹and the ability to sidestep the usual paperwork rules, issuing, say, an ordinary transport document instead of a forwarder”s certificate of receipt. ²

Reform of the Freight Forwarding Act has resulted in the forwarder being subject to far broader obligations.

Firstly, freight forwarding activity has adopted a notification-based approach. It may now be carried on only where information about the person providing such services has been entered in the register of notifications of freight forwarding activity.

Secondly, the freight forwarder now bears a duty to collect and store information about the carriage performed, to establish the properties of the goods, and to run the software and hardware needed to communicate with the authorised unit of the Federal Security Service (FSB) of the Russian Federation. ³

Failure to comply with the new requirements entails substantial turnover-based fines and the administrative suspension of operations. ⁴ The status of freight forwarder has, in consequence, ceased to have general application and lost much of its commercial appeal. For entities accepting cargo for carriage, compliance with the new rules is now the only way to continue operating. As for entities providing services not directly connected with carriage (settlements, concluding transactions on the client’s behalf, storage, and so on), the viable alternative has become to bring their status into line with the services they actually provide.

In light of the reform, the question of correctly characterising one’s activity has become especially pressing for the representatives of sea carriers. Depending on the business model chosen, they may deal with clients either as a freight forwarder or as an agent of the sea carrier (a shipping agent).

In the first case, the representative of the shipping line concludes a freight forwarding agreement with clients, under which it accepts the cargo and delivers it to the carrier under a contract of carriage by sea. On the one hand, this business model confers on the freight forwarder the status of contractual carrier and, consequently, liability for the goods accepted. On the other, it allows a wide range of services to be provided and, where necessary, third parties to be engaged in the carriage.

In the second case, the sea carrier’s representative acts as an agent, and the carriage chain is reduced to a single contract of carriage by sea concluded with the client by the agent, either in its own name or in the name of the carrier. Under this business model, the agent is not treated as a party to the contract of carriage and does not accept the cargo for carriage, and is therefore not liable for any loss of or damage to the cargo, unless its activity is reclassified as that of a freight forwarder (see section 3).

The sea carrier’s representative cannot resolve its choice of one business model or another without also considering insurance, because the liability of the freight forwarder and that of the shipping agent are covered by different insurance products, each with its own subject matter, terms and conditions. Accordingly, the selection of appropriate insurance requires the services actually provided to be properly characterised and assessed against the terms of the relevant insurance products.

This article distinguishes the statuses of agent and freight forwarder as applied to carriage by sea, compares the liability cover each can obtain, and assesses the risk of a court reclassifying an agent as a freight forwarder. As we shall see, the risk of reclassification is slight for anyone who operates purely as an agent. Risks arise only where the agent in fact provides services that go beyond representing the carrier’s interests.

2. Distinguishing Shipping Agency from Freight Forwarding

Before turning to the differentiation between the relevant insurance products and the assessment of their terms, it is necessary first to identify how the legal position and supply-chain function of a sea carrier’s representative differ according to whether it acts as a shipping agent or as a freight forwarder.

The key similarity between shipping agents and freight forwarders is that both may assume an open-ended range of obligations.

Depending on the terms of the agreement, a freight forwarder may act either as an actual or contracting carrier, or as a person providing a limited range of services unrelated to the acceptance of cargo for carriage.

The legislator grants the parties to a shipping agency agreement even greater freedom to regulate their relations, since the whole of Chapter 13 of the Merchant Shipping Code of the Russian Federation is discretionary in nature, a feature rarely encountered in Russian law. ⁵ It is therefore appropriate to refer to the standard-form agreements used in the industry when identifying the generally accepted rights and obligations of a shipping agent.

Thus, BIMCO recommends that shipowners use the Standard Liner Agency Agreement (1993) and the General Agency Agreement (2017), adopted by the Federation of National Associations of Ship Brokers and Agents (FONASBA). ⁶

The Standard Liner Agency Agreement and the General Agency Agreement provide that the agent acts in the name of the shipowner and performs, at the shipowner’s expense and for its benefit, a wide range of services within a defined territory, including marketing and commercial services, port agency, the canvassing of bookings, the reservation of space on the vessel, the handling of claims, and so on.

It follows from the terms of these standard-form agreements that the range of a shipping agent’s duties is considerably broader than that of a freight forwarder, yet does not extend to the organisation of carriage itself.

This reflects the purpose of a shipping agency agreement, which V. A. Vaypan defines as the representation of the principal’s interests before third parties, whereas the representative obligation in freight forwarding is ancillary in character. ⁷ By contrast, the purpose of the freight forwarding agreement is to provide services related to the carriage of cargo. ⁸

Although neither shipping agents nor freight forwarders operate under an exhaustive list of obligations, the purposes of their activities differ considerably. A freight forwarder provides services connected with carriage and may even act as the carrier. A shipping agent, by contrast, acts as the carrier”s representative and does not accept goods for carriage, since that would be inconsistent with its representative role.

The exception is where the agent exceeds its authority and provides services that a court may classify as those of a freight forwarder. The risk of a court reclassifying a shipping agent as a freight forwarder is examined in section 3 of this article.

Russian case law also reflects the view that, unlike a freight forwarder, a representative rarely provides the relevant services itself; its primary role is to bring in clients. ⁹

It therefore makes perfect sense that clause 18 of the General Agency Agreement distinguishes between insurance of the agent’s liability and insurance of the principal’ s liability, imposing on the agent an obligation to insure its professional liability for negligent acts or defaults in the performance of its obligations under the agreement, as well as its public liability for harm caused to third parties. The principal, for its part, is required to take out shipowners’ liability insurance (P&I).

3. Liability Insurance for Shipping Agents and Freight Forwarders

Under Russian insurance law, a shipping agent cannot directly insure its contractual liability, owing to the prohibition in Article 932 (1) of the Civil Code. Under that provision, insurance of liability for breach of contract is permitted only in cases expressly provided for by law. Agency activity is not among them, so shipping agents are obliged to build their insurance protection through professional indemnity insurance (Article 931 of the Civil Code).

Yu. B. Fogelson regards the distinction between insurance of liability for causing harm and insurance of contractual liability as one of the gravest problems of Russian insurance law, arising from the fact that contractual liability insurance is unavailable to a wide range of professionals. ¹⁰He notes that professional indemnity insurance should for the most part be governed by Article 932 of the Civil Code (insurance of contractual liability), although in practice Article 929 (property insurance) or Article 931 (insurance of liability for causing harm) is often used in order to avoid the restriction in Article 932 (1).¹¹ Both insurance products are thus, in essence, directed at insuring contractual liability, but owing to statutory restrictions they are implemented through different types of insurance.

B esides the difference in legal characterisation, the content of the insurance products themselves also differs. To analyse them, we may turn to the Professional Indemnity Insurance Rules ¹² and the Carriers’ / Freight Forwarders’ Liability Insurance Rules¹³ of AlfaStrakhovanie JSC.

Although both products provide liability cover, the insured interests differ. Under freight forwarder»s liability insurance, the insured interest lies in the insured»s proprietary interest in being protected against liability for loss of or damage to property (cargo) arising in the performance of services under a freight forwarding and / or carriage agreement, together with interests relating to the salvage of cargo. ¹⁴

Professional indemnity insurance, by contrast, covers interests connected with liability for loss or damage caused by an unintentional professional error in the course of the insured activity. ¹⁵

The key distinction between the two products is already apparent from the description of their insured interests: whereas freight forwarder’s liability insurance is intended to offset the risks of loss of or damage to cargo, professional indemnity insurance covers the risks associated with the provision of substandard services.

This difference stands out more when one analyses how the insured events are framed. Under freight forwarder’s liability insurance, the insured event is the insured’s obligation to compensate losses resulting from loss of, destruction of or damage to cargo, provided that, depending on the scope of cover, such loss, destruction or damage is caused either by any fortuitous event (clause 4.3.1, “all risks”) or by specified fortuitous events and perils (clause 4.3.2, “named perils”). In other words, under the rules on freight forwarder”s liability insurance, the insured event occurs when an obligation to compensate losses arises. By contrast, under professional indemnity insurance, the insured event requires an unintentional professional error and a causal link between that error and the harm caused.

16 Accordingly, freight forwarder’s liability insurance is taken out against loss of or damage to cargo, whereas professional indemnity insurance is taken out against harm caused by an unintentional error.

This logic can also be traced in the exclusion of cargo-related risks from professional indemnity cover. In particular, the exclusions include liability for harm to property taken by the insured into its management or safekeeping,¹⁷ as well as liability connected with the operation of sea-going and inland-waterway vessels. ¹⁸ Taken together, these exclusions make it impossible to cover loss of cargo during carriage by sea, which is the freight forwarder’s principal risk, and thereby draw a line between the two types of insurance under consideration.

The exclusion of the risk of loss of goods from cover is also reflected in the price of the products. The premium rate for professional indemnity cover is around 0.6 per cent of the sum insured, ¹⁹whereas freight forwarder’s liability insurance is almost three times as expensive, of the order of 1.5 per cent of the sum insured. ²⁰

Freight forwarder’s liability insurance is thus directed primarily at covering the risks of loss of or damage to goods. As discussed above, a shipping agent performs representative functions and does not accept goods for carriage, and therefore the cheaper professional indemnity policy is sufficient to cover its liability.

Potential risks may arise where a shipping agent also provides freight forwarding services. Thus, Article 237 (1) of the Merchant Shipping Code includes the forwarding of goods among a shipping agent’s functions (although it has been suggested in the literature that this function was included without justification). ²¹ In such a case a court may classify the agent’s activity as that of a freight forwarder, which creates a gap in insurance cover, since a professional indemnity policy does not include liability for the goods.

4. The Risk of a Court Reclassifying a Shipping Agent as a Freight Forwarder

The problem of distinguishing the statuses of shipping agent and freight forwarder arises in disputes over holding such persons liable for harm caused to goods, or over breaches of the terms of a contract of carriage by sea.

In practice, Russian counterparties (consignors or consignees) see the bringing of a claim against the agent of a foreign shipping line (usually a Russian legal entity) as a simpler way of recovering losses, artificially attributing to the agent the status of a freight forwarder, which does not preclude situations in which agents do genuinely assume the duties of a freight forwarder.

As a general rule, when imposing liability on a freight forwarder, the court must establish the scope of the forwarder’s obligations and whether they were improperly performed. ²² Identifying the rights and obligations assumed by the parties is particularly important where liability is imposed on a freight forwarder for damage to or loss of cargo, which may arise where the freight forwarder carried out the carriage itself or issued a transport document. ²³

Two cases are instructive in this regard, both concerning the status of CMA CGM Rus LLC as shipping agent for the French container carrier CMA CGM S. A. What is particularly noteworthy is that the courts reached opposite conclusions: in the first case²⁴ the status of shipping agent was confirmed, whereas in the second the courts found the relationship that had arisen to be of a mixed character. There is in fact no contradiction here, but let us take things in turn.

In the first case, an agency agreement was concluded between a Russian company (the principal) and CMA CGM Rus LLC (the agent), under which the agent undertook to organise the carriage of cargo in accordance with the terms of the shipowner’s bill of lading.

In February and March 2022, CMA CGM S. A. cancelled its scheduled calls at the port of St. Petersburg, where the Russian company’s containers were awaiting carriage under the relevant booking, resulting in additional storage charges for the containers.

The Russian company brought a claim against CMA CGM Rus LLC seeking to recover the additional container storage charges it had incurred. In the claimant’s view, CMA CGM Rus LLC, as the official representative of the shipping line, had in fact acted as a carrier-freight forwarder and ought to have notified the claimant that the voyages could not be performed.

The courts dismissed the claim, holding that the defendant had acted solely as an agent.

In characterising the defendant’s status, the courts had regard to the following features of the relationship that had arisen between the parties. First, the list of services provided by CMA CGM Rus LLC (effecting settlements of charges in favour of the sea carrier and printing bill-of-lading forms) was consistent with agency activity. Secondly, the bills of lading had been signed by the defendant in the name of the sea carrier, and the defendant had therefore assumed no carriage obligations. Thirdly, the booking was confirmed by the carrier, while the defendant merely coordinated the release of the containers and forwarded the shipping line’s documents. ²⁵

The same approach, namely that a shipping agent cannot be held liable for the carrier’s acts, can also be seen in disputes concerning the recovery of losses for loss of or damage to cargo during carriage by sea. ²⁶

To illustrate the criteria that, in the courts’ view, indicate that an agent is carrying on freight forwarding activity, let us turn to the second case,²⁷ in which an agency agreement concluded between CMA CGM Rus LLC and a Russian party was held to be a mixed contract.

In that dispute, CMA CGM Rus LLC and a Russian party agreed on the delivery of three forty-foot containers from Ningbo, China, to Novosibirsk via Vladivostok. The carriage by sea was performed by the carrier CMA CGM S. A., while the agent engaged a chain of freight forwarders to organise the loading and unloading of the goods between the sea and rail legs.

During transhipment at the Commercial Sea Port of Vladivostok, the goods were damaged, which gave rise to a claim against the agent.

Interpreting the agreement literally, the courts held the agency agreement to be mixed in nature, since it gave the agent the right to engage third parties and made the agent responsible for their acts. Since the cargo had been damaged as a result of those third parties’ acts, the courts upheld the claimant’s claim. ²⁸

These conclusions are difficult to dispute, since the agent’s representative functions were limited to the carriage by sea and consisted in issuing the carrierмs bill of lading. The subsequent engagement of third parties was directed at organising the carriage, rather than at representing the carrier’s interests, and therefore falls within the scope of freight forwarding activity.

These cases therefore do not conflict, but rather complement one another. So long as a shipping agent acts strictly within its representative functions, as in the first case, its status is not exposed to the risk of reclassification. That risk arises only where the agent goes beyond the bounds of agency, for example by engaging third parties to organise carriage, as in the second case.

Later case law likewise adheres to the approach of strictly distinguishing agency functions from freight forwarding functions,²⁹which confirms that the courts have maintained a uniform approach to characterising the status of a shipping agent according to the services it provides.

5. Conclusions

The insurance cover of participants in the logistics market must thus correspond to the services they actually provide. Despite the open-ended list of functions of the agent and the freight forwarder, the activities of these persons pursue different purposes. The purpose of shipping agency is to represent the interests of sea carriers within a defined territory. The purpose of freight forwarding, by contrast, is to organise carriage. The functions performed by market participants must correspond to the purposes of their activity, so the services performed by a shipping agent cover various matters connected with representing the carrier’s interests (commercial and marketing services, the handling of claims, and so on) but do not include organising carriage by sea.

These differences are also expressed in the terms of insurance cover. Freight forwarder’s liability insurance is more expensive, since it is directed at settling losses connected with damage to or loss of goods, whereas agents’ liability insurance focuses only on unintentional professional errors and wholly excludes the risk of loss of or damage to goods.

At the same time, it is important to bear in mind that the actual performance of freight forwarding functions (engaging third parties, accepting goods for carriage, and so on) may be a ground for a court to reclassify agency activity as freight forwarding and to impose on the person liability for the goods carried.

When choosing an insurance product, a person should therefore be guided by the services it intends to provide in the future. In our view, it would be unwarranted for an agent to purchase the more expensive freight forwarder’s liability cover merely out of concern that a court might reclassify its activities, since current case law follows a consistent approach, determining a person’s status by reference to the services it actually provides. In light of the reform of the Freight Forwarding Act, correctly assessing the nature of one’s activity is important not only because of potential liability for losses, but also from a public-law perspective, since freight forwarders are now subject to substantial obligations relating to security and control over the cargo carried. ■

Notes