UNIT: SHIPPING BUSINESS

TOPIC 1: BUSINESS ORGANIZATION

Meaning of business organization
Forms of business organization
Advantages and disadvantages of each form of business organization
TOPIC 2: TRADE
Meaning of trade
Purpose of trade
Meaning of national trade
Meaning of regional trade
Relationship between international trade and shipping
TOPIC 3: INTERNATIONAL SALES TRANSACTIONS
Meaning of international sales transactions
Sales contract
International commercial Trading terms
Methods of payments used in international trade
TOPIC 4: THE PRINCIPLES OF SHIPPING BUSINESS
Meaning of the principles of shipping business
Categories of principles in shipping business
TOPIC 5: PRACTITIONERS IN SHIPPING BUSINESS
Meaning of practitioners in shipping business
Roles of practitioners in shipping business
Categories of practitioners in shipping business
TOPIC 6: MARINE INSURANCE
Meaning of insurance
Functions of insurance
Benefits of insurance
Meaning of marine insurance
Historical development of marine insurance
Meaning of risks, peril and hazard
Scope of marine insurance
Nature of marine insurance contract
Applications of principles of insurance to marine insurance operations
Types of marine insurance policies/covers
Types of marine losses
Benefits of marine insurance
TOPIC 7: INTERNATIONAL ORGANIZATIONS REGULATING SHIPPING BUSINESS
Meaning of international organizations
International organizations regulating shipping business
Functions of international organizations regulating shipping business
Challenges faced by international organizations regulating shipping business
TOPIC 8: LINER AND TRAMP TRADES
Meaning of liner trades
Meaning of tramp trades
Operations in liner trades
Operations in tramp trades
TOPIC 9: MULTIMODAL TRANSPORTS
Meaning of multimodal transport
Modes of transport
Modal interfaces
Importance of multimodal transport
TOPIC 10: SHIPPING BUSINESS IN KENYA
Nature of shipping business in Kenya
Types of shipping business in Kenya
Shipping business regulation in Kenya
TOPIC 11: EMERGING ISSUES AND TRENDS

TOPIC 1: BUSINESS ORGANIZATION

Meaning of business organization
business organization, an entity formed for the purpose of carrying on commercial enterprise. Such
an organization is predicated on systems of law governing contract and exchange, property rights,
and incorporation.

Forms of business organization

What are the five forms of business organizations?
The five forms of business organizations include the following:
 Partnership

 Corporation

 Sole proprietorship

 Cooperative

 Limited liability company

Partnership
You can classify a business partnership as either general or limited. General partnerships allow both
partners to invest in a business with 100% responsibility for any business debts. They don't require a
formal agreement. In comparison, limited partnerships require owners to file paperwork with the
state and compose formal agreements that describe all of the important details of the partnership,
such as who is responsible for certain debts.
Some advantages of partnerships include:
 Easy to establish: Compared to other business structures, partnerships require minimal
paperwork and legal documents to establish.

 Partners can combine expertise: With more than one like-minded individual, there are
more opportunities to increase their collaborative skillset.

 Distributed workload: People in partnerships commonly share responsibilities so that one

person doesn't have to do all the work.

Disadvantages to consider:
 Possibility for disagreements: By having more than one person involved in business
decisions, partners may disagree on some aspects of the operation.

 Difficulty in transferring ownership: Without a formal agreement that explicitly states

processes, business may come to a halt when partners disagree and choose to end their
partnership.

 Full liability: In a partnership, all members are personally liable for business-related debts
and may be pursued in a lawsuit.
An example of a partnership is a business set up between two or more family members, friends or
colleagues in an industry that supports their skill sets. The partners of a business typically divide the
profits among themselves.
Corporation
A corporation is a business organization that acts as a unique and separate entity from its
shareholders. A corporation pays its own taxes before distributing profits or dividends to
shareholders. There are three main forms of corporations: a C corporation, an S corporation and an
LLC, or limited liability corporation.
Advantages of corporations include:
 Owners aren't responsible for business debts: In general, the shareholders of a corporation
are not liable for its debts. Instead, shareholders risk their equity.

 Tax exemptions: Corporations can deduct expenses related to company benefits, including

health insurance premiums, wages, taxes, travel, equipment and more.

 Quick capital through stocks: To raise additional funds for the business, shareholders may
sell shares in the corporation.

Disadvantages include:
 Double taxation for C-corporations: The corporation must pay income tax at the corporate
rate before profits transfer to the shareholders, who must then pay taxes on an individual
level.

 Annual record-keeping requirements: With the exception of an S-corporation, the

corporate business structure involves a substantial amount of paperwork.

 Owners are less involved than managers: When there are several investors with no clear
majority interest, the management team may direct business operations rather than the
owners.

Common examples of corporations include a business organization that possesses a board of

directors and a large company that employs hundreds of people. About half of all corporations have
at least 500 employees.
Related: Corporate Life Cycle: Everything You Need to Know
Sole proprietorship
This popular form of business structure is the easiest to set up. Sole proprietorships have one owner
who makes all of the business decisions, and there is no distinction between the business and the
owner.
Advantages of a sole proprietorship include:
 Total control of the business: As the sole owner of your business, you have full control of
business decisions and spending habits.
  No public disclosure required: Sole proprietorships are not required to file annual reports or
other financial statements with the state or federal government.

 Easy tax reporting: Owners don't need to file any special tax forms with the IRS other than
the Schedule C (Profit or Loss from Business) form.

 Low start-up costs: While you may need to register your business and obtain a business
occupancy permit in some places, the costs of maintaining a sole proprietorship are much less
than other business structures.

Disadvantages include:
 Unlimited liability: You are personally responsible for all business debts and company
actions under this business structure.

 Lack of structure: Since you are not required to keep financial statements, there is a risk of
becoming too relaxed when managing your money.

 Difficulty in raising funds: Investors typically favor corporations when lending money

because they know that those businesses have strong financial records and other forms of
security.

Some typical examples of sole proprietorships include the personal businesses of freelancers, artists,
consultants and other self-employed business owners who operate on a solo basis.
Related: What Is Equity? Tips for Small Business Owners
Cooperative
A cooperative, or a co-op, is a private business, organization or farm that a group of individuals
owns and runs to meet a common goal. These owners work together to operate the business, and they
share the profits and other benefits. Most of the time, the members or part-owners of the cooperative
also work for the business and use its services.
Advantages of a cooperative include:
 Greater funding options: Cooperatives have access to government-sponsored grant
programs, like the USDA Rural Development program, depending on the type of
cooperative.

 Democratic structure: Members of a cooperative follow the "one member, one vote"

philosophy, meaning that everyone has a say, regardless of their investment in the co-op.

 Less disruption: Cooperatives allow members to join and leave the business without
disrupting its structure or dissolving it.

Disadvantages include:
 Raising capital: Larger investors may choose to invest in other business structures that allow
them to earn a larger share, as the cooperative structure treats all investors the same, both
large and small.
  Lack of accountability: Cooperatives are more relaxed in terms of structure, so members
who don't fully participate or contribute to the business leave others at a disadvantage and
risk turning other members away.

Many cooperatives exist in the retail, service, production and housing industries. Examples of
businesses operating as cooperatives include credit unions, utility cooperatives, housing cooperatives
and retail stores that sell food and agricultural products.
Limited liability company
The most common form of business structure for small businesses is a limited liability company, or
LLC, which is defined as a separate legal entity and may have an unlimited amount of owners. They
are typically taxed as a sole proprietorship and require insurance in case of a lawsuit. This form of
business is a hybrid of other forms because it has some characteristics of a corporation as well as a
partnership, so its structure is more flexible.
Some advantages of an LLC include:
 Limited liability: As the name states, owners and managers have limited personal liability
for business debts, whereas individuals assume full responsibility in a sole proprietorship or
partnership.

 Pass-through taxation: Owners of LLCs may take advantage of "pass-through" taxation,

which allows them to avoid LLC and corporation taxes, and owners pay personal taxes on
business profits.

 Flexible management: LLCs lack a formal business structure, meaning that their owners are
free to make choices regarding the operation of their businesses.

Some disadvantages include:

 Associated costs: The start-up costs associated with an LLC are more expensive than setting
up a sole proprietorship or partnership, and there are annual fees involved as well.

 Separate records: Owners of LLCs must take care to keep their personal and business
expenses separate, including any company records, whereas sole proprietorships are less
formal.

 Taxes: In regards to unemployment compensation, owners may have to pay it themselves

TOPIC 2: TRADE
Meaning of trade
Trade is a basic economic concept involving the buying and selling of goods and services, with
compensation paid by a buyer to a seller, or the exchange of goods or services between parties.
Trade can take place within an economy between producers and consumers.
Purpose of trade
 The five main reasons international trade takes place are differences in technology,
differences in resource endowments, differences in demand, the presence of economies of
scale, and the presence of government policies.

Reason for Trade #1: Differences in Technology

Advantageous trade can occur between countries if the countries differ in their technological abilities
to produce goods and services. Technology refers to the techniques used to turn resources (labor,
capital, land) into outputs (goods and services). The basis for trade in the Ricardian model of
comparative advantage in Chapter 2 "The Ricardian Theory of Comparative Advantage" is
differences in technology.

Reason for Trade #2: Differences in Resource Endowments

Advantageous trade can occur between countries if the countries differ in their endowments of
resources. Resource endowments refer to the skills and abilities of a country’s workforce, the natural
resources available within its borders (minerals, farmland, etc.), and the sophistication of its capital
stock (machinery, infrastructure, communications systems). The basis for trade in both the pure
exchange model in Chapter 3 "The Pure Exchange Model of Trade" and the Heckscher-Ohlin model
in Chapter 5 "The Heckscher-Ohlin (Factor Proportions) Model" is differences in resource
endowments.

Reason for Trade #3: Differences in Demand

Advantageous trade can occur between countries if demands or preferences differ between countries.
Individuals in different countries may have different preferences or demands for various products.
For example, the Chinese are likely to demand more rice than Americans, even if consumers face the
same price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese
more fish than Americans would, even if they all faced the same prices. There is no formal trade
model with demand differences, although the monopolistic competition model in Chapter 6
"Economies of Scale and International Trade" does include a demand for variety that can be based
on differences in tastes between consumers.

Reason for Trade #4: Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate advantageous trade
between two countries. Economies of scale refer to a production process in which production costs
fall as the scale of production rises. This feature of production is also known as “increasing returns
to scale.” Two models of trade incorporating economies of scale are presented in Chapter 6
"Economies of Scale and International Trade".

Reason for Trade #5: Existence of Government Policies

Government tax and subsidy programs alter the prices charged for goods and services. These
changes can be sufficient to generate advantages in production of certain products. In these
circumstances, advantageous trade may arise solely due to differences in government policies across
countries. Chapter 8 "Domestic Policies and International Trade", Section 8.3 "Production Subsidies
as a Reason for Trade" and Chapter 8 "Domestic Policies and International Trade", Section 8.6
"Consumption Taxes as a Reason for Trade" provide several examples in which domestic tax or
subsidy policies can induce international trade.

Meaning of national trade

Internal trade is trade that involves buying and selling taking place between two parties which are
located within the political and geographical boundaries of a country
Meaning of regional trade

Regional trading agreements refer to a treaty that is signed by two or more countries to encourage
free movement of goods and services across the borders of its members. The agreement comes with
internal rules that member countries follow among themselves. When dealing with non-member
countries, there are external rules in place that the members adhere to.
TOPIC 3: INTERNATIONAL SALES TRANSACTION
Meaning of international sales transaction
International sales transactions (also known as international commercial transactions) refers to
the cross-border sale of goods. International commercial law is the body of law that governs
international sale transactions. A transaction qualifies as international if elements of more than one
country are involved.
Sales contract
Under Contract of sale the seller is responsible to
 provide the goods,
 arrange for carriage and insurance to cover the goods.
 In addition, the seller has to tender valid documents against payment of the purchase price.

 The buyer secures his interest by the use of documentary letters of credit. The
harmonization of these transactions by the use of trade usages and conventions has help to
eliminate risk to a point. For instances, incoterms help to define the responsibilities of the
parties by allocating the sharing of cost and risk. However, there is lack of clarity as to the
exact point in time property passes to the buyer. The responsibility then lies with the parties
to decide on whether property passes on shipment or on tender of the documents.

International commercial trading terms

(International Rules for the Interpretation of Trade Terms)=INCOTERMS
Incoterms or International Commercial Terms are descriptions of terms of delivery of goods
between seller/exporter and buyer/importer. The ICC is responsible for the interpretation of
the delivery terms used in foreign trade contracts between seller and buyer.
They provide the parameters of responsibilities between seller and buyer. Since
transportation is vital in international trade it is necessary to know incoterms which are used
when moving goods from seller to buyer including use of intermodal transport.
DESCRIPTION OF INCOTERMS It is important to know when is the obligation to deliver
fulfilled. Incoterms is about costs, risks and responsibilities of a seller/exporter and
buyer/importer. Some commonly used incoterms include the following:

• EXW (EX WORKS) “Ex works” means the seller fulfils his obligation to deliver when he
has made the goods available at his premises (i.e. works, factory, warehouse, etc.) to the
buyer. In particular, he is not responsible for loading the goods on the vehicle provided by
the buyer or for clearing the goods for export, unless otherwise agreed. The buyer bears all
costs and risks involved in taking the goods from the seller’s premises to the desired
destination. This terms thus represents the minimum obligation for the seller and the
maximum obligation for the buyer. This term can be used for any mode of transport.

• FCA (FREE CARRIER) named place “Free Carrier” means that the seller fulfills his
obligation to delivery when he has handed over the goods, cleared for export, into the charge
of the carrier named by the buyer, at the named place or point. This term may be used for
any mode of transport, including multi-modal transport. Carrier means any person who, in a
contract of carriage, undertakes to perform or to procure the performance of carriage by rail,
road, sea, air, and inland waterway or by a combination of such modes. If the buyer instructs
the seller to deliver the cargo to a person, e.g. freight forwarder who is not a “carrier” the
seller is deemed to have fulfilled his obligation to deliver the goods when they are in the
custody of that person.

• FAS (FREE ALONGSIDE SHIP) named port of shipment. “Free Alongside Ship” means
that the seller fulfils his obligation to deliver when the goods have been placed alongside the
vessel on the quay or in lighters at the named port of shipment. This means the buyer has to
bear all costs and risks of loss of or damage to the goods from that moment. FAS terms
requires the seller to clear the goods for export. This term can be only used for the contracts
where the main carriage is by sea or inland waterway transport, as the critical point of risk
and cost transfer related to the “ship’s rail”

• FOB (FREE ON BOARD) named port of shipment. “Free on Board” means that the seller
fulfills his obligation to deliver when the goods have passed over the ship’s rail at the named
port of shipment. This means that the buyer that the buyer has to bear all costs and risks of
loss or damage to the goods from that point. FOB term requires the seller to clear the goods
for export. This term can only be used for contracts where the main carriage is by sea or
inland waterway transport, as the critical point of risk and cost transfer related to the “ship’s
rail”

• CFR (COST AND FREIGHT) named port of destination “Cost and Freight” means that
the seller must pay all the costs and freight necessary to bring the goods to the named port of
destination. However, the risk (of loss, of damage to the goods, as well as any additional
costs due to the events occurring after the time the goods have been delivered on board the
vessel) is transferred from the seller to the buyer when the goods pass the “ship’s rail” in the
port of shipment. CFR term requires the seller to clear the goods for export. The term can
only be used for contracts where the main carriage is by sea or inland waterway transport, as
the critical point of risk and cost transfer related to the “ship’s rail”

• CIF (COST INSURANCE AND FREIGHT) named port of destination. “Cost, Insurance
and Freight” means that the seller has the same the obligation as under CFR but with the
addition that he has to procure marine is insurance against the buyer’s risk of loss, or damage
to the gods during the main carriage. The seller contracts for insurance and pays the
insurance premium on the buyer’s behalf, and includes this in the price of goods in the
contract of sale. Under CIF term the seller is only required to obtain insurance on minimum
coverage. The CIF term requires the seller to clear the goods. The term can only be used for
contracts where carriage is by sea or inland waterway transport, as the critical point of risk
and cost transfer related to the “ship’s rail”

• CPT (CARRIAGE PAID TO: named place of destination. “Carriage paid to” means that
the seller pays all the costs and freight for the carriage of goods to the named destination.
The risk (of loss of or damage to the goods, as well additional costs due to events occurring
after the time the goods have been delivered to the carrier) is transferred from the seller to
the buyer when goods have been delivered into the custody of the first carrier. “Carrier”
means any person who, in a contract of carriage, undertakes to perform or to procure the
performance of carriage, by sea, road, sea, air, inland waterway or by a combination of such
modes. If subsequent carriers are used for the carriage to the agreed destination, the risk
passes when the goods have been delivered to the first carrier. CPT term requires the seller
to clear the goods for export. This term may be used for any mode of transport including
multi-modal transport.

• CIP (CARRIAGE &INSURANCE PAID TO:)named place of destination. “Carriage and

Insurance paid to— “means that the seller has the same obligation as under CPT but with the
addition that the seller has to procure cargo insurance against the buyer’s risk of loss of or
damage to the goods during the carriage. The seller contracts for insurance and pays the
insurance premium on the buyer’s behalf, and includes this in the price of the goods in the
contract of sale. The term may be used for any mode of transport including multi-modal
transport.

• DDU (DELIVERED DUTY UNPAID) named place of destination. “Delivered duty

unpaid” means that the seller fulfils his obligation to deliver when the goods have been made
available at the named place in the country of importation. The seller has to bear the costs
and risks involved in bringing the goods thereto (excluding duties, taxes and other official
charges payable upon importation as well as the costs and risks of carrying out customs
formalities) The buyer has to pay additional costs and bear any risks caused by his failure to
clear the goods for import in time. This term may be used irrespective of the mode of
transport.

• DDP (DELIVERED DUTY PAID) named place of destination. “Delivered duty paid”
means that the seller fulfils his obligation to deliver when the goods have been made
available at the named place in the country of importation. The seller has to bear the risks
and costs, including duties, taxes and other charges of delivering the goods thereto, cleared
for importation. Whilst the EXW term represents the minimum obligation to the seller, the
DDP term represents the maximum obligation to the seller. This term should not be used if
the seller is unable directly or indirectly to obtain the import license. The term can be used
irrespective of the mode of transport used.

METHODS OF PAYMENT USED IN INTERNATIONAL TRADE

1. Cash in Advance

Cash in advance is a type of payment where the buyer pays the seller upfront before the
goods are shipped. Wire transfers and credit cards are the most frequently used payment
options for this method.

Pros
This method protects the seller from buyers who may not honor the terms of the contract and
decide not to pay.

Cons
Although this method protects the seller, it is not a secure method for the buyer as the buyer
will face the risk of receiving goods that do not meet the quality agreed on the contract, or
not receiving the goods altogether.

2. Letter of Credit

A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will
be received on time and for the correct amount. If the buyer fails to make the payment on the
goods purchased, the bank will be required to cover the full or remaining amount of the
purchase.

How it Works
Usually some form of securities or cash as a collateral is required by the bank for issuing a
letter of credit, and charge a service fee, typically as a percentage of the value of the L/C.

Types of Letter of Credit

Standby Letter of Credit – With this LC, the bank will cover the full or remaining amount
of the payment if the buyer fails to fulfill payment obligations to the seller.
Irrevocable Letter of Credit – A letter of credit where it cannot be modified unless all
parties agree to the modifications.
Revocable Letter of Credit – Opposed to the irrevocable L/C, the bank can modify the L/C
under the buyer’s permission without the consent of the seller. Once it is revoked, the bank is
no longer liable to pay the seller.
Confirmed Letter of Credit – This L/C involves a bank other than the issuing bank
guaranteeing the letter of credit. The second bank is the confirming bank, usually the seller’s
bank. The confirming bank would honor the L/C if the issuing bank defaults.
Back-to-Back Letter of Credit – Used when an intermediary such as a broker is involved
between the buyer and the seller, or when the seller must first purchase the goods from a
supplier that would be sold to the buyer. This L/C consists of two letter of credits to finance
a transaction.
Transferable Letter of Credit – A letter of credit that allows the seller to assign a portion
of the L/C to other party/parties. This L/C comes in handy when the seller is not the sole
manufacturer of the goods and require purchasing from other suppliers, since it doesn’t
require multiple L/Cs anymore.
Deferred Payment Letter of Credit – a letter of credit where payment is delayed to a fixed
date stated in the L/C.
Red Clause Letter of Credit – A letter of credit where the seller requests a portion of the
L/C to be paid before goods have been shipped and documents have been submitted.
Payment at Sight Letter of Credit – Payment is made immediately (maximum within
seven days) after the required documents have been submitted.

3. Open Account
Overview
Open account is a transaction where the seller is only paid typically in 30, 60, or 90 days,
after goods are shipped and delivered to the buyer. Sellers who accept open account payment
method can seek additional security by using export credit insurance.

Pros
This method is by far the most secure for the buyer as payment is not obligatory until the
goods have been received.

Cons
An open account transaction is the most advantageous to the buyer, but it is the least secure
method for the sellers; hence sellers in many riskier industries do not accept this payment
method.
Revolving Letter of Credit – a single letter of credit that can be used for multiple shipments
over a period of time. It is used for regular shipments of the same commodity to the same
buyer.
Pros
L/C is one of the most commonly used payment methods in the import and export industry
as it minimizes risk for both the buyer and the seller.
L/C protects the buyer since payment is only required after the goods have been shipped or
delivered to the buyer.
Also protects the seller since the bank is guaranteeing the payment as well as conducting a
verification process to ensure the legitimacy of the buyer.
Cons
Letter of credit is more expensive than other payment methods
The reliability of the L/C depends on the reputation of the buyer’s bank
DC

4. Documentary Collections (D/C)

Overview
Documentary Collections is a payment term where the seller relies on the seller’s bank
(remitting bank) to collect payment from the buyer. The seller would send the document to
the remitting bank, which is forwarded to the buyer’s bank (collecting bank) along with the
instructions for payment. The document is called a bill of exchange (draft) which requires
the buyer to pay the face amount either at sight or on a specified future date.

The buyer would then send the fund to the collecting bank, which is transferred to the seller
through the remitting bank in exchange for those documents.

When to Use D/C?

D/Cs should be used in established trade relationships in stable markets where the seller and
the buyer have already engaged in a transaction previously. The seller should also ensure
that the funds will not be blocked due to political and economic reasons in the buyer’s
country. D/Cs are recommended for ocean shipment.

Types of D/Cs
1. Document against Payment (D/P) – Also known as “Sight Draft” or “Cash Against
Documents”
The documents and the bill of exchange are only provided to the buyer from the collecting
bank once payment is made by the buyer to the seller. Once fund is received by the
collecting bank, it will then be transferred to the seller through the remitting bank.

2.Document against Acceptance (D/A) – Also known as “Cash Against Documents”

The buyer is given a credit extension to pay at a specified future date through a time draft.
Once time draft is accepted by the buyer, the documents are released by the collecting bank.

Pros
Less complicated and cheaper than letter of credit
The buyer is not obligated to pay for goods before shipment
More favorable to the buyer
Cons
Riskier for the seller since there is no verification process
The bank does not guarantee payment
Not recommended for air and overland shipments

5. Consignment
Consignment in international trade is a variation of open account in which payment is sent to
the exporter only after the goods have been sold by the foreign distributor to the end
customer. An international consignment transaction is based on a contractual arrangement in
which the foreign distributor receives, manages, and sells the goods for the exporter who
retains title to the goods until they are sold. Clearly, exporting on consignment is very risky
as the exporter is not guaranteed any payment and its goods are in a foreign country in the
hands of an independent distributor or agent. Consignment helps exporters become more
competitive on the basis of better availability and faster delivery of goods. Selling on
consignment can also help exporters reduce the direct costs of storing and managing
inventory. The key to success in exporting on consignment is to partner with a reputable and
trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance
should be in place to cover consigned goods in transit or in possession of a foreign
distributor as well as to mitigate the risk of non-payment.

PRACTIONERS IN SHIPPING BUSINESS..docx - LECTURE THREE PRACTIONERS

IN SHIPPING BUSINESS 1 INTRODUCTION These are merchants who are engaged in the
| Course Hero

THE PRINCIPLES OF SHIPPING BUSINESS

Meaning of principle
These are companies, individuals or practitioners with the highest authority in shipping
sectors

Categories of principles in shipping business

i) Ship owners
This is someone who equips and exploits a ship usually for delivering cargo at a
certain freight rate, either as per freight rate 9given price for transport of certain
cargo between two given ports or based on hire. (a rate per day)

Ship owner roles

 To equip and exploit ships
 To hire a licensed crew and captain to take charge of the vessel in person
 To provide a sea worthy ship which complies with the charter party description
 To properly and carefully load, handle, stow, carry, keep, care for discharge and
deliver the cargo
 To comply with charterers legitimate employment instructions
 To prosecute voyages with reasonable dispatch

ii) Non Vessel Operating Common Carrier (NVOCC)

This is a person or company who does not own a carrying vessel that contact with the
carriers as he organizes the shipment for individuals or corporation to get goods from
manufacturers or producers to a market, customer, or a final point of distribution
using the carriers’ vessel. A freight forwarder, forwarder, or forwarding agent also
known as a non-vessel operating common carrier (NVOCC)
 A Freight Forwarder acts as intermediaries between importers and exporters, they seek
out and then coordinate the most cost effective and fitting way to move goods between
nations. A forwarder is not typically a carrier, but is an expert in supply chain management

Forwarder’s role falls into four main areas: the provision of a range of independent services such
as packing and warehousing; giving distribution advice; acting as a agent to source transport
space; and acting as a principal to move goods across international frontiers.

PRACTITIONERS IN SHIPPING BUSINESS

Practitioners: These are merchants who are engaged in the international maritime business.

The two major practitioners are

 Principles
 Intermediaries

Intermediaries
 Ship agents
 Broker
 Special broker for tanker ships
 port agent 

SHIPPING AGENT

A shipping agent is employed by the shipping line at a shipping port and provides all the
services required by a visiting ship to ensure the ships stay runs smoothly.

A shipping agent sometimes only provides some of the services and the shipping line
managers the balance with their own offices.

In some instances the shipping line managers all of the services themselves without the
need of a shipping agent.

A shipping agent is a person who deals with the transactions of a ship in every port that the
ship visits or docks. In simple terms, it is a shipping agent who with a local expert acts as a
representative of the owner of the ship and carries out all essential duties and obligations
required by the crew of the ship.

SHIP BROKER

A ship broker is someone who arranges the employment of a vessel or buys and sells ships on
behalf of his clients.

Ship brokers act as intermediaries between ship owners and charterers or the buyers
and sellers of ships. The broker is involved in many stages of a deal: presenting the
business to potential clients, negotiating the main terms of a contract or sale, finalising the
details of the contract and following the deal through to its conclusion. Increasingly ship
brokers also provide their clients with a wide range of
market intelligence and advice.

CARGO FREIGHT BROKER

A cargo (freight) broker is an individual or company that serves as a liaison between

another individual or company that needs shipping services. Though a cargo broker plays
an important role in the movement of cargo, the broker doesn't function as a shipper or a
carrier. Instead, a cargo broker works to determine the needs of a shipper and connects
that shipper with a carrier willing to transport the items at an acceptable price.

Often, cargo brokers are confused with freight forwarders. Though a cargo forwarder
performs some of the same tasks as a freight forwarder, the two are not the same.
NOTE
The main differences are:

 The main difference between the two is the responsibility they have in the business being
made. The freight forwarder is responsible for the shipments while the cargo broker is
responsible for organising the transaction between the two parties doing business between
each other. A forwarder takes possession of the items being shipped, consolidates smaller
shipments, and arranges for the transportation of the consolidated shipments. By contrast, a
cargo broker never takes possession of items being shipped.

 A freight forwarder is also known as a forwarding agent. This person is someone who
takes care of the shipments of certain business transactions. The forwarder responsible
for the bookings of shipment spaces for the transport of cargoes through ships, planes,
trucks, or trains, commercial invoices, bills of lading, shipper’s export declarations, and
other kinds of documents needed in shipping cargo.

 The broker, on the other hand, is a third party who is responsible for the transactions of
two parties. They are the middlemen for the buyer or the seller. These buyers and sellers
may be individuals or companies. The broker gets a commission for every successful
transaction he or she has done. When a broker acts as a middleman, he or she becomes a
principal, or someone acting on behalf of the buyer or seller.
 TOPIC 6: MARINE INSURANCE

What is insurance?

An arrangement by which a company or the state undertakes to provide a guarantee of

compensation for specified loss, damage, illness, or death in return for payment of a
specified premium.

Benefits of insurance
 payment of losses. An insurance policy is a contract used to indemnify individuals and
organizations for covered losses.
 managing cash flow uncertainty. Insurance provides payment for covered losses when they
occur. Therefore, the uncertainty of paying for losses out-of-pocket is reduced significantly.
 complying with legal requirements. Insurance meets statutory and contractual requirements as
well as provides evidence of financial resources.
 promoting risk control activity. Insurance policies provide incentives to implement a loss
control program because of policy requirements and premium savings incentives.
efficient use of an insured's resources.
 reducing social burden. Insurance helps reduce the burden of uncompensated accident victims
and the uncertainty of society.

Meaning of marine insurance

Marine Insurance is a type of insurance that covers cargo losses or damage caused to ships, cargo
vessels, terminals, and any transport in which goods are transferred or acquired between different
points of origin and their final destination.
Historical development of marine insurance
The History of Marine Insurance in England is associated with the
The history of Lloyds. The word “Lloyds” is associated with the name of Edward Lloyd, a
small coffee-house keeper where in, towards the latter part of the seventeenth century, the
commercial community interested in shipping met.
The Italian merchants who introduced the practice of marine insurance in England were
known as Lombards who took their name from the name of the street of London. It is believed
that from them originated the word “ Polizza”- i.e a promise- which is the etymological root of
the expression “Policy”. However, the frequenters of “Lloyds” coffee-house were not allowed
the privilege of conducting the marine insurance on a monopoly basis and it was in 1720 that the
parliament allowed two more marine insurance companies to be established in London.
According to history of Marine Insurance, all trade operations of any nature, until 17th century,
had operated by sea from one port to another port. When transport facilities were gradually
developed, the other modes of conveyances like Road, Rail, Air were utilized. With the
development of various modes of conveyances, Marine insurance is now extended to cover the
transit risks for the cargoes travelling by any means of conveyance that is, ocean vessel, ferry,
ocean barge, truck, van, rail, post, air and even courier.

Meaning of risk, peril and hazard

Peril: Cause of loss.
Risk: Uncertainty arising from the possible occurrence of given events that would result in loss
with no opportunity for gain.
Hazard: Condition that increases the probability of loss.

Scope of Marine Insurance

the scope of marine insurance is very wide as it covers not only the goods that are at risk during
transportation but covers almost every risk that could occur in the process or transportation
weather it is the goods or the instrument of transport. Weather it is in land or in the ocean or air,
marine insurance will cover the loss and damage if the goods, freight, merchandise or the
instrument of transport face some perils during transit.

The concept of marine insurance as defined by the marine insurance act covers all man-made
calamities or perils which include, theft, robbery, piracy, arson, etc. This insurance also covers
for natural calamities such as earthquakes, lightning, cyclones, etc. the concept of this insurance
also includes the stranding or sinking of ships as in many circumstances there is no return of the
ship and goods which have been sent out.
Nature of Marine Insurance
Marine insurance is one of the most important and oldest concepts of insuring a party
from damage suffered by the loss or destruction of goods or the instrument of
transportation. The contract of such insurance should comply with all the essentials of a
standard contract and should not be a void contract. The main essentials of a valid
contract according to the India Contract Act, 1872 is that a contract should consist of an
offer, which is the proposal, an acceptance, which is a go ahead by acceptor, a
consideration, a premium payable on the completion of the contract.
 There are mainly two kinds of marine insurances:

 Ocean Marine Insurance: This insurance of the ocean is one which is

connected to and covers the damage and losses of the perils of
transportation at sea. Ocean Marine insurance is one of the largest opted
for insurance in the world as of today.

 Inland Marine Insurance: this insurance of Inland is one which is related

to and covers the damage and losses of the risks of transportation on the
land or in the land. Inland insurance is available on stand alone or can be
covered with other insurances.

Application of principles of insurance to marine insurance operations

The 7 principles of insurance
Principle of Uberrimae Fidei (Utmost Good Faith),
Principle of Insurable Interest,
Principle of Indemnity,
Principle of Contribution,
Principle of Subrogation,
Principle of Loss Minimization, and
Principle of Causa Proxima (Nearest CaTuse

Application of the principles to Marine

Insurable Interest Sec 7 of Marine Insurance Act,1963 refers that every person has insurable
interest who is interested in marine adventure. Sec 8 of MI Act refers that the assured must be
interested in the subject matter insured at the time of the loss though he need not be interested
when the insurance is effected.
Indemnity Sec 67 of Marine Insurance Act 1963 refers that the sum which the assured can
recover in respect of a loss on a policy by which he is insured, in the case of an unvalued policy
to the full extent of the insurable value, or, in the case of a valued policy to the full extent of the
value fixed by the policy. Therefore, the Assured is allowed to set the insured value while
effecting the insurance according to the value of consignment shown in the invoice issued by
them. The Assured is allowed to include some mark up, say 10-15% as incidental charges over
and above the invoice value. The maximum liability under the policy shall be the insured value
on which the premium is collected.
Utmost good faith
Sec 19 of Marine Insurance Act, 1963 refers that a contract of marine insurance is a contract
based upon
the utmost good faith, and if the utmost good faith be not observed by either party, the contract
may be
avoided by the other party.
What does “uberima fide” mean?
The insurance contract is based on mutual trust. The insured should disclose all the material fact
about the
subject matter of insurance. A breach of good faith by one party entitles the other to avoid the
contract.
Subrogation
Sec 79 of Marine Insurance Act,1963 states that where the insurer pays for a total loss, either of
the whole, or in case of any apportionable part, of the subject matter insured, he thereupon
becomes entitledto take over the interest of the assured in whatever may remain of the subject
matter so paid for, and he
is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject
matter as from the time of the casualty causing the loss.

Proximate Cause
Sec 55 of MI Act provides that unless the insurer is liable for any loss proximately caused by a
peril insured
against, but subject as aforesaid, he is not liable for any loss which is not proximately caused by
perils
insured against

Contribution
Sec 80 (1) of Marine Insurance Act, 1963 states that where the assured is over-insured by double
insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably
to the loss in proportion to the amount for which he is liable under this contract
Types of marine insurance policies/covers
Specific Policy
The specific policy covers a particular consignment for a specific voyage/transit against an
individual
proposal submitted by the client. The premium under a specific policy should be paid prior to
commencement of the risk. The complete details like commodity, vessels particulars, B/L or RR
or AWB
number and date, sum insured, details of voyage, terms of cover must be declared while effecting
the Insurance.
As per Marine Insurance Act, a policy must contain the following particulars:
 The name of the assured.
 The subject matter of insurance and the risk insured against.
 The voyage.
 The sum or sums insured.
 The name of the insurer.
The policy must be appropriately claused, stamped and duly signed by the appropriate
authority.
Floating or Open policy
Sec 31 of the Marine Insurance Act, 1963 states that a floating policy is a policy which describes
the
insurance in general terms, and leaves the name or names of the ship or ships and other
particulars to be
defined by subsequent declaration.
“Unless the policy otherwise provides, the declarations must be made in order of dispatch or
shipment.
They must in the case of goods, comprise all consignments within the terms of the policy and the
value of
the goods or other property must be honestly stated, but an omission or erroneous declaration
may be
rectified even after loss or arrival, provided the omission or declaration was made in good faith.”
Open (Floating) Policy is effected for an amount sufficiently large to cover the total value of
shipments/
dispatches to be made over a specified period usually 12 months.
Subject to its terms and conditions, such a policy covers all shipments/ dispatches made by the
Insured. As
each shipment/dispatch takes place the required details are declared to the insurers and the value
is
deducted from the total sum insured under the policy. Here again, the insured is bound to declare
all
shipments/ dispatches coming within the scope of this policy. It is not open to him to run his own
risk on
certain shipments/ dispatches or to insure them elsewhere. Omissions or incorrect declarations
may be
rectified even after the loss or arrival provided such omissions or errors were genuine.
When the total of the amounts of the various declarations reaches or exhausts the amount for
which the
Policy was originally issued, the Policy is said to have been fully declared. However, the Policy
may, of
course, be reinstated for a fresh total value of shipment / dispatch to be effected over the
remaining period.
Certificate of insurance
This is a document which is issued under an Open Cover or an Open (Floating) Policy. This
document is a substitute for a specific policy and is a very simple document containing
particulars of the shipment/ dispatch insured, the terms of cover in brief and certifying that the
said shipment / dispatch is held covered in terms of the relative open contract.
Open cover
Open cover is a contract effected for a period of time, usually 12 months, whereby the insurer
agrees to
accept the insurance of all shipments/dispatches made by the Insured during that period. The
Insured is
bound to declare all shipments/dispatches coming within the scope of contract. It is not open to
him to
run his own risk on certain shipments/ dispatches or to insure them elsewhere. Open cover is an
unstamped document but when the policy will be issued against each and every shipment, the
same
should be duly stamped.
Special declaration policy
This is a special type of open policy issued for 12 months covering inland transit only. The
minimum S.I.
under the policy is Rs. 2 Crs and the total value of the goods in transit is required to be declared
at least
once in a quarter in the form of a certified statement.
Final premium is adjusted (downward only) on the basis of actual annual T.O. of goods covered.
The
subject policy allows mid term increase of S.I. twice only during a year.
Turn Over discount is available under the policy ranging from 20% to 50% on the premium
depending
upon the actual T.O. of the insured. Maximum discount available under this policy is 70%,
taking into
account all discounts available under the policy.Minimum premium for the policy is Rs. 5000.00
only.
Multi transit policy

The Marine policy generally covers goods during ordinary course of transit on warehouse to
warehouse
basis. However, if the consignment comes under the control of the assured at any intermediate
point for
allocation, redistribution, processing etc. the normal transit policy comes to an end and further
transit is
treated as fresh transit. Risk during storage at such intermediate points is considered as a separate
nonmarine risk. To effect a continuous cover whilst in transit or in storage or during processing
of the goods,
multi transit policy and intermediate storage cover may be granted. The storage places should be
covered
in all sides including roof.
Sellers’ contingency policy
Sometimes the Exporters export their goods under FOB or C&F terms and not under irrevocable
letter of
credit. The responsibility of the exporter for arranging insurance ceases as soon as the
consignment is
safely placed on board the vessel but ownership of the consignment does not change until the
buyer
accepts the goods and relative documents. In some cases the exporters do not get sale proceeds
from the
buyer due to the following reasons:

Annual policy
The Annual Policy is issued only in respect of goods belonging to the assured or held in trust by
him not
under any sale or purchase while in transit by road or rail from specified depots/ processing
centre to
other depots / processing centre. The depots must be owned or hired by the assured but the
processing
units may not be owned or hired by the insured.

Duty policy
The Duty policy is taken out by an Importer who imports the cargo under a valid import license.
The policies are issued on actual assessed duty. The policy can also be issued on provisional duty
and the same should be adjusted on the actual duty duly assessed by the customs authority after
arrival of the goods. The policy shall be one of the pure indemnities. Duty cover cannot be
granted after arrival of the vessel unless it is covered under open policy or open cover. The rate
of premium under Duty policy shall be 75% of the cargo rate including all extras.
Increased value insurance
This Policy is issued for import cargo when CIF value at port of loading is less than value at port
of destination. The insurance is not for an agreed value but shall be for an amount not exceeding
the actual difference between the market value at destination on the date of arrival of the goods
in India and the total CIF + Duty subject to establishment of a higher market value or control
price as notified by the appropriate statutory authority. The policy has a compulsory excess of
25%. The insurance is generally granted for an amount more than 100% of the CIF value of the
cargo. The rate of premium for increased value insurance is 100% of the normal rate applicable
to CIF insurance.
Special storage risk insurance
Under this policy, the cover is available to goods during storage at Railway Yard/Carrier’s
premises pending clearance of cargo by the consignees on termination of cover under
Open/Special declaration Policy. Insurance shall be granted in conjunction with the Open policy
or Special declaration Policy and the cover shall be identical as available under Open and Special
declaration Policy. Basis of valuation shall be the invoice value
OTHER POLICIES
Voyage Policy: A voyage policy is that kind of marine insurance policy which is valid for a
particular voyage.
Time Policy: A marine insurance policy which is valid for a specified time period – generally
valid for a year – is classified as a time policy.
Mixed Policy: A marine insurance policy which offers a client the benefit of both time and
voyage policy is recognized as a mixed policy.
Open (or) Unvalued Policy: In this type of marine insurance policy, the value of the cargo and
consignment is not put down in the policy beforehand. Therefore, reimbursement is done only
after the loss of the cargo and consignment is inspected and valued.
Valued Policy: A valued marine insurance policy is the opposite of an open marine insurance
policy. In this type of policy, the value of the cargo and consignment is ascertained and is
mentioned in the policy document beforehand thus making clear about the value of the
reimbursements in case of any loss to the cargo and consignment.
Port Risk Policy: This kind of marine insurance policy is taken out in order to ensure the safety
of the ship while it is stationed in a port.
Wager Policy: A wager policy is one where there are no fixed terms for reimbursements
mentioned. If the insurance company finds the damages worth the claim then the reimbursements
are provided, else there is no compensation offered. Also, it has to be noted that a wager policy is
not a written insurance policy and as such is not valid in a court of law.
Floating Policy: A marine insurance policy where only the amount of claim is specified and all
other details are omitted till the time the ship embarks on its journey, is known as a floating
policy. For clients who undertake frequent trips of cargo transportation through waters, this is the
most ideal and feasible marine insurance policy.
Single Vessel Policy: This policy is suitable for small ship-owner having only one ship or
having one ship in different fleets. It covers the risk of one vessel of the insured.
Related Reading: Marine insurance for piracy attacks

Fleet Policy: In this policy, several ships belonging to one owner are insured under the same
policy.
Block Policy: This policy also comes under maritime insurance to protects the cargo owner
against damage or loss of cargo in all modes of transport through which his/her cargo is carried
i.e. covering all the risks of rail, road, and sea transport.
TYPES OF MARINE LOSSSES
Types of Losses Sec 56 of MI Act categorizes losses under marine insurance policies into total
and partial losses. The Act further categorizes total loss into Actual Total Loss and Constructive
Total Loss. Partial losses are categorized into Particular Average and General Average.
Actual Total Loss According to Sec 57 and Sec 58 of MI Act 1963, actual total loss may occur
when the cargo is completely destroyed/lost and ceases to be of any value to the insured.
Example: Cargo is destroyed by fire.
Constructive Total Loss Sec 60 (i) of MI Act, 1963 provides that there is a constructive total
loss where the subject matter insured is reasonably abandoned on account of its actual total loss
appearing to be unavoidable, or because it could not be preserved from actual total loss without
an expenditure which would exceed its value when the expenditure had been incurred.
Example: There will be a constructive total loss, if the cargo has been damaged during transit
but the cost of repairing the damage and the charges for forwarding the repaired goods to their
destination will exceed the value of the consignment
Particular Average (PA) Sec 64(I) of MI Act, 1963 defines a particular average loss as a partial
loss of the interest insured caused by a peril insured against and which is not a general average
loss.
Example: Cargo is partially damaged by sea water or fire.
General Average (GA)
GA loss is caused by direct result of a GA Act. General Average Act has following ingredients:
1) General Average may be either a sacrifice or expenditure, extra ordinary in nature. 2) Incurred
voluntarily and intentionally. 3) Incurred reasonably and prudently. 4) Incurred when the
adventure is in real danger. 5) The losses or expenses so incurred are for common safety of the
vessel, cargo carried in it and the freight at risk. 6) The adventure must be saved so that these
losses/expenses shall be borne by all interests which have been saved. The following expenses
are also recoverable under Marine Cargo Policy.
Particular Charges Sec 64 (2) of M.I. Act defines particular charges to mean expenses incurred
by, or on behalf of, the assured for the safety or preservation of the subject matter insured.
Unlike Sue and labour charges, there is no particular contractual provision in the policy under
which they are paid; consequently, they cannot be recovered in excess of 100% payable in
respect of a single loss. Particular Charges are incurred to avoid a greater loss which would
otherwise fall on the policy and these charges are recoverable as a loss by an insured peril.
Sue and Labour Charges
 As per Duty of the Assured Clause, the insured should always act as if he is uninsured. The
insured is expected to take all measures to avoid or to minimize the loss despite being insured
under the policy. The insureds are entitled to receive all reasonable expenses/charges that they
incur for minimizing the loss in addition to the amount of claim payable under the policy, e.g.
reconditioning charges of the damaged cargo at an intermediate port to avoid aggravation of
damage. It is also to be noted that this is a supplementary agreement to the Policy and the
expenses, when properly and reasonably incurred, are payable irrespective of percentage even in
addition to a total loss,but not exceeding 100% of the insured value. In fact, sue and labour
charges are a type of particular charges.
Extra Charges
These are the expenses which are incurred for proving a claim such as survey fees, settling
agents fees etc. Sale charges and auction fees incurred for disposal of the damage cargo are also
examples of extra charges
Salvage Charges
These are the charges payable to the third parties, who, independent of any contract render
services to save the adventure. The services are rendered as “NO CURE-NO PAY” basis.
Maritime salvage is distinguishable from general average expenditure by English Law, but most
foreign codes treat salvage as general average. The difference between general average and
salvage charges are as under:
1) General average is the result of a voluntary act on behalf of the whole venture, where as
salvage falls directly on each unit of salved property. One can not be made to pay on behalf of
another.
2) Salvage is enforceable at the places where the services terminate; general average is only
enforceable at destination.
3) The values on which salvage is assessed are also taken at the place where the services
terminate, where as contributory values for general average are assessed at the end of the voyage.
4) The claim under general average shall only be admitted if the adventure is saved where as
claim for salvage charges shall be admitted even if the adventure is not saved after successful
salvaging. Liability under the policy for salvage charges is assessed in the same way as for
general average expenditure.

Salvage Loss
A salvage loss falls short of a constructive total loss because the latter must concern the whole
of the goods insured under the particular policy, (unless there are different species insured). The
damage goods sometimes are sold at intermediate port in order to prevent them from becoming
total loss or being aggravated further if the goods are allowed to be carried up to their final
destination. The insured in such situation is allowed to retain the sale proceeds of the goods after
deducting the sale charges and survey fees. The difference between the insured value and the
amount received by the insured through sale proceeds is the amount of claim payable by the
underwriters.
Ordinary Loss The policy shall not cover any kind of ordinary loss which includes ordinary loss
in weight and/or volume and/or leakage as the case may be. Some commodities have recognized
trade allowance, but, where there is not, the ordinary loss can be ascertained by investigating
deliveries of previous (sound) shipments or the sound part of the shipment on which the claim
arises.
Sentimental damage
Sentimental damage is actually a “Fear of Loss.” Where some chests of tea were damaged due to
sea water but buyers feared that other chests, although sound, might have been damaged as they
were sold at a reduced price. Such losses are not a real one and are never recoverable under the
policy being in the nature of a “Trade Loss”.
Sympathetic damage
19 This is also known as Taint Damage. Cargo which is damaged may taint other cargo. If the
original damage is due to an insured Peril, the resulting damage is considered as having been
proximately caused by that peril. Example: Hides damaged by Sea water, putrefy and the
consequent odour spoils tobacco in the same hold. Taint damage to tobacco was held to be
proximately caused by Sea water.

BENEFITS OF MARINE INSURANCE

Physical damages
Coverage for physical damage typically covers the necessary repairs to your vessel because of
damage resulting from a broad range of perils. The best insurance policies offer “all risk”
coverage. This implies that if the source of loss isn’t particularly excluded, it’s covered.

Property coverage
Considering how expensive property damage can be to your vessel, one of the important benefits
of marine insurance is its capacity to offer coverage for this kind of damage
Liability Coverage
The same way you could hit another car on the road, boaters recognize that accidents can also
take place in the water, and if you’re deemed at fault for an accident that involves another
watercraft or person, you’ll require liability insurance to cover the damages. Considering how
expensive boat accidents can be, this is a significant kind of coverage and advantage of acquiring
insurance.
TOPIC 7: INTERNATIONAL ORGANIZATIONS REGULATING SHIPPING
BUSINESS
International organizations
An organization with global mandates, generally funded by contributions from national
governments.

INTERNATIONAL ORGANIZATIONS REGULATING SHIPPING BUSINESS

World Trade Organization
The World Trade Organization (WTO) was established in 1994 and is the largest
intergovernmental economic organization in the world. According to the official website, WTO’s
ultimate goal is “to ensure trade flows as smoothly, predictably, and freely as possible.”
Throughout its history there have been several World Trade Agreements that are signed by
representatives from member countries and ratified by their respective legislative bodies. Major
agreements include those designed to establish a common approach to handling country-to-
country trade agreements and conflict resolution processes. The WTO acts as a forum for
negotiations between member countries.
The Agreement on the Application of Sanitary and Phytosanitary Measures, known as the SPS
Agreement, is an international treaty established by WTO in 1995. It sets rules called
International Phytosanitary Measures which are meant to protect safety and the environment.
Among them is International Standards for Phytosanitary Measures No. 15 (ISPM 15), a set of
regulations requiring that wood packaging materials be properly treated in order to minimize the
spread of pests and diseases.
There are currently 164 countries participating in WTO. It is headquartered in Geneva,
Switzerland.
World Customs Organization
The World Customs Organization (WCO) was founded in 1952 as an intergovernmental
association of customs authorities dedicated to the continual improvement of customs processes
worldwide. Its primary goal is to maximize the effectiveness and efficiency of each country’s
customs authority in order to facilitate collecting revenue, compiling trade statistics, and
ensuring security.
WCO plays a role in the administration of WTO’s agreements on customs valuation and rules of
origin. Customs valuation is the process where customs authorities assign a monetary value to a
product being imported or exported. Rules of origin are regulations that specify what criteria
must be met in order for a country to claim to be the origin of a good or service.
Rules of origin may be used when determining whether preferential duty treatment applies under
the terms of a free trade agreement or in a free trade zone. Rules of origin may also be non-
preferential in nature, such as for the purpose of collecting trade data relevant to governing a
nation’s economy.
The Harmonized System (HS) was implemented by WCO in 1988 as a standard set of
nomenclature regarding product classification that could be used by all trading nations. HS is
organized into 21 sections, which are subdivided into 96 chapters. The 96 chapters are further
subdivided into approximately 5,000 headings and subheadings.
An HS code is a six-digit numeric code which represents a unique category of products. The first
two digits designate the chapter, the second two digits designate the heading, and the third two
digits designate the subheading. Individual countries may add two or four digits to form eight-
digit or 10-digit codes that further specify products and which may be different in each country.
In essence, HS lays out a logical decision tree that starts with general categories and branches out
into more and more specific categories, with the idea being that any product that can be traded
has a corresponding code that can be used to identify it.
HS is significant because it makes it easier for countries to assess duties (assessment is the
process of determining the value of an item for the purpose of taxation; duties is a term used
interchangeably with import tax or tariff) and to collect trade statistics. More than 200 countries
use the Harmonized System, and more than 98% of merchandise in international trade is
classified in terms of HS codes.
There are currently 180 customs administrations participating in WCO. It is headquartered in
Brussels, Belgium.
International Chamber of Commerce
Founded in 1919, the official motto of the International Chamber of Commerce (ICC) is “The
World Business Organization.” It is the largest association of companies in the world. ICC
enables businesses to cooperate in order to set rules, resolve disputes, and advocate for policy
change on the world stage.
Incoterms are internationally recognized trade terms that clearly communicate the costs, tasks
and risks allocated to the buyer and seller in an international transaction. They outline who is
responsible for packaging the goods, arranging transportation, and paying import duties.
In 1923, ICC published its first work on international trade terms, and the first edition known as
Incoterms was published in 1936. Incoterms have been revised over the years, with the most
recent revision occurring in 2010. There are currently 11 Incoterms, and each Incoterm has a
three-letter abbreviation.
One very general way of understanding the differences is to think of Ex Works (EXW) as being
on one end of the spectrum, with the seller’s responsibility minimized and the buyer’s
responsibility maximized, while Delivered Duty Paid (DDP) is on the other end of the spectrum,
with the seller’s responsibility maximized and the buyer’s responsibility minimized.
Uniform Customs and Practice for Documentary Credits (UCP) was established by ICC in 1933
as a set of rules on the use of letters of credit, a method of payment involving banks that is often
used in international transactions.
ICC has hundreds of thousands of member companies located in over 130 countries. It is
headquartered in Paris, France.
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development (UNCTAD) was established in 1964
as an intergovernmental organization dedicated to assisting developing countries build their
economies. They do this by increasing access to digital technologies, ending regulations that
limit trade, and providing analysis, consensus-building, and technical assistance.
Among UNCTAD’s accomplishments is establishing preferential duty treatment for imports into
developed countries from developing countries. This means importers can import goods from
developing countries duty-free or at a reduced duty rate, making the developing countries more
competitive and ensuring a more fair playing field.
There are currently 194 countries participating in UNCTAD. It is headquartered in Geneva,
Switzerland.
International Maritime Organization
The Inter-Governmental Maritime Consultative Organization (IMCO) was established in 1948
and later renamed the International Maritime Organization (IMO) in 1982. It is a specialized
agency of the United Nations. IMO’s purpose is to create and maintain a common framework for
international maritime shipping (shipping via sea) in order to ensure safety, legality, security and
efficiency.
Among IMO’s primary functions is to regulate the maritime transport of dangerous goods. It
publishes guidelines for creating a Dangerous Goods IMO Declaration, a shipping document
used to declare that a shipment contains dangerous goods and to provide important information
to the carrier in order to ensure safe transport.
The International Convention for the Safety of Life at Sea (SOLAS) is an international treaty that
was passed in 1914 in the aftermath of the Titanic disaster. It is governed by IMO and has been
updated over the years.
An amendment in 2015 added a regulation requiring that exporters provide a Verified Gross
Mass of each container before it is loaded on a ship. This change was initiated due to the
realization that many exporters were misrepresenting the weight of their containers, leading to
potential safety issues.
There are currently 172 countries participating in IMO. It is headquartered in London, United
Kingdom.
International Air Transport Association
The International Air Transport Association (IATA) was established in 1945 as a trade
association for the world’s airlines. Its purpose is to promote and support airlines and to establish
industry standards.
Among IATA’s primary functions is to regulate the transport of dangerous goods by air. It
publishes guidelines for creating a Shipper's Declaration for Dangerous Goods, a shipping
document used to declare that a shipment contains dangerous goods and to provide important
information to the carrier in order to ensure safe transport.
There are currently 278 airlines participating in IATA, representing 117 countries. It is
headquartered in Montreal, Canada.
International Organization for Standardization
The International Organization for Standardization (ISO) was founded in 1947 and consists of
representatives of national standards organizations from countries around the world. Its purpose
is to create and maintain international standards in order to ensure safety, fairness, and efficiency
in international trade.
ISO is not specific to any one particular industry, and plays a role in maintaining standards in
industries as varied as manufacturing, transportation, energy, healthcare, agriculture, financial
services, and information technology.
There are currently 162 countries participating in ISO. It is headquartered in Geneva,
Switzerland.
United Nations Commission on International Trade Law
The United Nations Commission on International Trade Law (UNCITRAL) was established in
1966 as an association of nations committed to the modernization and harmonization of laws
which regulate international trade.
Function: UNCITRAL activities include helping governments coordinate to achieve mutually
beneficial economic goals, promoting and facilitating the unification of disparate legal systems,
and collecting and disseminating information on case law and other legislative activity.
UNCITRAL is currently composed of over 50 member states. Members are elected to serve six-
year terms by the United Nations General Assembly. UNCITRAL’s work is carried out in annual
sessions held alternately in New York City and Vienna.
Functions of international organizations regulating shipping business\
IMO FUNCTIONS

 Develop and maintain a thorough regulatory framework for shipping.

  Looking after the safety and security of ships.
 Administering environmental concerns related to shipping.
 Handling legal matters for maritime cases.
 Provision of technical cooperation
 To improve the overall efficiency of shipping

CHALLENGES FACED BY INTERNATIONAL ORGANIZATIONS IN REGULATING

SHIPPING BUSINESS

1. Over-regulation and politics:

While shipping is already claiming the title of a heavy regulated- industry, things change so fast
continuously transforming requirements and demands from shipping companies, seafarers,
stakeholders, ports, shipbuilders, classification societies, flag states, etc. Meanwhile, an
increasing trend of geopolitical tensions and sanctions imposition recently reveals how politics is
expected to gain an even greater impact on commercial shipping
2. Cost:
The above trends require continuous investment from shipping companies, in the first level, to
achieve compliance with the new regulations and, in a second level, to maintain sustainability
amid a constantly changing environment and an uncertain future. For example, widely discussed
lately are the cost implications associated with the 2020 sulphur cap, where ship-owners can
either install scrubbers on ships or opt for low-sulphur fuels, but both solutions increase costs
compared to the conventional HFO used until now. These new developments require from
companies to find efficient ways to manage the cost and survive or even make the difference
N/B We need to find a balance between the investment and the sustainable shipping.
3. Digitalization & Automation:
While the reality of a “smart present” makes the image of a “smart future” certain and given the
advantages presented by automation and smart technology, the biggest challenge for shipping
organizations seems to be a right mindset. Companies which are still stuck in their traditional
way of doing things will have to change perspective in order to adopt to new reality of the digital
sphere.
4. Decarburization and lower emissions: Shipping could not stay unaffected from the ongoing
discussion and greater awareness on the adverse effects of climate change globally, with IMO
boosting efforts to lower the industry’s emissions over the last years. The IMO’s landmark
decision of 2018 for at least 50% reduction in greenhouse gases by 2050 (compared to 2008)
triggers new challenges for the industry on how to manage a lower-emissions pathway.
Five sustainability challenges for shipping by 2030 - SAFETY4SEA
Topic 8: LINER AND TRAMP TRADES
Liner trade
 Liner trade is a seaborne trade of one company (or a consortium of companies), which
maintains regular services between a certain number of ports.

 It is also the passage of ships between designated ports on a fixed schedule and at
published rates.

Within this trade one can further distinguish main routes: east-west and vice versa, north-south
and vice versa and short-sea lines. The latter provide a regular service between a number of ports
at the same continent, e.g. Rotterdam-Bilbao-Southampton-Rotterdam. The essence of all these
lines is:
• Times of arrival and departure in any port of the route are scheduled (and published) over a
certain period in advance; high reliability
• Tariffs are fixed over a certain period • Berth location in most ports is fixed
Tramp trade
A boat or ship engaged in the tramp trade is one which does not have a fixed schedule or
published ports of call. As opposed to freight liners, tramp ships trade on the spot market with
no fixed schedule or itinerary/ports-of-call(s).

Difference between liner trade and tramp trade

                    LINER TRADE
They work according to the schedule of the port
They follow fixed schedule
Their consignments are from many shippers
They have different document from different
shippers
They normally carry containers
The goods are normally carried in containers
                 TRAMP TRADE
They work depending on the order availability of the
orders.
They do no follow any fixed schedule
They usually carry consignments from one  shippers
They have one document for the shipment
They carry raw materials or semi raw materials
They mostly refer to bulk dry cargo
Assignment; Make notes on operations in linear trade and tramp trade
Liner Shipping Operations | PDF | Amortization (Business) | Underwriting (scribd.com)

Topic 9: MULTIMODAL TRANSPORTS

Multimodal transport

Multimodal is defined as the movement of cargo from origin to destination by several modes of
transport where each of these modes have a different transport carrier responsible, However
under a single contract or bill of lading. Single carrier during a single journey. The same
transport carrier is responsible for moving the shipment in all legs, in all modes. In simple terms,
Multimodal is using various modes of transport but with one transport bill of lading.
Advantages of Multimodal transportation are associated with:
a) Shipment tracking efficiency able to monitor with one transport carrier from door to door
delivery;
b) access to remote parts of the world with responsibility and liability of the movement with one
transport carrier;
c) efficiency in delivery time; and
d) minimization of logistics coordination expenses of a shipper
Modes of transport
1. Truck Freight — Road Transportation
Road transportation has come a long way since the days of horse and wagon shipments. Truck
freight alone accounts for more than 54% of all northern border freight between Canada and the
United States. Truck transportation is ideal for industries that require quick, small shipments
directly to a business, warehouse or consumer’s door and is equipped to handle possible delays.
2. Ship — Marine Transportation
Compared to air transportation, ships are capable of carrying immensely heavier loads for a
fraction of the cost. It is the preferred transportation for large items shipped in bulk, such as
metals, agriculture products, building supplies and others that cannot be reasonably
accommodated by plane.
3. Train — Rail Transportation
Since the invention of the railway, trains have played an important part in trade and logistics
around the world. As of January 2020, rail freight accounted for roughly 15% of northern border
freight between the United States and Canada, with the top three commodities being motor
vehicles and parts, mineral fuels and plastics. Rail transport is ideal for companies who require
fast, scheduled ground freight.

4.. Plane — Air Transportation

Air transport is the newest shipping method, but it is often the best choice if you want fast,
uncompromising delivery. Air transport is accessible across most of the world and is ideal for
shipments that need to be moved quickly across long distances, including overseas. Air
transportation also has a vast scope compared to rail and ship freight, as it is an ever-expanding
industry with several thousand airports and landing strips in operation across the globe.

Modal Interfaces
The use of unitized cargoes (containerization) has facilitated the intermodal exchange of
overseas cargoes and gives promise of a coordinated land and sea transportation system.
Intermodal transport
Intermodal transportation means moving large-sized goods in the same steel-based containers
through two or more modes of transport. It's a typical way of moving goods in modern times.
Intermodal transfer may involve truck, rail, ship, and then truck again. Basically, instead of
shifting goods from one vehicle to the next in their journey, intermodal transport handles these
special standardized containers instead. This process brings many benefits, such as increased
safety for the goods and faster delivery.
This mode of transportation system dates back to 18th-century Britain. The British used it to
move coal stored in containers over their canal network. But it wasn't until the 1960s that
intermodal become the preferred choice for sea transport.
Advantages
Rapid service: By using intermodal transport, a company can reduce delivery times. The
business can use the fastest mode of transport for long distances. Using containers also allows an
efficient transfer of goods from one mode of transport to another. Reduced loading and
unloading times also contribute to faster delivery.
Lower costs: Shippers enjoy lower prices, along with low handling costs. These prices are also
more predictable. Thus, the entire intermodal transfer is cheaper. Choosing railway mode is also
a good way to reduce costs, as it consumes less fuel while traveling a considerable distance.
Increased capacity: Because most industries use intermodal transfer, it's relatively easy to
achieve economies of scale and ensure increased capacity. Companies can also use reverse
logistics to fill up large containers.
Safety: The containers store the goods throughout the journey. They also don't need handling
during shifting between the modes of transport. These containers are like a warehouse and limit
the risk of damage to the goods. Thus, nobody has access to the goods while they're in transit.
Using containers also reduces the chances of theft. Also, the container is also always under
supervision, unlike an over-the-road shipment, thus providing the highest security for goods.
Eco-friendly service: Reducing a shipment's carbon footprint minimizes the environmental
damage it causes. According to Breakthrough Fuel, trains emit 5.4 pounds of carbon dioxide per
100-ton mile, while trucks emit 19.8 pounds over the same weight and distance
Disadvantages
Structural costs: Can intermodal transport reduce your transportation costs? It largely depends on
your product's structure. If your container is heavy and requires a crane to move it to trucks from
rail, then shippers can manipulate the costs, leading to higher infrastructure costs. This issue is
common in some developing countries where there's a lack of standardization.
Delays: Although many companies prefer intermodal transport because of its low cost, it may be
slower in some situations. For example, the railroad may not offer direct routes to all
destinations, thus increasing the delivery time. The time to unload the carrier can also be
frustrating if that facility is delayed.
Reliability: Because intermodal transport depends on more than one transit mode, there's a high
chance of the chain breaking at some point. Different businesses may be in charge for each mode
of transport. This requires more logistical coordination and increases risk. Unexpected delays
due to weather change and equipment failure are possible.
Importance of multimodal transportation
 Centralization of responsibility in one transport operator;
 Use of international experience, in transportation as well as in the field of bureaucracy
and commerce;
 Economies of scale in transport negotiations;
 Better use of available infrastructure and more efficient means of transport, focused on
cost reduction;
 Reduction of indirect costs (e.g. human resources).
TOPIC 10: SHIPPING BUSINESS IN KENYA
BACKGROUNG OF SHIPPING IN KENYA
Kenya is not a traditional maritime country. Formal shipping activities may only be traced to
1896, when the first jetty was built at Kilindini (the.present Mombasa Port), which was used
mainly for the discharge of material arriving from overseas for the construction of the railway
line through Kenya to Uganda. This was the beginning of the construction of the present Port of
Mombasa, situated at the western part of Mombasa Island. Oceangoing vessels however from
India, the Arabian Gulf and Far East had used the ’Old Mombasa Port’ on the eastern side of the
xsland many centuries before. From the afore said,.it is apparent that development of organized
shipping activities in Kenya owes much to the construction of the Kenya-Uganda Railway Line.
One of the acute problems faced by our colonial masters (The British Government) at the
beginning of the construction of the Railway Line was the provision of some kind of port
facilities for the unloading of steamers bringing materials, a problem which was solved by
construction of lighterage wharves in Kilindini. This event marked the transition of the port of
Mombasa from the era of dhow traffic to the primitive era.^ Jetties were built so that fully loaded
lighters could lie alongside at any side and be off loaded by steam cranes directly into a wagon.
Traffic continued to increase in the Port and an additional wharf, 168 metres long, was built,
which represents the inauguration of the era of marginal quay extension at the Port. The first of
the deep water berths was opened 2 0 years after (l937 ).
Immediately prior to the First World War considerable pressure upon port facilities developed at
Mombasa and efficient working was further handicapped by the very irregular arrival of
steamers. Due to complaints arising from delays and damage of cargo, in 191^ the British
Government made available £700,000 for building 7 the much needed deep water berth. As the
railway extended and European settlement and export of crops increased, the need for deep water
berths were completed. These were followed by construction of 2 more berths in 1929 » t>ut
further major construction had to be stopped because of the outbreak of the Second World War.
Further construction took place in 1953» 195^> 1958 and onward. The Port Administration of
the colonial era remained an extension of the British Maritime Administration. Most, if not all, of
the developmental decisions were made in Britain until Kenya attained independence, when port
activities fell under the hands of East Africa Railway and Harbours, and later to the Kenya Ports
Authority (KPA) under the Ministry of Transport and Communication
currently
The Port of Mambasa has grown to be very important, not only to Kenya, but also to her
neighbouring countries, especially the land locked. It is the only modern port in East Africa. The
port handles all of the Kenya's international maritime trade and those of some of the other East
African countries, which include Uganda, Rwanda, southern Sudan, Zaire and to some extent
Tanzania and Somalia, though at present trade of the last two countries through the port is
irregular and restricted to a small quantity, but this does not rule out extensive use of the port by
these countries in the future. Table I indicates transit traffic cargo - import/export, handled by the
port from 1980-84. The port of Mombasa has been under the Kenya Ports Authority since 1978,
which came into existence by an Act of Parliament, Q chap. 391 of the Laws of Kenya. The
Authority was established after the collapse of the East African Community, It Operates under
the Ministry of Transport and Communications. The Authority is also in charge of other minor
ports along the coast, which include Kilifi, Malindi, Shimon, Mtwapa, Lamu, Funzi, Vanga and
Kiunga. These, though minor ports, are important for fishing vessels and coastal trade within the
country and also used by leisure vessels, expecially by tourists. The port of Mombasa can
accommodate all types of ships. The depth of the berths average fifteen metres and can handle
cargo from twentyfour ships at a go. Mombasa handles over 510 million tons of cargo annually
(see Table II and III, which indicates the principal commodities by the port (exports/imports)
from 1980 .1984).

Nature of shipping in Kenya

Kenya is connected to various trading zones such as Europe, North America, Indian
Subcontinent, Far East and Australasia by regular liner services provided by various shipping
lines. Most of the trade with South America is conducted by transshipment either through North
American or Europe ports.
The port of Mombasa has facilities for handling all the above mentioned types of cargo. There
are sixteen dry general cargo berths, while dry bulk cargoes are handled at the Mbaraki Wharves
composed of the cement wharf and two other dry bulk handling wharves. Liquid bulk cargoes are
handled through two specialized terminals, one for crude oils and the other for refined oils and
other bulk liquids.
The liquid bulk cargoes are dominated by crude oil. Kenya’s crude oil originates primarily from
the Persian Gulf and is owner' carried by major oil companies or by chartered vessels for the’
smaller ones'. Other bulk oils and bulk liquids originate from various sources and are also
transported on owner carriage basis or in chartered.

Types of shipping business in Kenya

LINER SHIPPING

Liner shipping could lay claim to being the world's first truly global industry. Likewise it
could claim to be the industry which, more than any other makes it possible for a truly
global economy to work. It connects countries, markets, businesses and people,
allowing them to buy and sell goods on a scale not previously possible. And as
consumers, we have become used to seeing goods from all parts of the globe readily
available in the stores we visit.
BREAK BULK SHIPPING SERVICE

In shipping, break bulk cargo or general cargo is a term that covers a great variety of goods
that must be loaded individually, and not in intermodal containers nor in bulk as with oil or
grain. Ships that carry this sort of cargo are often called general cargo ships.

The term break bulk derives from the phrase breaking bulk — the extraction of a
portion of the cargo of a ship or the beginning of the unloading process from the ship's
holds. These goods may be in shipping containers (bags, boxes, crates, drums,
barrels). Unit loads of items secured to a pallet or skid are also used.


Shipping business regulation in Kenya
Overview of KMA
Kenya Maritime Authority (KMA) was set up in June 2004 as the semi-autonomous agency in
charge of regulatory oversight over the Kenyan maritime industry. Maritime safety and security
is one of the Authority’s core functions.  As the pacesetter of the Kenyan maritime industry,
KMA thus strives to strengthen national maritime administration through enhancement of
regulatory and institutional capacities for safety and security, fostering effective implementation
of international maritime conventions and other mandatory instruments on safety &  security,
promoting maritime training, coordinating Search and Rescue, preventing marine pollution and
promoting preservation of the marine environment as well as  promoting trade facilitation and
maritime investments.
Roles of Kenya Maritime Authority
1. It coordinates the implementation of policies relating to maritime affairs and promotes the
integration of such policies into the national development plan.

2. It advises the government on legislative and other measures necessary for the implementation
of relevant international conventions, treaties, and agreements to which Kenya is a party.

3. It undertakes and coordinates research, investigation, and surveys in the maritime field.

4. It develops, coordinates, and manages a national oil spill contingency plan for both coastal and
inland waters.

5. It maintains and administers a ship register.

6. It deals with matters pertaining to maritime search and rescue and coordinates the activities of
the Kenya Ports Authority, the Kenya Navy, and any other body engaged during search and
rescue operations.

7. It enforces the safety of shipping, including compliance with construction regulations,

maintenance of safety standards, and safety navigation rules.

8. It conducts regular inspections of ships to ensure maritime safety and prevention of marine
pollution.

9. It oversees matters pertaining to the training, recruitment, and welfare of seafarers. Seafarers
are people who work on ships or people who travel regularly on the sea.

10. It plans, monitors, and evaluates training programs to ensure conformity with standards laid
down in international maritime conventions.
11. It conducts investigations into maritime casualties including wreck.

12. It undertakes inquiries with respect to charges of incompetence and misconduct on the part of
seafarers.

13. It ensures, in collaboration with such other public agencies and institutions, the prevention of
marine source pollution, protection of the marine environment, and response to marine
environment incidents.

14. It regulates activities with regard to shipping in the inland waterways including the safety of
navigation.

15. It administers and enforces the provisions of the Merchant Shipping Act, 2009, Regulations,
International Maritime Conventions, Treaties, Agreements, and any other Instruments relating to
the Maritime Sector for the time being in force.