Forwarders Certificate of Receipt (FCR) and Practice of its Usage in Ukraine

The FCR was developed and introduced by International Federation of Freight Forwarders Associations — FIATA (Fédération Internationale des Associations de Trasitaires et Assimilés) for the use of international freight forwarders within the organization. FIATA is the largest international non-governmental organization in the field of transportation founded in 1926 in Vienna, which today represents an industry covering approximately 40,000 forwarding and logistics firms, employing around 8 - 10 million people in 150 countries. Since freight forwarding is one of the most important components of international trade, the primary the aim of FCRs was to unify and regulate, to some extent, the relationships between consignor (owner of the cargo) and freight forwarder, which usually find themselves in different jurisdictions when concluding an international sales contract.

Generally, the legal nature of the FCR is as follows. The FCR is a document certifying the receipt of a specific consignment that is issued by the freight forwarder, acting as an agent of consignor or consignee and acknowledges that the forwarder is in possession of the consignment and assumed responsibility of the latter together with irrevocable instructions for dispatch of the said consignment. In other words, by issuing the FCR the freight forwarder certifies that (i) he has taken over the goods specified in the FCR and that the right of disposal of these goods is vested solely in him i.e. nobody is entitled to dispatch the goods except the person to whom the FCR has been issued; (ii) the goods appear to be in apparent good order and condition; and (iii) he has received the irrevocable instructions on the disposal of the goods, e.g. to forward them to a purchaser or to deposit the goods till receipt of further instructions from the person for the benefit of whom the FCR has been issued (consignee).

It is obvious that at the present time international trade is unable to survive without the participation of banks providing financing for the international trade transactions. The international sale of goods such as grain and scrap metal is marked among other by special financing provided by the banks called so-called short loans, i.e. loans that shall be repaid in a short term from the proceeds received from the sale of goods purchased under the provided financing. The said transactions may be also described in the following way: "obtaining a loan — purchasing goods — selling goods — repaying the loan". Naturally, every bank providing financing for the described transactions, will do its best to secure the said financing. Taking into account the specific nature of the mentioned transactions, as well as the short transaction period, the standard legal security mechanism e.g. lien or pledge may not suffice. In order to secure the latter enforcement, a bank shall execute some formalities set out by local legislation e.g. attestation by notary, registration etc. If the bank is located in Switzerland or the Netherlands, the borrower in a third jurisdiction and the seller as well as the goods are in Ukraine, then the execution of the mentioned formalities will need a lot of time and may significantly complicate the performance of "fast" transactions under the short loan.

The situation described above resulted in the development of more "flexible" and "fast" legal instruments securing to a bank, the financing of international trade transactions and the performance of borrowers' obligations. The FCR recently became one such instrument. Taking into account its legal nature as described above, banks started to provide financing for international trade transactions against the FCRs issued to the benefit of the bank by the freight forwarders in accordance with the instruction of the consignees (owners). The said security mechanism suits the banks since (i) the issuance of FCR does not require much time; (ii) proceeding from the legal nature of the FCR under the FIATA rules and the international good business practice, while issuing the FCR the freight forwarder undertakes, in particular, to follow only the bank's instructions related to the goods under the issued FCR. The latter is very important with a view to securing the bank`s interests as far as the bank is, practically, entitled to dispose of the goods under the issued FCRs until the receipt of the loan repayment.

Therefore, we deem it expedient to provide readers with details of a recent case related to fulfillment of the obligations of a freight forwarder under the issued FCRs to the bank providing financing against the said FCRs considered by Ukrainian courts, wherein the authors of the present article represented the interests of the international bank.

FCR: The Ukrainian Approach

The plot of the case was as follows. A foreign bank (the "Bank") provided financing to a non-resident company (the "Purchaser") for purchase of grain in Ukraine. A Ukrainian freight forwarding company (the "Freight forwarder") providing services to the Purchaser under the instructions of the latter issued the FCRs for the benefit of the Bank. The issued FCRs contained the standard wording used in such types of transactions: "We (the Freight forwarder) hereby confirm that the complete cargo has been received and taken over by us in apparently good order and condition and is held to the irrevocable disposal of the Bank...We herewith also confirm that we will not move the cargo without the instructions of the Bank..."

The loan was not repaid and the Bank, in order to enforce its rights regarding the cargo (goods) under the issued FCRs, provided the Freight forwarder with the relevant instructions on the cargo's disposal. However, the latter were not followed by the Freight forwarder. Thus, the Bank had every reason to believe that the goods under the issued FCRs that should have been "held to the irrevocable disposal" of the Bank and which should not have been moved "without instructions of the Bank", were merely dispatched under the instructions of the Purchaser (the borrower) notwithstanding the FCRs issued to the benefit of the Bank. In response to the Bank's instructions the Freight forwarder stated that the issued FCRs were invalid in Ukraine. The issue as to whether the FCRs are valid or invalid in Ukraine was considered at first by the Commercial Court of Odessa Region after being approached by the Bank to protect its interests.

It is fair to say that the issue brought before the court i.e. legal assessment of the FCRs is complex and complicated, taking into account that it is neither regulated by national Ukrainian legislation nor governed by international treaties binding on Ukraine. In practice, the FCR is an international custom developed in international trade practice. In any case, the said thesis is supported by Prof. Jan Ramberg1, who is regarded as one of the most reputable experts in the field of international freight forwarding. In particular, he stated that: "...the existing chaos (of legal regulation of freight forwarding) would have been removed by international legislation long ago. Thus, it does not seem likely that mandatory legislation will supersede the contemporary practices within the near future."2 Besides, Prof. Ramberg put special emphasis on the danger of consideration by the courts of the continental system of law of disputes related to international freight forwarding in the absence of relevant national provisions regulating the said specific relationships3. It should be also noted that it is only one aspect of the "everlasting problem", described by the Prof. Pokrovskiy in 1896. Indeed, unlike public law, civil law is much more conventional and shall be least affected by a particular situation. The latter shall be regarded as a dubious achievement of civil law, since conformism usually means stability and invariability. At the same time, there is also a flip side of the coin — relationships are developing too quickly for the law to regulate. As a result, the courts are trying to squeeze new relationships into the Procrustes` bed of old legal concepts. The latter, in its turn, does not encourage the justified consideration of the said cases. In such a situation the law can develop in two ways: to adopt new legislative acts on the issue urgently or to interpret the said relationships taking into account the existing good business practice.

Reverting to our case, we would like to sum up the position of the claimant (Bank). Under the issued FCRs, the Bank was entitled to dispose of the goods (consignment) indicated therein, and the Freight forwarder was obliged to follow the Bank's instructions regarding the latter. The said obligation of the Freight forwarder was based on the FCRs issued by him. The Bank provided the Freight forwarder with instructions to transfer the goods under the issued FCRs and all the documents related thereto to the third party. The Freight forwarder failed to perform the said instructions and thereby violated his obligations to the Bank. The Bank (claimant) asked the court to oblige the Freight forwarder to transfer the goods in accordance with the Bank's instructions.

It should be noted that Ukrainian legislation in force does not contain any provision on the FCRs. At the same time, the claimant requested the court to interpret the rights and obligations of the parties under the issued FCRs applying international trade usages and good business practice. Letters from the Ukrainian Chamber of Commerce and Industry and Association of International Freight Forwarders of Ukraine confirmed the position of the said Bank.

The Bank argued its position referring to:

  1. Article 11 of the Civil Code of Ukraine which provides that "civil rights and obligations shall arise from the persons' actions provided by civil legislation acts as well as from those that are not provided hereby but generate civil rights and obligations by analogy";
  2. Article 4 of the Commercial Procedural Code of Ukraine, which states that in the absence of legislation regulating relationships in a dispute with participation of a foreign business entity, the commercial court may apply international trade usages;
  3. Article 7 of the Civil Code of Ukraine, according to which civil relationships can be regulated by practice (usage), in particular, by good business practice. Good business practice (usage) shall be the rule of conduct not provided by civil legislation acts but which has been developed in the particular sphere of civil relationships. The latter may be provided for by the relevant documents as well as not provided in any document. The Higher Commercial Court of Ukraine, in its Interpretation of 31 May 20024, pointed out once more the possibility (which actually means necessity) of application by Ukrainian courts of international good business practice.

The Commercial Court of Odessa region refused to apply international good business practice and trade usages and dismissed outright the Bank's claim. Thus, the said court actually confirmed the position of the Freight forwarder that the FCR is invalid in Ukraine. The said decision might have had negative consequences for the Ukrainian freight forwarding business as a whole. It is well known that the ignoring of the FCRs by the Ukrainian court resulted in a ban imposed by FIATA on Ukrainian freight forwarders to issue the FCRs with regard to scrap metal.

The case was further considered by the appellate and cassation instances and the positions of both instances were in marked contrast to the position of the court of the first instance described above.

The Odessa Appellate Commercial Court reversed the decision of the court of the first instance, pointing out that "while adopting the decision in the case... the commercial court did not take into account the specifics of relationships of international freight forwarding, including the adherence to FIATA standards." We are of the opinion that the appellate court took a significant step by subscribing to the Bank's position on application of international trade usages and good business practice. Such a court's flexibility and readiness to follow the justified position related to application of foreign law or international good business practice occurs quite rarely in Ukraine.

The Higher Commercial Court of Ukraine confirmed the legality and reasonableness of the Resolution of the Odessa Appellate Commercial Court and stated that: "issuance by the freight forwarder of the FCR with an indication that the right of irrevocable disposal of the consignment creates an obligation of the freight forwarder to follow all the instructions on the consignment's disposal, and entitles the holder of the FCR to demand the performance of the said instructions. Thereat in disputable relationships the right of the claim to demand the latter is grounded by the undertaking arising out of the issued certificates (the FCRs) by the Respondent, and the sense of the said relationships includes the obligation of the freight forwarder without instructions of the claimant not to dispose of the consignment under the issued FCRs and to transfer the said consignment under the claimant's instruction, as well as the relevant right of the claimant to demand the performance of the latter."

The Higher Commercial Court of Ukraine also noted that proceeding from the case materials and "... taking into account good business practice in accordance with Article 7 of the Civil Code of Ukraine, as far as the practice on the certificates usage (the FCRs) in international freight forwarding, have been confirmed by the attached to the case letter of the Association of International Freight Forwarders of Ukraine... and certificate of the Ukrainian Chamber of Commerce and Industry..., the appellate court reasonably resolved to satisfy the claim..."

The respondent approached the Supreme Court of Ukraine with the "second" cassation appeal. However, the court has not found any grounds to admit the said appeal for consideration.

Implications

We believe that the case described above will have a significant effect on the Ukrainian international freight forwarding business. By the nature of our job, we have on repeated occasions dealt with unfair freight forwarders, which considered that since the FCR is not incorporated into Ukrainian "written" legislation, the said document is invalid in Ukraine and, therefore, the rights of its holder cannot be protected. The described case is testimony of the contrary. Undoubtedly, application and interpretation by Ukrainian courts of good business practice in this case, for almost the first time in Ukrainian judicial practice, shall be considered a positive step towards the development of the Ukrainian judicial system. Moreover, the judicial decisions in this case may significantly improve the image of Ukraine held by international organizations (e.g. FIATA) as a state with a legal system, which acknowledges common rules developed in international trade and business.

Footnotes

1. Professor Emeritus of Private Law, Stockholm University

2. The Law of Freight Forwarding, J. Ramberg, 2002, FIATA, p. 27

3. The Law of Freight Forwarding, J. Ramberg, 2002, FIATA, p. 18.

4. On some aspects of considering cases with participation of foreign business entities and organizations Interpretation of the Highest Commercial Court of Ukraine of 31 May 2002, No. 04-5/608

Oleg Y. Alyoshin is a partner with Vasil Kisil & Partners (Kiev)
Nataliya Y. Mykolska is an attorney at law with Vasil Vasil Kisil & Partners (Kiev)

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