Ocean Service Contracts & Service Arrangements

by George Carl Pezold, Esq.
Pezold, Smith, Hirschmann & Selvaggio, LLC

         If you are an importer or exporter with a significant volume of ocean freight, you should definitely consider entering into a formal contract with the ocean carriers and/or NVOCC's that you deal with.
         A well-drafted agreement will cover key issues such as volume commitments, rate stability and predictability, surcharges, including fuel surcharges, service obligations, and miscellaneous issues such as contract duration, detention and demurrage, dispute resolution and other concerns.
         An experienced transportation attorney can assist you in drafting and negotiating an agreement that protect your interests. Here are some of the things that we consider when drafting a "shipper-friendly" agreement (thanks to the Westbound Transpacific Stabilization Agreement, which published the following "Service Contracting Process Checklist" on its website):

Volume Commitment
 
   a.. Does the contract clearly define the obligations in terms of the overall volume commitment (minimum quantity commitment, or MQC, as well as maximum, if any)? Is there a clear mutual understanding of the importance of a genuine commitment to volume?
   b.. Does the contract language provide for projected volume and capacity forecasting by both parties?
   c.. Are both shippers and carriers clear in their expectations as to how much cargo is likely to move under the contract, with their commitments tailored to reflect this? How should the volume commitments be structured, given the parties' expectations and any flexibility needed by the parties?
   d.. Does the contract contain any options for more clearly setting forth volume (for the benefit of carrier) and equipment/capacity (for the benefit of shipper) commitments? Possible options could be:
                a.. A maximum volume commitment in addition to the required MQC, and provisions to specify what happens when the maximum is reached/exceeded.
                b.. Language that clarifies whether the MQC is equally divided over the contract term or may be shipped on a less regular/consistent schedule
               c.. Language clarifying if tolerances are allowed (e.g., shipper will tender/carrier will supply a certain number of containers per week __%)- More granular MQCs by commodity, equipment, trade, or origin/destination pair, for example, depending on shipper's ability to forecast and commit this level of detail
               d.. A clause providing that shipper commits to and pays for a certain quantity of cargo whether the space is used or not.
   e.. Is it possible to subdivide the commitment by time frame (i.e., quarterly, monthly) for better planning and monitoring by both sides?
  f.. For contracts covering multiple commodities and trade lanes with different characteristics, should 'sub-MQCs' be considered for each, that take into account the possible different circumstances and how they might change?
   g.. Does the contract provide for review and adjustment of commitments based on performance in the prior time period?
   h.. What provisions are there for non-performance against the commitment, by both sides? (see more detailed separate items below)
   i.. Are there provisions for "force majeure" events that could impact the actual volume shipped?
   j.. Is it necessary or practical to have a 12-month contractual commitment? Based on the nature of the commodity, would a shorter or longer contractual time frame be preferable?

Rate Applicability
 
   a.. For how long should the pricing in the contract be fixed?
   b.. If pricing is to be fixed in terms of increases, should there be a similar provision for decreases? Can language be included to provide stability and predictability for both parties?
   c.. Does the contract provide for specific time frames when rate levels can be reviewed, such as upon completion of the MQC, or on a regular calendar basis? Are there market conditions spelled out in the contract that would trigger reviews in rate levels?
   d.. Can there be shorter-term fixed pricing within the overall contract duration? Should prices be fixed both up and down for a specified time frame, based on commodity?
   e.. If there are fixed time periods within the contract for pricing (e.g., monthly, quarterly), does the contract include language that specifies when the pricing for the next time period is to be reviewed and finalized? Does it include specific advance notice requirements?
   f.. Is there some type of mutually agreed upon index in the contract that would trigger adjustments in rates, both up and down?
   g.. As an alternative, should the contract include a minimum and/or maximum band within which rates would float up or down throughout the life of the contract?
   h.. Will the contract contain any "force majeure" clause on pricing, which would allow for unforeseen events that could affect rates (other than normal GRI adjustments, etc.)?

Surcharges

   a.. Does the contract clearly specify and define those surcharges that are covered under, and governed by, the contract?
   b.. Where a contract provides for assessment of new charges over the contract term, is there a notification period and specified acceptance process for such new charges?
  c.. Is there a provision stipulating a minimum notice period for any surcharge increase?
  d.. If surcharges are governed by the applicable carrier tariff, is there a clear reference to this in the contract?
  e.. Are the definition, purpose and calculation methodology of each surcharge clearly spelled out, including any acronyms referenced?

Fuel Surcharges

  a.. Is it clear to all parties what fuel-related charges are covered under the contract are subject to?

Specifically:

   a.. Is the "bunker fuel charge" clearly defined and consistently described throughout the contract? Is there agreement on the scope of the charge and what it covers, so as to avoid duplication with other possible charges?
   b.. Is the amount of the charge, and the formula on which the charge is based, clearly laid
out in the contract?
   c.. Will the charge be self-contained in the contract, or will it refer to carrier's governing tariff? If the latter, is there clear wording in the contract that makes this easy to understand and refer to?
   d.. How will the charge reflect changes in bunker costs over the contract term? Will there be a floating formula or other mechanism to modify the charge periodically? If there is a floating formula, how often and on what basis will it be modified?

Service Obligations

   a.. Are service guarantees and commitments (equipment, schedule, transit time, etc.), subject to mutual agreement provided for the contract? if so, are they clearly defined in the contract and understood up front?
   b.. Are there guarantees and penalties, which would normally be mutual, with both parties prepared to adhere to these conditions and penalties?
  c.. What protection do carriers have with respect to fall downs and phantom bookings?
  d.. What protections are included in the contract with respect to rolled bookings by carriers?
   e.. Have parties considered clearly defined "force majeure" clauses that are mutually agreeable to both sides for conditions that could affect performance?
   f.. Are there provisions for notice to be provided by either party to the other party when there are delays in production problems, vessel departure, vessel arrivals, etc.
   g.. Does the contract language provide for regular, mutual performance reviews during the contract term, using clearly defined metrics? Does it enable both sides to amend performance commitments going forward based on these reviews, by mutual agreement?

Dispute Resolution

   a.. Does the contract define and stipulate the recourse that either party will have in the event of a contract dispute?
   b.. Among the possible options for recourse that might be considered:
   c.. A clearly defined channel of communication at senior management level for both carrier and shipper, to resolve disputes informally
  d.. Mediation/arbitration services offered by the FMC, through its Office of Consumer Affairs and Dispute Resolution Services (CADRS)
   e.. Resolution by court or arbitrator, specifying governing law and applicable venue, if above fails

Other Considerations

  a.. Does the contract define and clearly spell out terms and conditions for detention/ demurrage charges and free time allowances, either in detail or through a reference to carriers' governing tariff provisions?
  b.. Are there defined parameters by which the contract is considered to be "fulfilled" by either party? Is there a specified point (measured by duration, volume, or some other factor) at which the contract obligations are no longer binding?