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International Transportation

What’s Wrong with Ocean Transportation Contracts & What Can Be Done About It

It’s that time of year again when Beneficial Cargo Owners, steamship lines and Non-Vessel Operating Common Carriers come together for their annual ritual known as, “Contract Season”.

Dan Gardner

Business Solutions Consultant

It’s that time of year again when Beneficial Cargo Owners, steamship lines and Non-Vessel Operating Common Carriers come together for their annual ritual known as, “Contract Season”.  With maritime supply chains in disarray, bunker charges on the rise and the lingering hangover from the Trump Tariffs still a factor, one can only wonder when and how negotiations between BCO’s, carriers and NVOCC’s will pan out in a year wrought with uncertainty.

As an NVO and BCO, I’ve had the opportunity to negotiate ocean transportation contracts from both sides of the table. Whereas I won’t profess to be an expert on all facets of FCL/LCL shipping, those experiences did provide me with insights on how the negotiation process really works, and more importantly, what happens when it comes time for the parties to honor their mutually agreed upon service, volume and price commitments.

Based on those experiences, the first thing I’ll say about ocean transportation contracts is that there are a number of flaws, omissions and not-so-best practices inherent to carrier-direct contracts, as well as NVOCC Service Agreements. Whereas these issues were present long before the outbreak of COVID-19, market volatility has made them more pronounced and as such, a source of heightened contention between shippers and carriers.

This blog is dedicated to pointing out “what’s wrong with ocean transportation contracts”, how those contracts might evolve to better accommodate what is clearly a symbiotic carrier/shipper relationship and ultimately, what BCO’s can do to manage the agreements that they enter into.

Ocean Contracts Aren’t About Enforceability…They’re all About Leverage

Long before the Trump Tariffs or COVID-19, the underlying issue with ocean contracts was (and remains) that while these documents contain all of the requisite legal terminology and clauses, when push comes to shove, they’re almost never enforced. I saw this as an Ocean Transportation Intermediary (NVOCC), as well as an importer, so there’s no shortage of examples that illustrate this point.

The first scenario deals with the infamous, “Minimum Quantity Commitment” clause. Whereas a carrier has every right to enforce this clause, historical practices have shown (repeatedly) that as long as the BCO “signed up for next year” with the carrier, shortfall penalties for not hitting MQC’s in the current year were forgiven. Conversely, if an importer or exporter entered into an agreement with an NVOCC and spot rates went below the contracted rate, all bets were off and the BCO either wanted a new rate, or they took their volumes elsewhere.

On the other hand, when spot rates are on the rise, carriers and NVO’s look to implement a General Rate Increase or Peak Season Surcharge. As a BCO, and in spite of having contracts that clearly stipulated no GRI’s or PSS’s, I recall instances where carriers would “honor the rate”, but then either reject bookings outright, or accept bookings (and containers), only to roll them multiple times. Needless to say, both carriers and BCO’s have long memories and these types of shenanigans didn’t do much to foster a spirit of true partnership.

There are numerous other examples that illustrate the historically “loosey goosey” nature of ocean contracts, but the overarching theme is this: Ocean contract aren’t about enforceability, they’re about leverage. And because market shifts will always determine who has the leverage, ocean contracts should be recognized for what they are; temporary guidelines, the details of which can be adhered to or ignored, depending on prevailing market conditions, and who’s calling the shots.

Until such time as ocean contracts are actually enforced, this leverage-based type of dynamic will continue to hobble relationships and ultimately, operational execution.

More Skin in the Game and Bucking the Status Quo

In order to move from leverage-based relationships to one of mutual respect for contractual commitments, I think that both shippers and carriers have to have more skin in the game. Again, there are lots of examples, but one could be, that upon committing to a weekly TEU allotment, the carrier has to respect that commitment. In other words, when a carrier starts rejecting bookings that are within the quantity allotted, then a penalty should be charged to the carrier.

In terms of BCO responsibilities, the bogus practice of making multiple bookings for the same container and then executing a “no-show booking” against the carrier that didn’t get awarded the freight, should also be met with a penalty. In the spirit of fairness, if an NVOCC does honor a weekly allocation at the contracted rate, they should have the right to quote market rates for any containers that are beyond the weekly allotment.

Moving on to land-side issues, the small matter of demurrage and detention must also be addressed, starting with greater contractual granularity. With so much congestion at ports around the world, there simply needs to be a higher degree of contractual clarity around matters like per diem charges, when the clock starts ticking on containers and under what circumstances demurrage and/or detention can be charged.

For example, if a BCO gets four days of free time on a U.S. container terminal before demurrage charges start, but it takes seven days to get an appointment to pick up an available container, then the BCO should not be charged for three days of demurrage. Or, if an importer’s drayage provider gets turned away at a terminal in spite of having a legitimate appointment, they shouldn’t be charge demurrage for the amount of time it takes to get a new appointment (assuming the new appointment will be honored).

On the detention side of the house and speaking from the responsibilities a BCO should shoulder, where is it etched in stone that detention free time has to be ten, or even fourteen days? I know it’s easy for me to say because I’m no longer a BCO, but any importer that needs to delay returning a container for more than fourteen days has issues that go way beyond detention fees. Although it’s a story for another blog, it’s possible that detention fees incurred by an importer are a symptom of a much more serious supply chain ailment.  
In the spirit of true collaboration, perhaps the carriers and Marine Terminal Operators should focus less on penalizing BCO’s for late container recovery/return and incentivize them for early pick up and returns. With carriers in such a hurry to get containers back to Asia, might it not make sense to negotiate a lower FEU rate with a BCO in exchange for an (enforceable) commitment to return an empty in five days? How about five days free time on detention with a “discounted” FEU rate?

Equitable Contracts Are One Thing, Managing them is an Entirely Different Story

Clearly, there are lots of opportunities for BCO’s, carriers and NVOCC’s to bring greater equity and clarity to both existing, as well as future contractual agreements. As part of that evolutionary process, BCO’s also need to be able to effectively make the transition from negotiating ocean transportation contracts to tactically managing them on a daily basis. To do that, they require a Transportation Management System (TMS) that can align contractual details with what’s going on out in the field.

Even in times of less market volatility, BCO’s have to be able to make sure that what they’ve negotiated becomes reality once containers start moving. That means that they not only have to house contract details in a web-based TMS, but that they must have real-time visibility into every facet of the maritime eco-system to ensure compliance with service commitments. In a post-shipment world, TMS’s must also be able to align contract rates with actual charges to support an auditing function.  

In recognition of the above, 3rdwave has developed a web-native, maritime-centric TMS that addresses the needs of BCO’s from the moment a contract is signed, through goods movement and into a billing audit environment. By combining contract management tools with real-time visibility across the entire maritime eco-system (that includes a “Port Monitor” App), 3rdwave not only allows BCO’s to house contract details, it empowers them to manage those contracts at the container-level throughout the life of an agreement.

So, while there’s lots of structural work to be done with regard to how carriers, NVO’s and shippers design ocean contracts, there are tools out there that allow BCO’s to proactively manage what’s been agreed to. And as ocean contracts become more granular (and they should), BCO’s will come to depend on enhanced visibility and management capabilities to enforce those contracts. In my opinion, it will be solutions like 3rdwave TMS that helps to transition the ocean contract dynamic from one that is based on leverage, to contracts that are built on mutual respect and enforceability.