|Gary Ferrulli, president of Global Logistics Consulting, and a panelist on the JOC webcast “Today’s Container Shortage Ordeal: Assessing Where You Stand with Carriers and Exploring Options,” answers your questions on ocean carrier contracts and agreements.|
Q: How do you prevent carriers from applying surcharges to escape from their space commitments?
I think I understand the point and let's start with the Service Contract. When my clients are asked to allow new surcharges to go into effect, it has already been addressed in the Service Contract with a provision that says, in effect, this contract constitutes the entirety of the agreement between the parties and if either party wants to change/amend the contract, both parties have to agree. That said, what happens when the carrier says, "Well, if you don't agree to this, we may not be able to load your cargo.”? Again, we have addressed the issue in the Service Contract, with a non-performance "penalty clause" that entails a reasonable charge and a reduction in the MQC.
Don't take this as a "we never bend" situation; under certain circumstances, my clients have agreed to changes in contract terms. Check out my point in the webcast on getting to know the carriers well. It comes down to specific circumstances. And always recall that Service Contracts were created to specifically allow individual shippers and individual carriers to negotiate whatever they want to, as long as it doesn't violate other regulations or laws.
Q; What would you consider a meaningful non-performance penalty that an ocean carrier would accept?
First it comes down to who the company is, what they ship, volume, etc. In essence, what "value" does the carrier see in the shipper? Next, what is the importance of the non-performance? By that I mean, if you are a retailer with 45 percent of your goods moving in 12 weeks and they fall down, that’s one thing; it is another if you ship 10 a week for 52 weeks and they miss 2 loads per week. But for the purpose of a "thumb nail rule," if they have liquidated damages for a shortfall in the MQC, the penalty to them should reflect something very similar or the same. On top of that, should they refuse/not accept offered bookings for any reason, you should be able to reduce the MQC one for one.
There is no fixed rule for this. My clients have had very different views and we've come up with very different answers, some having nothing to do with a monetary penalty. It comes down to your company's objectives, requirements, and the impact if loads aren't taken. Lastly, some have suggested that "we just lost a sale and it cost us $xxxxx." My experience is, don't bother trying to go there.
Q: What’s the penalty for not complying to volume commitments?
I trust that you mean: What is the cargo interests penalty for not meeting the minimum quantities written into the contract?
If so, it is a negotiable matter, but generally speaking if one signs up for, say, 1,000 containers annually there will be a clause saying that for every container under 1,000 shipped there is a charge of $250 (this is called liquidated damages). So if one signed for 1,000 containers and moved 950, then the carrier can send you an invoice for $12,500.
As a practical matter, if you move your cargo with a carrier in good faith and miss the number per the above example, when the next contract rolls around you can ask the carrier to "extend" the current contract for a full year and then within the two-year period ship a total of 2,000 containers (assuming you are signing up for 1,000 the second year). Carriers will usually agree to that.
One thing to recall in my presentation is the last slide: be realistic. Meaning, if you are working on negotiating service contracts and know that the larger volume shippers get lower rates, you might be tempted to inflate your real numbers… DON'T. And if in the middle of a service contract period someone comes in the door offering to lower your rates by $xxx, unless you have excess volumes, don't do that either. You can call your carrier or carriers and tell them "so and so offered me these rates, is there anything you can do about it?" and that presents a whole other category of problems.
Lastly, like the ads on TV on drugs, I'll give you the legal take: if you don't fulfill the contract terms, then the rest of the contract applies, including any liquidated damage provisions. Make sure you know and understand the consequences well before signing any contract.
Q: Do or can carriers guarantee space for customers?
The simple answer is yes, they can and do.
It comes down to who the account is, what their relative "value" to carriers is, and what they are asking for versus what are they willing to give in return.
These are all individually negotiated contracts. I've been in the position of having to be a "carrier executive" negotiating with cargo interests, and now I am a neutral party usually hired by the cargo interests to assist in their RFP process, so I have a unique perspective of what can and is done.
--Contact Gary Ferruli at firstname.lastname@example.org.