Unlike the standard contract documents used as a matter of course in other segments of the shipping industry, contracting for project logistics services often operates under one-sided, inflexible, or unfit-for-purpose documents.
These can contain terms and conditions clearly more appropriate for procurement or service agreements, technically causing the agreement to be “in breach” from the moment of signing, according to Ashley True, regional counsel with T. Parker Host. Logistics service providers may be reluctant to red-line or amend inappropriate clauses for fear of alienating their clients, while many project owners and engineering, procurement, and construction (EPC) companies often do not have the appropriate documents readily available when creating agreements.
As the result of a panel discussion during the 2019 JOC Breakbulk & Project Cargo Conference in New Orleans, a team of industry experts has come together to address the sector’s contracting shortcomings. The Project Logistics Contracts Model Rules Initiative includes True; John Hark, director of North American Chartering with FH Bertling and adjunct professor at Texas A&M University at Galveston (TAMUG); Utsav Mathur, senior associate, Norton Rose Fulbright US LLC; and Dennis Mottola, global logistics consultant and recently retired head of Bechtel Global Logistics.
During the panel, Mathur cited an “unfit-for-purpose” contract example in which a freight forwarder had committed to providing services that would have put the company in violation of Jones Act regulations if actually undertaken as written. Service providers often assume that anomalies such as this will simply not be enforced — and often they are not — but when they are included in an agreement, the service providers are vulnerable. “It’s important to quantify the cost of dispute resolution,” Mathur told JOC.com in a recent interview. “If the contract anomalies have to be litigated, costs will mount. There’s a snowball effect.”
Contracts provided by EPCs often start with their own clients — project owners with oil and gas, mining, power, or other projects to be constructed. Flow-downs from those contracts can be required in formats used for logistics services, Mottola said, even if they have little to do with logistics services. EPCs may not have the support they need from their own legal departments, or from outside resources, to create contracts that are fit for purpose.
Project forwarders often recognize that the contract given to them by their client is a construction contract, or a material supply contract, not one intended for a logistics provider. However, it can be difficult to have a meaningful discussion about inappropriate terms and conditions, according to the members of the contracting initiative. Service providers can be kicked out of negotiations if they protest, even if requests for changes to a contract are reasonable and logical.
The rules initiative team says it will consult with relevant professors at the University of Houston, Tulane Maritime Law, and TAMUG as the project develops. The goal, Hark said, is to develop industry-tailored rules that incorporate the interests of shippers and logistics service providers but are also acceptable to EPCs and other service providers and project owners. In theory, the model rules should improve productivity, save time, and provide cost savings for all participants.
Mottola and Hark plan to present the contracting model during an August general meeting of the Exporters Competitive Maritime Council, a Houston-based project logistics advocacy group. Industry members interested in joining this effort can contact Mottola via LinkedIn.