Shipper/Carrier Contracts - A Move towards Fixed Agreements on Price and Capacity

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A consideration of potential changes in the market and how Reed Smith can assist in the light of such changes.

The traditional "gentlemen's agreement"

Traditionally, carriers' agreements with customers as regards how much cargo will be transported and at what price have taken the form of informal "gentlemen's agreements". This has allowed each party flexibility as regards the finer points of the agreement.

However, in the past couple of years the market has become far more volatile and rates can fluctuate by several hundreds of dollars within a short period of time. As a result, carriers have been trying to increase rates and surcharges wherever possible, while shippers have been seeking to renegotiate rates downwards. Such volatility, and inability of the parties to agree on a way to perform the contract at prices with which they are both satisfied, has led to an increasing number of difficulties in how to interpret these "gentlemen's agreements".

Parties who are faced with these difficulties of interpretation are starting to find themselves involved in litigation in an attempt to resolve them. The recent high profile claim brought by Argos against Maersk is the first recent example of a customer taking a carrier to court over a breach of contract. This is despite the fact that, according to the European Shippers' Council, several customers have complained in the last year that carriers have been ignoring terms and conditions previously agreed to. Although the Argos/Maersk case has recently settled, and so far no shippers have followed Argos' lead in commencing litigation, this case could open the door for other shippers to take similar action.

Going forward: fixed agreements on price and capacity

In the wake of the claim filed by Argos, Maersk announced that in future it proposes to focus on reaching fixed agreements with its customers on both price and capacity, and other major shipping lines may well wish to follow suit. Indeed, in statements following the recent settlement of the litigation both Argos and Maersk stated that their relationship would be on a "significantly firmer contractual basis" going forward.

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