Micro Trends For 2021: Ocean Shipping Contracting Responses

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The major thrust of this post is to underscore certain micro trends which have emerged in the ocean transport industry in the recent past, which are not expected to transcend into macro territory, but will be present for a good while, and need attention since they can result in substantial damages/losses to importers and exporters. Focusing on these can result in big dollar savings in the short and long run. These micro trends have surfaced as a result of a combination of events and developments such as unpredictable turns in the import trades from China/Asia to the United States; the export levels and trends of agricultural commodities from the U.S. to China; the prevalence of equipment unavailability to the shipping industry (both containers and chassis, and now, sometimes vessels).

The responses to the impact of the global pandemic, and these other factors have combined to produce port congestion and other uncertainties which have resulted in ocean carriers canceling sailings (blank sailings), cargo being rolled over to other vessel voyages than the ones booked, and the imposition of steep spot pricing to replace long term contractual pricing. The most productive course should be to assume all the above micro trends will continue and need to be dealt with immediately. The immediate best practice solutions involve carefully considered contracting in this ocean transport arena. The micro trend dynamics addressed here may be alive and well for the next contracting season and then some. Also, as will be noted below, there may be a new micro-trend afoot resulting in shorter contract periods. We need to immediately explore contracting solutions in these threatening environments.

The short-term worst-case micro trend assumptions (certainties).

  • Ocean carriers will continue blank sailings strategies which are clearly short-term solutions and usually made at the last minute by ocean carriers based on real time booking statistics related to the contemplated vessel voyage strings. Count on the continuation of cancelled sailings. These have resulted in positive economic returns for ocean carriers when properly executed, and they are not expected to quickly dissipate for that reason.
  • As cargo accumulates at the various ports as a result of blank sailings, and other economic and operations phenomena, also count on your cargo being rolled over to subsequent vessel voyages from sailings on which your cargo was booked.
  • Hand in hand with the roll over phenomena is the suspension of service contract rates and the implementation of that now ubiquitous term—spot rates. The spoken or unspoken “contracting” dynamic goes this way: “if you want to be assured space on the vessel voyage on which you booked, or even the vessel immediately after that one, if that voyage has been cancelled, you must agree to higher freight rates than those for which you contracted in your service contract —i. e., spot rates.” At this juncture, to certain shippers, they seem necessary especially at the time of year when goods must be on the shelf (in real brick and mortar stores, or in e-commerce fulfillment centers) by certain date.
  • The other sure thing in this current arena is port congestion. This involves large volumes of import cargo sitting at ports awaiting pick up or vessels for loading, mainly due to chassis shortages. Export cargo is likewise immobile waiting to be loaded on vessels. This is the perfect mix for historically high demurrage and detention charges. Shippers and truckers are being subjected to millions of dollars of additional detention and demurrage charges despite their inability to return empty containers or pick up import cargo due to lack of available chassis. These are the congestion issues which are to a large extent being caused by overwhelming imports related to the holiday season, a partial recovery to the pandemic, the replenishment of depleted inventories, and the unpredictability of blank sailings’ impact on ports. The congestion factor is so severe there are at the time of this writing more than a dozen vessels anchored offshore from the Los Angeles port areas awaiting discharge delayed by cargo at the terminals which can only be slowly delivered for many reasons, the main ones being shortage of chassis.

Best contracting strategies as a shipper in a clearly non-traditional micro trend environment.

  • Ocean Contracting in the U.S. Trade Lanes. The main contract instrument in ocean shipping in the United States is, of course, the service contract. Service Contract is a defined term in the Shipping Act of 1984, as amended, (“the Act”) at 46 U.S. Code § 40102:

(21) Service contract. — The term “service contract” means a written contract . . . in which— (A) the shipper or shippers commit to providing a certain volume or portion of cargo over a fixed time period; and (B) the ocean common carrier. . . commits to a certain rate or rate schedule and a defined service level, such as assured space, transit time, port rotation, or similar service features. (Emphasis supplied).

The most salient of these regulatory features applicable to ocean carriers in this discussion is the following at 46 U.S. Code § 41104:

(a) In General. — A common carrier . . . may not—. . .
(2) provide service in the liner trade that is—
(A) not in accordance with the rates, charges, classifications, rules, and practices contained in a. . . service contract entered into. . .(Emphasis supplied).

Litigation should never be the strategy with which one leads, but in view of the dollar values of the impact of some of these micro trends, it should not be dismissed altogether.

  • The hefty damages factor. There are obvious regulatory penalties for violating these provisions, as well as the possibility of Complaint proceedings for which attorneys’ fees may be awarded. We recognize that a shipper’s first instinct is not, and should not be, to sue ocean carriers which are vital partners in the supply chain process. In the present environment, it is not unusual for a shipper to be subjected to claims for hefty sums by ocean carriers. In one recent proceeding a carrier is suing for damages of over $450,000 for detention charges where the facts are somewhat precarious. These types of claims by ocean carriers may alter innate reluctance by shippers to engage in legal remedies.
  • Impact of the trio of blank sailings, rolling over of cargo, and spot pricing. These factors, while individual events, are somewhat linked in that they influence each other and often end up in the imposition of substantially increased spot rates in order to gain access to vessel space. This must be addressed with specificity in service contract language. objectives:

Variations of the above trends should be addressed in service contracts if sailings are missed due to cancellation of sailings. The foremost consideration should be the assurance of space for that cargo on the next vessel calling the port. At the very least, a guarantee should be sought for a specific number of TEUs on the next vessel. If increased rates are inevitable, these should be structured in the service contract to keep the last-minute panic factor to a minimum. Depending on the shipper’s negotiating power with an ocean carrier, liquidated damages might even be considered if the ocean carrier does not meet agreed-to volume assurances per vessel voyage.

The basic idea here is to presume that these micro trends are real and are going to proceed into the near term, perhaps the next couple of years, and should be pro-actively considered in the contracting process.

  • Shorter term service contracts. In view of the micro trend of pricing fluidity, the phenomena of structuring service contracts for shorter periods than the usual annual terms is starting to take hold. At the very least, service contracts are being structured so that pricing is defined on a rolling basis at defined intervals. In this scenario it would be best to define measurable factors in the contracting process which would assist in quantifying rate changes up or down.
  • Congestion, chassis/container shortages, demurrage and detention. This is an area of potential major issues somewhat distinct from the mischief which can be experienced from the trio of factors addressed above (blank sailings, rolled over cargo, and spot pricing). The one feature which they have in common is that damages which can result from this area of potential mishaps can reach substantial levels within a relatively short period. The potential damages in this environment which should be considered at the service contract negotiation stages are the following:
    • Detention charges. These can quickly accelerate into serious amounts especially when numerous containers are involved. Ocean carriers enter into Uniform Intermodal Interchange Agreements (“UIIAs”) with almost all, if not all, motor carriers which pick up and deliver intermodal equipment to/from ocean carrier terminals. The UIIA has provisions which have a negative impact on importers in the U.S., in terms of detention assessments. These provisions make a) the trucker responsible for detention (charges for not returning empty containers within a period of free time); and b) these agreements contain provisions that the ocean carrier will not invoice the motor carrier for detention until the equipment is returned to the carrier at its terminal.

The impact of the above is that the importer, including consignee NVOCCs, are not made aware of the collection process taking place with the truckers until all equipment has been returned to the terminal. The trucker inevitably fails to pay the amounts claimed. The so-called “Merchants” on the bill of lading do not become aware of accumulating detention charges until months or sometimes literally years after the fact. At this point in many cases, the charges are at five or six figures.

    • A best practice in this detention scenario is for the parties to negotiate with the ocean carrier in the service contract that they be invoiced on a monthly basis as soon as the detention starts accruing to provide immediate notice to all “Merchants”, as that term is defined in the ocean carrier’s bill of lading, of the accruing detention. This would be before the containers are returned to the carrier as provided in the UIIAs. This would have an “incentivizing principle” to keep these charges under reasonable control, as opposed to creating a novel revenue stream for ocean carriers. Note the charges above in the paragraph titled “The hefty damages factor” referencing a real current case with over $450,000 in detention charges which could have easily been avoided had the “incentivizing principle” required by FMC Guidelines been adhered to and as suggested here.
    • Another best practice in door delivery transactions. When ocean carriers have undertaken “door” delivery responsibilities, all equipment obligations should be explicit in the service contract. The responsibility for attainment of chassis for delivery; any consequences related to demurrage; and detention should all be allocated to the ocean carrier. If not, it has been clearly demonstrated that carriers will allocate these charges to the shipper per tariff or bill of lading terms.
    • Congestion consequences allocation. To the extent possible, language should be included in service contracts that any circumstance, not of the shippers’ making, that results in detention and/or demurrage due to port congestion circumstances, including the availability of chassis and or other equipment will not be allocated to the shipper or Merchant. This drafting of this provision will challenge the author, but it can and should be addressed.

Conclusion

The suggestions herein are not intended to be the whole universe of remedies, but rather they are intended to focus the shipping industry on a new approach to service contract negotiating that takes into consideration these relatively new phenomena which have taken hold in the industry. Who would have ever predicted that service contract rates could be so readily suspended for spot rates or that service contracts would not “assure space” without causing a bigger stir than what we have seen so far? It is time to revisit the “contract” terms in service contracts. Note that the definition of service contract in the Act specifically defines the term in providing “service levels” such as “assured space.” What happened? It’s time to refocus on the basics of the service contract negotiating process.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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