FBX Index: Devil is in the detail when it comes to shipping contract enforceability

One of the issues being hotly debated amongst some shippers in the current market environment pertains to the level of enforceability of the shipping contracts.

There are clearly cases of shippers who find that they have been unable to book cargo volume in accordance with their service contracts over the past months.

This usually gives rise to the decades-old back-and-forth discussion where shippers complain that carriers do not always deliver the capacity promised in the contract when the market is tight and spot rates are high, and carriers complaint that shippers do not deliver the promised volumes when the market suffers from overcapacity and spot rates are low.

This usually gives rise to the decades-old back-and-forth discussion where shippers complain that carriers do not always deliver the capacity promised in the contract when the market is tight and spot rates are high, and carriers complaint that shippers do not deliver the promised volumes when the market suffers from overcapacity and spot rates are low.

The only difference this time is the magnitude of spot rates involved, as they have never been as high as what is currently the case.

But instead of just flogging this old horse from the perspective of what is – and isn’t – fair, it is useful to look at a legal precedent which deals with this exact issue. However, such a view will not lead to a clear resolution but rather a new set of challenges for both shippers and carriers should this matter be brought to a legal resolution.

A slight caveat here is that I am not a lawyer and hence the following is simply my extraction of facts and findings from a specific case. The case is a carrier suing shippers for not delivering agreed volumes, and to some degree it would be logical to assume the current situation is identical but with the roles reversed.

The specific case in question is the lawsuit following in the wake of the bankruptcy of The Containership Company (TCC) in 2011. TCC was launched as a new carrier on the Pacific in April 2010 in the midst of the market rebound after the financial crisis. At launch, the conditions were not unlike those seen today with rapidly rising spot rates and a lack of vessel capacity and shortage of empty containers. But towards the end of 2010 and into 2011 the market went downhill fast and on April 8th 2011 TCC filed for bankruptcy. The last 4 Pacific sailings in the contract period were thus cancelled.

TCC had standard contracts on the transpacific service with shippers, all of which had the usual one-year duration for expiry April 30 2011. The contracts included standard clauses for liquidated damages if the shippers did not book the volumes agreed in the MQC (Minimum Quantity Commitment).

TCC’s lawyers sued some 75 shippers for failing to deliver the volumes agreed to. TCC lost the case.

And this is where the waters get a bit murky, and shippers anxious to address any carrier’s failing to deliver the capacity necessary might want to tread carefully.

Even though TCC lost the case, the devil is in the detail – and those details have 3 important parts:

Part 1 – contracts are enforceable

The contracts were found to be valid and enforceable by the court. The shippers’ tried to argue that the contracts were illusory and hence void for consideration. The court disagreed.

Part 2 – Force majeure does not apply

The shippers’ lack of performance was not excused by the force majeure provisions in the contracts. This failed for two reasons for the shippers. First, they did not give notice of force majeure during the period. Secondly the argument was that adverse action taken by Shanghai International Port Group (SIPG) made it arduous for the shippers to live up to the contractual obligation, but the court found that financial hardship is not grounds for avoiding performance under a contract.

With these two parts is seems to be a clear run to the end-zone for TCC, but then comes the all-important part number 3.

Part 3 – Performance excused by TCC’s termination

TCC terminated the services on April 8 and the contracts ran until April 30. In the view of the court this means that the shippers could have chosen to book their remaining volumes under the MQC on the 4 services which were cancelled in the remainder of April 2011.

Physically this would have been impossible as only 10% of the shortfall on the total MQC could have been loaded on the last four vessels. But this was not material to the court. As they stated: “There is no enforcement mechanism to compel the [shippers] to ship cargo evenly, and the requirement that the [shippers] do so “as far as possible” is tantamount to a requirement that the [shippers] use their “best efforts.” “

Consequently TCC lost the case.

And what does this tell us in the current market circumstances?

Essentially this leaves us at a point where on one hand the service contracts are indeed enforceable, and it is hard to claim force majeure, but on the other hand legally shippers could wait until the very last sailing before booking their entire MQC. If the carrier could then not accept all these bookings at the last minute that would presumably be a failing on the part of the carrier and not the shipper.

It was clear that the MQC is only to be seen from a full-year perspective after the fact, and not on a week-by-week basis due to lack of a weekly enforcement mechanism. Hence the reverse must also be true – the carrier is not obligated to provide 1/52 of the MQC each week, only the full MQC seen over the full period.

But for shippers frustrated with the current situation this presumably also works in reverse. It was clear that the MQC is only to be seen from a full-year perspective after the fact, and not on a week-by-week basis due to lack of a weekly enforcement mechanism. Hence the reverse must also be true – the carrier is not obligated to provide 1/52 of the MQC each week, only the full MQC seen over the full period.

This means that a carrier could – hypothetically – approach all shippers on April 30 2022 and say they can now accept all the remaining bookings on the MQC on this date. If the shipper cannot suddenly book many thousands of containers on that day, then it is the shipper not living up to the contract.

Additionally it could be hypothesized that a carrier could claim to have sailed with empty space in weeks where the shipper did not deliver 1/52 of the MQC hence fulfilling their obligation in those weeks but the shipper not using it.

Of course, there are likely many additional legal nuances involved, but as a relatively simple example of whether the MQC is enforceable or not the TCC case points to the duality that, yes, the contracts are enforceable but no, they are not enforceable on a week-by-week basis.

And as a final comment for any frustrated parties who do want to seek a swift legal resolution to the matter – be forewarned that even though TCC went bankrupt and the case started in April 2011, it was only legally concluded in October 2020 when the appeal of the ruling from September 2019 was re-affirmed.

It would therefore seem that commercial discussions between shippers and carriers pertaining to such grievances might be more beneficial than action in the US legal system if time is of the essence.

Disclaimer: Please note that I was employed by TCC in the period April to December 2010, but has not been in any way involved in the subsequent court proceedings.

Source: Hellenic Shipping News

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