Deferred rebate

Deferred rebate. A carrier of goods by sea may offer his services to the general public for a price. The price may be set for users of the service but, in order to obtain long-standing custom from some users, the carrier may offer a “rebate” or discount, which is eventually a return of some of the price originally paid by the user.

The rebate may be an immediate reduction in the advertised freight (as in the “dual rate contract” system) or it may be payable after a specified period, if the user continues to use the carrier’s services. The “deferred rebate” is therefore a return by the carrier of a part of the original freight payment to a shipper if the shipper has been a “faithful” or “loyal” customer over the specified period and has complied with all the terms of the rebate agreement or arrangement between the carrier and the shipper. In this system of deferred rebating, usually the shipper must use that carrier’s services for a period of six months to earn the discount, but he receives the discount at the end of a second six month period, only if he continues to use that carrier’s service exclusively during this second period. The shipper can generally lose the rebate earned during the initial six-month period and any rebate earned during the second sixmonth period if he uses the services of any other carrier.

The deferred rebate system seems to have originated in about 1877 and its use by liner conference has been much criticised. The system was not universally accepted by shippers, not only because it was against the freedom of choice but also because it required a complex administration to make it work and for a shipper to claim his rebate.

Under the U.S. Shipping Act 1984, a deferred rebate may not be offered or paid by a common carrier. In the U.S. these activities may be seen as fraudulent or discriminatory in nature, especially if a customer is almost forced to use a carrier’s services because of the apparently cheaper transportation cost. In particular, liner conferences may use this method of retaining the loyalty of their customers by making it expensive for a customer to switch from a conference to a non-conference carrier. Such “loyalty arrangements” may also be seen as a tactic to permit conferences to build up their monopolistic power. This may be contrary to free market, fair competition and the freedom of choice of the shippers between different carriers and is therefore prohibited under U.S. law. The penalties on carriers are high, even if the carriers are foreign-based, but carrying goods from the United States.

This is one form of “loyalty contract” where the user’s “loyalty” is being purchased, or the shipper is being forced to give his loyalty to one carrier or conference. Another form of “loyalty contract” is a system where the shipper signs a service contract, undertaking to use the carrier’s services for a specified period and he can then obtain an immediate rebate, each time he ships cargo with the carrier. The shipper’s use of another carrier may lead him to become liable in damages to the original contracted carrier for breach of the rate agreement or arrangement. This alternative to the “deferred rebate system” seems to have commenced just after the First World War (1914—1918), because of the shippers’ dissatisfaction with the deferred rebate. In the early days of the dual rate contract the immediate rebate could be about 9 per cent of the freight rate while the deferred rebate could be about 10 per cent. With the more flexible service contracts and time/volume contracts, especially as provided for in the U.S. Shipping Act 1984, it may appear the deferred rebate system has all but disappeared.


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Written by Ship Inspection

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