General cargo contract

General cargo contract. This is fundamentally a loyalty agreement or arrangement by which the shipper undertakes to ship all his cargo with an independent liner company or with a liner conference.

For the shipper’s benefit, the line or the conference, on behalf of its members, agrees to provide regular services as required by the shipper and, most important, to offer a freight rate at a tariff that is lower than the tariff for the general public. The tariff or rate book of a conference would usually contain both contract and non-contract rates of freight. This is a “dual rate contract”. If the conference offers a deferred rebate (illegal in the United States and in other places), the discount of about 10 per cent of the published noncontract rates would be payable after about six months of “loyalty”. If the deferred rebate is not being used, the reduction may be about 9.5 per cent for shippers who enter into the general cargo contract. For non-contract shippers the surcharges, such as the CAF, BAF and others would have to be added to the contract shippers’ rate which has already been increased by the 9.5 or 10 per cent as appropriate.

For the liner company’s or for conference members’ benefit, the main purpose of such a contract is to provide the carriers with a continuous flow of cargo from dependable, “loyal” shippers over a long period of time and thus minimize the effects of competition from other earners.

In a general cargo contract the main obligations can be looked at from those of the shipper and those of the carrier. The shippers agree to give the carrier their full support for the carrying of all the cargo, for an agreed period, from the shippers or from the parties whose agents the shippers may be (for example, if the shippers are freight forwarders or consolidators) and the shippers undertake not to act as agents for competitors of the carriers. The cargo consists of commodities specified in the contract. The shippers agree that they will make no arrangements for contractual discounts on behalf of persons not entitled to these. The shippers also agree to refrain from making a false declaration as to the nature, weight, measurement or value of the cargo shipped.

The carriers’ obligations are fundamentally to provide services which are sufficient for the ordinary requirements of the liner trade from the usual liner shipment areas to the advertised destinations, subject to the ability to carry the cargo and subject to the contract between the shipper and the carrier concerning the quantity to be carried in each shipment. The contract can also include the names of the ports of origin and destination for the commodities subject to carriage under the general cargo contract. The carrier also agrees to apply the contractual tariff rates. Carriers also give due notice of changes to the rates or surcharges or, if the contract is entered into on behalf of conference members, notice of any change in the list of member lines.

Under the U.S. Shipping Act, the concept of a general cargo contract was formalised as a “service contract” and this is defined

“as a contract between a shipper and an ocean common carrier or conference in which the shipper makes a commitment to provide a certain minimum quantity of cargo over a fixed time period, and the ocean common carrier or conference commits to a certain rate or rate scheduled as well as a defined service level such as, assured space, transit time, port rotation, or similar service features; the contract may also specify provisions in the event of nonperformance on the part of either party”.

The non performance or breach of contract may cause loss of freight and also instability in the liner trade in which the contract is used. The cargo contract in the liner service is necessary in order to provide the stability and regularity of services required by the trade and also for the lines to be able to make the necessary trade forecasts to warrant their investment. Therefore loyalty arrangements are common. However, either party may breach the arrangement.

Compensation for breaches can be calculated the nature of “damages” but these may be complex and difficult to calculate. The parties may agree that in lieu of all damages, “dead freight” for breach by the shipper is assessed in advance (“liquidated damages”) and specified in the contract. This usually occurs if the shipper fails to tender the minimum quantity commitment specified in the contract. The carrier or conference agrees to invoice the shipper and the shipper agrees to pay deficit charges on the difference between quantity of cargo actually shipped and the minimum agreed quantity at the rate specified in the contract. In a liner conference, the deadfreight may be distributed among the members in proportion to the revenue earned by each member under the service contract. The liquidated damages are sometimes about two thirds of the ocean freight which would have been payable to the carrier or conference member for the shipments concerned.

If the carrier or conference fails to fulfill its service commitments in the service contract the shipper’s remedy can be a reduction in the minimum agreed quantity. If a member of a liner conference ceases to be a member, the conference may grant the shipper dispensation to ship certain cargoes for a limited period in vessels of the line that left the conference. There is usually a general exceptions clause or force majeure clause in a service contract, under which each party to the contract may be excused from its obligations under the contract to the extent of and for the duration of the disability to ship the agreed cargo or perform the carrying services.

Service contracts and general cargo contracts are given considerable importance by shippers, especially in the United States and also by carriers. While service contracts assist shippers to negotiate specific commitments from carriers over a specific period, they do not permit the illegal, secret “deferred rebate” because of the requirements of filing details with the FMC and the disclosure of essential terms of such contracts to all shippers.

In the United States the service contracts come under the watchful eye of the Federal Maritime Commission (FMC) which oversees such issues as the eligibility of shippers’ associations and NVOCCs (Non-vessel operating common carriers) to enter into such contracts, the filing of information in the contracts with the FMC and the ability of carriers to amend and revise contract terms and conditions during the contractual period. Thousands of service contracts are filed with the FMC each year. Independent carriers account for most of the service contracts filed. Rate Agreements (for example, ANERA) and conferences encourage their customers to enter into service contracts mainly to ensure stability of revenue and to reduce competition by outsiders and independents, and shippers are encouraged by the cheaper contract rates which also promote stability of the shippers’ cost structure. Liner conferences seem to be reluctant to enter into service contracts with NVOCCs and parties who are not bona fide shippers. Accordingly, following pressure in the United States, the Shipping Act was amended to ensure that the definition of “shipper” was clarified to exclude agents of the shipper, ocean freight forwarders, brokers or NVOCCs which had not filed its tariffs with the FMC.


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