Loyalty contract

Loyalty contract.  This is a contract by which a carrier or a conference offers a shipper a lower than normal advertised freight rate if the shipper undertakes to use the carrier’s or conference’s services exclusively.

The purpose of such contracts is to induce or encourage shippers to retain their use of the carrier’s or conference’s services over a long period. Liner conferences used this method in the very early days of their existence for the main purpose of defending their member lines’ interests against outsiders’ competition. This can be seen as a third objective of liner conferences, the other two being freight rate stability and rationalisation of sailings.

Under the U.S. Shipping Act 1984 a common carrier is not permitted to use a loyalty contract, except in conformity with the antitrust laws. Under the Act, a loyalty contract is a contract by which the shipper obtains lower rates by committing all or a fixed portion of his cargo to a specific carrier or conference. It does not include “service contracts” (which see, below) or a contract based simply upon an agreed volume being shipped over an agreed period of time. “Loyalty contracts” are generally of two types, the “deferred rebate” variety where the shipper obtains his discount after a period of loyal custom, or a “dual rate” contract where the shipper obtains an immediate reduced freight rate or tariff but can be required to pay damages for breach of contract to the carrier if he uses another earner. The former is prohibited under the U.S. Shipping Act 1984 while the latter is more commonly used.

While the United States may frown on loyalty contracts as being against the antitrust laws for restraint of trade and anti-competitive, the courts do not seem to have any trouble with accepting loyalty contracts. In an early case, Mogul Steamship Co. v. McGregor, 1892, the English House of Lords decided that such agreements were not a conspiracy to restrain trade.


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