By Adina Solomon
Panalpina has dozens of contracts with air carriers.
Twice a year, the Switzerland-based freight forwarder meets individually with selected companies for rate negotiations.
Though those meetings take one afternoon, the analysis work and data-crunching stretch the process to three months, says Lucas Kuehner, Panalpina’s global head of airfreight.
“Our strategy with the contract is to set a general framework of cooperation between two companies and to make sure that our partners follow our standards,” Kuehner says. “I think that’s what we’re trying to achieve in terms of contracts. But we’re trying to get beyond that pretty quickly because then what we’re really interested in is how can we work with an airline and get them to act as a key partner and understand what they need also so that we can act as a key partner, but that really takes more than contract conversations. That really then takes developing a relationship, understanding each other’s businesses, and that’s really what we then try to do through our semi-annual sourcing process.”
Michael McDaniel and Christoph Wahner, both partners at the Law Offices of Countryman & McDaniel specializing in cargo law, talk about some of the pitfalls a forwarder should watch out for with contracts.
The Los-Angeles-based attorneys, who supervise cases in 87 countries, say there are two types of agreements between freight forwarders and shippers that their firm commonly reviews: volume commitment subject to ordinary trading terms, and contracts that supersede the normally applicable trading terms.
That’s where danger lies, Wahner says.
By entering into these special agreements with volume shippers’ “perhaps onerous demands,” the freight forwarder could be eviscerating protections ordinarily afforded under applicable law and trading terms, as well as its liability insurance coverage in the event of a claim, he says.
They say forwarders should always have legal counsel look at contracts.
McDaniel says he and Wahner are seeing a trend toward freight forwarders and shippers adopting special contracts.
“It’s incumbent on the parties to get the contracts right at the beginning to make sure that they’re acceptable to the legal liability underwriters because those agreements can last for a long time,” McDaniel says.
He says these contracts tend to have evergreen clauses.
“If they’re not canceled by one party or another, they have often times a clause known as an evergreen clause which will automatically renew the contract for another term of either a year or three years or what have you,” he says.
Sounds like a timesaver, right?
But McDaniels insists that an evergreen clause is a trap if you aren’t aware of the deadline. Wahner says these clauses must be put in a calendar so the date doesn’t fly by.
“You may be stuck with those terms. You may be stuck with those rates. So legal counsel needs to look through that document and make sure that if there is an evergreen clause, that it’s been detected and identified and all parties put on notice of it,” Wahner advises.
He says contracts, particularly those with evergreen clauses, need to have mechanisms to make adjustments for fluctuating costs. For example, the rates could be variable or subject to renegotiation based on aspects beyond control, such as fuel rates or security charges.
“No one wants to get stuck in an unprofitable contract,” he says.
Kuehner says Panalpina’s contracts include performance requirements, how it deals with claims and its code of conduct. The forwarding company also talks about e-cargo and the environmental standards of the equipment that the carrier uses.
“Basically, all the things that you don’t need necessarily on a day-to-day basis transaction, but you need it in writing once something goes wrong,” Kuehner says. “I think that’s a good way of describing of what we want to have in a contract in general.”
Cathay Pacific Airways’ contracts usually state the selling rates and space offered by the airline, including the flight, day of week and specific allocation, Mandy Ng, manager cargo sales and marketing at Cathay Pacific Airways, tells Air Cargo World.
“At Cathay Pacific Cargo, we view the freight forwarders as our long-term business partners, and we always strive to provide the best service levels and solutions in the airfreight industry,” Ng writes.
McDaniel and Wahner discuss how complicated air cargo contracts can become, especially if one of the parties tries to deviate from standard International Air Transport Association terms that are used by both forwarders and airlines.
Wahner gives an example: say a freight forwarder enters into an e-AWB agreement with an airline and the standard term for cargo damage is that there must be written notice within two weeks.
“Let’s say the freight forwarder enters into this very lucrative contract with a large manufacturer, and that large manufacturer’s general counsel, unfamiliar with transportation or air cargo, has a boilerplate vendor contract, and it says, ‘Well, in the event of a loss, we have three months to let you know to make a claim for it,’” he says. “So now we have a freight forwarder that agreed to accept it as late as five months, but the freight forwarder is bound under the IATA terms to give notice to the airline within two weeks. So what happens when the freight forwarder gets notice two months after delivery? They basically just accepted the loss without recourse against the actual responsible party.”
People in freight must review freight agreements, McDaniel stresses. Wahner says to always include a severance clause and to speak up if there is something unenforceable in a contract.
“We saw one [contract] earlier this week from a Fortune 500 company that contained a requirement that we as the forwarder would agree to abide by the regulations of the Interstate Commerce Commission, which incidentally has not existed for about two decades,” McDaniel says.
Another issue that arises with forwarder contracts is which country’s law will apply to the interpretation of the contract.
“As we see the trend toward more and more international contracts, there can be pitfalls for the unwary – the consequences of a contract being interpreted under an international legal jurisdiction,” he says.
For example, many special contracts between forwarders and shippers have provisions that call for the limitation of liability to be overcome in circumstances where gross negligence has occurred, McDaniel says. In the U.S., gross negligence is a high standard, but if EU laws apply, the bar is much lower.
Kuehner says all the contracts and negotiations with companies come down to freight forwarding being a people’s business.
“You really have to have a good understanding of who you’re working with because what it boils down to is filling a plane that leaves at a certain point in time, and once the plane has left and is not full, then that product is gone. It’s never going to come back. So in order to understand how exactly the other company works, there are cultural things to understand,” Kuehner says. “As a freight forwarder, we’re acting on behalf of our clients, of the shippers, and we need to find the best optimal way to move shippers’ cargo, and that takes into account not just the cost but also service standards, quality standards and so on. And that really takes time to develop the relationship.”
Ng says Cathay Pacific considers a freight forwarder to be a business partner.
“Together, we provide the best products and services to our mutual customers. We strive to develop win/win solutions on all commercial issues,” she says.
Kuehner says having a relationship with a company is beneficial. When an Icelandic volcano’s ash cloud shutdown airspace across Europe in 2010, there was a backlog of cargo that needed to be flown, he says. Panalpina got access to pallet positions in its airline partners’ planes, including British Airways.
“The cargo needed to move because otherwise, a company over in Europe was risking a line shut down from their assembly plant,” Kuehner says. “We would not have received that space from our key partner there unless we had a relationship in place in the first place. You can’t just come at the last minute and ask for a favor, so to say, if you don’t have something to give in return.”
He also says key partners such as Cathay Pacific and Lufthansa have delayed a plane’s departure by a few hours in order for Panalpina to put on the cargo of a mutual client.
A healthy relationship with a company includes a contract.
And the advice that McDaniel and Wahner drive home again and again is to have contracts reviewed.
McDaniel points out the high value of much of the cargo that planes carry.
“We see the effect upon a contract that was not well thought out and not reviewed,” he says. “When you’re dealing with risks of that magnitude, it puts into sharp focus the need for proper foresight in drafting these agreements and having them frequently reviewed just as you would doing a safety check on an aircraft.”