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Where the paper trail leads

By Adina Solomon on June 3, 2013

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.

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