3 Facts for First-Time Shippers to Know About Shipping Contracts

Marine transportation is popular because it is a low-cost means of moving bulky goods over significant distances. Before a shipper can move freight, they must enter into a shipping contract with an ocean carrier (ship owner). Such a contract can be long-term or short-term. If you need to move your cargo via the sea, you need to make specific considerations before signing a shipping contract. This article examines critical facts for shippers to know about ocean contracts.

What Are Ocean Contracts? -- Ocean or shipping contracts refer to an agreement, whether short-term or long-term, between ocean carriers and shippers. There is no one-size-fits-all solution regarding such contracts. Ocean contracts are complicated because of the different surcharges and rates applied by various carriers. Remember that every carrier uses various rates and structures in the application of shipping contracts. Therefore, shippers should have excellent negotiation skills to avoid being locked in a bad deal. A shipper and a carrier must strive to arrive at a fair deal that satisfies both parties.

Types of Shipping Contracts -- There are three main types of shipping contracts that shippers can choose from, namely short-term, long-term, and index-linked. Shippers should know that each type of contract has its benefits and challenges. Short-term contracts last less than a year and require frequent negotiation with carriers. The main benefit of a short-term contract is that it helps shippers to avoid major changes in the global market, which can affect their businesses significantly. If you are uncertain about what the future holds, then you are better off entering into a short-term contract with a carrier. Long-term contracts offer shippers fixed rates and surcharges, and thus, eliminate continuous adjustment of shipping rates in the short-run. The major advantage of such type of a contract is the provision of better shipping services even when shipping capacity dips. However, shippers who enter into long-term shipping contracts have to deal with market volatility. Index-linked shipping contracts allow a negotiated contract rate to fluctuate based on an external index. Such contracts help shippers to achieve enhanced security of capacity, especially during peak season. Shippers who use index-linked contracts rarely break contracts because there is less divergence between rates offered.

Compromise Is Key -- There should always be room for flexibility when it comes to negotiating shipping contracts. There should be a spirit of giving and taking during negotiations, whereby a shipper should deliver what they committed to in a contract. Conversely, carriers should reciprocate such a gesture by offering better terms. Do your research beforehand on current market conditions that can affect charges and shipping rates. One way of reducing risks is for shippers to enter into different types of contracts. You can move half of your cargo via an index-linked contract while the rest can be shipped under a short-term or long-term contract.