Liner Agency Contracts

ITIC is frequently requested to review draft liner agency contracts which have been presented to its Members for signature. Regrettably, if not surprisingly, these are often biased in favour of the liner principal. This, of course, reflects the relative strengths and bargaining positions of the two contracting parties and the fact that competition amongst agents to secure a new appointment is often intense. Although the Club appreciates that commercial considerations are often important, it is clearly dangerous to accept provisions which could have serious adverse consequences at a later date.

It is the purpose of this article to review a number of clauses which, in one form or another, are often included in liner agency contracts. Hopefully, this advice will provide general guidance to Members when conducting negotiations with prospective liner principals. However, specific help can always be requested from the Club on each individual occasion.

The first observation to be made is that the variations to be found in different liner agency agreements are considerable. Most are tailor-made by the particular liner principal depending on the trade, geographical area and scope of the agent’s functions. A standard liner agency contract does, however, exist. This was first issued by FONASBA in 1978. It has subsequently undergone several revisions but although approved by BIMCO has not gained wide acceptance within the industry. This is because many liner principals believe that its terms go too far in favour of the agent. An opportunity may therefore exist for the creation of a standard contract which steers a middle course between the conflicting interests of principal and agent. Turning now to specific provisions in liner agency contracts: The appointment of sub-agents frequently causes difficulty. Most agreements will allow the agent to appoint sub-agents with the prior written consent of the principal and it is often useful to add a clause that such prior written consent should not be unreasonably refused. Between the principal and the agent it is often stipulated that the latter shall remain responsible to the former for the sub-agent’s performance of the agreement.

Furthermore, that the agent should indemnify, defend and hold the principal harmless against any claims for loss, damage etc. caused by the negligence of any sub-agent. By contrast the FONASBA wording provides that the agent is not responsible for the negligent acts of the sub-agent unless the agent has failed to exercise due care in the appointment and supervision of such sub-agent. In any event in the same way that carriers invariably ask for evidence that the agent maintains professional indemnity insurance, it is prudent for the agent to insist that any sub-agent they appoint is also insured. Furthermore, the sub-agency agreement should, where possible, be back-to-back with the main agreement so that responsibilities and obligations imposed by the carrier on the agent can be passed down the line to the sub-agent in identical terms. FONASBA has recently drafted a standard sub-agency agreement which satisfies this requirement by annexing to the document an extract of the liner agency agreement entered into between the line and the general agent. Indemnity clauses are frequently included in liner agency agreements.

More often than not the clause will only be in favour of the principal. The agent undertakes to indemnify, defend and hold the principal harmless from all claims, penalties, costs and expenses resulting from his negligent act or omission. In a well balanced document there should be a reciprocal clause in which the principal undertakes to indemnify the agent against all claims, charges, losses etc. which the agent may incur in connection with the fulfilment of his duties under the agreement, save that the indemnity would not extend to acts arising by reason of wilful misconduct or negligence of the agent. The granting of credit by the liner agent is frequently excluded without the prior written consent of the principal or only in accordance with his credit policy laid down from time to time. Where consent has been given to the extension of credit the relevant question is whether the agreement obliges the agent to remit freight to the principal regardless of whether he has been paid or not.

Where an agent guarantees to his principal the payment of freight and takes the risk of, for instance, the shipper or forwarder failing to pay, the agent is effectively acting as a del credere agent. If the shipper does default, the principal need look no further than his agent for payment of the outstanding freight. In this event the agent might argue that he is entitled to an additional commission for assuming this risk. Most agreements specify a number of events which may allow the other party to terminate - either immediately or after a period of notice. The bankruptcy, or special arrangement, or composition with creditors of either of the parties is an example which usually allows for termination forthwith. It is important to ensure that rights to terminate are reciprocal and not merely in favour of

the principal alone. A breach of the agreement may also justify termination, but it is useful to include a caveat that this will apply only where the breach has not been remedied within a specified number of days after the other party has given written notice requiring such breach to be remedied. It is very rare for compensation provisions to be included in an agency agreement. Indeed it is sometimes expressly stipulated that the agent agrees to waive all and any of his rights to any compensation to which he may be entitled by law or by custom.

Liner agents should be careful not to assume responsibility for any delays to ships or damage to cargo arising out of the negligence or default of stevedores or terminal operators. The agent may be drawn into a dispute where he has been obliged under the agreement to arrange and supervise stevedoring activities. The position can be clarified by the insertion of a clause to the effect that “the agent will not be responsible for the negligent acts or defaults of any stevedores or terminal operators unless the agent fails to exercise due care in the appointment of such stevedores or terminal operators”. Principals frequently feel they are vulnerable in relation to the financial risk to which they believe they are exposed. This fear is, to some extent, justified following the failure in the past of a number of well known agency companies. In their attempt to overcome or reduce this exposure several methods have been adopted. These often include a requirement for the establishment and maintenance by the agent of separate trust bank accounts in order to receive both freight or other income on behalf of the principal, and funds received by the agent from the principal to cover disbursements and expenses. The object is to keep the funds entirely separate from those belonging to the agent, or to other principals, so that they can be easily identified. An alternative method is for the agent to open a separate bank account in the name of the principal operated jointly by both parties. All freight collections are deposited by the agent in this account without any deductions. Funds required for disbursements are then requested by the agent who provides details of estimated expenses. If approved, the principal authorises the agent to draw the requisite funds from the account. Similar protection can be given by means of bank guarantees in respect of monies held by the agent on the principal’s behalf. Inevitably most agreements stipulate that such guarantees should be maintained at the agent’s cost and should also be in a form acceptable to the principal.

In conclusion liner agents should give very careful consideration to the contents of agreements with their principals. Many clauses contain onerous provisions which can trap the unwary and cause difficulties at a later date. If in any doubt always obtain legal advice whether from your Club, your lawyers or your own legal department.

“Many clauses contain onerous provisions which can trap the unwary and cause difficulties at a later date.”