One of my friends recently contacted me over an issue which he faced with respect to shipment of two containers of personal effects. Once the containers were loaded, my friend’s forwarder advised him that the Container Carrier (“CC”) had imposed a General Rate Increase (“GRI”) over the earlier freight rates quoted. The GRI quoted was indeed substantial and therefore my friend contacted me to check whether such an increase could be introduced once the containers were loaded with cargo.
- The freight market is determined by the state of the demand and supply present i.e. if demand is more than the supply, the freight rates will go up. Conversely, if the supply is more than the demand (which is presently the case now as most of the main line operators have invested in larger vessels on the premise that the demand would increase. But the actual fact is that growth in trade is much lesser than the capacity available). During period of high demand, CC charge higher freight rates and / or impose General Rate Increases so as to not only have a positive return of investment but also to have enough reserves for the slack periods. Traditionally, these period of demand were seen in the period prior to Chinese New Year, particularly in the Far East / South East Asia, and for all other sectors 2-3 months prior to the X’Mas/New Year (Peak Season for the US Trade) etc. However, as mentioned above, for the past few years the growth of container space far exceeds the growth in trade and therefore we have not witnessed any significant demand during these periods except for periods when there have been other issues such as closure of ports, etc (recently the closure of ports in US West Coast led to the increase in freight rates / GRI for shipments in to the US East Coast as cargo was being moved via East Coast and trucked / railed to various locations in the US).
- CC quote to their clients either on a case by case or on a periodic basis i.e. monthly/ quarterly. In some trades, the practice is for CC to sign a service contract in which the cargo volumes and freight rates are clearly set out. With respect to other trades where service contracts have not made much inroads, CC quote on a periodic basis and make adjustments depending on the demand and supply in the market. The issue arises as to whether the CC can vary the rates which have already been quoted?
- If the quote of the CC makes reference to any variation of freight rates / GRI taking effect from a certain date, then given that the quote properly provides notice, CC should be properly entitled to impose the rate increases to their customers. But in cases where the quote does not provide for any increases in freight rates/GRI, could the CC increase the freight rates:
- Where their customer is yet to make any bookings?
- Where their customer has made a booking and is yet to pick up the containers or has picked up the containers?
- Treitel (1999) in The Law of Contract defines a contract as:” an agreement giving rise to obligations which are enforced or recognized by law”
Under English Law, every contract should have
- Intention to be legally bound
- We must however distinguish between an offer and an invitation to treat.
- An offer is a statement of the terms which the offeror is prepared to be contractually bound if accepted. Hence, an offer must be complete, specific and capable of being accepted and must include the fundamental terms of the agreement with the intention that no further negotiations are to take place.
- An invitation to treat is different from an offer in that it only invites the party to make an offer and it is not intended to be binding.
- With respect to the periodic quotation submitted by the CC, would this be an offer or an invitation to treat? It is submitted that there are other considerations in the container shipping industry such as space and equipment availability and which would be more properly dealt with when the customer makes a booking with the CC and therefore the periodic quotation is akin to an invitation to treat. Hence, the booking made by the customer would more properly be the offer and the booking confirmation provided by the CC would be the acceptance and it is here that the contract is formed. Alternatively, even if the freight quote is considered as the “offer”, the offeror is entitled to withdraw / amend the offer prior to acceptance of the offer.
- If the customer is yet to make any bookings or even if bookings have been made but the CC is yet to provide a booking confirmation, it is submitted that the CC is entitled to make any revisions / GRI’s as the offer made by the customer is yet to be accepted by the CC. However, when the CC accepts the offer made by the customer, a contract is formed and from now on the CC would not be entitled to make any rate increases/ variations (unless the quotation provides for rate escalations).
- In conclusion, in the case of a “one off” or “periodic” quotation, it is submitted that while the CC is entitled to amend / vary freight rates prior to issue of the booking confirmation to their customers, they would not be enitled to amend / vary the freight rates once they have issued a booking confrimation.