Derivatives and Shipping

Many companies frequently hedge their risks to offset the uncertainties of fluctuating prices. Changes in the future price of energy, crops, and currencies are all business risks that can be subject to contractual hedges that smooth future swings in prices and help to provide predictability in pricing and business costs. Recently, some shippers and carriers have started to use derivative contracts and index based freight rates when shipping containerized goods internationally to increase their rate certainty and hedge risks.

To facilitate the use of indexed rates, this March the Federal Maritime Commission modified its service contracting regulations to allow more flexibility for carriers and shippers to reference outside terms in service contracts. Under prior FMC service contract regulations, service contracts could not include terms not explicitly contained in the contracts unless they were “contained in a publication widely available to the public and well known within the industry.” Under the FMC’s new regulations, service contract terms not explicitly contained in the contract are allowed “if the terms are readily available to the parties and the Commission.” Such terms are “deemed readily available to the Commission if the carrier party to the service contract provides the Commission with the associated records of the terms within thirty (30) days of the Commission’s written request.”

In adopting the rule change, the FMC stated that it is seeking to allow greater certainty and flexibility for shippers and carriers to enter into long term service contracts that adjust based upon an index reflecting changes in market rates. Although only a small percentage of the service contracts currently on file with the FMC reference such indexes, the Commission believes that the trend to use indexed rates will increase in the future. It stated that the rule modification was necessary because some freight rate indices are not available to the public or require expensive subscriptions fees that as a practical matter do not make them available to the public.

The new rule will also apply to NSAs, which are NVOCC versions of service contracts. While the Commission’s rule change is designed to facilitate a greater use of freight rate indices in service contracts, the Commission stated that “as long as the referenced terms comply with the revised regulations, the shippers and carriers are free to use not only any freight indices but also other indices such as the Bureau of Labor Statistic’s Consumer Price Index,” which it noted is currently being used in some service contracts.

Although the Commission’s focus was on the use of freight rate indices, its new regulation has a much broader scope. Most parties to a service contract will prefer to have all terms and conditions of the contract included within the “four corners” of the contract. However, the Commission’s new rule does allow incorporation by reference in service contracts of all types of external contract terms, not just rate terms, provided that the associated records of the terms can be made available to the Commission within thirty (30) days.

The Commission’s rule change was published in the March 7, 2012 edition of the Federal Register and is effective immediately.

For additional information, please contact either Ronald Cobert or Andrew Danas at Grove, Jaskiewicz and Cobert, LLP 1101 17th Street, N.W., Suite 609, Washington, D.C. 20036; tel. 202.296.2900; e-mail rcobert@gjcobert.com; adanas@gjcobert.com.

Posted in All Advisories, International Law, Shipping, Transportation

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