This article has been written by Mithi Jaiswal, pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
In the early days, the ships were the source to transit and sell goods at various destinations all around the globe. The ship owners used to sail their ships from port to port to sell and purchase more commodities when they reached their next destination. In the 19th and 20th century the ports were drastically developed and this led to the birth of liner shipping that provided various day-to-day services on the ports for the cargo and ships carrying that cargo to different ports. Due to the development of new and larger markets, the ship owners started appointing independent agents for ports at different jurisdictions in order to improve their efficiency of ship operations.
Earlier, the agreements between ship owners and the agents were verbal in nature but eventually due to the increased transactions, there was a need for written agreements. These agreements between the principal and the independent agents appointed were known as the liner agency agreement. The services given by the liner agency include documentation, port operations, sales & marketing, equipment control, etc.
The Liner Agents are appointed through these agreements and besides addressing the functions that both the parties are supposed to fulfill, the agreements also contain general terms and conditions, termination, liability, warranty clauses, etc. However, nowadays the liner agency agreements are being tailored in an imbalanced way that is in favor of the principals.
The Federation of National Associations of Ship Agents and Brokers (FONASBA) of which India is a party has created a Standard Liner Agency Agreement. This is a standard format that is followed by all the member states while drafting a liner agency agreement. Many states have not accepted this because it is heavily weighted towards the agent. After the introduction of standard liner agency agreements, the member states follow the template with certain changes according to their needs. The agreement has to be balanced and provide equal responsibilities to both principal and the agent without being principal-biased. The whole intention of bringing this Standard format is to erase the biases towards the principal and work in favor of both parties.
Types of liner agency agreements
1. Tailor-made agreements
These agreements are tailored and made from scratch according to the needs of the parties. However, one of the disadvantages of this agreement is that it is principal biased and gives more rights to the principal. These are unique and don’t follow any guideline or draft which is already present for the liner agency agreements.
2. FONASBA Standard Liner Agency Agreement
Since the responsibilities were growing there was a need to bring a universal template for the liner agency agreement. In late 1960, the first version of this template was introduced by FONASBA which gave an equal share of responsibilities to both the principal and the agency. However, this was not accepted widely by the principals because they drafted the agreements according to their specific modes of operation. So, in 1992 FONASBA along with BIMCO (ship owners association) came up with another template which was then accepted by the principal and owners of the vessels. This document provides an exhaustive list of duties for both parties.
Components of liner agency agreement
The contents of the liner agency agreement drafted herein in India is in consonance with FONASBA and it includes:
Definitions of principal and agent
A principal is a firm or the person who owns or manages the vessel which is represented by the agent and the agent is the person who assists the principal in building a relationship with third parties. He acts on behalf of the principal and performs all the functions that are laid down in the liner agency agreement. The agreement starts with the definition of the principal and the agent.
This clause gives the term of the agreement and the reasons for termination. So, the agreement can be terminated because of various reasons – some of them are
- the duration of the agreement has expired
- or because of operation of the law
- or due to the acts of either party.
Some of the reasons that the tailor-made and the FONASBA agreements provide for termination are negligence, the bankruptcy of the agent, a major change in the management or control of the agency, malafide withholding of the principal’s funds, etc. Before the termination of the contract, a notice has to be given so that the notice period is given to the parties.
Typically, almost all agreements have an arbitration clause as it is the cheap and fastest way of dispute resolution.
Conflict of interest clause
Through this clause, the principal safeguards himself by restricting the agent to engage with anyone else who is in direct competition with the principal.
The agent is bound to keep all aspects of the principal’s business with strict confidentiality.
Duties of the agent
This is an extremely important clause and it outlines all the duties that the agent is bound to intake after coming into the contract. Some of the duties which are enshrined in almost all the agreements are to obey all the instructions given by the principal, take due care and caution while performing the duties, obtain all the necessary permits and licenses, to not delegate the duties to the third party, etc.
Marketing sales clause
Under this, the commercial functions that the agent will undertake are given. The functions include maintaining contact with the third parties for increasing the business of the principal, negotiating the freight rates, booking cargo, preparing the necessary documentation, etc.
Accounting and financing
The accounting and financing clause includes the financial functions which include the duty to prepare periodic statements, advising the principal about the customary credit terms, etc.
Duties of Principal
Both the tailor-made and the FONASBA agreements include the duty of indemnification of all the claims and charges that the agent will incur because of the damages during the fulfillment of his duties, the principal also has to provide the money in order to cover all the disbursements, etc.
This clause is important because under this the parties agree that the agent is bound to get remuneration for the performance of all the contractual duties and the amount that he spends for the efficient running of the principal’s business, etc. The principal is also responsible for the ancillary charges that the agent undertakes.
In tailor-made agreements, the remuneration clause is drafted in a very concise and inadequate manner whereas the standard liner agency agreement given by FONASBA gives an elaborative list of the remuneration that the agents are bound to get.
There is a famous legal maxim “delegatus non potest delegare” which means that the agent does not have any right to delegate any work to the third party. This provision is inserted because the contractual relationship between the principal and the agent is not a personal one but a relationship that demands discretion and the delegation of the discretion will be a breach of confidence.
The major difficulty encountered while conducting the study, was in obtaining the sample agreements, as they are essential, confidential documents. Also, a greater number of the agents contacted to give their views on the subject of the agency agreements declined to give disclosed interviews or fill in questionnaires for fear of 6 jeopardising the existing relationships with their principals. It is also worth mentioning that the subject of agency agreements has not been given much attention in published books. Hence, much of the research was carried out by use of journals and internet sources as reference material.
The liner agency agreements can either be tailor-made or follow the standard format given by FONASBA. All the member states follow the prescribed guidelines given by FONASBA and India is a member party to it. The standard format gives fair provision applicable to both parties thereby making the agreement neutral. The tailor-made agreements try to impose one-sided demands that create an unfair situation for the agents. Almost most of the time, tailor-made agreements are made in favor of the principal. In any balanced contract, there must be corresponding rights and duties. So, the rights of the agents should create corresponding duties on the principal and the rights of the principal should give rise to corresponding duties on the agent.
There are various liner agency agreements either following the tailor-made method or the standard format and both of them have their pros and cons. The focus should be on the roles and responsibilities the agents have to undertake and responsibilities owed by the principal and according to draft a balanced contract.
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.
- https://www.lawinsider.com/dictionary/tailor-made-contracts#:~:text=Tailor%2Dmade%20contacts%20 means%20 Contracts,Sample%201
- Encyclopaedia Britannica Online (last visited Nov. 09, 2021 at 11:01 p.m.), http://www.members.eb.com.
- Patricia Mwikali, The Maritime Commons: Digital Repository of the World Maritime University, World Maritime University (last visited Nov. 09, 2021 at 02:46 a.m.), https://commons.wmu.se/cgi/viewcontent.cgi?article=1443&context=all_dissertations.
- Paul Smith, Liner Agents Liabilities, PS Associates (last visited Nov. 07, 2021 at 12:44 p.m.), https://commons.wmu.se/cgi/viewcontent.cgi?article=1443&context=all_dissertations.
- Rodolfo M Gonzalez Lebrero, The agents and their liabilities: In Baltic and International Maritime Council, BIMCO Review 211, (1997).
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