News / Shippers should be wary of index-linked contracts – get the right legal advice

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As shippers, carriers and forwarders look to index-linked contracts (ILAs) to mitigate risk to capital amid Red-Sea freight-rate volatility, Matthew Gore, partner at shipping law firm HFW, warned of potential flaws in the system.  

Yesterday, Xeneta revealed that a shipper with an ILA may use 40ft containers (feu) to transport their goods, but their contract is tied to a 20ft equivalent container index (teu). 

It said: “Global ocean trade is dominated by 40ft containers, yet many ILAs benchmark against teu indices rather than feu. However, the price of a 40ft container is not double that of a 20ft – far from it.” 

The crowd-sourced analytics platform calculates that a business shipping 1,000 feu from China to South America paying rates based on a teu index, could pay some $4.3m too much.  

Mr Gore told The Loadstar a shipper using a majority of 40ft containers could use an index based on feu pricing and apply “an agreed fixed discount” for any 20ft containers they move, such as 70% the price of a 40ft.

But he added: “The parties recognise this isn’t ideal, given that the delta between 20ft and 40ft container pricing can be volatile, but accept it for simplicity given the minimal volumes for the other container size(s) they move.” 

And he warned that in most cases, if a shipper has agreed to a pricing mechanism and lost money because of this issue, “there will generally be little they can do under English law”.   

“Depending on the terms of the ILA, they may be able to terminate the contract and look to re-tender, or award the volumes to other carriers under ILAs with correct pricing mechanisms. 

“The law will only intervene in limited circumstances to rectify a contractual mistake, and usually must be accepted as a lesson to be learned and avoided when contracting again.”  

Mr Gore also urged shippers to consider surcharges when negotiating an index-linked contract with a service provider.  

“There is little point in agreeing fixed or index-linked freight rates if the carrier has complete discretion on additional surcharges it may apply,” he said.  

“In the early days of the Red Sea crisis, many carriers were relying on their bill of lading clauses to impose new surcharges, despite in some cases this conflicting with their shipper contracts and clauses within those contracts. 

“These gave express precedence to the negotiated contract over the bill of lading terms”. 

Mr Gore advised shippers to choose an appropriate index that recognises the essential factors like cargo origin and destination covered by the index as against the ILA tradelane(s), frequency of publication, whether the rates are those intended to be charged or actually charged and if it represents the spot market, contract or both. 

He concluded: “It probably comes down to ensuring that shippers get the appropriate industry-focused consulting and/or legal advice when entering into ILA.”