By Capt. Prakash Joag

JOINT VENTURES, SHIPPING POOLS & CONSORTIA

By Capt. Prakash Joag

JOINT VENTURES, SHIPPING POOLS & CONSORTIA

QUESTIONS

How is the consortium concept different from that of conferences ?

Is there any common ground between the two?

What is the advantage of COAs over CVs or TCs?

Why must one use extra caution while framing clauses for a COA?

What is the basic aim of a conference?

What is the basic aim of a consortium?

Compare gross income pooling and net income pooling

Can there be several consortia within on conference?

CONTRACT OF AFFREIGHTMENT (COA)

In one sense all charter parties are COA’s,

all CPs being contracts of carriage by sea,

but we use the term ‘Contract of

Affreightment ’ to mean carriage of a

specific quantity of cargo covering more

than one shipment over a period of time

CONTRACT OF AFFREIGHTMENT (COA)

The main purpose of a contract of affreightment

(COA) is to oblige a carrier to lift a fixed or

determinable quantity of cargo of a specified type

over a given period of time. Usually, the COA is not

limited to one particular vessel, but operates as a

series of voyage charters. Freight is payable on the

quantity of cargo transported and the carrier bears

the risk of delay en route.

Advantage of a COA – It allows the ship-

owner/operator an opportunity to use

substitute tonnage

A COA has options for flexibility in the

description of voyages, dates, quantities

and can be customized to suit the

cargo/cargo interests.

CONTRACT OF AFFREIGHTMENT (COA)

Usually the circumstances of a COA are such that timely

acceptance of the vessel nominated is essential in order that the

parties know where they stand. The COA rarely makes express

provision for timely acceptance of nomination to be of the

essence of the contract. However, owners advance consideration

of such a provision may be beneficial especially where vessels

are in high demand and have considerable earning power. A

clear breach of a condition by charterers will enable owners to fix

the vessel on a different contract quickly and with certainty.

CONTRACT OF AFFREIGHTMENT (COA)

As with many of the issues that arise under COAs, there

is little direct case law and the answers always turn on

the particular facts and circumstances of each case.

 Whilst care is taken in drafting the COA to suit the

parties commercial interests, this is one area where the

commercial relationship between the parties to the COA

is often a good incentive for both sides to find an

acceptable commercial solution to any disputes.

CONTRACT OF AFFREIGHTMENT (COA)

BULK/ LINER PARCELLING It costs more to handle small parcels than to handle big ones.

That is smaller the parcel size the more expensive to carry per

tonne of cargo. Some operators specialize in the carriage of

these goods, safe loading/unloading and carriage of these goods

segregation as well as scheduling of the cargoes and services

The service providers of parceling services negotiate the highest

freight rates and the most lenient possible terms for each

individual parcel and fix suitable tonnage to carry it at rates

which are low enough so that the expenses are lower than their

earning from the cumulative freights on the carriage of similar

parcels.

Freight Earned – (Charter Hire Paid –Overhead – Marketing

Expenses) = Profit Margin

JOINT VENTURES Ship-owners may find such partners in traders/merchants who

may need vessels for short durations.

Each such venture is a separate issue and the contract has to

envisage and provide for the requirements at each and every

stage of the venture depending upon the scope of the contract as

agreed to by the negotiating parties.

Contract has to be customized to provide some or all of the

followingFinance – investment

Management

Training

Operational Support

Ship broking

Crewing

Marketing

SHIPPING POOLS A shipping pool is the name given to a collection of similar types

of vessels under different owners placed under the care of one

administration which markets vessels as a single cohesive fleet

unit, pools their earnings and divides it amongst the individual

owners, under a pre arranged weighting system, each vessel

receiving their due share.

Objective of the pool is to provide the members a safety net in

times of freight market depressions without losing the freedom to

take advantage of periods of market buoyancy.

In order to survive, the pools must –

Decide on an optimum number of members

Decide on the type of tonnage

SHIPPING POOLS A shipping pool is just another method to reduce the risk of

losses and provide/secure employment to tonnage and to maximize earnings and profits. To this end the activities and functions of the shipping pool are:

Keeping in mind the short term expediency as well as the long term over view to achieve forward fleet planning.1. Zero idle tonnage2. Minimum Ballast Voyages3. Reduced waiting time for cargoes4. Continuous and regular employment for the tonnage

through proper scheduling 5. Next cargo already fixed prior to completion of previous

cargoes6. Maximization of space utilization, elimination of accepting

part cargoes.

SHIPPING POOLS Finding optimum employment for the members of the tonnage pool

Small or medium size ship-owners may not be in a position to

exploit the commercial opportunities though aware of them. Joining

a shipping pool at the cost of sacrificing total independence it offers

a ship-owner the advantage of belonging to a larger market force,

thereby enabling him to take advantage of such opportunities.

Other Functions:

Advertising

Collecting market intelligence and market reporting

Cargo contracting

Hedging – through chartering and freight futures

Consultancy to owners /operators

CONTROL OF THE POOLA shipping pool may be controlled by

the members themselves. Alternatively the shipping pool may be administered by a body for the purpose.

Achieve --- zero idle tonnage, minimum ballast voyage, reduce waiting time for cargo , Continuous and regular employment, maximize utilisation of vessel.

PROFIT/REVENUE AND CARGO POOLSGross pool income – operating expenses = net pool incomeNet pool income/ individual vessel weighting factor =

individual distributionLiner Conference Pools – Pool Members may collect the

earnings and incur the costs themselves and thereafter pool their gross or net earnings into a common pool account prior to receiving their entitled share of the overall income

Gross Earnings Pooling Arrangement =- the individual member bears his expenses himself and that has no effect on the gross total earnings remitted to the pool

Net Earnings Pooling Arrangement – There is little incentive for an operator to restrain his operating expenses to a reasonable level because the low cost, more efficient, operator subsidizes his less efficient higher cost net earnings colleague.

CONFERENCEUN defines it as generic term covering wide range of common

services and common obligations undertaken by ship owners serving a particular trade.

A meeting of lines serving any particular route aimed at agreements on uniform stable rates of freight and the provision of services under agreed working conditions in the trade. It ranges from very informal associations to a well developed organization with a permanent secretariat

Their Aims are:Control competition by eliminating avoidable competition

internally within the conference.\Protect members through co-operation from external

competition.In case a closer co-ordination is required it leads to formation of

pools. Such pools may be cargo or revenue pools or a mixture of pools

Advantages of conference – reduce malpractices , rate cuttings and unofficial rebating.

CARGO POOLING

Cargo pooling is a method whereby each participant is given a share of the traffic(base on their past performance) which he is entitled to carry.The cargo pool may be devised for a list of certain commodities

– partial pool comprising of commodities constituting the bulk of the trade.

Total cargo pools where all the cargo is pooled and shared.Revenue Pooling – Conferences may also pool revenues. As

discussed earlier, the pooling of revenue may be on gross income or net income basis and the revenue pooling may also be a partial pooling or a total revenue pooled .

The effect of revenue pooling is that since the revenue is shared in any way , the members avoid cut throat competition to carry more remunerative cargoes instead of low freight earning cargoes. Reduce malpractices, rate cutting and unofficial rebating.

CONSORTIAConsortium is an association of ship-owners and traders. It

implies that the carrier companies formed a separate

corporate body which operated as an independent entity to

the exclusion of the member lines own identity.

A consortium manages the ships and services of its

companies for the defined service or sector allowing the

members of the consortium to enjoy sufficient market share

in the trade as well as offering a good cost effective service.

Large size of the investment and risks involved in starting a

containerized service led to the idea of consortia.

CONSORTIAConsortium is an association of ship-owners and traders. It

implies that the carrier companies formed a separate

corporate body which operated as an independent entity to

the exclusion of the member lines own identity.

A consortium manages the ships and services of its

companies for the defined service or sector allowing the

members of the consortium to enjoy sufficient market share

in the trade as well as offering a good cost effective service.

Large size of the investment and risks involved in starting a

containerized service led to the idea of consortia.

Vessel sharing agreementSharing of vessels, joint operations of vsls,

services, exchange / charter of vessel space between Liner operators.

Shall not include inland carriage goods. Arrangement will be for a period of time. Shall not contain any price recommendation

or tariff imposed by the parties.Shall not require any disclosure of

confidential information to each other.Party can offer his own service arrangements

and pricing

Voluntary Discussion agreementSharing of information but not binding.Shall not include any inland carriage Shall be for a periodShall not contain any element of price fixing.Shall not impose and loss or penaltyCan withdraw by giving notice.Not required to disclose confidential information.Allows to enter any party to the agreement or

offer his own pricing and services. Competition commission of India has

exempted VSA from some section of the Competition Commission ACT.