Contract confidentiality not guaranteed

The new maritime law allows some measure of secrecy, but certain contract terms still must be published.

By Staff -- Logistics Management, 9/1/1999

A myth about the confidentiality of service contracts under the Ocean Shipping Reform Act of 1999 (OSRA) has taken root among shippers of ocean freight. Like an urban legend--one of those stories people believe to be true because they've heard it so often--the idea that all service contracts will be kept confidential between shippers and ocean carriers seems to be widely accepted.

But it's not true, says Washington, D.C.-based attorney Peter Friedmann, who represents several shipper groups on maritime issues. "Nothing in this law says there will be confidential contracts," Friedmann told members of the Coalition of New England Companies for Trade (CONECT) at the group's annual conference.

What the law does say--and what undoubtedly has given rise to that misconception--is that "each contract entered into ... by an ocean carrier or an [ocean carrier] agreement shall be filed confidentially with the [Federal Maritime] Commission." (Certain bulk and waste products, however, are exempted.)

In Section 8 (c) 2, OSRA goes on to specify eight essential terms that must be included in every filed contract. They are:

(A) The origin and destination port ranges;

(B) The origin and destination geographic areas in the case of through intermodal movements;

(D) The minimum volume or portion;

(E) The linehaul rate;

(F) The duration;

(G) Service commitments; and

(H) The liquidated damages for nonperformance, if any.

The next subsection is key: "When a service contract is filed confidentially with the commission, a concise statement of the essential terms described in paragraphs 2 (A), (C), (D), and (F) shall be published and made available to the general public in tariff format." That is, carriers are required by law to publish the origin and destination ports, the commodities, the minimum volume or portion, and the contract's duration. The rest of the contract terms, including freight rates, no longer must be published.

But that's a far cry from true confidentiality, Friedmann continued. Although the law no longer prohibits secrecy regarding some parts of service contracts, he points out, "it doesn't say a carrier can't publish [essential terms] or a shipper and a carrier can't tell others. If you really want confidentiality, you have to put it into the contract."

Edward J. Kelly, chief executive officer, North America for ocean carrier Cho Yang Line, agrees. "If you want confidentiality, you have to have clauses to that effect built into the contract," he said at the American Association of Exporters and Importers' 78th annual Customs and Industry Convention in May.

Because the whole concept of confidentiality is new in the maritime industry, it's important that contracts clearly define what constitutes a breach of confidentiality, Kelly said. "Forwarders and customs brokers have always seen the rates. Information was so readily available that no one took precautions."

Now that some measure of confidentiality is permitted, however, a number of shippers are including confidentiality requirements in their service contracts. For Cho Yang and other ocean carriers, that has meant instituting new procedures regarding the handling of documents and written and verbal communications. Cho Yang, for example, now requires its employees to undergo special training and sign confidentiality agreements.

Peter H. Powell Sr., president of freight forwarder C.H. Powell Co. in Peabody, Mass., and president of the National Customs Brokers and Freight Forwarders Association of America (NCBFAA), believes such measures may prove to be largely ineffective. Speaking on the panel with Kelly, he said that freight forwarders and customs brokers, banks, customs authorities both here and abroad, and other federal agencies often need to know the freight charges in order to prepare customs, financing, and other legally binding documents correctly. Powell said he counseled clients to include a clause in their contracts stating that freight charges should be disclosed to specific vendors of their choosing.

Although OSRA does not, as Friedmann noted, require confidentiality between shippers and carriers, neither does it entirely ignore the problems that could arise from carriers' sharing information. In Section 10, "Prohibited Acts," OSRA forbids common carriers to "knowingly disclose, offer, solicit, or receive" any information about a shipment without the consent of the shipper or consignee if that information may be used 'to the detriment or prejudice' of the shipper, consignee, or a carrier; or if it may improperly disclose a business transaction to the shipper's or consignee's competitor.

On the surface, Section 10 seems to offer protection to shippers. But the language is vague enough that it would be very difficult to prove beyond doubt that such malicious intent existed, say the experts. The safest way to go, according to maritime consultant Michael Berzon, is to put it in writing. "Contracts should include remedies if the shipper and the carrier don't do what was agreed," he says. "A well-written contract can protect both sides from any injustices."