An Analysis of Index-Linked Contract as a Solution to Shippers - Carriers Contractual Issues in Container Liner Trade

Abstract

Containerization has emerged as the favourable method in ocean transport as it is able to transport cargoes worldwide with low cost. Liner service is the concept which develops as the concept that provides scheduled transport service. At the latter development, it also provides intermodal service which combine ocean and inland transportation. Shippers and carriers, as two main stakeholders in container shipping commonly engage in service contract with agreed price and volume. However, this arrangement is vulnerable to contract default due to the fluctuation of spot freight rate which challenge the commitment of both parties and their ingenuity to avoid loss and/or gain profit from the situation. Index-Linked Contract (ILC) is concept that is introduced as one of alternatives in conducting service contract between shippers and carriers. With this concept, the contract price is adjusted by agreed indices and mechanism instead of fixed. This dissertation is focusing on the perception and future development of ILC form shippers and carriers point of view. The study objectives are met by conducting extensive literature review as well as gathering empirical data. Qualitative method is applied in this research by undertaking survey to companies which represents targeted group. The survey is conducted by interviewing key personnel in respective companies regarding the study objectives. Based on the findings, it is found that the concept is flexible and has diverse method to be applied based on the intended outcome, one of which is to be coupled with hedging tools to obtain predictable rates. However, as the concept is still considerably new, many shippers and liner operators are still hesitating in implementing the concept. Although it cannot solve current contractual problem completely, ILC can be perceived as alternative in contracting in liner container shipping. Finally, it is suggested to conduct more researches in the impact of commodity values specific commodities and trade routes with the implementation of ILC. Further investigation about the implication of regulation such as EU Commission in Competition and OSRA is equally important.