Insights: Contracts Are Overrated In Maritime

Here is an interesting article about the questionable value of contracts.   Do they make any situation more complex and less dependent on trust?   Absolutely. And especially since many business people are expert at getting out of contracts that looked good at the time and turned bad as events unfolded.

I am reminded of a story that occurred to me in real life.  Years ago we shred a data processing installation with a large company. They set up what they called an ‘alternate data center’ for backup of their main facility in Houston, and one of its main features was a giant IBM laser printer that was the size of a small house, what today we’d call a tiny house.  The President of the company was touring the facility, and the guy running it was extolling the value of the printer in providing backup.  Hi pointed out the that printer could print something like 100 pages a minute. Maybe it was more like 1000, I forget.  The President said “Gee, I guess I’m going to have to hire more readers!”

The more contracts you have, the more you have to read them, and the more you have to have lawyers and other experts, all sheer overhead. And we well know from contract studies that something is likely to happen that will not be covered in the contract.  What do you do then?

I’m not advocating a total absence of contracts.  And I really like sample contract terms such as INCOTERMS and BIMCO contracts that give precise standards that parties can agree to without hesitation, or understand why they need something else. Over time these standards grow in value, because as more deals use them a history of how they work evolves, which can be used as a precedent.  More would be useful. Chris Clott and I have written about the possibility of such terms for service levels in supply chain management of ocean shipping chains, which would coordinate the various participants (ocean liners, ports, terminals, drayage firms, storage firms, and long haul and last-mile carriers).

But still and all, there’s a need for substantial trust between the parties.   And when there’s trust, that people will play fair, the contract may be too formal.   Trust is also the reason why it’s unlikely that brokers of various kinds will still be successful in the maritime business despite the emergence of software forms handling.

Rik van Hemmen April 23, 2020 via Insights: Contracts Are Overrated In Maritime