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A good performance

This article first appeared in the April 2011 issue of Port Strategy and is reproduced with their kind permission. www.portstrategy.com

Key performance indicators are used by terminal operators to measure the performance of their terminals and to help maintain a consistent quality of work. Of course, KPIs and how they are measured vary from terminal to terminal and therefore there is a great deal of debate on how they should be used, and if the measurements are an accurate reflection of a terminal’s performance.

KPIs are also used in terminal services agreements as minimum agreed service levels to be achieved by the terminal operator. The KPI provisions in terminal services agreements are similar to those in concession agreements and normally include provisions relating to reporting, review, failure to meet KPIs, the consequences of a breach, and auditing.

In the negotiation of terminal services agreements, terminal operators and shipping lines must pay particular attention to the KPIs which are imposed on them.

Terminal operators need to make sure that KPIs are not too onerous so that they do not risk being made systematically liable for liquidated damages in case they are not able to deliver in accordance with the terms of the contract. Generally, only repeated failure to meet KPIs by a significant extent should be taken into account for the purpose of determining whether a breach of the KPIs’ provisions has occurred.

In container shipping, berth productivity is an important measure of a terminal’s performance in facilitating the competitiveness of a shipping line’s services. Berthing guarantees in terminal services agreements are often heavily negotiated, because they can be breached easily and often.

For example, a shipping line may seek undertakings from a terminal operator in accordance with its schedule or vessel arrivals at the terminal that the terminal operator guarantees or shall use its best endeavours to provide berth upon arrival for the shipping lines’ vessels. Particular attention should be given to the definition of berth hours as well as issues which may arise around establishing move counts.

Measures of crane deployment or crane intensity may also be included in terminal services agreements. A shipping line may seek guarantees from the terminal operator that a certain crane intensity will be reached. This is measured taking into account the size of the vessels and the number of moves to be performed by a crane on that vessel. A shipping line may also seek to set a minimum crane deployment, which is to be measured by the number of cranes deployed in relation to the number of moves to be performed on board the vessel.

Shipping lines may want to seek undertakings from terminal operators in relation to a number of other service levels such as truck turnaround times and rail productivity as these all have an effect on the quality of the shipping line’s services.

On the other hand, terminal operators may seek guarantees from shipping lines in respect of minimum throughput throughout the term of the agreement, so that they can benefit from certain advantages such as preferential rates. The failure by a shipping line to meet such minimum throughput may entitle the terminal operator to receive liquidated damages from the shipping line to compensate them for their loss.

In certain cases, the parties agree that the terminal operator may even be relieved from some of their obligations under the terminal services agreement if the shipping line fails to meet the minimum throughput levels.

A shipping line will normally seek to agree liquidated damages if the terminal operator is unable to meet any of the agreed productivity measures. In addition to that, the shipping line may also want to claim additional direct costs and expenses incurred as a result of the operator’s failure to meet the KPIs.

The parties will need to agree on which liquidated damages mechanism is most appropriate to their operations. For example, an agreed figure per hour may be applied in case a vessel’s berthing is delayed.

Alternatively, the parties may agree for each unit of cargo which is not loaded as a result of a berthing delay should entitle the shipping line to an agreed fee. The amount for such agreed fee may be related to the tariff for loading a unit or another measure may be agreed.

The terminal operator may also wish to be released from responsibility and from paying compensation where the arrival of vessels is delayed beyond a certain period after the scheduled date of arrival.

Parties to terminal services agreements should seek to put a limit on their liability for failure to meet certain KPIs and there exist various equitable mechanisms for achieving that, such as defining the circumstances in which claims may be made (eg. only when vessels which did not have access to a berth, arrived on schedule).

Similarly, de minimis levels may be agreed allowing a terminal operator some flexibility in reaching agreed performance levels, so that the parties do not bear the practical and administrative burden and cost of claiming against each other for each minor failure to meet certain performance levels.

Terminal operators will also want to impose a certain number of pre-conditions on the achievement of agreed productivity levels, such as, in the long term, certain developments or investments in additional facilities. They may want to ensure that they do not face potential claims for direct costs incurred by shipping lines whereby the shipping line takes the decision to divert its vessels to an alternative terminal in order to mitigate any losses which would otherwise be incurred in case of long delays waiting for an available berth.

For example, the cargo must be ready for continuous terminal operations, and delays caused by bad weather or any other force majeure events beyond the effective control of the terminal operators are discounted.

KPIs are used by terminal operators to compare their performance with the performance of competing terminals and to assess the terminals performance in relation to their customer’s expectations. In the context of terminal services agreements, KPIs may be used by a shipping line to trigger the terminals’ liability for damages, or even the termination of the agreement.

In long term terminal services agreements, a shipping line will want to consider having the right to terminate if the terminal operator fails to meet certain agreed performance levels on an ongoing and persistent basis, and where this amounts to material underperformance by the terminal operator.

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