Explanatory notes

The Agreement
Clause 1 – Definitions
Clause 2 - Duration of the Agreement
Clause 3 - Condition of Equipment on Delivery
Clause 4 - Condition of Equipment on Redelivery
Clause 4 - calculation example for depreciated value
Clause 5 - Delivery Procedures
Clause 6 – Redelivery Procedures
Clause 7 – Delivery and Redelivery Costs and Charges
Clause 8 - Payment of Rent and other Charges
Clause 9 - Taxes, Dues and Charges
Clause 10 - Termination of Agreement
Clause 11 - Build-down Period
Clause 12 – Insolvency
Clause 13 - Lien
Clause 14 - Liabilities and Indemnity
Clause 15 - Direct Interchange
Clause 16 – Track and Tracing and Remote Control
Clause 17 – Insurance
Clause 18 – BIMCO Dispute Resolution Clause 2016
Clause 19 – Notices

These notes are intended to provide some of the reasoning behind the provisions of BOXCHANGE and highlight notable changes introduced in the 2016 update.

The Agreement

The contract is divided into two sections. The covering box layout (Part I) is for the insertion of variable information relating to container interchanges, such as the name and contact details of the parties and the rates and values to apply to interchange of containers, and it provides a useful summary of the key elements of the agreement. Each box contains a short description of the intended contents and a reference to the relevant clause or clauses in the applicable terms and conditions in Part II.

Clause 1 – Definitions

The “Supplier” is defined as the party supplying the equipment to the other party, whereas the “User” is the party utilizing the equipment supplied by the supplier. However, the terms are interchangeable and parties can be supplying and using equipment simultaneously under the same interchange agreement. The application of contractual terms would depend on the circumstances relating to each individual interchange transaction, and the contract takes this into account by referring to both parties as “Supplier/User” in boxes 3 and 4.

The definition of “Equipment” follows the definition of “freight containers” developed by the International Organization for Standardization (ISO). However, the contract definition extends beyond freight containers to include other container-related equipment, such as clip-ons.

“Wear and Tear” has been defined in accordance with the IICL 5 Repair Standards, provided by the Institute of International Container Lessors (IICL). This standard is well-known to the industry and provides clear guidance of what is considered wear and tear.

New to the definitions section is the introduction of a number of examples of what constitutes wear and tear for reefer containers. These examples apply specifically for reefer containers and are supplementary to the general wear and tear examples that cover all container types. Refrigerated containers contain more fragile components than standard freight containers, for instance particular lamination, cooling components and sensitive machinery, and the new examples are incorporated to provide guidance on what could constitute wear and tear of reefer components. Acceptable damage would include normal deterioration of drainage tubes, general electrolytic corrosion, common delamination of floors and panels, and failures to or malfunctions of machinery if such machinery had been maintained in accordance with the manufacturer’s recommendations. The list of examples is not exhaustive.

The wording of BOXCHANGE 2016 mirrors the wear and tear provision of BIMCO’s Standard Container Leasing Contract, BOXLEASE.

Clause 2 - Duration of the Agreement

Interchange of containers is often performed on a trip basis in order to counterbalance mutual equipment demand between users and suppliers, but the parties are free to agree longer interchange intervals.

Clause 3 - Condition of Equipment on Delivery

This clause sets out the most important standards to which the equipment must be designed, manufactured, tested, and maintained. In addition, the supplier is required to warrant that the equipment is in a good and serviceable condition when delivered; that it is free from liens and encumbrances; and that it is operated under a CSC Approved Continuous Examination Programme (ACEP) as per the International Convention for Safe Containers (CSC). This is covered by subclauses (a), (b) and (c) respectively.

The inspection and repair criteria to apply is the Unified Container Inspection and Repair Criteria/Refrigerated Container Inspection and Repair Criteria (UCIRC/RCIRC). Should the parties wish to use another repair criteria, they can agree to do so by filling in box 6.

In accordance with subclause (d) the user may appoint a surveyor to inspect the equipment prior to the interchange, and this surveyor will be required to apply the UCIRC/RCIRC standards or such other criteria as agreed and stated in box 6. If the user appoints a surveyor to carry out a pre-interchange inspection of the equipment, the surveyor will issue a report describing its condition. In the event of a dispute between the parties, this report will serve as prima facie (compelling) evidence of the condition of the equipment interchanged. In BOXCHANGE 2016 it has been clarified that the user has to pay for any surveyor appointed by them.

Clause 4 - Condition of Equipment on Redelivery

Subclause (a) mirrors the provisions of Clause 3 (Condition of Equipment on Delivery) specifying that the containers must be redelivered in UCIRC/RCIRC condition or as per other repair criteria, if stated in box 6, wear and tear excepted. The user is also responsible for cleaning of the equipment, either by cleaning it before redelivery or by reimbursing the supplier for the costs of post-redelivery cleaning.

If the equipment is damaged on redelivery, the supplier must notify the user of this damage within the number of days stated in box 7. The supplier’s notification should be accompanied by a detailed estimate of repairs. Should the supplier fail to notify the user of any damage to redelivered equipment within the agreed deadline, such equipment is deemed to have been redelivered in an undamaged condition and the supplier has lost the right to claim reimbursement of subsequent repair costs.

Three options are provided in subclauses (b)(i), (ii) and (iii) for payment of repair costs: franchise, lump sum, or repair estimate. If repairs are already covered by franchise, the user is responsible for any costs exceeding the franchise amount. If a lump sum has been agreed for repairs, the user should pay the amount agreed per damaged container. Finally, if there is no franchise and no lump sum has been agreed, repair costs will be based on a repair estimate for each piece of damaged equipment.

If the user does not object to the supplier’s repair estimate within the agreed number of working days after receiving the estimate, the user will pay for the repairs in accordance with the provisions of subclause (b) and the details of the repair estimate (please refer to box 7 and subclause (c)). However, if the repair estimate is disputed, subclause (d) comes in to play. This subclause sets out the procedure in case of a repair estimate being disputed by the user. In those circumstances the parties must appoint a joint surveyor, who will establish the extent of the repairs payable by the user and the reasonable costs for such repairs. The parties will be bound by the surveyor’s decision and they will share the cost of the survey.

Subclause 4(e) sets out that all damage shall be defined in accordance with UCIRC/RCIRC repair criteria and that the actual repairs shall be performed in accordance with the IICL Repair Manual.

Depreciated Value
Subclause (b)(iv) provides a calculation method to determine the depreciated value of any equipment (see below example calculation). The depreciated value is found by depreciating the replacement value with a yearly depreciation rate. If the repair cost exceeds the depreciated value, the user pay only the calculated depreciated value but not less than an amount equivalent to the residual value.

It should be noted that the calculation only applies for owned equipment. In case of leased equipment, the user or the supplier should reimburse the depreciated value as calculated by the third party lessor.

See the example set out below for further details.

Clause 4 - calculation example for depreciated value

The replacement value for a 20-foot dry cargo container was USD 2,000.00, the residual value was USD 400.00, franchise was USD 100.00, and the annual depreciation rate was agreed at 10%. While the container was in the user’s possession it was damaged and the repair cost was USD 1,000.00. The container was damaged exactly 4 years after it was built.

1 year: USD 2,000.00 less the residual value of USD 400.00*, depreciated by 10% = USD 1,440.00
2 year: USD 1,440.00 depreciated by 10% = USD 1,296.00
3 year: USD 1,296.00 depreciated by 10% = USD 1,166.40
4 year: USD 1,166.40 depreciated by 10% = USD 1,049.76

The depreciated value of USD 1,049.76 exceeds the residual value of USD 400.00. Therefore, the user must pay to the supplier the repair cost of USD 1,000.00 less franchise of USD 100.00, in total USD 900.00.

*Note: It is customary accounting practice to deduct the residual value before applying depreciation.

Clause 5 - Delivery Procedures

This clause sets out the delivery procedures to apply for any pick-up of containers under the interchange agreement. In the previous edition of BOXCHANGE, Clause 5 covered also redelivery procedures and costs and charges associated with delivery and redelivery, but these matters are now dealt with separately in two new clauses: Clause 6 (Redelivery Procedures) and Clause 7 (Delivery and Redelivery Costs and Charges).

As set out in subclause (a), containers must be picked up from the depot allocated by the supplier.

Subclauses (b), (c) and (f) describe the required information and documentation flow between the parties when the user takes delivery of a container under the interchange agreement. The requirements reflect industry practice and have emerged over the past decade because of developments in warehouse operating systems and logistics.

Subclause (d) provides the parties with a right to request that an equipment interchange receipt (EIR) is signed as evidence of delivery of the equipment. The clause reflects the widespread use of electronic data interchange (EDI) in the container trade, but exchange of delivery information must not necessarily be based on EDI. Not all depots are able to notify users via EDI, so BOXCHANGE 2016 provides a flexible solution where use of EDI is an option, but not an obligation.

Inspections of reefer containers are commonly conducted before delivery in order to ascertain the equipment’s physical condition and to ensure that all components are in good working order, because such components are vital to the container’s cargo-worthiness. Subclause (e) therefore provides for the user to appoint a surveyor to perform pre-trip inspections of reefer equipment on delivery. The provision has been mirrored for redelivery.

Clause 6 – Redelivery Procedures

Clause 6 outlines the procedures for redelivery of equipment. The user is obliged to redeliver interchanged containers to the supplier’s depots. Annex A lists the addresses of such depots, whereas Annex B contains a redelivery schedule with information specific to each depot such as permissible redelivery quota. See below for details on how to complete Annex B.

As set out in subclauses (b) and (c), the user shall notify the supplier of intended redelivery at least 24 hours in advance and, based on this notice and expected location, the supplier will nominate a relevant depot or terminal. It is the supplier’s responsibility that the relevant depot is kept informed. Sub-clause (f) describes the documentation that should be given to the user after redelivery of a container. The procedures in these provisions resemble the parties’ obligations under Clause 5 (Delivery Procedures).

Subclauses (d) and (e) address the use of EDI and sets out a procedure for appointment of surveyors for post-trip inspections of reefer equipment. The provisions mirror the delivery requirements set out in subclauses 5(d) and 5(e). (See above explanation to Clause 5 for further details.)

Completion of Annex B - Redelivery of Equipment
Annex B is divided in to 3 vertical columns. In the first column the supplier must state the location (city) and depot name, for example “New York, Howland Hook Marine Terminal”. The next two columns are allocated to the various types of equipment, and a code should be inserted in the vertical columns in order to identify whether that particular depot provides unlimited redelivery (U), return subject to approval (A) or if it is closed for redelivery (C). The codes are based on specific container types and it may well be the case that some container types can be returned in all cases, whereas return of other types would require prior approval from the depot.

Clause 7 – Delivery and Redelivery Costs and Charges

The default position set out in subclause (a) is that depot and handling charges are covered by the supplier, but the parties are free to agree otherwise by stating their choice in box 10.
Transportation costs to the depot are always for the user’s own account (subclause (b)).

Although the previous version of BOXCHANGE also provided an option to request an interchange receipt (EIR), it had never been established who should cover the potential costs for obtaining such receipt. This issue has now been clarified, and subclause (c) specified that the party who requests the EIR will also be responsible for any costs incurred in this regard.

In accordance with subclauses (d) and (e), costs arising from pre-trip and post-trip inspections of reefer equipment are allocated to the user and the supplier, respectively. The reasoning behind these provisions is that the user is likely to want an inspection of the container before it is put in service, whereas the supplier wants to make sure that the container is fully workable when returned. It is the intention that the party on whose behalf the inspection is carried out will also be responsible for resulting costs.

Clause 8 - Payment of Rent and other Charges

The user must pay, as rent, an agreed daily rate per container from the pick-up date and until the equipment has been redelivered (subclause (a)). The daily rate should be specified in box 5, and it is the intention that a full day’s rent should be paid for the pick-up date as well as the date of redelivery. If the user should pay other charges, such as depot and handling charges, this should be indicated in box 10.

A monthly invoice should be sent to the user’s address in accordance with subclause (b). To avoid discussions as to whether payment should be made within a number of working, banking or running days, it is explicitly stated in subclause (c) that payment should be made within the number of running days stated in box 11. It is important that the parties agree on the number of days to apply because there is no default option if the parties forget to fill in box 11.

Subclause (d) sets out the procedure for handling of disputed items on the supplier’s invoice. The user must pay the invoices in full within the agreed deadline set out in box 11. Subsequently the supplier is obligated, within 30 days of the invoicing date, to either provide supporting documents evidencing the disputed items or issue an appropriate adjustment of the invoice. To keep the structure of the document simple and user-friendly, subclause (d) combined with box 7 provides for the same number of days’ notice if the invoice is disputed as would be the case with any disputed repair estimates under Clause 4 (Condition of Equipment on Redelivery).

It should be noted that the clause does not contain a specific time-bar for invoicing. This means that any dispute concerning when an invoice becomes time-barred would be solved on the basis of applicable background law (which would be the governing law of the contract as agreed and stated in box 14).

Clause 9 - Taxes, Dues and Charges

This clause allocates responsibility for payment of taxes, fees and fines.

Clause 10 - Termination of Agreement

Both parties can terminate the agreement in writing with immediate effect as per subclause (a), and thereafter a build-down period will commence as described in clause 11 (Build-down Period).
In some instances, the parties may wish to terminate the agreement without any build-down period. Subclause (b) enables the parties to do this, but only in circumstances where the equipment has been curtailed or obstructed by any legislation or regulation of any government or statutory body of any country where the user wishes to use the equipment, or if the equipment is shown to have latent defects that makes it unsafe or unsuitable for continued use.

Clause 11 - Build-down Period

With any sizeable quantity of containers spread out geographically, timely redelivery becomes a logistical problem. It is therefore common that, following termination of the agreement, a certain build-down period is allowed during which the containers may be redelivered and are on hire at the agreed rate. If equipment is still being used after the build-down period the supplier can, in its sole discretion, either increase the daily rate as per box 5 or invoice the user for the depreciated value of the equipment.

Clause 12 – Insolvency

Subclause (a) provides for termination by either party in the event of the insolvency of the other.
If it is the supplier who terminates the agreement, subclause (b) ensures that there is a right of immediate repossession of all equipment, provided that it is empty. The reason for this condition is to protect cargo owners against becoming hostages to the situation. However, it should be kept in mind that it is not the supplier who has the contractual duty towards the cargo owners to deliver the cargo.

If the user becomes insolvent, the supplier would also have a right to request notification of the exact location of all of its equipment interchanged under the agreement.

Clause 13 - Lien

This clause stipulates that the supply of containers under the agreement will not result in any lien being attached to any ship connected in any way with the user.

Clause 14 - Liabilities and Indemnity

Subclause (a) places liability for damage or total loss of the equipment on the user. In case of actual or constructive loss the supplier shall be immediately notified upon which rent ceases and the user becomes liable to pay the depreciated value. Once paid, title to the container passes to the user.

It should be noted that it is not necessary to prove a total loss before agreeing to the described procedure. Proof of such a loss would not be realistic as in many cases of an actual total loss the container simply vanishes, either overboard or stolen, or is otherwise untraceable. This is also the reason that a provision is made in subclause (a) allowing the process of declaring total loss to be reversed in case the container turns up. However, such reimbursement only applies if the container is recovered within twelve months of the total loss declaration, and the supplier is entitled to deduct the rent that would have been accrued during this time.

Subclause (b) stipulates that each party should defend, indemnify and hold the other party harmless for any claims, loss or damage arising out of their respective responsibilities. The user’s responsibilities would relate to the possession, leasing, operation, control or use of the equipment, whereas the supplier would be responsible for claims arising out of the ownership, manufacture, design or supply of the equipment. The structure of subclause (b) has been simplified in the new version of BOXCHANGE in order to improve its readability, but there have been no changes to the substance of the clause.

Both parties commit themselves to giving immediate notice to the other party of any such claims or actions, and assisting in the handling of them (subclause (c)).

Clause 15 - Direct Interchange

By using BOXCHANGE, carriers’ can increase or decrease their container fleet at certain times and thereby avoid unnecessary, and costly, redeployment of containers. In certain circumstances carriers may find container interchange more attractive than leasing, for instance if the supplier has a favourable leasing with a third party lessor and this is reflected in the daily interchange rates. However, it was never the intention that users should be able to rely on suppliers’ beneficial leasing agreements to expand the user’s container fleet on a more permanent basis. The user is therefore required to assume full responsibility for leased equipment that has been interchanged for more than a year, and from such time the user will become lessee of the equipment on terms similar to its own lease contracts (Direct Interchange) and the supplier will be released from its obligations to the lessor.

This clause is an important provision that has worked well over the years but, for various reasons, direct interchange is not always possible in practice. The approach in the previous edition of BOXCHANGE was to handle such incidents on a case by case basis, leaving it with the parties to negotiate an appropriate solution if direct interchange was not possible. However, reaching agreement on this point has proven particularly challenging in practice, and therefore it was concluded during the recent review of BOXCHANGE that more certainty was needed. This issue has now been addressed and the solution is set out in subclause (b), whereby the supplier may either increase the daily rate or invoice the user for the depreciated value of the equipment. If the container is leased, the depreciated value will be as advised by the leasing company.

This clause now consists of two subclauses. Subclause (a) sets out the procedure for direct interchange and subclause (b) provides alternative options in circumstances where direct interchange has proved to be impossible or impracticable.

Clause 16 – Track and Tracing and Remote Control

Cargo owners and shippers often request complete visibility of the whereabouts of transported goods and such requirements are met by means of track and tracing devices being installed on containers. In addition, the machinery used to control temperatures inside reefer containers can be remote controlled, which adds to the level of information that carriers are able to provide. However, with the use of such technologies arises also the risk of abuse of the same equipment and its recorded data, and subsequently there is a need for protection of confidential information and other sensitive trade data.

Clause 16 of BOXCHANGE addresses the handling of such information by restricting downloading of data and banning permanent modifications of electronic equipment.

Clause 17 – Insurance

The user and supplier are obliged to have in place general liability insurance. The parties should agree a minimum limit per insurance event to ensure adequate coverage, and this limit should be stated in box 13. Deductibles will be for the parties’ own account, and evidence of the insurance should be provided on request.

This clause contains a general indemnity provision in case one of the parties fail to procure or maintain liability insurance, or if the insurance is otherwise invalidated. Indemnity can only be claimed where one party has suffered loss or damage or incurred additional liability or expense as a consequence of the actions or omissions of the other party.

Clause 18 – BIMCO Dispute Resolution Clause 2016

This clause is the latest edition of BIMCO’s standard suite of dispute resolution provisions. It offers four options on arbitration: London (which applies by default if no other venue is agreed); New York; Singapore; and, finally, a free choice of venue as may be agreed between the parties. If Singapore is chosen as venue the parties will have a choice between application of Singapore or English law, with English law applying by default if no choice of law is agreed.

If the parties do not indicate their choice of governing law and arbitration venue in box 14, then English law and London arbitration will apply by default.

Clause 19 – Notices

This Clause is BIMCO’s standard notices clause as used in a number of other agreements. It basically provides for all notices under BOXCHANGE to be given in writing and that the method of communicating such notices must be “effective”, meaning that it should be a method commonly in use by the parties, such as email or fax.

Parties should use the most appropriate method for sending notices and other communications under the agreement. Although email is perfectly acceptable for most general communications, parties may wish to consider other more traditional methods such as courier service or registered mail for more important notices.