COA is a shipping term which stands for Contract of Affreightment. A COA is a legal agreement, made between a shipper/cargo owner and shipping company/carrier to transport goods by sea.
In this article we look at what a Contract of Affreightment (COA) is, compare it to a Bill of Lading, then zoom in to look at the different types of COA and how exactly a COA works.
What is a Contract of Affreightment?
Used when moving goods by sea, a Contract of Affreightment is a legal-binding agreement between two parties (i.e. the party wanting to ship the goods and the party responsible for shipping them). Companies will often use a COA when transporting bulk commodities or other goods in large quantities in order to achieve clarity and security during the shipping process. In essence, a Contract of Affreightment is the shipowner saying they will carry a certain amount of goods on a certain journey for a certain amount of time on behalf of the charterer.
Contract of Affreightment vs Bill of Lading
A Contract of Affreightment (COA) and a Bill of Lading (BoL) are both important documents frequently used in the shipping industry, but each with different purposes and features. Let’s compare and look at a Contract of Affreightment versus a Bill of Lading:
In comparison to a BoL, a COA is a broader ongoing agreement that covers multiple shipments over a longer period of time. A COA details the terms and conditions for transporting a specific total quantity of cargo over a specified amount of time. On the other hand, a BoL is an agreement relating to one individual shipment. Furthermore, BoLs are multi-purpose documents, used as a contract of carriage between the shipper and cargo operator as well as a receipt of freight services and a title document.
A COA is a lot more flexible than a BoL, which tends to be highly specific to a particular shipment. The terms and conditions set out in a COA will apply to multiple shipments, whereas those in a BoL will only apply to a single shipment and give detailed instructions on the specific cargo, route, and any other special instructions etc.
- Quantity of cargo and duration of agreement
A BoL is used for a specific individual shipment whereas a COA usually applies to multiple shipments over a specific period of time. When compared with a BoL, a COA is used to ship larger quantities of cargo (e.g. bulk shipments) and covers a longer time period, usually several months or even years.
- Transfer of ownership
A BoL permits the transfer of ownership of the goods between parties, a feature which is important for international trade and finance.
How does a Contract of Affreightment work?
Let’s use an example to illustrate how a Contract of Affreightment works:
Freight forwarding company X wants to ship goods using shipowner Y. Both parties enter into negotiations with one another and then use a Contract of Affreightment to set out the specific agreed upon details of their arrangement, including the:
- Type of cargo
- Quantity of cargo
- Ports where the cargo will be loaded and discharged
- Loading and unloading procedures
- Freight rates
- Responsibilities of both parties (including Customs clearance)
- Liability for potential damages
- Any other terms and conditions
Company X then pays shipowner Y to complete the transaction and both parties are then legally bound by the terms set out in the COA.
Types of Contracts of Affreightment
There are several different types of Contract of Affreightment, each designed to meet the various needs, requirements and preferences of those operating in the shipping industry, such as shipowners and freight forwarding companies. Let’s look at some of the most common types of Contracts of Affreightment:
- Voyage charter
Used when transporting a set amount of cargo from one port to another, either on a single voyage or a specific number of voyages. This type of COA sets out the terms for each voyage (e.g. freight rates, start and end ports etc).
- Time charter
Used to give the charterer more control, this type of COA sees the shipowner agree to provide the vessel for a set amount of time (usually on a long-term basis, such as several months or years). The charterer can then use the ship for multiple voyages during the contracted period.
- Trip charter
This type of COA is a hybrid between a time charter and a voyage charter. It provides shippers with a highly flexible option that covers the shipping of goods for one or more predefined trips.
- Contract of carriage
This type of COA is used for multiple shipments over a longer period of time, but does not specify the exact voyages that will be taken, nor the vessels that will be used. It offers a more comprehensive agreement than other types of COA.
Advantages and disadvantages of Contracts of Affreightment
There are both advantages and disadvantages to Contracts of Affreightment, meaning they may or may not be suitable depending on the individual needs and circumstances of the parties involved. Let’s look at the pros and cons of Contracts of Affreightment in more detail:
Advantages of COAs include:
COAs enable long-term planning for both the shipper and the carrier which in turn facilitates the consistent flow of goods and income.
The right type of COA provides flexibility around the volume, route and scheduling of the cargo, which is particularly useful for businesses with dynamic shipping needs.
- Cost control
COAs allow those involved to lock in rates for a specific time period. This enables businesses to predict costs, which is particularly beneficial in potentially volatile market conditions.
COAs help build long-term relationships between shippers and carriers. This in turn encourages open communication, improved operational efficiency, and more streamlined processes.
- Risk mitigation
By offering clarity on terms, conditions, responsibilities and liabilities, COAs can help better manage risk for all parties involved.
Disadvantages of COAs include:
If/when circumstances change, being locked into a COA can cause issues given the terms and conditions are set and cannot be changed.
COAs usually require shippers to commit to a fixed volume of cargo. This means they will still need to fulfil their obligations as set out in the COA, even if subsequent fluctuations in supply/demand mean they don’t have as many goods to transport.
- Rate risk
If the COA has a fixed freight rate and the market is volatile, a drop in the market rate could mean the shipper has to pay above market value for the services required.
- Operational challenges
Lack of vessel availability, scheduling issues, or other unforeseen events can result in operational challenges when it comes to meeting the obligations set out in a COA.
The process of drafting and negotiating COAs is a complex one, meaning there are often significant legal and administrative costs incurred.