So, you’ve decided to move ahead with a new transportation provider or expand a current relationship—congratulations! The first step in a committed business relationship is contracting. Here now are our top dozen tips to negotiate a contract that reflects your objectives and minimizes legal risks.
1. Do your due diligence. Thoroughly check out the provider’s reputation, operational performance, integrity and financial strength prior to moving forward. A contract will be little comfort if a supplier is dishonest, incompetent, or goes bankrupt.
2. Have a business conversation. Before the contract discussion and documentation process commences, ensure that you and your new partner agree on the substance of the deal and discuss goals and expectations for the business. A non-binding term sheet can reflect your discussion and lay out the framework for your agreement. Just remember that as a matter of contract law, the written contract will supersede all prior discussions. If it isn’t in the contract, it isn’t!
3. Start fresh. Every new endeavor starts with someone wanting something different than what he has today. What are you trying to accomplish with the new vendor? The reason you selected the provider and the goals and objectives for the relationship should be reflected in the contract you negotiate and sign. Too often shippers re-use an inappropriate contract template that overlooks the priorities for the work to be done. Include and highlight what’s important to you.
4. Enforcement practicalities. If your carrier is headquartered outside of the U.S., allowing jurisdiction in a far-off country with a questionable legal system may be tantamount to no remedy at all or, at best, place you at a home court disadvantage if there is a breach. Some arbitration mechanisms involve large unanticipated filing and arbitrator fees which make it impracticable to pursue anything except the largest claims.
5. Ensure that services are properly described. Contracting can involve a range of services such as air, rail, ocean and motor carriage, customs brokerage, contract logistics and consulting. Typically each of these services will have a different pricing methodology, liability limit and service requirement. Master agreements and transaction documentation such as supplements, schedules and work orders should reflect what is desired in each case so expectations are clear. Rate schedules and surcharge clauses need to be understood the same way by each party. In our experience, a lack of clarity concerning rates and surcharges is the most frequent cause of disputes and dissatisfaction in new shipping relationships.
6. One size does not fit all. Terms which have been developed to fit the procurement of goods or other services often have only so much relevance in the logistics space. For example, a warranty of merchantability and assignment of intellectual property rights will often prompt confused inquiries to the shipper’s legal team. When thinking through the goals of your contract, exclude irrelevant items while including items which do matter.
7. Require the insurance that you need. Avoid boilerplate, and specify the insurance coverage you really need the provider to possess. For example, cargo liability coverage is important, while cyber-liability will usually not be.
8. Neither party should bet their business on one deal. We have seen numerous contract drafts with liability or liquidated damage terms which are tilted to one side or the other. One side seeks to disclaim all direct or indemnification liability or to limit it to a few cents per pound while the other proposes onerous liquidated damages for minor delays and/or unlimited liability for direct and consequential damages. Providers should certainly take meaningful responsibility for their breaches, but responsible companies will not “bet the farm” on each engagement or shipment. Conversely, companies that are willing to do so may not be viable. As tempting as it is to shift costs and risks, consider how much coverage your business really needs and whether the risk/reward benefit you’re offering is reasonable. If your contract must ask for limits or remedies not specified when rates were requested, what can you offer the provider in compensation?
9. Separate limits. Since the potential for carrier or forwarder misdeeds varies greatly, it may make sense to establish different tiers of exposure. For example, an egregious error in customs filings is likely to have greater implications for shippers, officers of whom may face personal liability under U.S. law, than a one-day delay in delivery. Shippers selecting the cheapest mode and carrier should expect pushback on charges for delay.
10. Commit to provide what carriers and forwarders need from you. For example, carriers require accurate and complete declarations of the nature of cargo. By the same token, for reasons pertaining to both safety and liability, carriers and third-party logistics providers (3PLs) also must obtain commitments regarding proper packaging for cargo and additional measures for hazardous materials. Taking these obligations seriously will get your shipments there faster and avoid legal headaches.
11. Keep the rug under you. While many companies desire the ability to terminate any contract at any time for any reason, without consequence, termination for convenience clauses can be like getting married, while planning to divorce: a lack of commitment to the relationship that bodes ill. Carriers often make contractual commitments for substantial investments in people, space and equipment to accommodate clients and these investments need to be recouped. Conversely, shippers may be seriously harmed if a transportation provider withdraws without notice. If the vendor is performing and the shipper is paying the invoices, why would either cancel a contract without notice? Consider a reasonable notice period, and address concerns about an unanticipated change in your company’s business, or a change in business control, with exceptions.
12. Express performance requirements. For non-performance, a good approach is to document the performance requirements of each party, to define a corrective action process that includes a reasonable timeline, and to specify executive level discussion between the parties before termination is triggered.
In summary, the contract is the beginning of your relationship with a transportation provider. A collaborative contracting process with shared goals and understandings, clear expectations and mutual obligations will reduce your company’s legal risk while building a foundation for a long-term relationship.
Martin Robins has practiced law for 39 years and is a partner with the Chicago law office of the firm of FisherBroyles LLP. He also serves as an adjunct professor at DePaul University College of Law.
Lauren Pittelli is the founder and principal of Baker Logistics Consulting Services Inc., a consulting firm focused on addressing transportation, trade and customs consulting needs. Prior to starting Baker she spent 30 years in senior leadership roles in the freight forwarding and customs brokerage industry providing transportation, customs and contract logistics services to shippers.
