June 20, 2018 | Cargo Insurance, Industry Insights
Customer Contract Considerations for International Forwarders
International forwarders often enjoy a significant advantage over entities that arrange for domestic transportation in that international forwarders are able to perform a larger amount of their services pursuant to their standard terms and conditions, whereas domestic providers are often required to sign onerous contracts drafted by their customers. Given that reliance on standard terms, the international forwarder is often at a loss when approached by a customer that demands that the forwarder sign a “master services” or similar type of contract covering the forwarder’s services as, invariably, that contract is mismatched or directly at odds with the forwarder’s standard terms. Compounding the difficulty in this situation is where the commercial opportunity is compelling and thus there is pressure on both sides just to “get the deal done.”
The purpose of this article is to provide a brief overview of some (but by no means all) legal and practical considerations to take into account when approached by a customer with a contract purporting to address international forwarding operations.
What Does “Forwarder” Mean in the Contract?
First and foremost, it is important to understand the role that the forwarder will be playing under the contract. Is the forwarder acting as the “carrier” (in other words, will it be issuing air waybills and ocean bills of lading and acting as the carrier under the so-called “Carrier Model”) or is it holding out to act solely as an agent of the customer in arranging with third-party carriers to transport the customer’s cargo on behalf of the customer (under the so-called “Agent Model”)? Simply put, the forwarder must fundamentally understand its role if it hopes to have a contract that appropriately addresses that role and gives the customer a clear understanding of what it can and cannot do in performing services.
Legal Limitations of Contracted Services
Once the forwarder understands its role, it needs to understand whether applicable law places limitations on terms of that contract or its ability to provide contracted services. As an example, while the Federal Maritime Commission (“FMC”) is in the process of relaxing limitations its places on the parties’ ability to privately contract, currently, if a non-vessel operating common carrier (“NVOCC”) is providing services that are not governed by its tariff and bill of lading terms, it must do so pursuant to a NVOCC Service Agreement (“NSA”). NSAs are required to be filed with the FMC, with certain of their terms published by the NVOCC in tariff format, and the NSA must include a minimum commitment of cargo from the shipper.
If the forwarder wants to arrange for international ocean service pursuant to the Agent Model, at least with respect to exports from the U.S., FMC regulations require the forwarder to offer to make a full disclosure to the customer of, among other things, the underlying carrier’s bill of lading, a breakdown of rates (including the transporting carrier’s actual published rate), and other pertinent shipment details. This last piece defies the typical forwarder model, which seeks not disclose the underlying cost of service providers to the customer.
When proposing a contract, the customer often does not understand these limitations and nuances. As part of a Request for Proposal process, the customer’s representative may not be legally trained or worse may have limited authority to even discuss the terms of the contract. This makes even initial negotiations difficult, as the forwarder will by necessity be proffering contract edits which have complex legal backgrounds. For instance, the forwarder might wish to operate under the Agent Model, but be presented with a contract that casts the forwarder’s role as a carrier, with the rationale being the customer wants “one neck to choke” but which exposes the forwarder to liabilities it is ill-suited to take on.
Similarly, even if the forwarder intends to operate under the Carrier Model, the shipper might not understand that, if the contract addresses international ocean transportation, then if the shipper wishes to disclaim the tariff and bill of lading (which a customer-drafted contract will almost certainly seek to do), the contract must include a minimum quantity commitment and be filed with the FMC. Or, without careful review and discussion, the forwarder might give up certain rights and remedies it is otherwise entitled to under applicable law, without realizing their importance if later the relationship goes sour. It is up to the forwarder to educate its customers regarding these limitations.
In Contracts the Devil is in the Details
As noted, customer contracts will almost always seek to disclaim the forwarder’s form documentation such as its bill of lading and air waybill terms, and the terms of any power of attorney. This is, of course, extremely problematic to the forwarder, especially one operating under the Carrier Model (whether by choice or because the customer forces the forwarder to do so) because such a forwarder often relies on industry standard limitations of liability provisions so that its liability to the customer is realistically capped. Resolution of these issues with the customer often involve some mix of educating the customer, investigating the forwarder’s insurance program (and available alternatives), and ultimately a “gut check” on the part of the forwarder in determining what level of risk and exposure is acceptable.
With respect to specific issues to be considered, obviously, cargo liability is an important consideration. In addition, special care needs to be given to contract clauses like the indemnity (to ensure that the forwarder is not assuming liability for acts and omissions of third party carriers, which might be uninsured, and also to ensure that the forwarder has not unwittingly given the customer a second “bite at the apple” with respect to cargo liability since indemnity clauses are often uncapped), insurance (including things like waivers of subrogation and additional insured status), liens, payment terms (including whether offset will be expressly prohibited), consequential damages (which should be mutually waived), and governing law and where legal actions may be filed (“venue”).
Likewise, for more specialized commodities, customers often seek to impose specific handling or security obligations. Care needs to be taken with respect to such clauses since the forwarder is not in a position to actually perform, or even monitor, the underlying carrier’s performance of those obligations. In sum, before just signing the contract and toasting the deal, forwarders need to carefully consider the terms of any such customer contract in order to protect their long-term interests.
For further information on this topic, view the on-demand webinar Shipper Contracts and Master Service Agreements – The Devil’s in the Details presented Jacob Fisher and Nathaniel Saylor.