April 24, 2014 | Industry Insights

Five Important Tips to Consider When Reviewing Shipper / LSP Contracts

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Five Important Tips to Consider When Reviewing Contracts

If one thing can be said for the relationships between transportation intermediaries and their clients, it’s that no two are the same. That is especially true for shippers who demand that their own terms and conditions dictate your relationship.  In the past, only a select group of shippers or logistics service providers (LSPs) insisted that transportation intermediaries contractually waive industry standards or statutory limitations of liability. It has now become common practice for shippers and logistics providers to demand the same. Most shipper / LSP contracts can significantly increase your liability as an intermediary and require close scrutiny by your risk manager, compliance officer and attorney.

Here are five tips you and your team should consider when reviewing shipper / LSP contracts.

Beware of Inexact Terms

Some shipper contracts are created by people who understand very little about transportation and logistics. Signing an ill-constructed contract can cause as much pain to you and your shareholders as it may cause the shipper.  Many of the contracts you’re asked to sign are not applicable to transportation intermediaries at all; rather, they are shipper-carrier contracts designed for use directly with truckers.

The following is an excerpt from a contract provided to a domestic freight forwarder that owns no trucks: “Carrier represents and warrants that it is registered with the FHWA to operate as a common and contract carrier of general commodities and that it is in full compliance with Department of Transportation safety regulations.”  At best, this contract would be unenforceable and likely would make for a short relationship between shipper and forwarder. At worst, the forwarder is identifying itself as the actual carrier, so he could be taking on the liabilities of the trucker thus exposing itself to injury and damage claims.

When confronted with ill-fitting contracts like this, a transportation intermediary should either modify the contract to the satisfaction of both parties or revert to its standard terms and conditions.

Outline All Parties’ Responsibilities

Service contracts can include many aspects of the services that you promise to your client including some that may not be under your direct control. For example, equipment availability, the safety and fitness of carriers, delivery hours, and even hiring practices of drivers are controlled by the companies actually providing the service. As an intermediary, when presented with a contract of this nature, you should transfer the responsibility for those services to the actual vendors. Transferring responsibility ultimately requires a contract between you and those vendors.

Also, understand that your vendor may rely on another layer of vendors. Consider a contract between shipper and forwarder that includes domestic transportation.  If your normal practice is to use a property broker to arrange domestic transportation, make sure the contract will accommodate this practice. Put in place a sub-contract with the property broker that outlines what you and the shipper require of the trucker. Outlining all parties’ responsibilities up front ensures that there are fewer disagreements down the road, and your ability to seek recourse against responsible parties is preserved.

Have a Carefully Planned Negotiation Strategy

Shifting liability or risk from one party to another inevitably involves added cost to the party that inherits the risk. Ultimately, that cost gets passed on to the customer.  Pointing this out can create some leverage when trying to make modifications to the contract. For example, a shipper contract may stipulate a limit of liability for damage to cargo but may not include a cap on those limits. If the shipper has its own cargo insurance policy, it’s a duplication of cost to require you, the intermediary, to contractually obligate yourself to uncapped liability limits.

It’s also important to consider what is not stipulated in a contract and how that can increase your liability and costs to the customer. For example, a contract that does not address punitive, indirect, incidental or consequential damages does not mean that you are immune to them; instead it’s a potential landmine where both parties can spend considerable resources fighting a claim.

Carefully Scrutinize Hold Harmless Agreements

The job of the attorney drafting the shipper’s contract is to transfer liability for a claim to a third party. As a result, most strive for overly broad hold harmless agreements that can create big problems for the intermediary. Terms like ‘agent’, ‘any’, ‘other parties, ‘occurring in connection with’, are all examples of hold harmless wording that can extend your liability outside the scope of services to be provided. Rarely does the author of the contract even consider that many of these overly broad terms are often uninsurable and unacceptable especially with coverage such as General Liability and Worker’s Compensation.

Strive for Clarity and Equity

Consider that a contract is more than an agreement between two parties; it’s a document that may be seen by many third parties including insurance adjusters, attorneys, collections specialists, and perhaps even the courts. The contract must be written in a way that’s easily understood by all parties. I recommend that if you are presented with a contract that is unclear to you, have the document modified to clarify the intent, and include definitions within the contract.

Remember, most insurance policies DO NOT automatically cover contractual liability, so any contract that deviates from your standard terms and conditions must be approved by your insurers prior to entering the contract. Also remember that a shipper contract is designed to protect the shipper, not you, so there may be language within a contract that increases your liability.

Any successful and long-term business relationship must benefit both parties. A clearly understood and equitable contract is a vital part of that relationship. A contract signed without proper review and thorough consideration is doomed to fail from the start.

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