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Deal or No Deal... Lessons on Contracting
There comes a time in the life of every transportation manager when you have to make the decision regarding a carrier contract: "Is this a good deal for my company?" This is not an exhaustive list of contract dos and don'ts, but it points out some of the pitfalls that can cripple an otherwise successful transportation program.
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THE TRANSPORTATION CONTRACT provides the foundation for your transportation program and defines the rules of engagement. Knowing some of the common pitfalls in transportation contracting will help you to know when to walk away and when to run. Here is a checklist of issues to help you determine if you should engage in business with a carrier.
Failing to Fully Address Security Issues
A carrier must comply with all applicable laws and be ready to comply with new security laws. In addition, a carrier might be required to take steps necessary for expedited processing of shipments under customs programs like the Customs-Trade Partnership against Terrorism (C-TPAT). There may also be additional security measures not required by law that shippers may want a carrier to adopt.
Indemnification Provisions
Shippers want to be indemnified against carriers. Carriers want to be indemnified by shippers. Shippers are more likely to be dragged into lawsuits against carriers than vice versa. Be sure to watch out for indemnification language that requires shippers to be blameless, e.g. "except where shipper is negligent."
Liability Limitations
Liability caps need to be examined carefully. Be aware of low liability limits based on Freight of all Kinds (FAKS), which is an average freight class in pricing LTL business, and realize that insurance coverage is not the same as liability. Make sure your contract has a means to arbitrate any applicable claims.
Failure to Prohibit Late Pay Penalty Claims
Most late pay penalty provisions in carrier tariffs are unlawful. Many of us still remember the late pay penalty claims that led to mass undercharge collection actions back in the 80s and early 90s.Loss of discount penalties or penalties exceeding collection costs are unreasonable and should not be accepted in any contract.
Referencing Carrier Tariffs or the NMFC in Your Contract
Carrier tariffs are written to favor carriers and can be unilaterally amended without your knowledge. The National Motor Freight Classification (NMFC) is also written to favor carriers and can be amended over shipper objections. If you are going to accept these tariffs, be sure you know what you are agreeing to and that you will be giving up some control.
Make Use of an "Evergreen" Clause
Provide contractual protection after expiration of the initial term with an "Evergreen" clause. The expiration of a contract can expose shippers to undercharge claims on subsequent shipments. Contracts should be set up to terminate when a party notifies the other of termination within a specified time period (usually 30 days).
Failure to Limit Shipper's Exposure to Unexpected Rates and Charges
It is important to require all rates and charges be disclosed and provided for in the contract. Also, make sure that rates or charges not in the contract will apply only with shipper agreement. Additionally, make sure that application of increases in rates and charges must have shipper agreement.
Using Motor Carrier Contracts for Intermediaries
Given the increasing use of intermediaries, it is important to note that an intermediary's agreement to rates and charges is not equivalent to an underlying carrier's agreement. Make sure your terms and conditions are passed through to underlying carriers and that carrier conduct will be subject to the carrier's agreement with the intermediary. Don't forget to address audit rights, which will help insure that the intermediary is making payments to their underlying carriers, and provide notice of payment problems as well.
Ensure Provisions for the Use of the Shipper's Receipt or Bill of Lading Form
Bills of lading as receipts rather than "contracts of carriage" have become more prevalent as shippers have moved to contract carriage. The bill of lading and the contract must be in synch, and conflicting documents need to be avoided.
These are some of the key issues to help you decide whether your transportation contract is good for your company. This is not an exhaustive list of contract dos and don'ts, but it points out some of the pitfalls that can cripple an otherwise successful transportation program. If you have suggestions or ideas for future articles, please let us know. Please contact the editor at fmoody@logisticsquarterly.com)