Transportation contracts are a reality of life for carriers, shippers, freight brokers, intermediaries, third-party logistics companies, freight forwarders and anyone else I can’t think of. I often see contracts at the center of a dispute which make me think to myself: “Why did you sign this?” Which reminds me: it’s better to ask me to review a contract beforeyou sign it. Remember: your leverage, well-being, and future performance are all best served by having a lawyer involved before you enter into a contract.
However, I realize this is not always the case. Therefore, I have created this list of items commonly included in Transportation Contracts which everyone should look for. These are the clauses that can come back to bite you and you need to be aware of them!
Forum/Venue Selection and Choice of Law clauses.
Contracts often contain a Choice of Law provision and a Venue or Forum Selection clause. A Choice of Law Provision determines which state’s legal rules will be applied in a lawsuit. A typical choice of law clause will state something to the effect of “this agreement shall be governed by the laws of the state of California“.
A Venue or Forum Selection clause determines the geographic locations where a lawsuit must be filed. A forum selection clause chooses the specific court in which a dispute will tried. A typical Forum Selection clause says something like this: “Any dispute arising from this contractual relationship shall be governed by California law, and shall be decided solely and exclusively by State or Federal courts located in Los Angeles, California.”
Be on the lookout for these clauses: They tend to be enforceable and if a dispute arises, you may end up in a lawsuit in a far away place with very unfavorable law being applied to your case. Alternatively, you may find if you want to sue the other party to a contract, you are stuck having to file a lawsuit in a very inconvenient location.
By statute, if the parties expressly agree in writing, a contract can supersede the terms and conditions of the uniform bill of lading, the carrier’s rules tariff and other general rules of commerce. Contracts no longer have to be written for multiple shipments or meet any distinct shipper need. There are no standard and accepted terms and conditions in shipper/carrier or broker/carrier contracts. So be on the lookout for any contractual language that voids the contractual language in documents such as Bills of Lading, Tariffs, Rate Confirmation Sheets, E-mails, etc. Just remember: smart people read and understand every word of each contract before signing. Failure to do so can result in nasty surprises. Don’t sign a contract without reading each paragraph carefully. Cross out objectionable language and initial and date your changes.
The right to a jury trial is one of the most basic, fundamental and cherished Constitutional privileges we enjoy as Americans. Don’t give it away thoughtlessly. Notably, the party who is pushing for arbitration is the party who wants to deprive you of your rights. A typical clause will say something like: “All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration”.
Arbitrators are the judges in Arbitration proceedings. Unlike in judicial proceedings, the arbitrator is neither bound by the law, nor the terms of the parties’ contract. Rule 43 of the AAA Rules simply provides: “The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.” Similarly, even if a contract is clear and unambiguous, there is a danger that an arbitrator will ignore the contract in favor of a more “equitable” result. Litigants often refer to this concept as “rough justice” or the “splitting of a baby.” Furthermore, you have essentially no appeal rights: Courts will not review arbitrators’ decisions on the merits of the case.Beware of Mandatory Arbitration Clauses.
Bill of Lading Variations
Another area to examine is bill of lading variations, such as compensating for a loss based on price per pound instead of total wholesale, retail, or replacement value; courts have varied widely on how they interpret contract terms such as a shipment’s full actual value. That’s particularly the case when shipping requirements are unique. Another issue is the use of subcontractors.
How do you feel about being someone else’s Insurance Company? That’s exactly what you will be if you sign a contract that says something like this: “Company shall fully indemnify, hold harmless and defend (collectively “indemnify” and “indemnification”) ABC and its directors, officers, employees, agents, stockholders and Affiliates (collectively, “Indemnified Parties”) from and against all claims, demands, actions, suits, damages, liabilities, losses, settlements, judgments, costs and expenses (including but not limited to reasonable attorney’s fees and costs), whether or not involving a third party claim…blah, blah, blah.
Don’t agree to these if at all possible. Indemnity clauses requiring you to hold a shipper harmless from all losses arising out of the loading or transportation can require you to defend the shipper when it is sued for its own acts of negligence. You could end being on the hook for hundreds of thousands or even millions of dollars.
Billing and Payment Terms
Contract language must discuss the issues of when payment is due, penalties for late payment, including interests, costs of collections and suit and attorney fees.
Consequential Damages/Limitation of Liability
Consider a waiver of consequential damages. These include indirect loss, such as loss of profits, or shut down of manufacturing process, which are only remotely connected to the services you’re rendering.
Also look for a limitation of liability clause, which is an agreement between you and your customer that establishes a maximum amount of liability exposure you will be responsible for in the event of a claim arising out of the services rendered.
The fine print in some shipper and broker contracts can hide provisions forspecial and consequential damages that your cargo insurance doesn’t cover. In some cases, carriers have unwittingly agreed to accept potential cargo claims of up to $5 million per occurrence. Some provisions even require you to pay the shipper for damages that are not your fault.
Certifications, Warranties and Guarantees
You should never promise the total accuracy of anything, e.g., pickup or on-time delivery, 100% satisfaction, or complete compliance with all possible regulatory controls. If faced with such high expectations, you can substitute contract language that reduces that promise to a reasonable expectation.
Contracts may include a clause on safety that makes it clear the responsibility for job safety remains with the person or entity performing the specific task. For example, if you are a motor carrier and your driver slips on oil on the shipper’s dock while counting the piece loading, you should not accept responsibility for an unsafe work condition over which you have zero control. Beware of of clauses that shift responsibility away from the responsible party. Don’t get stuck being on the hook for someone else’s screw-up.
All good things must come to an end. You must have a termination clause that defines the circumstances under which you or the other party may end the legal relationship. Contracts aren’t fairy tales and we don’t live happily ever after: so-called “evergreen” contracts that never expire will eventually become quite stale and cause trouble. Renewals at specific intervals, even if by email confirmations, are best.
Rubber Stamps and Gold Stars
Don’t ask me to “look this over” and approve it because you started work last month. I regularly get calls asking me if I’d be willing to “check out our contract” and “make sure we are OK”. Would you like me to put a Gold Star on top of the agreement, too? We’re not in elementary school and you don’t want to pay me to grade your contract like its homework. I can do that – and better late than after some disaster strikes. However, the best time to consult with a lawyer is before you sign a contract. Get an experienced Transportation Lawyer involved in the drafting of an agreement up front.
Companies in California rely on Non-Compete and Non-Solicitation agreements at their peril. California is one of very few states in which Non-compete agreements are void as against public policy. Also look out for clauses like this: “under no circumstances will carrier solicit customers for payment of freight charges…” you put your own comma in there and print, “unless broker does not pay within 30 days.” That gives you the right you already have under FMCSA regulations to do that. They have no right to take that right away from you. Some crooked broker who stiffs the carrier walks away with your money and you can’t go after the customer? Remember the general rule of law: The Carrier always gets paid.
This is by no means a complete list. Your best bet is to engage an experienced Transportation Attorney to guide you and make sure your rights are protected before signing any contract.
Cargo loss and damage claims will eventually land on your desk and you will need to deal with them. Some factors you cannot control and no steps will absolutely insulate you from liability, claims or the costs of defending claims in every circumstance. However, there are steps that might help reduce your liability exposure and costs of administration and litigation when a claim does eventually land on your desk.
The ABC’s of cargo claims.
Motor Carriers contractually obligate themselves to deliver cargo from Point A to Point B. When a carrier doesn’t get the goods from point A to point B safely, the carrier has breached a contract. Therefore, Cargo claims are based upon a breach of contract by the carrier, not whether the carrier was negligent: the essence of a transportation contract is that the carrier agrees to move a piece of cargo from point A to point B. In return, the shipper (or broker) agrees to pay the carrier. When cargo is lost or damaged, the basic contract for carriage has been breached, giving rise to the shipper’s claim.
The contract for carriage can either be an individually negotiated contract between the shipper and the carrier or the Bill Of Lading if no written contract exists between the shipper and carrier. The BOL will typically incorporate, by reference, the terms of the carrier’s tariff or their “terms and conditions”. The term “incorporate by reference” simply means that the contents of one document are incorporated into the document at hand. For example: a bill of lading, by simply by referring to the other document such as the carrier’s tariff, incorporates the tariff into the BOL.
Generally speaking, in order to prevail on a claim, the claimant has the initial burden of proving its claim. The claimant must prove 1) good condition at origin, 2) damaged condition at destination, and 3) the amount of its damages. After establishing these three elements, the burden of defense shifts to the carrier.
Claims for loss of and/or damage to cargo transported in interstate commerce by motor carrier are governed by the Carmack Amendment to the Interstate Commerce Act, which is codified at 49 U.S.C. § 14706. The Carmack Amendment imposes a semi-strict liability standard on “carriers” and “freight forwarders.” In order to prevail on a claim under Carmack, a claimant need only prove: 1) that the goods were in good condition when entrusted to the carrier; 2) that the goods either did not arrive at destination or arrived in damaged condition; and, 3) the amount of money damages suffered by the loss or due to the damaged condition of the goods.
Carriers and freight forwarders have very limited defenses to claims under Carmack. The essence of Carmack is that the carriers and freight forwarders are considered to be a virtual insurer and are strictly liable for cargo claims. There are, however, five recognized exceptions or defenses: (1) an act of God, (2) an act of the public enemy, (3) an act of a public authority, (4) an act of the shipper, or (5) an inherent vice of the product. And, even though one or more of these factors might be present, the carrier must also show that it was free of negligence.
The U.S. Congress wanted wanted to implement a comprehensive regime for determining the liability of motor carriers and freight forwarders. Thus, Carmack preempts (or prohibits) assertion of all state laws claims relating to damage to cargo. Therefore, claims under legal theories such as negligence, bailment, fraud, unfair trade practices, etc. cannot be pursued against a motor carrier or freight forwarder. A claimant must and is entitled to proceed under the Carmack Amendment.
Filing a Claim
Whatever the mode, the first step to recover a loss and damage claim is the filing of a claim. The purpose of the claim is to put the motor carrier on notice of the facts relating to the damage or loss so that the motor carrier may investigate the claim and make a decision whether to pay it, decline it, or offer a compromise amount in settlement.
Although not at all in the nature of a lawsuit, the timely filing of a claim is a prerequisite for any later litigation. If a claim with a motor carrier is not filed within nine months, the claim is extinguished. Please note that the claim must be filed with the motor carrier, as opposed to the insurance carrier. A claim filed with the insurance carrier, rather than the carrier providing the transportation service, is not considered a duly filed claim for purposes of meeting the claim filing time limit.
So who is liable for a cargo claim?
While only “carriers” and “freight forwarders” are liable for loss of or damage to cargo in interstate commerce under Carmack, that hasn’t stopped enterprising plaintiff’s lawyers from trying to bring others to the party. For instance, “Brokers” are not covered by the Carmack Amendment and, therefore, are not liable for cargo loss or damage under Carmack. However, claims for loss of or damage to cargo are often asserted against brokers under a number of other legal theories beyond Carmack. For example: a claimant may allege that the “broker” acted as a “carrier” or “freight forwarder” or that the “broker” held itself out to be “carrier” or “freight forwarder.” (Attention Brokers: if you want to protect yourself against a cargo claim, make sure your role as a broker is clearly defined and your contracts make this clear)
As stated above, Carriers and Freight Forwarders are strictly liable for lost or damaged cargo that was carried in interstate commerce. Brokers, on the other hand, may be liable for lost or damaged cargo under theories of:
Another theory often asserted is that the broker is liable under a theory of negligence for the loss of or damage to cargo. Some courts have held that if a broker is negligent in selecting a carrier, it may be liable for cargo loss or damage. On the other hand, some courts have held that loss of or damage to the cargo while in transit or after the carrier selected has taken possession of the cargo occurred after the broker had fulfilled its responsibilities and the broker is, thus, not liable.
a claimant may assert a claim against a broker for breach of bailment. However, to create a “bailment”, the party against whom the claim is asserted must have taken physical possession of the article of tangible property. Therefore, where a “broker” never takes physical possession of the freight, it is difficult for a claimant to prevail on a “bailment” theory.
Master/Servant and Joint Venture:
If a claimant can prove that the carrier was the “servant” of the broker, rather than a truly independent contractor, it may be able to show that the “broker” is liable for the negligent actions of that carrier.” The central question is typically whether the “broker” had a right to control or if the “broker” did, in fact, control the means by which the carrier performed its duties. Check your contracts with your carriers.
Breach of Contract:
Claimants also often assert that a “broker” is liable to the claimant based upon a breach of contract. If a “broker” has, in fact, agreed to be liable for loss of or damage to cargo for which it arranges transport, the broker can be liable for such claims.