Transportation Contracts – What’s In Yours?

by gspencermynko

Let’s Address The Terms Everyone Needs To Understand and The Nasty Stuff Everyone Needs To Avoid

Any business relationship that involves transportation should be reduced to a contract: shippers, brokers, freight forwarders, 3PLs, motor carriers, and whoever else operates in the transportation world needs to be aware of, and include, critical contractual terms that address the following topics.

Billing and Payment

Everybody loves money, and I know I am no exception. Chances are so do you. So therefore, any contract should include specific language as to when payment is due, late penalties, interest, costs for collections, or a lawsuit and attorney fees. Enough said.

Guarantees, Warranties, Promises

Too often I come across contracts with words like “warrant“, or “guarantee“, where the trucking company is being held to a standard of perfection. No one can guarantee perfect service or total compliance with legal requirements. Don’t let yourself fall into that trap. A transportation company should be held to a standard of reasonableness and not perfection.

Consequential Damages

This is a Pandora’s box that should never be opened. While I understand shippers and consignees may demand that you take responsibility for damages, such as lost profits or opportunities, delay of projects, etc., such far flung and practically limitless exposure can put you out of business. Demand a waiver or at least a limitation of consequential damages.

In other words, carriers should avoid agreeing to clauses that state they will be liable for any and all losses that result from damage, delay, including, lost profits, downtime, etc. Carriers can demand limiting their liability according to Carmack (49 USC section 14706 ) and not being liable for special or consequential damages, but instead limiting their damage to the actual cost of the freight, less salvage value with a ceiling or formula limiting damages according to truckload or weight.

Limitation of liability

See above re: Consequential Damages. Furthermore, such a clause between you and your customers can limit your maximum exposure.

Regulatory Compliance

When it comes to compliance with federal and state law, your contract should include a clause that makes it clear that your company is only responsible for matters within its control, and does not accept responsibility for matters over which you have no control.

Arbitration and Mediation

In the unfortunate event that a dispute arises, anything you can do to keep things out of court is a good idea. Encouraging mediation, and if that fails, arbitration, are good steps to settling disputes with your business partners. Any time a dispute can be resolved informally, as with mediation, is almost universally a good thing for everyone involved.

Who are you and what are you do?

Every contract should make it clear as to who you are and what services you will provide for your customers. I cannot overstate the importance of making it crystal clear as to what your duties, responsibilities, and obligations are, and by implication, what they are not. This is critical.

Standard of conduct

“Strict liability, negligence, gross negligence, intentional acts”. These legal mumbo-jumbo terms are frequently buried in contracts. Make sure you are aware of them, because the standard of care you are held to will have profound consequences upon your legal exposure.

All good things must come to an end

Make sure the termination clause makes clear the circumstances under which you and your customer may end a legal relationship. Also, be aware of “never ending contracts”, because I can assure you that you and your customer will not live happily ever after, and all contracts become stale and problematic. Reviewing contracts every 2 to 3 years is probably a good business practice.

Third-party beneficiaries

Anything having to do with third parties in a contract is always a tricky situation. The reason is the third party is not a party to the contract, was not involved in its negotiation, and did not sign at the bottom. Therefore, make damn sure you clearly understand the potential for third-party claims.

Hey Lawyer, tell me this contract I signed last week that you never looked at is “A-OK”

I can help clients a lot more when I am involved in drafting the contract, and negotiating with the other party in the event they don’t accept all of the terms of the contract. In other words, don’t be like the alcoholic that calls his sponsor after he decides to start drinking again. Get your lawyer involved before you sign anything.

Waiver of statutes and regulations

Anything that says something to the effect of “the parties expressly waive all rights, duties, and obligations pursuant to some law” is asking for trouble. Better language will say something to the effect of “General principles of federal transportation law shall apply”.

Indemnification Clauses

I hate these clauses because everybody wants to make everybody else their insurance company. Do not agree to indemnify anyone for all loss, damage, and claim arising out of this contract, and limit the liability instead to that caused by negligent or willful (mis)conduct. I can’t stress this enough. Indemnification demands have gotten completely out of hand, and it’s time for people in the transportation world to stand up and refuse to assume such broad and limitless risk. 

Additional insured

I hate this stuff, almost as much as I hate indemnification clauses. Typically the objectionable language will state that the shipper, or whoever, shall be listed as an “additional insured“ and the carrier’s policy will be “primary“ and any insurance carried by the shipper will only be for excess and be secondary to the carrier’s insurance . The contract should simply state that the carrier, warrants it maintains adequate insurance for personal injury, property damage, cargo, and Worker’s Compensation. My clients are transportation companies, and not insurance companies, and should not be held to that standard.

Right of Offset

This is another contractual term, frequently inserted into broker carrier contracts, that carriers should object to. Language that states compensation paid to the motor carrier may be withheld to satisfy claims or shortages at the shipper’s or broker’s sole discretion is objectionable. Don’t fall for it. One bad load/cargo claim could destroy your company. 

Concealed damages and count

In any given situation, make sure your company is protected against shortages or concealed damages. Contractual language is critical in this situation to protect you from hidden damages and shortages in sealed containers.

Don’t sign away your lien rights

Specifically, I’m talking about penalties for nonpayment of freight charges. Don’t wave your right to assert a lien on shipments for freight charges, and make certain the contract states that your company will be paid within 30 days of the receipt of an invoice and certified copy of delivery, with late charges subject to interest and collection fees.

Choice of law/choice of venue

Always be careful with these clauses, because often times shippers (or others) will demand that you consent to jurisdiction and venue in BFE (a horrible place were none of my clients reside). Furthermore, they may want you to agree to arbitrate in BFE. The judges, arbitrators, and jurors who reside in BFE are decidedly hostile to anyone not from BFE. Men from BFE think family reunions are a good place to pick up women. Don’t agree to go there.

The carrier may not get paid (Nasty Non-Recourse Clauses)

The general rule in the law is that “the carrier must get paid“. The problem arises in a “non-recourse provision“ which is often in broker contract, where the carrier waves his right to go after a shipper, or consignee, in the event of nonpayment. Don’t wave this important right. If a broker demands that you agree to this and that you waive your right to go after the carrier and only look to the broker for payment, walk. Don’t sign or agree to that contract. 

Back Solicitation

Again, this is another issue that frequently arises in Broker-Carrier agreements, where the broker tries to claim that anyone who the carrier works with is a result of the broker’s divine intervention. Nonsense. A better approach that is balanced and fair is for the carrier to agree to not back solicit with respect to shippers that the broker introduced the carrier to, and for a period of no more than one year. Similarly, watch out for liquidated damages clauses that run as high as 20%, when a 10% commission for true violations is far more reasonable.