6 Rules for Collaborative Global Logistics Contracting
Lopsided logistics and transportation agreements are comprised of onerous terms and conditions, and a disproportionate shifting of risk over to service providers, and this approach has become the norm in the third party logistics industry.
Unpacking Risk Shifting
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One of the most challenging business areas for parties committed to collaborative contracting is in the area of international logistics services.
However, some recent research at the University of Tennessee, combined with practical experiences, has started to shape some rules for success in contracting complex logistics.
I’ve written about the University of Tennessee’s “vested” rules applicable to many business relationships, but sought some input from a leading logistics practitioner on what’s been working effectively in global practice.
“If the parties view the logistics service provider contract as a simple tool to outsource risk, reduce costs, or capitalize on the other party’s vulnerabilities, a lopsided and unbalanced contract will likely result,” says Coughlin.
“If the parties truly want to work with each other and view the service provider contract as a conduit to making that happen, a good contract is likely to take form.”
He shared six rules that he and the Expeditors team try to use in new contracts with shippers.
Good Guidance for Good Contracting
- Use a pragmatic approach. Each of the parties should see their business needs being met through the contract instrument. “Overall, there must be a desire and willingness to conduct the negotiation in a collaborative, rather than competitive environment,” says Coughlin.
- Aim to be fair. Coughlin notes that some contracts are so onerous that they’re practically and legally unenforceable. “The service provider contract should create a win-win situation for each party, which ensures that a healthy business relationship is formed” says Coughlin. “Overly onerous or one-sided terms could be subject to challenge in court and can be ignored or stricken out by judge or jury, thereby leaving the parties in a far worse position than if a fair and balanced contract was achieved,” says Coughlin.
- Respect the purpose of the parties’ relationship. One of the painful memories for any 3PL is when they have had to deal with procurement organizations sending out standard template contracts. When I asked Coughlin about this he responded, “One size fits all contracts do not usually make sense for logistics services contracts.” For example, he says that a standard manufacturing contract with a supplier of goods is not the right template agreement to govern a complex agreement for the supply of international transportation, logistics, and customs brokerage services. “The insistence that all contracts be the same regardless of industry or services being provided is both naïve and counterproductive.”
- Seek reasonable liabilities. According to Coughlin, logistics services contracts should not be misused as a tool to entirely shift the risk and regulatory compliance obligations inherent in one party’s business to the other. Neither party should be forced to accept an amount of risk for loss, damage, or other liability that is disproportionate to the potential benefit to be gained under the agreement. “In order to reach this objective, both parties need to be willing to have an open discussion on what amount risk makes sense,” he adds.
- Be mutual. Standard terms in logistics services contracts, like termination capabilities, rights upon default, representations about compliance, general indemnities, non-assignment provisions, and treatment of confidential information, should be mutual,” says Coughlin. It’s critical that both parties operate within industry best practices and regulatory requirements.
- Achieve brevity and clarity. On the subject of contract language, Coughlin says that logistics services contracts must be written in plain language so that rights and responsibilities of each party should be clear to any reader - especially those unfamiliar with the transportation and logistics industry. “In the case of a dispute, plain, concise language will be important in reducing any misinterpretation of the agreement by either party,” he adds.
For shippers and third-party logistics providers (3PLs) that are willing to make the effort, collaboration in contracting pays off for both parties.
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Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]