Deciphering the Carrier Contract Agreement: Key Elements and Guidelines
Defining a Carrier Contract Agreement
A carrier contract agreement is a legally binding contract between a transportation provider (the carrier) and a shipper which contains conditions for the provision of transportation services. These agreements are a useful, effective business tool in freight transport and often outline the carrier’s obligations in detail, as well as the general responsibilities of the shipper. In logistics and transportation, carrier contract agreements have become standard practices in the industry.
In many scenarios, the parties to these agreements are commerce companies (the shipper) and the transportation provider (the carrier) . Although at first glance it may seem as though these parties naturally make a perfect match, the truth of the matter is that a strong, comprehensive carrier contract agreement can help protect both parties in their own right.
For instance, a carrier contract agreement can be helpful to those within the industry who operate "spot markets" — meaning that prices are set at spot market rates, so when transportation providers fail to meet standards, they don’t receive compensation. With such agreements, carriers will still receive compensation for the services they provide, and the shipper receives peace of mind that their goods will arrive, no strings attached.
Critical Elements of a Carrier Contract Agreement
The language a carrier contract agreement uses to reference the scope of services is some of the most important because it can be ambiguous and vague, creating confusion down the road. The specific scope of service section should spell out exactly what the carrier will move, how they will move it, and the named locations. Remember, a named destination or origin may be as small as one address, or as large as an entire state. So in addition to mentioning the specific addresses, the named locations should also include where the shipper or broker has the shipments picked up from the sender and delivered to the receiver, as well as any extra costs that will be incurred to satisfy the contract. This will save the carrier the hassle of having to refer to a completely different agreement for every pickup and drop-off.
Payment terms should also be very specific. A poorly worded payment term can be just as problematic as the scope of services. For example, if the shipper or broker states the payment will be made in seven days, but the contract states payment is due on the 15th and it is the 7th, the payment will be viewed as due immediately by the carrier. Getting the parties to meet to discuss how they will be paid is essential to a strong contract.
A contract of carriage is more than just a means of holding the carrier accountable for their actions; it is also a way for the carrier to hold the shipper or broker accountable for their actions. This often includes a liability provision that spells out clearly how the carrier will be held liable for actions taken even though the shipper or broker was directly responsible. It is therefore important to define the liability precisely, with reference to applicable statutes and regulations, as well as legal precedent in previous cases.
A carrier contract agreement should also contain an indemnity provision that provides for indemnity against losses. These losses can be financial or related to property damage or bodily injury. But the specific language is important to be prepared for any claims that may arise during a shipping operation. It is also important to ensure the indemnity provision covers the shipper or broker for indemnity as well.
Termination clauses are also crucial to a strong carrier contract agreement. It should clearly define how the agreement can be ended as well as the consequences of early termination. It is not unusual to provide notice to terminate the contract; usually it is some time frame in writing. It may also require the signing of a new contract if work continues past the end of the term of the current contract.
Legal Framework and Adherence
Carrier contract agreements are subject to a number of legal requirements that vary among jurisdictions and according to the specifics of the agreement. Due to the number of parties involved in the shipping process, carriers must be aware of a number of laws and industry regulations that govern the shipping process.
In the U.S., the Federal Motor Carrier Safety Administration (FMCSA) maintains a database of all companies that have applied for an interstate commerce license. The database may also include information on whether the operating authority has been revoked, suspended or canceled—for example, if the trucking company failed a random eliminating drug test. If a carrier responds to a request for a rate, it is a good idea to check the FMCSA database to make sure that the carrier does have a valid license.
The Motor Carrier Act of 1980 removed most of the economic regulations of the motor carrier industry, but carriers are still affected by many other federal laws and regulations, including:
- Federal Safety Regulations. These laws govern the practices of the motor carrier industry. They also affect employment and safety regulations.
- Hours of Service Regulations. Now governed by the Restoring Safety through Transportation Research Act of 2009, these laws affect the workers’ ability to drive vehicles under certain circumstances.
- Drug-Free Workplace Act. Carriers are affected by the government’s drug-free workplace regulations.
Federal regulations aren’t the only ones for which shippers and carriers have to account when entering into a carrier contract agreement. They must also consider state labor laws as well as industry regulations.
Advantages of Comprehensive Carrier Contracts
The advantages of a solid carrier contract agreement extend far beyond legal protection. A well-drafted carrier contract forms the backbone of the business relationship, reducing risk and ensuring that both parties have a clear idea about service expectations.
Risk Mitigation
The primary benefit of any contract is risk mitigation, and this is especially true in the high-stakes, fast-moving world of shipping. Regulations are complex and constantly evolving. Unexpected problems with cargo can put your entire operation at risk. It’s critical that all the i’s are dotted and t’s are crossed before you put pen to paper on any contract with a carrier.
The worst time to negotiate a contract is when you and the carrier have a lot on the line. If something goes wrong with your cargo, do you want to come to the negotiation table at a moment when you’re under economic duress? Or will you be in a stronger bargaining position if your cargo reached its destination as agreed?
A written carrier contract that has identified the many ways you can work together with your carrier creates a smoother process whenever any issue arises with a shipment. Identify the areas where you will share information and costs with your carrier, so you don’t end up with an unpleasant surprise later. Identify and define the liabilities for your carrier and for you. This way you can agree in advance on how to address shipment problems, or hold each other to account if the client complains.
Think of your contract as a working document that includes all the details of your relationship. You can always add things to your contract, but you can never take things away. If you agree to a carrier charge (like detention fees) but don’t include them in your contract, you can be charged them later. But if you include a charge in your contract, it’s there in black and white for the life of your contract. Imagine that you agreed to a certain fee in writing, not in a phone call. A few months later, when that fee shows up on your bill, would you prefer to argue about it by providing evidence of your agreement, or by arguing about your faulty memory in a courtroom?
The bottom line here is to make sure that your contract covers every possible liability and risk for you and your carrier. Then you can both rest easy later.
Clarify Expectations
A carrier contract agreement should clearly outline the service levels you expect from your carrier, and the level of service they can expect from you. A well-articulated contract safeguards both your interests and the interests of your carrier. In the absence of a contract, it may prove difficult to prove the existence of your shipping agreement and enforce it against another party in a dispute, or to prove what each party’s obligations were under the contract.
Your contract also helps to clarify the outcomes you’re willing to accept if your cargo is lost, damaged or delayed. Are you willing to pay extra to get it back on time, or is getting the cargo to its destination on time paramount? The answers to these questions should be clearly spelled out in your contract.
If a difficult shipping season arrives, and supply chain delays compound the issue, do you want your carrier to ensure that your products arrive on time, even if that means sending them by the most expensive route?
Or are you willing to pay the per-day expense of a missing product on the market, in full understanding of the chances of delay (and discount the carrier’s fine for goods arriving after a deadline)?
These are things you can answer in your contract, so you remain in control of your risks.
Strong Business Relationships
In the end, a carrier contract agreement is about having a strong relationship with your carrier. When both parties know exactly what they’re getting into, they can avoid disagreements. Contracts give you both the peace of mind to do business with each other.
Of course, it’s not only about spelling out the risks you are agreeing to take on and the ones you aren’t. It’s also about spelling out the specifics of your relationship with a particular carrier. If you don’t like one particular carrier’s fees, can you add other transport companies into your contract? How much is it worth to you to have a backup transport option available? Are you prepared to pay a little bit more to have that backup system?
Your carrier contract agreement also gives both parties the peace of mind to reevaluate the contract if it has expired or if larger changes have occurred in the business environment. If the agreement has run its course, or the relationship is no longer a good fit, both parties know they have the option to walk away when the contract expires.
Are you unsure about what should be included in a carrier contract agreement? Contact us today to find out more about the process for creating a strong carrier contract agreement.
Typical Issues with Carrier Agreements
Common challenges arise in the negotiation, drafting, and operation of carrier contract agreements, making it essential to consider several key aspects when discussing common challenges and how to avoid or mitigate them through appropriate drafting. Carrier’s property loss measures. Subrogation. Operational changes. Rate change procedures. Insurance coverage principles.
When doing so, here are some common challenges that can arise both on the front end upon contract inception and in the ongoing operations between the parties . Each of the challenges below can and should be addressed in the plain language used to discuss the legal agreement. The goal is for the practicing lawyer at least to be aware of the following items:
The practical takeaway from a business perspective is to focus on those terms in a carrier contract agreement that will cause the most problems if not resolved upfront. Then, in those cases, consider the additional time and effort upfront to identify the parties’ initial intent and then specifically set forth how the parties have agreed to restrict the scope of certain provisions.
Best Practices in Crafting Carrier Contracts
Best practices when drafting carrier contract agreements include the use of an experienced transportation attorney to draft the form contract, or a transportation attorney to review the proposed contract before signing it. If a shipper has set up a company to act as its agent to avoid the Motor Carrier Act and file annual reports on its behalf, that agent must have a transportation attorney approving the carrier contracts and making sure they will stand up in court. The contract should require that a copy be provided to the customer who is sending the freight, and that it is posted on a website whenever a rate quote is given. It should also make it clear that the carrier will be liable to the customer for loss or damage, if the carrier cannot give a bond or confirm insurance in writing.
The contract should also contain specific terms regarding when the bill of lading is created. If the bill of lading is not created until the carrier’s equipment arrives at the shipper’s dock, then the contract should state that the contract becomes effective when the bill of lading is created; if the contract is signed when the shipment is called in, then the bill of lading controls, and vice versa. The bill of lading should contain a clause stating that if there is a conflict between the contract and the bill of lading, the bill of lading shall control. The bill of lading should also state that if there are any charges to be billed, including demurrage, detention or demurrage or other detention charges, that those charges have to agreed upon in writing and be on the bill of lading. Final freight charges should also be agreed upon in writing, and those details can be added to an e-mail exchange. When the rate confirmation is agreed to, the place of delivery and charges should be specific. Short stays and demurrage are areas that always need special care in a contract to make it clear that sorghum and cotton do not have the same charges.
Trends in Carrier Contract Negotiations
As the industry evolves, so too will the trade and commerce landscape. In addition to more robust technology for data sharing and connectivity, there may be a shift toward new contract models that emphasize collaborative, cross-carrier business planning. Beyond the necessity of managing disruptive technological change, changes in the organization of global supply chains are at play. For instance, the contraction of manufacturing activities in markets previously considered off-shore could spur regionalization, ending the long-standing trend toward larger, more distant market suppliers. Such changes in supply chains increase the need to revisit the "efficiency vs. resiliency" balance. And of course , localization, whether it means payments based on local economies or disappearing political and social borders, creates new contract requirements to meet new consumer demands.
The impact of technological change, particularly the flexibility afforded by automation, will continue to challenge current contractual models; contracts with rigid, defined environments stand to benefit from dynamic data sharing. Industry disruption and supply chain changes can force all parties back to the bargaining table. In each of these circumstances, the contract content, the structure and the strategy for determining the direction of the carrier-shipper relationship comes into play.