Overview of Shipper Carrier Agreements
Understanding Shipper Contract Carrier Agreements
A shipper contract carrier agreement is a key legal agreement between a freight shipper and a freight carrier that outlines all the terms of transportation between the two parties. It sets expectations for both the shipper and the carrier, ensures that goods are transported according to the federal regulations set forth by organizations like the Department of Transportation (DOT) and the Federal Motor Carrier Safety Act (FMCSA), and helps each party to manage its liability in the case of theft or other disaster.
The primary parties that need a shipper contract are the shipper, such as a wholesaler, manufacturer or retailer, and a carrier, which is an entity that holds itself out to the public for the transportation of goods by motor vehicle (though other types of carriers also use shipper contracts). Any business that frequently hires trucking companies to transport its loads absolutely needs to utilize one of these contracts in order to ensure compliance with all laws, regulations and general best practices.
In general , the most basic explanation of a shipper contract carrier agreement is that it defines the relationship between shipper and carrier, explicitly stating what is required of both parties in order to fulfill the contract. This means that both parties will have a clear understanding of their responsibilities, and will be able to better hold one another accountable to failures to perform. If the carrier hauls a load that is not theirs, or the shipper loses or damages a load in transit, neither party can argue about who is responsible if the agreement is clearly laid out ahead of time.
These agreements generally define the responsibilities of the shipper and carrier beyond, "I’ll take your stuff and make it go that way." Typically, the shipper is responsible for:
The transportation of the load is the main responsibility of the carrier, which typically is responsible for:
As you can see, these agreements are imperative to immediate success in freight shipping for both shippers and carriers, and for long-term business stability.
Key Components of a Shipper Contract
A shipper contract will have at least five primary components, but most companies add additional provisions to address their specific needs and concerns.
Price Terms. The price component will often address what the rates for the various services are, how they will be applied and what triggers payment. Regarding the last item, certain process protections can be put into place, such as requiring pre-authorization of services or requiring the contractor to obtain permission from the shipper before incurring certain charges. Even where those safeguards are in place, however, there is little a shipper can do after it agrees to pay for a service if it is contractually required to pay for it. Also, the price term will include any discounts that may be applied in determining the final rate.
Service Expectations. A shipper contract will also provide expectations for service such as timelines, hours of pickup and delivery, and whether and when scheduled services are available. For example, a shipper contract might specify that expedited services will only be offered at certain times of day for an additional fee.
Liability Clauses. A shipper contract will often include liability clauses setting forth the level of liability if certain events occur or do not occur, and also exclusions for certain types of liabilities. A shipper contract will also normally specify the carrier’s liability regarding charges/services and/or the extent to which services will be performed. This enables both parties to know either the potential maximum value (if the goods are lost or damaged) or the potential maximum liability (for failure to perform a service). There can be a wide variety of options, but these are generally the fields that need to be addressed.
Insurance Requirements. An insurance requirement will normally obligate the contractor to maintain insurance coverage so that a shipper will have protection against two types of events: contractual liabilities (in case the contractor breaches any of the liability provisions in the shipper contract) and losses arising from the shipment of goods (to insure against theft, physical damage, mechanical breakdown, spoilage, etc.).
Termination Conditions. The shipper contract will normally give both parties the right to terminate without cause with a certain number of days’ notice to the party, often stated in days (e.g., 7, 30, etc.). More importantly, a shipper contract will also normally have provisions for termination of the contract if circumstances arise that make it impossible for one of the parties to continue under the contract.
Legal Considerations and Compliance
The integration of technological advancements and evolving industry standards has a significant influence on the development of contracts between shippers and carriers. One implication of this evolution is the increased demand for legal compliance with regulatory agencies. Indeed, the United States Department of Transportation (USDOT) and the Federal Motor Carrier Safety Association are increasingly vocal about their intent to ensure that trucking regulations governing commercial motor vehicles are enforced to the fullest extent of the law. One of the more specific regulations is the requirement that both the carrier and shipper have a contract for freight services, which clearly identifies the parties’ rights and responsibilities. 49 C.F.R. § 371.103. It shall be noted that the USDOT defines a contract carrier as any carrier who owns or leases transportation equipment and has entered into a contact for the furnishing of transportation service for compensation. 49 C.F.R. § 373.109. A broker, on the other hand, does not assume responsibility for the goods during the course of transportation. Rather, brokers are intended to be the middle person between the shipper and the carrier. 49 U.S.C. § 13102(2). 49 C.F.R. § 371.2. These contractual agreements are intended to protect all entities involved in the process and allows for some assurance to the parties that they are not operating under a contract of adhesion. 49 C.F.R. § 371.102; Acme Truck Line v. Theresa Schrader’s, 205 N.W.2d 899 (Wis. 1973).
Another of the more pertinent implications of the evolution of contractual agreements between shipper contract carriers has been the development of certain catch-all provisions. These provisions render void any agreement that attempts to release a contracting party from their liability in a way that runs afoul of the law, such as negligent actions, etc. 49 U.S.C. § 14101(b)(1). These catch all provisions have become extremely important in the modern context of an agreement between a shipper and shipper contract carrier, as many contracts attempt to limit the carrier’s ability to seek or dispense remedies. This development of contractual agreement is often bolstered by the increased risk associated with the transportation of certain types of goods, including hazardous materials. Other examples of high risk materials include, but are not limited to: certain categories of medicine and pharmaceuticals, batteries, and various food and beverage products. These goods are often subject to special regulation by federal entities due to the high risk nature of transporting these items. Other items that are in high demand can also fall victim to liability limiting agreements. For example, while a classical example of a high risk good is precious metals, more recently an item such as a flat screen television has been identified in case law as another example of a high risk good, due to the value of the good and the inherent risk of theft during transport. Because of the potential for liability to the shooper if the good is lost or destroyed, some shippers will provide additional training for the truckers they contract with when a good falls within a high risk category. This training is intended to reduce the risk of loss to the carrier due to theft or injury caused by the valuable nature of the good, therefore also mitigating the risk for the shipper.
Creating an Effective Agreement
To create a master shipper contract carrier agreement that is both binding and practical, shippers and carriers must ensure mutual benefit to each. A few tips are provided below that will provide for a more effective agreement.
Negotiation strategies differ with the leverage (if any) of each party. The negotiation process can be tedious and demanding of time and costs, but the time spent may save the shipper from burdensome liability down the road, or the carrier from financial loss. For example, when negotiating, the shipper can increase its leverage by making sure the contract expires before the next transportation season, thereby forcing the carrier to either keep its rates competitive for renewal or be forced to find new carriers if the shipper decides not to renew. Conversely, a carrier can increase its leverage in the negotiation process by leveraging specific dates or locations for renewal based on availability and demand within the shipping industry.
A "one-size-fits-all" approach rarely works in a master shipper contract carrier agreement. Both parties should be encouraged to spend the time to customize the language and provisions in the agreement to their specific needs. In customizing, consider factors such as specific destination points, delivery routes, weight requirements, type of cargo/freight, duration of the contract, whether the agreement will permit for transloading and whether the service will be exclusive for the shipper.
It is important to ensure that the language of the agreement is clear and easily understood by all parties. As discussed above, this will involve some time spent customizing the agreement, but it is worth the effort to prevent future misunderstandings. For example, some carriers operate throughout the United States, but may have physical resources that are limited to specific areas, e.g., focused in California. If the shipper is in Chicago and has operations in California, it may be appropriate to limit the carrier’s responsibilities to the Chicago-to-California route instead of those routes to/from Chicago to all destinations. This will ensure that the agreement is clear as to which geographical areas the carrier is able to service and can better allow for performance within the capacity of the carrier’s resources.
Once the elements of the agreement are finalized, make sure you get legal review.
Advantages of an Explicit Agreement
Moving on from the generalities of deciding not to have an agreement, it is time to address how a well-defined shipper contract carrier agreement can indeed be well defined. By the way, a shipper contract carrier agreement is sometimes referred to as a service agreement, or transportation service agreement, or simply as a contract by some. I am not wedded to the idea that we must all universally use the exact same terms. What is most important is that all parts of the agreement are considered in detail, and that a conscious decision is made as each component of the agreement is crafted.
What are the benefits? Well, let’s start with the fact that it is more than just legal liability involved when things do not go as expected. Service failures create cost for the shipper and possibly the carrier. These may be out-of-pocket costs if additional freight charges must be paid, or penalties for late deliveries assessed, or they could be costs associated with the unintended consequences of service failures to the parties involved in the supply chain. However, shortages, overages and claim filings are all administrative costs that are not appreciated in almost any business. This is even more true in the world of logistics and transportation a where carrier lost and damage claims are often filed the wrong way, or missing documents from the shipper cause the carrier to be unable to collect money from those who should pay for the freight.
The next benefit is one of risk mitigation. A compliant shipper linehaul agreement can help protect against legislation and litigation with respect to broker liability. It can be used to minimize misclassification liabilities and allegations against a carrier by putting the true independent contractor status into writing, and ensuring both parties are clear on that matter . Even if the initial classification was made correctly, it may not be if not documented. The courts seem to love to "reclassify" relationships so they can make their opinion law and the subject of books and articles. And therefore they create a legacy of a specific decision that could change how companies are formed, operated and shut down by virtue of the case that is made law. Unfortunately this fear can chill honest relationships where both parties want to do business. However, this fear can also result in higher administrative costs and service levels, and that creates burdens for the shipper as well as the carrier. A clearly stated relationship is one way to eliminate this risk.
Another benefit is managing your relationship as between the contracting parties. By drafting an agreement that explicitly states what the parties’ responsibilities are for the entire relationship, everyone knows what is expected. In my experience this is the biggest winner for retaining clients and helping the parties feel they are being treated fairly.
I just lost another client because we couldn’t agree on how to pay the fuel charges that the shipper has in part promised to pay. This is such a tiny detail to miss, yet without an explicit statement in an agreement it is prone to misunderstanding. Such ingredients are vital "warm fuzzies" in your agreement. They add to the relationship and give your account managers the tools they need to manage the relationship fairly and inline with the agreement. This explicit description allows the carriers to be confident they are receive the value they signed up for, and ensure hopeful changes are noted and understood as to whether or not they will actually happen.
A well crafted agreement should be win-win for all involved. There is no need for it to be a war.
Common Pitfalls and How to Avoid Them
In the dynamic world of logistics and transportation, shipper contract carrier agreements are indispensable tools for ensuring a smooth and efficient flow of goods. However, the industry is not without its challenges – from disputes over service levels to delayed payments, and even breaches of contract. In this section, we will explore some of the common issues that companies may face and provide practical solutions for overcoming these obstacles.
Disputes over Service Levels
A common issue that companies can face with their shipper contract carrier agreements is the risk of disputes between shippers and carriers over service levels. For example, a company may find itself having to deal with a situation in which a carrier driver has reported a defect in a piece of equipment that is scheduled for delivery. The company must then respond by communicating with both the carrier and the client, evaluating the situation, and determining the best course of action to minimize any disruption to the supply chain. In essence, resolving a dispute is about open communication and problem-solving.
Delayed Payment
Another challenge that companies may face is overdue payment from their shippers or customers. This can be particularly frustrating if the payment is central for continuing normal operations. In this situation, the company will have to consider what actions it should take to remedy this situation. The best solution is to ensure that the terms of payment are clearly defined from the outset, and that regular follow-ups are done to ensure punctual payment. In addition, early payment discount can also be offered to encourage timely payment.
Contract Breaches
A contract breach is always a significant concern, regardless of the situation. The challenge here is to have a clear understanding of the contract terms and to identify what has been breached. Are there aspects of the contract that have not been met, or does one of the parties believe that the contract has been modified to the point that it is almost invalid? In any case, it’s critical to understand precisely what has taken place, so that the company can determine the best course of action. It’s also essential to communicate with the other party involved and try to arrive at an agreement on how to resolve the issue.
By having a solid understanding of the potential challenges associated with shipper contract carrier agreements, companies can be better equipped to address these issues head-on and find suitable resolutions.
Emerging Trends in Shipper Carrier Agreements
Future Trends in Shipper Contract Carrier Agreements
As we look to the future, there are a number of key trends looming in the wake of the exploded interest in shipper contract carrier agreements.
Technological Advancements
A number of platforms are starting to develop that provide opportunities for shippers to obtain discount programs directly with carriers, and carriers to provide these via a bidding process. These platforms may soon provide standard form contracts for both use by shippers and carriers with robust dispute resolution sections and processes built in to ensure compliance. There is also regulation under consideration by the Federal Motor Carrier Safety Administration (FMCSA) that may radically alter the manner in which carriers are required to license their work with respect to owners of motor carrier freight. This may have a substantial impact on the ability of those carriers to engage subcontractors responsible for handling the freight.
Evolving Legal Frameworks
There will be changes in the litigation over these types of agreements. In litigation that does not involve the federal pre-emptive effects of the Carmack Amendment, equitable remedies such as reformation of contract appear to be more prevalent. Courts will be looking to see if the contracting parties took adequate steps to understand the proposed agreement and its effects. If a shipper simply signs a form agreement without any idea of what it contains, the courts are going to be increasingly more reluctant to extend equitable relief to a carrier who has been presented an agreement the carrier cannot understand. This means that the front end preparation of these contracts prior to execution will be vital. In the past two years , we have begun to see claims in which loss payees, subrogates, and other parties who either have no contractual relationship with the carrier or are intended by the agreement to be non-third party beneficiaries (whose rights are governed by the contract), are sued. Those parties cannot sue under contract law, but instead must be sued under subrogation or other applicable rules. Some of those parties do not realize that they are not third party beneficiaries to the agreement. Those parties will be bringing nearly identical claims under different authorities when they are not parties to the contract. The result will be confusion and tension between the parties because the parties will have to litigate to determine who is entitled to make claims and whether such claims are governed by the restrictive litigation provisions of the contract.
Globalization
Similar to recent trends in international arbitration, many of the issues facing the rail and intermodal industries are beginning to expand into the international scene. As shippers move freight over borders, issues like the allocation of liability for damage to cargo while also considering the overarching question of how and where claims may be brought, will remain a hot button issue. Class arbitration is already growing at a rapid rate outside of the United States. In a world where disputes can arise in any one of a number of jurisdictions, doing your homework on these complex questions can determine whether your industry flourishes or whether you shall flounder under the weight of potentially crippling penalties and unmitigated losses.