The Anatomy of a Transportation Contract: Part 2
Authored by SMC³ on September 8, 2021
12 Important Elements of Your Transportation Contract and What They Really Mean
Common understanding is the real measure of any good transportation contract. Every paragraph, every line, and every word should be chosen in a way that reduces confusion. Or, as Rob Moseley of Moseley Marcinak Law Group said in a recent SMC³ LTL204: Contracting for the Modern Supply Chain seminar session: “What you want is a contract that leaves no room for misinterpretation.” All the interpretation should be done before finalizing a contract so that whatever happens, the next step is always accounted for and agreed upon.
Of course, that’s a bit of a “perfect world” scenario. In reality, contract terms are often argued or questioned after something bad happens. That’s why it’s important to know your contract down to the paragraph and what each section means.
In a previous post, we covered nine elements to include in your agreement based on the ATA-NITL Model Agreement. In this follow-up session, Rocky Rogers and Rob Moseley of Moseley Marcinak Law Group picked up the thread by outlining a handful of additional “must-have” elements from the model agreement and what purpose they serve in an ideal contract.
Note: While these are nearly universal elements of transportation contracts, every agreement may have its own specific provisions. These are provided for reference and edification only.
1. Indemnification. Indemnification is the act of promising not to hold someone responsible for something that may happen. In terms of your contract, this is where the parties in an agreement settle on who will not be considered responsible for “claims, liabilities, losses, damages, fines, penalties, payments, costs and expenses” resulting from negligence, intentional misconduct or other violations.
In most agreements, indemnification should be considered mutual per the terms of the contract. This means that the shipper and carrier both promise not to hold the other solely responsible for damages or claims resulting from joint and concurrent negligence, and that both parties (or all parties, if a third party is involved) will share damages “in proportion to their respective degree of fault.”
The key language in the indemnification section of your contract, according to Moseley, “is what happens after the words ‘arising out of.’” He explained that when reading this provision in your contract, focus on the specific terminology and phrasing that can be so specific or general that it leaves you or the other party vulnerable to fault. “What comes after that is going to be key to [knowing] what your obligations are.”
2. Hazardous Materials. Here’s where shippers commit to identifying any hazmat as defined by law so carriers understand what they’re carrying, any dangers or risks posed by their cargo and how to safely handle it. Carriers also state that their employees are certified to handle those materials.
3. Legal Restraint or Force Majeure. This section of the contract covers things no party can protect against, or guarantee won’t happen, also known as “Acts of God.” Examples might include war, hurricanes, earthquakes, terrorism, local transportation disruptions and the like. No liability shall be incurred by either party for occurrences that fall under force majeure, but it’s in the contract to help ensure that shippers and carriers will do their best to let the other party know of any interruptions and plans to resolve them.
4. Business and Employment Opportunity. This section ensures your contract and load are subject to non-discrimination of the Civil Rights Act of 1964, the Rehabilitation Act of 1973 and the Vietnam Era Veterans Readjustment Act of 1974. Apart from social justice considerations, this section also covers requirements of hauling freight or doing business with the U.S. government.
5. Successors and Assigns: Other Parties. This section outlines that if the work or business transfers from one party to another (a “successor” or an “assign”), the terms of the agreement apply to that new party. The ATA-NITL Model Agreement stipulates that in most cases, both parties need to agree on transferring work beforehand, and that it’s not implicitly acceptable for one party to delegate work to a different party under the terms of the contract. Moseley said this section can cover the protocol in case of a merger, sale of shares or just “a load you’re obligated to haul, but you don’t want to haul” – this section also answers whether or not you can assign it to a broker or another carrier without breaking the terms of the contract.
6. Entire Agreement. The Entire Agreement section says that the agreement being signed supersedes “all prior agreements, representations, warranties, statements, promises, information, arrangements and understandings, whether oral, written, expressed or implied” as it pertains to the transportation deal, you’re making. Thanks to this section, those emails, texts and letters you send about the deal (or even prior agreements) aren’t considered part of the actual agreement or either party’s contractual obligation to the job.
7. Severability. “If some part of the contract is determined to be illegal, can you enforce the remainder of the contract?” Moseley said that’s the main question answered by the Severability clause. If so, how much of it can be enforced? What’s forfeit if a part of the contract is found to be “invalid or unenforceable in any jurisdiction”?
8. Counterparts. In the old days, contracts were signed in person. Multiple originals may have been signed for by multiple parties, and parties often signed while the ink was still wet. Of course, that doesn’t happen very often anymore – usually, each party signs a copy and emails it to the other for signing (a.k.a., “counterparts” of the original). The Counterparts clause says that both parties agree that they only agree to copies of the contract that have been signed by the other party. Legally, counterparts are just as enforceable as wet-ink originals.
9. Governing Law. If you’re moving or sending something, you’re probably dealing with federal laws, since much of the freight is carried between states. This clause gets into the nitty-gritty – what if federal law doesn’t cover some specific thing that happens or a specific question that comes up for this agreement? “Normally, you’d say, ‘this contract is governed by federal law,’ Moseley said, “‘but to the extent it’s not governed by federal law, the law of the state will apply.’” He said it’s important to name a particular state whose laws will apply, and to know the laws and regulations of that state intimately before making it part of the agreement. If you’re moving freight from Oklahoma to California and something happens in Albuquerque that federal law doesn’t cover, which state’s laws do you want to apply?
10. Dispute Resolution. Remember how Moseley said you should leave “no room for misinterpretation”? Obviously, there will be some misinterpretation, and you and the other party may occasionally be on two different pages about how to read the contract. The Dispute Resolution clause puts forth “rules for what to do if there’s a dispute about interpretation of the agreement,” Moseley said. Most often, you could arbitrate (go through lawyers and courts) or mediate (get the two parties together to discuss possible resolutions before filing a suit). It’s worth noting that in LTL, a provision in the National Motor Freight Classification requires arbitration of certain cargo claims.
11. Compliance with Laws and Regulations. The terms of an agreement only extend within applicable laws. If any laws – federal, state, regional, municipal, provincial or regulatory – conflict with the terms of the contract, the law will always supersede the terms of the contract. This section also protects carriers from breach of contract claims if they’re delayed or removed from service because of inspections.
12. Commentaries. Some contracts contain paragraphs that further explain the terms of each clause and provision. The Commentaries paragraph says that, like captions, the commentaries themselves don’t have any bearing on the interpretation of the agreement – they’re “just for informational purposes,” Moseley said. These sections are sometimes called the ‘boilerplate’ because they’re universal to many contracts, but Moseley warned against downplaying their importance. “It’s like going to the doctor,” he said. “You want there to be an independent analysis of what your operations are and how this contract fits your operations” – even if that means reviewing the ‘boilerplate’ every now and then. Every contract has common elements, but you should make sure you’re comfortable with every contract you sign.
As part of this cutting-edge hybrid learning curriculum, students will have an opportunity to hear weekly from industry experts, like Moseley, and work through a self-paced curriculum of emerging regulatory industry topics. You can learn more about this course and other courses on the schedule here.