Insider Blog

The Anatomy of a Transportation Contract

9 Important Elements to Include in Your Agreement

In past posts, we’ve talked extensively about the RFP process—how to get the best price and set up your organization for a long-term, mutually beneficial partnership. But what about the steps that come next? Namely, making sure shippers and carriers both have the information and protections they need to execute the partnership and begin delivering freight, on time and on budget, to its final destination.

As a part of the SMC³ LTL 204: US LTL Transportation Law & Regulations hybrid summer course, Rob Moseley and Fred Marcinak of Moseley Markcinak Law Group shared some of their tips for navigating transportation contracts and making sure your organization is legally prepared.

Throughout part one of this two-part contract law session, Moseley and Marcinak set the stage by going over the basics of a contract. For those who are unfamiliar with contract best practices, or haven’t felt a need to use contracts to navigate partner relationships in the past, Moseley suggests now is the time to get started—before it’s too late. Horror stories abound of the dangers that stem from unclear contractual terms. Throughout the early months of the pandemic, many of these issues were put on full display as shippers and carriers had to figure out how to overcome delays, shutdowns and inventory shortages.

As a starting point, Moseley points to the ATA-NITL Model Agreement as a good framework to build out a fair contract agreement. He says, ultimately, the key to a strong shipper/carrier contract is to be as direct and to-the-point as possible.

“How can we say this as succinctly and clearly as we possibly can?” he said. “You really don’t have to say everything about the relationship. Sometimes people go overboard, and you get contracts that are 30 or 40 or 50 pages long—and frankly, I think that is a little overkill. You just don’t need that.”

The ATA-NITL Model Agreement cuts out much of the unnecessary “noise” that can make its way into a contract and instead focuses the agreement into specific and universal clauses that should form the basis of any good contract. Let’s take a look at a few of these in more detail:

1. Terms. This first section of the contract should immediately focus on defining how long the agreement will last. Many shippers prefer to have an annual end date that allows them to review and select the best carrier option(s) each year. Others will prefer an evergreen contract that auto-renews. The right term length depends on the needs of both the carrier and shipper and their projection for future freight quantity and carrier capacity.

2. Scope of Agreement. This section will layout the terms of the agreement, as they pertain to both parties. This might include specifics around loading and unloading freight, as well as the carrier’s documented authority to do so. It may also include a “reasonable dispatch service” agreement that the carrier will transport goods in a timely manner.

3. Payment Terms. On its surface, this would appear to be one of the more straightforward aspects of the transportation contract. But pricing and payment can often times become more complicated than “how much” and “when payment is due.” E-commerce continues to change the delivery landscape—leading to accessorial charges, multiple-stop loads and other uncommon liftgate scenarios. Other things to consider include: What recourse will exist for the motor carrier if the carrier is not paid? What if there is damaged freight or the carrier arrives late?

4. Freight Documentation. This section will have some overlap with the Bill of Lading (BOL). However, you generally can’t just use the BOL here because some aspects of that document will be copyrighted. Any terms that are different in the BOL will be subservient to the contract, so it’s important to make sure the contract clearly states these terms.

5. Insurance. This can be one of the biggest issues for freight carriers and their shipper partners to navigate. Generally, the minimum insurance amounts required by 49 USC 13906—Federal security of motor carrier requirements—must be met. If a carrier does not maintain broad form coverage, both parties will need to negotiate more specific terms.

6. Refused Shipment Clause. In the event that a shipment is refused, or a carrier is unable to deliver the freight due to an error on the shipper’s part, this clause will change the carrier’s liability to that of a warehouseman. In this case, the shipper will be responsible for storage costs and reasonable costs incurred by the carrier. For example, if it was delivered to the wrong address, the carrier would be responsible for storing the freight and the shipper would pay the storage costs until the correct delivery can be attempted. 

7. Freight Claims. This section tends to be one of the most heavily negotiated parts of an agreement. The most common areas for disagreement include the parameters for when a claim must be made. The window for making a claim cannot be less than 10 months, but it is often much longer. Lawsuits can take up to two years after a claim is denied. In the event that a carrier does not have a specific limit to their liability in freight disputes, federal law states that a carrier assumes full liability, without limit. For this reason, having clear language laid out in the freight claims section of the contract can be a critical protective measure for carriers.

8. Sealed Shipments. It’s important for carriers and shippers to agree on the handling of these types of sealed shipments, as the carrier will not have the opportunity to account for inventory shortages or damage that occurs during the loading process.

9. Salvage Requirements. Salvage clauses attempt to clarify the relationship when freight is damaged. The shipper commonly reserves the right to elect to salvage the lading or dispose of the lading.

Looking for more contract tips? Stay tuned for part two of contract law in our blog series and sign up for the SMC³ LTL 204: US LTL Transportation Law & Regulations course. As part of the SMC³ cutting edge hybrid learning curriculum, students will have an opportunity to hear weekly from industry experts 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.

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Categories: Freight, Transportation