negotiating and drafting third-party logistics...

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Negotiating and Drafting Third-PartyLogistics Provider AgreementsStructuring Terms and Conditions; Anticipating Common Areas of Dispute;Navigating State, Federal and International Laws and Treaties

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WEDNESDAY, JUNE 8, 2016

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Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Eric Baker, Partner, SmithAmundsen, Indianapolis

Karyn A. Booth, Partner & Chair of Transportation Practice, Thompson Hine, Washington, D.C.

Lew R.C. Bricker, Partner, SmithAmundsen, Chicago

Paul W. Stewart, BBA, MA, JD, Logistics Law, Germantown, Tenn.

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Best Considerations WhenNegotiating and Drafting Third-PartyLogistics Provider Agreements

Lew BrickerSmithAmundsen LLC

Chicago, ILJune 8, 2016

Lew BrickerSmithAmundsen LLC

Chicago, ILJune 8, 2016

Overview

• Negotiating and Drafting Third-PartyLogistics Provider Agreements• Historical approaches and the new type of

agreement• Selecting 3PL providers• Negotiating contracts with 3PL providers• Measuring performance• Terminating 3PL provider relationships

• Goal

• Negotiating and Drafting Third-PartyLogistics Provider Agreements• Historical approaches and the new type of

agreement• Selecting 3PL providers• Negotiating contracts with 3PL providers• Measuring performance• Terminating 3PL provider relationships

• Goal6

Negotiating and DraftingThird-Party

Logistics Provider Agreements(Or Not Your Uncle’s Cut and Paste)

Negotiating and DraftingThird-Party

Logistics Provider Agreements(Or Not Your Uncle’s Cut and Paste)

Strafford CLE WebinarPresentation by Paul W. Stewart

June 8, 2016

Career Perspective

• Trial Lawyer• GC to major international logistics co (17yrs)• Business side experience as EVP strategic dev.• Led acquisitions of 3PLs over $450M• Consulting for venture capital projects in 3PL• CEO of 3PL… start-up to sale in 3 Yrs• Private practice exclusively representing supply chain

management (SCM) clients

• Trial Lawyer• GC to major international logistics co (17yrs)• Business side experience as EVP strategic dev.• Led acquisitions of 3PLs over $450M• Consulting for venture capital projects in 3PL• CEO of 3PL… start-up to sale in 3 Yrs• Private practice exclusively representing supply chain

management (SCM) clients

8

Understanding the 3PL Relationship

• Getting to fair and effective 3PL Agreement canbe complicated.

• Traditional 2-party SCM functions (i.e.,shipper/carrier; bailor/warehouseman, etc.), arelinear and roles are more easily defined

• Adding “third party” creates multi-dimensional,multi-party relationship (more than 3)

• Additional participants are incalculable…legalimplications must be anticipated

• Getting to fair and effective 3PL Agreement canbe complicated.

• Traditional 2-party SCM functions (i.e.,shipper/carrier; bailor/warehouseman, etc.), arelinear and roles are more easily defined

• Adding “third party” creates multi-dimensional,multi-party relationship (more than 3)

• Additional participants are incalculable…legalimplications must be anticipated

9

Defining Third Party Logistics Provider(3PL)

• There is no “standard” or acceptable “legal”definition…will vary from contract to contract

• Provider’s point of view…from simple logisticalactivities to advanced logistical solutions

• Client’s point of view…degree of outsourcing variesand outsourced logistics activities differ greatly,sometimes without clarity in your client’s strategicplan (first challenge in drafting proper agreement)

SUGGESTED RULE: Counsel must fully understand actual services sought byclient in relation to likely capabilities, authorizations and expectations of3PL…there is almost always latent dissonance

(continued)

• There is no “standard” or acceptable “legal”definition…will vary from contract to contract

• Provider’s point of view…from simple logisticalactivities to advanced logistical solutions

• Client’s point of view…degree of outsourcing variesand outsourced logistics activities differ greatly,sometimes without clarity in your client’s strategicplan (first challenge in drafting proper agreement)

SUGGESTED RULE: Counsel must fully understand actual services sought byclient in relation to likely capabilities, authorizations and expectations of3PL…there is almost always latent dissonance

(continued)

10

Defining Third Party Logistics Provider(3PL) continued…

1. Interview client extensively as to nature of servicesexpected

2. Review client’s selection criteria3. Compare client’s RFP (if used) with 3PL’s response

to RFP and RFI4. Never assume client is not trying to put a round peg

into a square hole…it has consequences

See: http://www.paulstewartlogisticslaw.com/wp-content/uploads/2014/07/Practices-Procedures-and-Unlawful-Brokerage-Activity.pdf

1. Interview client extensively as to nature of servicesexpected

2. Review client’s selection criteria3. Compare client’s RFP (if used) with 3PL’s response

to RFP and RFI4. Never assume client is not trying to put a round peg

into a square hole…it has consequences

See: http://www.paulstewartlogisticslaw.com/wp-content/uploads/2014/07/Practices-Procedures-and-Unlawful-Brokerage-Activity.pdf

11

Distinguishing Transaction Based andOutcome Based 3PL Agreements

• The nature and extent of the MSA, along withsupporting schedules, is determined by thesedistinctions:

Transaction Based * Outcome BasedTransactional Cost Reduction Pursuing Desired OutcomesOperations Controlled by SLA’s Mutually motivated by added valueSeldom have client and 3PL aligned objectives Diligence has aligned objectivesSOW’s define precisely what/how tasks are done SOO’s defines goals, but not howCompensation by pricing schedule w/ gain sharing Compensation by min margin and new value

• The nature and extent of the MSA, along withsupporting schedules, is determined by thesedistinctions:

Transaction Based * Outcome BasedTransactional Cost Reduction Pursuing Desired OutcomesOperations Controlled by SLA’s Mutually motivated by added valueSeldom have client and 3PL aligned objectives Diligence has aligned objectivesSOW’s define precisely what/how tasks are done SOO’s defines goals, but not howCompensation by pricing schedule w/ gain sharing Compensation by min margin and new value

12

Selected Elements of TransactionBased MSA

1. Structure – provide services as specified in schedules, standard of care; function ofSOW’s as attached to schedules; incorporation of docs

2. Term and Termination – initial term; renewal options; for cause termination…perhapsmost important is an exit plan (See: http://www.paulstewartlogisticslaw.com/uncategorized/3pl-exit-management-plan-for-stafford-webinar/)

3. Fees, Charges and Expenses – by schedule; surcharges; changes in operatingparameters or conditions allowing proposed adjustments

4. Indemnification - mutual for negligence of employees or agents (not subcontractors)other than indemnitee, and excepting Goods under management (for cargo loss anddamage claims) Broad indemnity provisions vs. real responsibility of Counsel Full review of exposure should emphasize insurance over indemnity for remote parties and potential

vicarious liability Catch 22 in nullifying insurance due to “liability assumed by contract” insurance exclusions Only “contractual liability coverage” policy will insure indemnitor for “extraneous” liability Performance penalties to which your client is bound by their customers must be covered Do not tie the swing to the tree by making terms non-negotiable(continued)

1. Structure – provide services as specified in schedules, standard of care; function ofSOW’s as attached to schedules; incorporation of docs

2. Term and Termination – initial term; renewal options; for cause termination…perhapsmost important is an exit plan (See: http://www.paulstewartlogisticslaw.com/uncategorized/3pl-exit-management-plan-for-stafford-webinar/)

3. Fees, Charges and Expenses – by schedule; surcharges; changes in operatingparameters or conditions allowing proposed adjustments

4. Indemnification - mutual for negligence of employees or agents (not subcontractors)other than indemnitee, and excepting Goods under management (for cargo loss anddamage claims) Broad indemnity provisions vs. real responsibility of Counsel Full review of exposure should emphasize insurance over indemnity for remote parties and potential

vicarious liability Catch 22 in nullifying insurance due to “liability assumed by contract” insurance exclusions Only “contractual liability coverage” policy will insure indemnitor for “extraneous” liability Performance penalties to which your client is bound by their customers must be covered Do not tie the swing to the tree by making terms non-negotiable(continued)

13

Selected Elements of TransactionBased MSA …continued

6. Solicitation or Hiring Employees – especially needed due to “keys to thekingdom” of both parties’ SCM talent; should be mutual during and forreasonable time after term of Agreement, may have reasonableexceptions

7. Warranty of Payment to Subcontractors and Release of Liens – 3PL solelyand exclusively liable to subcontractors for payment of charges tocarriers and warehousemen; include in all contracts with subcontractorsthey agree to look only to 3PL for payment of all transportation relatedcharges; agree to defend and indemnify client for all subsequent claimsfor non-payment. (as additional protections of the “double payment”exposure parties should agree in “Bill of Lading” requirements thatshipper will execute non-recourse Section 7 of bill of lading and specifyas “Prepaid”)

(See: http://www.inboundlogistics.com/cms/article/3pl-liabilities-exposed-who-gets-stuck-with-the-bill/ ANDhttp://www.paulstewartlogisticslaw.com/wp-content/uploads/2014/02/Secondary-Liability-Traffic-World.pdf

6. Solicitation or Hiring Employees – especially needed due to “keys to thekingdom” of both parties’ SCM talent; should be mutual during and forreasonable time after term of Agreement, may have reasonableexceptions

7. Warranty of Payment to Subcontractors and Release of Liens – 3PL solelyand exclusively liable to subcontractors for payment of charges tocarriers and warehousemen; include in all contracts with subcontractorsthey agree to look only to 3PL for payment of all transportation relatedcharges; agree to defend and indemnify client for all subsequent claimsfor non-payment. (as additional protections of the “double payment”exposure parties should agree in “Bill of Lading” requirements thatshipper will execute non-recourse Section 7 of bill of lading and specifyas “Prepaid”)

(See: http://www.inboundlogistics.com/cms/article/3pl-liabilities-exposed-who-gets-stuck-with-the-bill/ ANDhttp://www.paulstewartlogisticslaw.com/wp-content/uploads/2014/02/Secondary-Liability-Traffic-World.pdf

14

Characteristics of Outcome BasedAgreement

• Fully collaborative• Assumes a partnership toward mutual new value• Must be flexible with fundamental protections• MSA covers fundamental definitions, mutual

intentions, reps and warranties, and incorporatesall Schedules wherein objectives, desiredoutcomes, performance measurement, pricing,relationship management and termination/exitplan are specified

• Fully collaborative• Assumes a partnership toward mutual new value• Must be flexible with fundamental protections• MSA covers fundamental definitions, mutual

intentions, reps and warranties, and incorporatesall Schedules wherein objectives, desiredoutcomes, performance measurement, pricing,relationship management and termination/exitplan are specified

15

The Contracting Continuum

You should writeevery trivialaspect of thebusinessagreement instone.

A contract is aflexibleframeworkdesigned tocreate“instruments forsocialcooperation”

If you have agood businessrelationship, youdo not need awritten contract.

Traditional/Rigid

Relational /“Handshake”

FlexibleFramework

You should writeevery trivialaspect of thebusinessagreement instone.

A contract is aflexibleframeworkdesigned tocreate“instruments forsocialcooperation”

If you have agood businessrelationship, youdo not need awritten contract.

16

• Contracts are typically rooted in the “classicalapproach” to contract law

• The classical approach is crafted to address:– How to manage transactions, such as documenting a

statement of work and the associated pricing andservice levels; and,

– Legal protections, such as limitation of liability,indemnification and liquidated damages

Traditional Contracting Theory

• Contracts are typically rooted in the “classicalapproach” to contract law

• The classical approach is crafted to address:– How to manage transactions, such as documenting a

statement of work and the associated pricing andservice levels; and,

– Legal protections, such as limitation of liability,indemnification and liquidated damages

17

Collaborative Logistics Requires a Shiftin Contracting Perspective

• Relationship must shift from protecting informationto full sharing

• Mutual trust must be exemplified among principals• Counsel must approach contracting with

understanding of risk and reward sharing• MCA and schedules must reflect flexibility

• Relationship must shift from protecting informationto full sharing

• Mutual trust must be exemplified among principals• Counsel must approach contracting with

understanding of risk and reward sharing• MCA and schedules must reflect flexibility

18

What Is Vested?

• Vested® is a business model, methodology, mindset andmovement for creating highly collaborative businessrelationships that enable true win-win relationships in whichboth parties are equally committed to each other’s success.

• When applied, a Vested approach fosters an environment thatsparks innovation, resulting in improved service, reducedcosts and value that didn’t exist before — for both parties.

• Vested is based on award-winning research conducted by theUniversity of Tennessee College of Business Administrationand funded by the U.S. Air Force

• Vested® is a business model, methodology, mindset andmovement for creating highly collaborative businessrelationships that enable true win-win relationships in whichboth parties are equally committed to each other’s success.

• When applied, a Vested approach fosters an environment thatsparks innovation, resulting in improved service, reducedcosts and value that didn’t exist before — for both parties.

• Vested is based on award-winning research conducted by theUniversity of Tennessee College of Business Administrationand funded by the U.S. Air Force

19

• Many organizations find getting the legal terms righttakes time and discussion.

• The Vested methodology calls for parties to addressthe MSA and overall contract structure at thebeginning of process

• Discussing potential disconnects on legal issues orconcerns upfront allow the the parties to understandif they have common ground before spending timeand energy to on the details of the businessagreement – what goes into the schedules

Address The MSA Early

• Many organizations find getting the legal terms righttakes time and discussion.

• The Vested methodology calls for parties to addressthe MSA and overall contract structure at thebeginning of process

• Discussing potential disconnects on legal issues orconcerns upfront allow the the parties to understandif they have common ground before spending timeand energy to on the details of the businessagreement – what goes into the schedules

20

Vested Agreement Structure

Element 1

Element 2

Element 3 Element 4

Element 5

Element 6

Element 7

Element 10

MASTERSERVICES

AGREEMENT(MSA)

RULE 1

BUSINESS MODEL PRICING MODELDESIRED

OUTCOMES

STATEMENT OFOBJECTIVES

(WHAT)

WORK SCOPE& ALLOCATION

(HOW)

GUARDRAILS&

ASSUMPTIONS

RULE 2 RULE 3 RULE 4 RULE 5

SPECIALCONCERNS &

REQUIREMENTS

SPECIALCONCERNS &

REQUIREMENTS

SPECIALCONCERNS &

REQUIREMENTS

GOVERNANCESTRUCTURE

Vested Agreement Structure• Non-disclosure• Non-compete• Limitation of Liability• Termination /Renewal• Other

A Vested agreement is structured as follows: A Master agreement is combined withsubordinated schedules or exhibits that individually outline each of the 5 Rules and 10elements of Vested.

© 2013 Vested®

Service Provider Owned

Element 8

Element 9

SHARED VISIONSTATEMENT OF

INTENT

RELATIONSHIPMANAGEMENTFRAMEWORK

PERFORMANCEMANAGEMENT

PLAN

WORK SCOPE& ALLOCATION

(HOW)

TRANSFORMATION MANAGEMENT

FRAMEWORK

EXITMANAGEMENT

PLAN

GUARDRAILS&

ASSUMPTIONS

OPERATIONALPERFORMANCE

REPORTING

QA PLAN

RISKASSESSMENT

MARGINMATCHING

INCENTIVES

21

Have Questions about Vested?

Kate VitasekFaculty, Graduate & Executive EducationUniversity of [email protected]

Learn more at…..www.vestedway.com

22

Kate VitasekFaculty, Graduate & Executive EducationUniversity of [email protected]

Learn more at…..www.vestedway.com

22

Miscellaneous Notes

• Shipper Remains Liable to Carrier Notwithstanding Payment ofTransportation Charges to 3PL…National Shipping Co. of Saudi Arabia, 106F.3d 1544 (11th Cir. 1997), "unless a carrier intends to release a shipper fromits duty to pay under the bill of lading, the shipper remains liable to the carrier,irrespective of the shipper's payment to a freight forwarder (i.e.,intermediary).“

• Carrier Estopped from Collection of Transportation Charges…OlsonDistributing Systems, Inc., 850 F. 2d 295 (6th Cir. 1988), the court ruled theplaintiff motor carrier was equitably estopped from enforcing its bill of ladingcontract directly against a shipper where the shipper was able to prove it hadpreviously paid the freight charges to an unlicensed freight forwarder.

• Shipper May be Held to Limitation of Liability Negotiated by 3PL…WernerEnters., Inc. v. Westwind Maritime Int'l, Inc., 554 F.3d 1319, 1326 (11thCir.2009).

• Shipper Remains Liable to Carrier Notwithstanding Payment ofTransportation Charges to 3PL…National Shipping Co. of Saudi Arabia, 106F.3d 1544 (11th Cir. 1997), "unless a carrier intends to release a shipper fromits duty to pay under the bill of lading, the shipper remains liable to the carrier,irrespective of the shipper's payment to a freight forwarder (i.e.,intermediary).“

• Carrier Estopped from Collection of Transportation Charges…OlsonDistributing Systems, Inc., 850 F. 2d 295 (6th Cir. 1988), the court ruled theplaintiff motor carrier was equitably estopped from enforcing its bill of ladingcontract directly against a shipper where the shipper was able to prove it hadpreviously paid the freight charges to an unlicensed freight forwarder.

• Shipper May be Held to Limitation of Liability Negotiated by 3PL…WernerEnters., Inc. v. Westwind Maritime Int'l, Inc., 554 F.3d 1319, 1326 (11thCir.2009).

23

Miscellaneous Notes…continued

• Transportation Liability: Busting SevenCommon Myths; Lisa Terry, Inbound Logistics,January, 2013http://www.inboundlogistics.com/cms/article/transportation-liability-busting-seven-common-myths/

• Transportation Liability: Busting SevenCommon Myths; Lisa Terry, Inbound Logistics,January, 2013http://www.inboundlogistics.com/cms/article/transportation-liability-busting-seven-common-myths/

24

3PL Contract Negotiating Strategiesfor the Purchaser

▪ Identify and prioritize your contracting objectives

– price stability

– on-time performance

– capacity

– limiting risk / liability

– efficiencies and optimization of supply chain

▪ Control the playing field

– develop your own contract form tailored to meet your businessobjectives

▪ Identify and prioritize your contracting objectives

– price stability

– on-time performance

– capacity

– limiting risk / liability

– efficiencies and optimization of supply chain

▪ Control the playing field

– develop your own contract form tailored to meet your businessobjectives

26

3PL Contract Negotiating Strategiesfor the Purchaser

▪ Look for ways to increase leverage

– maximize contract volumes by including affiliates

– geographic scope / global agreement

– integration of multiple services

– shipment forecasting / volume commitments

▪ Engage in competitive bidding process & include yourcontract form

▪ Relationships matter but do not be afraid to move yourbusiness

▪ Look for ways to increase leverage

– maximize contract volumes by including affiliates

– geographic scope / global agreement

– integration of multiple services

– shipment forecasting / volume commitments

▪ Engage in competitive bidding process & include yourcontract form

▪ Relationships matter but do not be afraid to move yourbusiness

27

3PL Contract Structure

▪ Master Contract. Contract may include master termsand conditions with rates and services appendices

▪ SOWs. Separate Statements of Work (SOWs) can beentered for different services or participating affiliates

– if terms conflict, would master agreement or SOW control?

▪ Affiliates. If affiliates are included, need to evaluateindividual vs. joint and several liability for breaches

▪ Exclusivity. Consider if the contract will be entered onan exclusive or non-exclusive basis

▪ Master Contract. Contract may include master termsand conditions with rates and services appendices

▪ SOWs. Separate Statements of Work (SOWs) can beentered for different services or participating affiliates

– if terms conflict, would master agreement or SOW control?

▪ Affiliates. If affiliates are included, need to evaluateindividual vs. joint and several liability for breaches

▪ Exclusivity. Consider if the contract will be entered onan exclusive or non-exclusive basis

28

3PL Contract Structure

▪ SOPs. Standard operating procedures (SOP) may bedeveloped and added as part of the contract

▪ Account Rep. 3PL may appoint a representative tomanage performance and address service problems

▪ NSA Terms. Contracts involving NVOCCs in the UStrades must include certain terms and be filed with theFederal Maritime Commission

▪ Company Std. Terms. Many contracts incorporate std.company terms for non-specialized provisions

▪ SOPs. Standard operating procedures (SOP) may bedeveloped and added as part of the contract

▪ Account Rep. 3PL may appoint a representative tomanage performance and address service problems

▪ NSA Terms. Contracts involving NVOCCs in the UStrades must include certain terms and be filed with theFederal Maritime Commission

▪ Company Std. Terms. Many contracts incorporate std.company terms for non-specialized provisions

29

3PL Agreement Scope of Services

▪ 3PL agreements may involve multiple services:

– international ocean transportation

– international / domestic air transportation

– domestic truck

– warehousing / consolidation

– customs brokerage

– other logistics services

– hazardous materials

▪ 3PL agreements may involve multiple services:

– international ocean transportation

– international / domestic air transportation

– domestic truck

– warehousing / consolidation

– customs brokerage

– other logistics services

– hazardous materials30

Shipment Instructions and Documentation

▪ How will shipment instructions be communicated to 3PL?

– EDI / other?

▪ Individual shipments typically evidenced by a receipt orBill of Lading (BOL) / Air Waybill (AWB)

▪ Contract terms should supersede conflicting terms in anyBOL, AWB, or other shipping document

▪ How will shipment instructions be communicated to 3PL?

– EDI / other?

▪ Individual shipments typically evidenced by a receipt orBill of Lading (BOL) / Air Waybill (AWB)

▪ Contract terms should supersede conflicting terms in anyBOL, AWB, or other shipping document

31

Insurance

▪ Contract should require 3PL and its contractors tomaintain insurance at specified amounts:

– commercial general liability

– employers’ liability

– worker’s compensation

– professional liability/errors & omissions

– cargo liability

– commercial automobile

– aircraft accident liability (required of air carrier contractors)

– warehouseman liability, if applicable

▪ Contract should require 3PL and its contractors tomaintain insurance at specified amounts:

– commercial general liability

– employers’ liability

– worker’s compensation

– professional liability/errors & omissions

– cargo liability

– commercial automobile

– aircraft accident liability (required of air carrier contractors)

– warehouseman liability, if applicable

32

Failure to Communicate

• All sides need to appreciate what the otheris trying to achieve

• Clarity matters• Lack of Communication

• Failure of the Contract• Bad deals• Exposure

• All sides need to appreciate what the otheris trying to achieve

• Clarity matters• Lack of Communication

• Failure of the Contract• Bad deals• Exposure

33


Eric A. BakerSmithAmundsen

June 8, 2016

Eric A. BakerSmithAmundsen

June 8, 2016

Relationships with 3PLs

• Managing customer relationships focusing onavailability of capable supply chain services.

• Providing/managing the provision of these supplychain services.

• Managing customer relationships focusing onavailability of capable supply chain services.

• Providing/managing the provision of these supplychain services.

35

Relationship with 3PLs

• How the relationship is structured and how itprogresses depends on how shippers (thecustomer) view themselves:• Strategic buyer• Tactical buyer• Or a combination of both

• How the relationship is structured and how itprogresses depends on how shippers (thecustomer) view themselves:• Strategic buyer• Tactical buyer• Or a combination of both

36


• Strategic Buyer – a shipper looking to the logisticscompany for supply chain solutions

• Tactical Buyer – a shipper that has alreadydeveloped its own supply chain channel and onlywants to fulfill its operational and service needs.

• Strategic Buyer – a shipper looking to the logisticscompany for supply chain solutions

• Tactical Buyer – a shipper that has alreadydeveloped its own supply chain channel and onlywants to fulfill its operational and service needs.

37


• Both parties – 3PL and shipper – need to invest inthe relationship – information and financialresources are required by both and must becoordinated between the parties.

• Both parties – 3PL and shipper – need to invest inthe relationship – information and financialresources are required by both and must becoordinated between the parties.

38

3PL Performance

▪ Customized Requirements and Procedures

– can be specified in an appendix or SOW

▪ Carrier Selection

– contract may provide flexibility for 3PL to select all carriers or 3PLmay be asked to arrange shipments under existing carrier contracts

▪ Shipment Tracking and Reporting

– contract may require specific data to be available or reported

▪ Refused Delivery

– procedures and instructions

▪ Customized Requirements and Procedures

– can be specified in an appendix or SOW

▪ Carrier Selection

– contract may provide flexibility for 3PL to select all carriers or 3PLmay be asked to arrange shipments under existing carrier contracts

▪ Shipment Tracking and Reporting

– contract may require specific data to be available or reported

▪ Refused Delivery

– procedures and instructions

39

Key Performance Indicators

▪ KPIs can clarify performance expectations and incentivize acertain performance level if tied to a remedy for KPI failure

▪ KPIs are often tied to the purchaser’s commercial needs– on-time performance– shipment mistakes

– cargo loss/damage– claims processing

▪ Possible remedies for KPI failures– conference with right to cure deficiencies– contract termination

– bonus/malus: reward and/or penalty for strong/poor performance

▪ KPIs can clarify performance expectations and incentivize acertain performance level if tied to a remedy for KPI failure

▪ KPIs are often tied to the purchaser’s commercial needs– on-time performance– shipment mistakes

– cargo loss/damage– claims processing

▪ Possible remedies for KPI failures– conference with right to cure deficiencies– contract termination

– bonus/malus: reward and/or penalty for strong/poor performance

40

Steps to Avoiding Termination

• Manage Expectations – Expectations of the 3PLrelationship need to be clearly defined andagreed to by all parties. Additionally, they needto agree on what the goal is to be achieved andhow to achieve it.

• Senior Management Buy-In – internalmanagement must be on board with using a 3PLand agree to what is expected from them.

• Manage Expectations – Expectations of the 3PLrelationship need to be clearly defined andagreed to by all parties. Additionally, they needto agree on what the goal is to be achieved andhow to achieve it.

• Senior Management Buy-In – internalmanagement must be on board with using a 3PLand agree to what is expected from them.

41


• Formalization of the 3PL Relationship – theparties’ understanding of the goal(s), the role ofthe individual parties, timing of when things areto be done, and plans for managing therelationships between the respective parties’ C-Suite, management and operations.

• Capability to Scale Operations – The parties needto address scaling the relationship up and downbased on Shipper’s demand.

• Formalization of the 3PL Relationship – theparties’ understanding of the goal(s), the role ofthe individual parties, timing of when things areto be done, and plans for managing therelationships between the respective parties’ C-Suite, management and operations.

• Capability to Scale Operations – The parties needto address scaling the relationship up and downbased on Shipper’s demand.

42


• Drafting Mutual Agreement –• Agreements should be understood and agreed to by

all parties in the 3PL relationship (shippers, 3PLprovider, and carriers).

• Dispute resolution procedures should be well thoughtout and applicable in the relationship of the parties.

• Understanding Roles and Relationship with Asset-Based Providers – shippers need to understandhow non-asset owning 3PLs work with carriers.

• Drafting Mutual Agreement –• Agreements should be understood and agreed to by

all parties in the 3PL relationship (shippers, 3PLprovider, and carriers).

• Dispute resolution procedures should be well thoughtout and applicable in the relationship of the parties.

• Understanding Roles and Relationship with Asset-Based Providers – shippers need to understandhow non-asset owning 3PLs work with carriers.

43

Important Considerations to AvoidTermination

• Control – which party controls which aspects ofthe supply chain?

• Risk Mitigation – weather, humans, and machines– disruptions will happen; plan for them.

• Communication – communication systems andprocesses are critical to the relationship.

• Refining the Relationship – the parties need tocontinually refine the relationship.

• Control – which party controls which aspects ofthe supply chain?

• Risk Mitigation – weather, humans, and machines– disruptions will happen; plan for them.

• Communication – communication systems andprocesses are critical to the relationship.

• Refining the Relationship – the parties need tocontinually refine the relationship.

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• Control of the Supply Chain.• Shippers are tending to want to retain control of the

supply chain to maintain:• Ability to leverage buying power from carriers• Ability for rate renegotiation with carriers• Possible discounts available from carriers

• The more Shipper control, the more closely the 3PLshould participate in strategic discussions

• Formal Plan for 3PL and Shipper to work together

• Control of the Supply Chain.• Shippers are tending to want to retain control of the

supply chain to maintain:• Ability to leverage buying power from carriers• Ability for rate renegotiation with carriers• Possible discounts available from carriers

• The more Shipper control, the more closely the 3PLshould participate in strategic discussions

• Formal Plan for 3PL and Shipper to work together

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• Risk Mitigation.• The weather, humans, and machines can be

unpredictable, which means disruptions to the transitprocess will happen.

• The parties need to develop preventative andcontinuous processes to deal with and avoiddisruptions

• The more closely the 3PL and Shipper work togetherwith one another, the more likely they will experienceshorter disruptions.

• Risk Mitigation.• The weather, humans, and machines can be

unpredictable, which means disruptions to the transitprocess will happen.

• The parties need to develop preventative andcontinuous processes to deal with and avoiddisruptions

• The more closely the 3PL and Shipper work togetherwith one another, the more likely they will experienceshorter disruptions.

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• Communication.• Business reviews provide feedback between the

parties and should highlight:• Historical performance measurements such as delays and

cargo damage and the KPIs associated with any pre-defined goals, and

• Identify both the failures and the successes which shouldbe used to refine the relationship.

• IT Technology should facilitate communicationbetween the parties, email, shipment tracking, etc.

• Communication.• Business reviews provide feedback between the

parties and should highlight:• Historical performance measurements such as delays and

cargo damage and the KPIs associated with any pre-defined goals, and

• Identify both the failures and the successes which shouldbe used to refine the relationship.

• IT Technology should facilitate communicationbetween the parties, email, shipment tracking, etc.

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• Refining the Relationship.• Communication leads to continuous improvement of

the Shipper-3PL relationship by identifying any servicefailures.

• Lean, Six-Sigma, and other efficiency modelingprocesses can identify unnecessary costs andinefficient parts of the relationship.

• Shippers and 3PLs should both being working toidentify areas for improvement among processes andtransactions.

• Refining the Relationship.• Communication leads to continuous improvement of

the Shipper-3PL relationship by identifying any servicefailures.

• Lean, Six-Sigma, and other efficiency modelingprocesses can identify unnecessary costs andinefficient parts of the relationship.

• Shippers and 3PLs should both being working toidentify areas for improvement among processes andtransactions.

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Termination

• The Process of Termination.• Shipper Perspective

• Negotiation with new 3PL – can take months• Understand economic impact of transition• Understand impact on Key Data Elements – 3PL is often

the entity feeding data to Shipper’s accounting,purchasing, and sales departments

• The Process of Termination.• Shipper Perspective

• Negotiation with new 3PL – can take months• Understand economic impact of transition• Understand impact on Key Data Elements – 3PL is often

the entity feeding data to Shipper’s accounting,purchasing, and sales departments

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Termination

• The Process of Termination.• Shipper Perspective (cont.)

• Identify the reasons for termination with incumbent 3PL• Be prepared for possible litigation – contract dispute• Manage expectations of C-Suite, managers and operations

• The Process of Termination.• Shipper Perspective (cont.)

• Identify the reasons for termination with incumbent 3PL• Be prepared for possible litigation – contract dispute• Manage expectations of C-Suite, managers and operations

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Termination

• The Process of Termination.• 3PL Perspective

• Manage expectations of C-Suite, managers and operations• Loss of Revenue – understand full effect of revenue loss

• Allocation of system expenses over smaller customer base• Effect on all departments and related entities (sister companies)

• Carriers• Loss of carriers in 3PL’s carrier pool which in turn affects ability

to service other customers of 3PL.• Loss of volume discounts if carrier contracts with 3PL

• The Process of Termination.• 3PL Perspective

• Manage expectations of C-Suite, managers and operations• Loss of Revenue – understand full effect of revenue loss

• Allocation of system expenses over smaller customer base• Effect on all departments and related entities (sister companies)

• Carriers• Loss of carriers in 3PL’s carrier pool which in turn affects ability

to service other customers of 3PL.• Loss of volume discounts if carrier contracts with 3PL

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Termination

• The Process of Termination.• 3PL Perspective (cont.)

• Employees -- 3PL may have to right-size employee base• Be prepared for possible litigation – contract dispute• Understand why the contract terminated and learn from it

• The Process of Termination.• 3PL Perspective (cont.)

• Employees -- 3PL may have to right-size employee base• Be prepared for possible litigation – contract dispute• Understand why the contract terminated and learn from it

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3PL Liability for Cargo Losses

▪ International Ocean

– freight forwarders: 3PL typically liable for its negligence inbooking shipments with ocean carriers and preparing shipmentdocumentation

– NVOCC services: 3PL liability is limited under the law:

▪ US COGSA: governs shipments moving to/from US under bill oflading and carrier’s liability is limited to $500 per package orcustomary freight unit

▪ COGSA limits may be increased by agreement but not decreased

▪ Hague-Visby: an int’l treaty applied by most other major tradingnations and NVOCC liability is limited to 666.67 SDRs per packageor 2 SDRs per kilogram


– freight forwarders: 3PL typically liable for its negligence inbooking shipments with ocean carriers and preparing shipmentdocumentation

– NVOCC services: 3PL liability is limited under the law:

▪ US COGSA: governs shipments moving to/from US under bill oflading and carrier’s liability is limited to $500 per package orcustomary freight unit

▪ COGSA limits may be increased by agreement but not decreased

▪ Hague-Visby: an int’l treaty applied by most other major tradingnations and NVOCC liability is limited to 666.67 SDRs per packageor 2 SDRs per kilogram

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– Contract can define scope of damages, subject toliability limits

– Contract should define the package—manufacturersdesire package to be the smallest unit loaded in acontainer to increase cargo claim recoveries

– Contract may void the liability limit for willful orreckless conduct


– Contract can define scope of damages, subject toliability limits

– Contract should define the package—manufacturersdesire package to be the smallest unit loaded in acontainer to increase cargo claim recoveries

– Contract may void the liability limit for willful orreckless conduct

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▪ International Air Transportation

– Montreal Convention applies to most international shipments

– limit for loss, damage, and delay = 19 SDRs/kg

▪ Other Services: Inland Transportation,Consolidation, Customs Brokerage

– typically includes liability for negligence subject to a liability cap

– level of the cap typically varies per service

▪ International Air Transportation

– Montreal Convention applies to most international shipments

– limit for loss, damage, and delay = 19 SDRs/kg

▪ Other Services: Inland Transportation,Consolidation, Customs Brokerage

– typically includes liability for negligence subject to a liability cap

– level of the cap typically varies per service

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Delay

▪ Contract may require compliance with delivery schedules

▪ Consider damages if delays occur:

– chargebacks

– plant shutdown costs

– expedited transportation

▪ Liability limits are common in any delay provision

▪ 3PL will seek to avoid open-ended potentiallyuninsurable delay liability risks

▪ Contract may require compliance with delivery schedules

▪ Consider damages if delays occur:

– chargebacks

– plant shutdown costs

– expedited transportation

▪ Liability limits are common in any delay provision

▪ 3PL will seek to avoid open-ended potentiallyuninsurable delay liability risks

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Other Liability Issues

▪ Consequential Damages. 3PL contracts typicallyexclude liability for consequential damages and anyspecial damages issues are addressed separately

▪ Aggregate Liability Caps. 3PLs increasingly seek toimpose annual aggregate caps on their liability

▪ KPI Remedies. Contract may include remedies forfailure to meet KPIs

▪ Consequential Damages. 3PL contracts typicallyexclude liability for consequential damages and anyspecial damages issues are addressed separately

▪ Aggregate Liability Caps. 3PLs increasingly seek toimpose annual aggregate caps on their liability

▪ KPI Remedies. Contract may include remedies forfailure to meet KPIs

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Indemnity

▪ Indemnity may cover losses arising from:

– negligence

– acts or omissions

– breach

– failure to comply with law

– all of the above

▪ Some contracts limit indemnity scope to 3rd party claims

▪ Preferable to cover conduct of 3PL subcontractors

▪ Indemnity may cover losses arising from:

– negligence

– acts or omissions

– breach

– failure to comply with law

– all of the above

▪ Some contracts limit indemnity scope to 3rd party claims

▪ Preferable to cover conduct of 3PL subcontractors

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Rates and Payment

▪ Rates: include all rates and charges in an appendix andlimit application of 3PL tariff charges, etc.

– if permitted, contract should define rate adjustment process (i.e.period of adjustment, negotiated vs. automatic adjustments,option to terminate)

▪ Invoices: clarify deadlines and content requirements

▪ Payment: clarify credit terms and currency requirements

– if affiliates are included, clarify entity responsible for payment

▪ Rates: include all rates and charges in an appendix andlimit application of 3PL tariff charges, etc.

– if permitted, contract should define rate adjustment process (i.e.period of adjustment, negotiated vs. automatic adjustments,option to terminate)

▪ Invoices: clarify deadlines and content requirements

▪ Payment: clarify credit terms and currency requirements

– if affiliates are included, clarify entity responsible for payment

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Termination

▪ Termination for convenience

– not always included; contract term and exclusivity play a role

▪ Termination for cause

– breach, with the right to cure

– insolvency

– change of control

▪ Completion of services and payment upontermination

▪ Transition to new provider; need for cooperation

▪ Termination for convenience

– not always included; contract term and exclusivity play a role

▪ Termination for cause

– breach, with the right to cure

– insolvency

– change of control

▪ Completion of services and payment upontermination

▪ Transition to new provider; need for cooperation

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Current Issues

▪ SOLAS VGM: all containers must have a VGM that iscommunicated to ocean carrier or terminal by 7/1/16

▪ 3PLs may be asked to facilitate weighing of containersand communicate the VGM

– consider requirements for accuracy and timeliness

▪ Port Congestion

– May require 3PL to extend free time to avoid demurrage liability

– Carriers often declare force majeure, which delays shipmentsand results in increased costs for shippers

▪ SOLAS VGM: all containers must have a VGM that iscommunicated to ocean carrier or terminal by 7/1/16

▪ 3PLs may be asked to facilitate weighing of containersand communicate the VGM

– consider requirements for accuracy and timeliness

▪ Port Congestion

– May require 3PL to extend free time to avoid demurrage liability

– Carriers often declare force majeure, which delays shipmentsand results in increased costs for shippers

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Compliance With Laws / Governing Law

▪ Many agreements include special provisions forhomeland and cargo security (C-TPAT), anti-bribery (i.e.FCPA compliance), hazardous materials, forced labor,other laws applicable to a particular industry

▪ 3PL agreements typically include a single choice of law

– Global agreements may address regional / local law issues in anappendix or SOW

▪ Many agreements include special provisions forhomeland and cargo security (C-TPAT), anti-bribery (i.e.FCPA compliance), hazardous materials, forced labor,other laws applicable to a particular industry

▪ 3PL agreements typically include a single choice of law

– Global agreements may address regional / local law issues in anappendix or SOW

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Costs and Exposures

• Failed Contracts• Litigation• Failed Relationships• Lack of Trust• Lost Profits

• Failed Contracts• Litigation• Failed Relationships• Lack of Trust• Lost Profits

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Contact Information

Karyn A. Booth [email protected] 202.263.4108

Eric A. Baker [email protected] 317-615-3108

Lew R. C. Bricker [email protected] 312-894-3224

Paul W. Stewart [email protected] 901-752-8781

Karyn A. Booth [email protected] 202.263.4108

Eric A. Baker [email protected] 317-615-3108

Lew R. C. Bricker [email protected] 312-894-3224

Paul W. Stewart [email protected] 901-752-8781

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