You may be wondering how having a well-formulated contract between you and your brokerage can benefit your business. Perhaps you’re running into issues reaching mutually beneficial terms and are looking for a way to truly understand these documents you’re signing.
Or maybe you’ve been at it for a while now but just aren’t sure if the contracts you’re entering into are sound and secure.
We can help. Here at ATS Logistics, we’ve been operating as a freight brokerage for over 30 years. During this time we’ve drafted, contributed to, and engaged in countless contracts with our shippers. As such, we understand exactly how these agreements should be formulated so that they benefit all parties.
In this article, we’ll outline some of the most common issues that we’ve seen arise when entering into contractual agreements with shippers. At its conclusion, this article will leave you with a better grasp of these issues and with some techniques to avoid problems in the future.
Below, you’ll find comprehensive outlines of:
- The main purposes of shipper-broker contracts.
- Three common issues with shipper-broker contracts.
- What you can do to avoid these issues in your own contracts.
The Purpose of Shipper-Broker Contracts
A contract is a business plan. Like any other business plan, a good contract is as detailed as needed to address the situations that are likely to come up. But because freight transportation is a heavily regulated industry, many common rules and situations are already addressed by federal regulations.
This means that shippers and brokers can often leave things largely to default: if both parties just agree to abide by the baseline regulations for freight shipments outlined by the Federal Motor Carrier Safety Administration and the Department of Transportation, then the smooth — and legal — transportation of freight can still be achieved.
That said, individual business needs can be complex, and many companies prefer to supplement (and sometimes replace) the baseline rules with custom terms of their own. To do this successfully, two primary areas of focus should be:
1 . Outlining The Overall Business Relationship
What are the rules and details of the operating plan? This must be clear. Any contract that’s signed between a shipper and a freight broker should clearly and concisely outline the working relationship between both parties. This includes what the duties and responsibilities of each party are and what services will be provided by each.
To be effective, contracts should provide a written record of the expectations on each side. Doing this well requires a deep understanding of your objectives.
Some things to consider include:
- Who should each party contact if issues arise?
- How available does each party need to be to the other?
- If something goes wrong, what’s the timeframe for notification?
- Any special expectations for a brokerage’s contracted carriers (experience, equipment type, safety ratings, etc.).
Anything that either party feels is of importance should be outlined and recorded before the time of signing.
2 . Pre-negotiated Risk Transfers
Great contracting requires an eye for anticipating (and addressing) potential problems in advance. Accordingly, another action these contracts must take is to clearly outline the liability on either side when something goes wrong with a shipment. Having an easily referenceable — and mutually agreed to — contract addressing the transfers of liability in times of uncertainty is vital.
It’s much better to fairly resolve disputes in advance than to argue about who is responsible for what after issues have already arisen. This helps to limit confusion in identifying the liable party when a costly mistake is made.
Additionally, pre-negotiated risk transfers assist in resolving disputes quickly and efficiently, saving time and money over the long haul.
3 Common Issues With Shipper-Broker Contracts
Although the value of a good contract is plain to see, they’re often not drafted or presented effectively. As such, issues arise that could easily have been avoided with the proper information.
Three common issues with the contracts presented by a shipper to their potential broker are as follows:
- Contracts that are inapplicable to brokerage relationships.
- Issues with carrier insurance requirements.
- Problems with the indemnification sections.
1 . Contracts That are Inapplicable to Brokerage Relationships
Your accounting department’s business plan probably looks nothing like your operating group’s business plan, and for good reason. Nobody wants to have their operators reconciling the general ledger or their accountants running the heavy equipment.
So why would you ask your freight brokers to warrant goods they don’t make, procure insurance they can’t buy, maintain equipment they don’t own and provide services they can’t do?
Yet every day, freight brokers are sent form contracts which do exactly that.
These contracts, which often have nothing to do with either freight or brokering, fundamentally fail at our first goal of contracting: Outlining the overall business relationship.
Obviously, then, they are not ideal starting points.
Here at ATS, we most often see these come through in one of three ways:
#1 Generalized Vendor Contracts
Sometimes these are designed for the purchase of goods. At other times, these contracts address services, but not the sorts of services provided by a freight broker.
As such, generalized vendor contracts often cover issues that nobody in a shipper-broker relationship cares about (such as the quality of workmanship for goods that a broker is neither manufacturing nor selling) while ignoring issues that shippers and brokers do care about (such as the minimum safety ratings of the carriers engaged by the broker to move the freight).
As a result, these contracts just aren’t well suited for the relationships between a brokerage and shipper. They don’t intelligently handle pre-negotiated risk transfers, they don’t outline the expectations for equipment types or carrier specifications, they don’t address expectations for communication.
These contracts otherwise just leave out most of the main terms that both shippers and freight brokers actually care about.
#2 Generalized “Subcontractor” Contracts
True subcontracting requires an obligation in an original contract that gets passed to someone else. This is almost always not going to be the case with a freight broker (or even a motor carrier).
A company hired to paint a house can subcontract its obligation to paint to an actual painter (because painting is what the company was hired to do). But if that painter goes to a store to buy the paint itself, they won’t get very far handing the cashier a 30-page subcontract before checking out.
Why? Because both the original contract (and the subcontract, which follows form) are about painting a house. They are not about buying the paint, much less about running a store that happens to sell paint.
Think about it: nobody at that store is going to be picking up a brush to help with the actual painting obligations in the original contract. And while it’s true that paint is necessary for painting, the particulars of where that paint comes from are not.
Paint can be bought new, can already be owned by the painter or the company, can be manufactured to order and can come from any number of other sources.
Where the paint comes from might be an important process question, but it isn’t what the original contract was about.
These dynamics don’t change if, instead of a brick-and-mortar store, the painter buys the paint from a website and the postal service delivers it. Neither the website owner nor the USPS should sign a subcontract here because neither website operations nor over-the-road delivery services have anything to do with painting.
The website owner and USPS might fairly be called “vendors” or “suppliers” here, but unless they’re going to be on-site taking part in the actual work of the contract, they can’t fairly be called “subcontractors” for that contract.
It’s no different for motor carriers or the brokers that engage them.
As much as freight brokers may love to help customers, the logistics agents are in the business of arranging transportation. They are not going to appear on-site at all, much less be shoulder-to-shoulder with the good folks breaking grounds, providing labor, hoisting equipment, cleaning debris, designing materials, or supplying goods.
As with general vendor contracts, subcontracts are filled with terms that shippers and brokers normally don’t care about (at least with respect to the brokerage relationship) while leaving out most of the terms that actually matter.
So here’s a good rule of thumb: if you wouldn’t ask USPS to sign the subcontract, don’t ask the motor carrier or the freight broker that engaged them to either.
#3 “Motor Carrier” Contracts
In a previous article entitled “Freight Broker Vs. Asset Carrer: Which Logistics Provider Is Right For You?” we covered many of the differences between motor carriers and freight brokers (along with some advice on how to choose between the two).
For our purposes, it’s enough to say that freight brokers and motor carriers perform very different (yet related) functions, much like the differences between a travel agency and an airline.
Both can help you with getting from A to B, but with the travel agency, you care that they find you a good flight at a good price, and with the airline, you care that they fly you safely and on time. And if your luggage ever gets lost, you typically don’t start with a call to your travel agent to find it.
These sorts of differences mean that contracts suitable for motor carriers are not suitable for freight brokers.
For example, it makes little sense to talk about a freight broker’s equipment, drivers, FMCSA safety ratings, or MCS-90 insurance endorsements when pure freight brokers do not and cannot have any of those things.
At the same time, a contract that isn’t about brokering will be silent about many of the things you most likely actually care about.
- Do the contracts that the brokers have with carriers have the terms you want in order to protect your interests?
- Does the broker have adequate carrier vetting practices in place?
- What insurance policies would you like to see your broker have, as opposed to the motor carriers they engage?
- What do you want your broker to require of the carriers they utilize?
At best, motor carrier contracts are inadequate to cover what matters most in a freight broker relationship. At worst, they include carrier requirements that would put the freight broker in regulatory jeopardy.
As with general vendor contracts and subcontractor contracts, contracts meant for shippers and motor carriers should not be used between shippers and freight brokers.
But if these types of contracts are so bad, why do so many freight brokers sign them anyway?
To unpack this further, consider these figures:
There are currently more than 700,000 trucking companies in the U.S. and 97% of them have 20 trucks or fewer in their fleet. These 679,000 or so carriers account for the vast majority of the truck capacity offered in this nation.
As a result, trucking companies of this size (20 trucks or fewer) often supply transportation capacity to smaller shippers operating across the U.S.
Because of their size, it often doesn’t make sense for these parties to have in-house legal or contracting departments. As a result, these companies don’t always have the time, wherewithal, or expertise to draft holistically functioning and fully appropriate shipping contracts.
Add to this another 100,000+ freight forwarders and brokers, none of whom face the same regulatory barriers to entry as trucking companies, and you end up with a critical mass of companies that don’t always apply the resources to contracting that you’d hope to see (and a lot contracts with terms that don’t always make sense).
What’s the solution?
To avoid the mishaps that could potentially accompany an ill-formed shipper-broker contract, shippers should consult a seasoned transportation attorney before the time comes to move their freight.
Doing so will help ensure that, should a problem arise, there’s little confusion as to who’s at fault and what action must be taken to amend each issue.
2. Problems With Carrier Insurance Requirements
Even when the type of contract is correct, the contents aren’t always what’s in the best interests of the parties. One area where this commonly crops up during contract negotiations between shippers and their brokerage relates to carrier insurance requirements.
Most specifically, in addition to the insurance requirements shippers place on their freight brokers, shippers are concerned with the coverages that these brokers require their carriers to hold. And rightfully so.
But when it comes to these carrier insurance requirements: is more always better?
To answer this question, it’s important to keep in mind a few of the shifting tradeoffs, benefits and risks that a shipper faces when working with a broker as opposed to working directly with a carrier.
The first tradeoff to note relates to capacity.
Many shippers prefer brokers to motor carriers precisely because they can find more trucks. Any single motor carrier is limited by the physical locations of its trucks and the availability of its drivers. If a particular carrier doesn’t have a truck and driver available at the time and in the place you need it, you’re going to be out of luck.
But large freight brokers have access to tens of thousands of individual carriers.
This not only radically increases the odds that a truck and driver can be found to move your freight at the time you need it moved, but it also (by increasing the available supply) helps to keep prices down relative to what any individual carrier might otherwise be likely to charge. Competition for your freight is a good thing.
And it’s precisely because capacity makes it easier to move more things for less money that shippers should carefully consider anything they do that would shrink it.
Requesting above-market insurance coverages does exactly that. Sometimes, a shipper really does need a carrier to have $250,000 cargo coverage for a load. But when they don’t, should they require those levels of coverage anyways, at a cost of 90% or more of the available capacity out there?
Some will, perhaps believing high coverage levels are a better proxy for quality than their freight broker’s own carrier rating processes. But they should do so with eyes wide open as to the reduction in truck availability and corresponding increases in average load-by-load pricing.
The second tradeoff to keep in mind relates to risk.
Many shippers are rightfully concerned about the trend towards “nuclear verdicts” — massive sums of money legally mandated for settlement payments — becoming increasingly common in today’s transportation industry.
Do these trends make it worthwhile to require above-market liability coverages for the carriers, despite the loss of capacity and increase in load-by-load costs that would arise?
But when making that choice, it’s important to keep in mind another benefit of using an established, professional freight brokerage: you now have a professional intermediary standing between you and the trucks on the road.
Instead of the liability chain argument being “the shipper should be responsible for this crash because it negligently chose the negligent carrier”, it becomes “the shipper should be responsible for this crash because it negligently chose the negligent freight broker which in turn negligently chose the negligent carrier”:
Negligent in Hiring Broker
Negligent In Hiring Carrier
Negligent In Execution of Duties
This potential liability chain is obviously going to be much harder to establish with the broker in the middle than it would be otherwise — especially if the broker is an established industry leader that has been selecting safe carriers for decades.
That doesn’t mean that using a broker removes all risk from a shipper, or that high carrier coverage levels aren’t the right solution for certain shippers.
But it does mean that the shipper should at least consider its actual odds of exposure before requiring insurance changes that will reduce capacity and increase prices for it.
What’s the Solution?
If you’re a shipper with these concerns, consider whether it might be better to manage risks through your own insurance coverages and the coverages you require from your broker as opposed to reflexively passing out-of-market requirements down to the carriers (in a manner that will reduce your available capacity and increase your costs).
3 . Problems With The Indemnification Sections
A third common issue that arises with shipper-broker agreements is tied to the sections on indemnity. These sections lay out what will occur if one party is left damaged in some way.
That’s normally a good thing. It’s great to negotiate over risks and to figure out in advance (with calm heads) how disputes should be handled. But trouble can arise when one party uses overly-broad language in an overly aggressive attempt to mitigate its risks.
These clauses stop making sense when they are worded in such broad terms — terms that have little to do with causation or fault — that they can lead to absurd results.
For example, if a shipper states that “Broker shall indemnify shipper for all claims arising from, relating to, or in connection with the transportation”, does that mean the broker has to pay if a shipper drops a crane on a driver because that relates to or is connected with the transportation? If so, does that really make sense as a fair allocation of risk between business parties?
This problem is multiplied when you consider the fact that in this industry, many companies simply don’t know better than to sign legally-binding contracts with overly-aggressive indemnification sections.
How to Avoid This?
To avoid issues, it’s important to watch out for unreasonably broad language that can unnecessarily slow down and complicate the negotiation process.
Watch out for terms like “related to” or “in connection with”, as these can often implicate absurd results. And remember the golden rule of thumb: if you wouldn’t be comfortable signing it yourself, consider not asking it of the other side.
Your Next Step Toward Contractual Mastery
Now you understand how inappropriate contract types, carrier insurance disputes, and unfair indemnity sections can slow down negotiations, delay your freight, and damage shipper-broker relationships and activities, you’re ready for the next step toward shipper-brokerage contract mastery.
To do this, you’ll want to make sure that you have a properly drafted document that both limits your liability and fairly outlines the intricacies of your shipper-broker relationships going forward.
If you’re a smaller operation looking for guidance in re-calibrating your existing contracts, make sure that you either confer with a transportation attorney who understands these documents. Additionally, make sure you work with an experienced brokerage that has a demonstrated history of putting its customers first.
From here on out you’ll want to get these contracts correct so that you’re in the absolute best position to facilitate the continued success of your business.
Partnerships with trusted brokerages like these will keep your best interest in mind as you draft your new contract.
If you’d like more information on how ATS Logistics can assist you with your next freight shipment and walk you through how these contracts should be developed, reach out. We’re happy to assist you in any way that we can.