When A Logistics Contract Go Wrong
A logistics contract is a valid document, signed between shippers (importers/exporters) and carriers (ship, truck and aircraft owners) or Shippers and Forwarders (Licensed/Customs Agents) for the carriage or transportation of goods to or from one part of the world to another – including the performance of all regulatory formalities and delivery to the agreed destination in return for a fee. A typical logistics contract specifies the duration of the agreement, condition(s) for termination and sanctions for non-conformity. Service Level Agreements (SLAs), Bill of Ladings, signed Purchase Orders (POs), invoices and approved quotations, are all forms of logistics contracts.
Even with all the legally valid components and embedded consequences of non-compliance usually contained in contract terms, isn’t it surprising that parties still default on those terms to which they had willingly given their assent? This is one of the many questions often asked when logistics contracts go wrong but we must first examine some of the factors that could bring about failures in the execution of a logistics contract:
Logistics contracts fail for the following (among many other) reasons:
Cost Pressure: Cost pressure on either the logistics users or service providers can lead to contract failures. Sometimes service providers can get too excited about sealing a contract and may pay little or no attention to details of potential cost elements. This may bring about high-cost pressure on the service provider, leading to non-compliance with contract terms.
For instance, if a Door-to-Door freight forwarding contract is silent about who bears the risk of demurrages or how the risk is shared, when it eventually occurs, ensuing arguments and counter-arguments on who should pay, could automatically lead to break-down of the contractual relationship between the shipper and the freight forwarder. Another example is, if the penalty for delayed delivery is stated in the contract and statements considering potential force majeure are not stated, the forwarder will bear the cost of delayed delivery, even if it was prompted by forces of nature.
The absence of Periodic Reviews: Every logistics contract communicates expectations to both providers and users, but some may not give room for periodic performance review and the result can be catastrophic. When there are no periodic reviews, primary or major concerns are hardly addressed, and parties are just expected to follow through with the terms for the duration of the contract. Several factors ranging from cost, discounts, exchange rate volatility, performance conditions, delivery timelines and payment terms must be reviewed at least every quarter to address these concerns. Otherwise, parties (service providers for instance) can renege on agreed terms.
Low Asset Base: When service providers get into contracts that require storage and trucking without a warehouse, owned or available trucks, execution become very difficult and obligations may not be fulfilled.
Poor Knowledge and Application of INCOTERMS: INCOTERMS would define key responsibilities between the parties. It determines who does what, when and how; the mode of delivery, who must arrange for customs clearance and licenses (for instance); passage of title (transfer of rights); transfer of risk and insurance responsibilities; what the delivery terms are; how transport cost will be allocated between the parties and when the delivery process can be said to have been completed.
All these must be built into a logistics contract because they are universally applicable, acceptable and defy language barriers across the globe. So, poor demonstration of knowledge of INCOTERMS or wrong interpretation or application of the same can be disastrous.
Preventing and Managing Potential Failures in Logistics Contract
Having looked at some of the reasons logistics contracts could go wrong, let’s turn our attention to some of the ways that high risk of failures can be either be avoided or managed:
Pay Attention to Hidden Details: Issues ranging from potential risks like exchange rate volatility, INCOTERMS, cost, penalties, performance conditions, delivery timelines, payment terms and indemnities are easily identified when keen attention is paid to contract details. This will prevent potential failures because concerns are addressed well ahead of contract execution.
Engage in Periodic Reviews: Identify Key Performance Indicators and measure them consistently so that performance expectations and priorities are clearly communicated. This exercise can be carried out quarterly. Again, if there are concerns or obstacles, they are also discussed, and the appropriate solutions are proffered.
In conclusion, the foregoing are some salient issues to consider before, during and after drafting a logistics contract. The idea is that there are services to be rendered by a logistics service provider to the user (shipper/importer/exporter) at some cost and under certain conditions, also known as Service Level Agreement (SLA), which is the contract, which also subject to periodic reviews, so that parties involved can fulfil their obligations without a feeling of being compelled to do so.