Creating an Effective Shipper-Motor Carrier Freight Agreement – Part 2

The first part of this blog focused on the operational, service and equipment issues that constitute a strong shipper-carrier freight agreement. This blog will address the financial and business issues that need to carefully captured in detail.

6. Rates and Service Charges

The rates, fuel surcharges and other accessorial charges need to inserted as appendices and discussed in the contract. There must be a clear understanding of the length of time the rates will be in effect (i.e. one year) along with a formula to highlight if, when and how much rates will increase in future years. There is value in inserting a formula, tied to increases in the Consumer Price Index (CPI) that specifically addresses the level of rate increases in each year of the agreement.

The quarterly or annual rebate program, if one has been created, should be stated in the agreement with the thresholds required to generate each level of incentive payment. There also needs to be an Annual Review Process so the two parties can discuss the status of agreement and if there is a need for corrective action. Also the annual agreement formula above should be tied to specific performance criteria set forth in the agreement and captured in the appendices. A failure to meet specific performance criteria can sometimes provide a mechanism to terminate the agreement prior to its target expiry date.

7. Term of Agreement

The term of agreement (i.e. one year plus two more years at the increases agreed to above) should be clearly stated. There should also be an exit clause for both parties if the one of the parties is unhappy with any aspect of the contract. Typically a 30 day exit clause is satisfactory but this should be carefully considered since it can take a shipper more than a month to find and negotiate with a qualified replacement carrier or carriers. There needs to be a process where either party can serve notice to the other party, by a specified date, if it wishes to exercise its right to exit the agreement.

8. Payment Terms

This section should state the required payment interval (i.e. 30 days), the documents required to justify payment (i.e. signed proof of delivery) and state that the rates in the invoice must match the rates detailed in the appendices.

9. Indemnity

There is a requirement to include words in the agreement that ensure the carrier indemnifies the shipper from all liabilities and claims made against the shipper as a result of the carrier’s actions while the property, goods, materials or commodities are in their possession.

10. Insurance

The shipper must ensure that the carrier maintains an adequate amount of bodily injury and property damage public liability insurance so that any injuries sustained or cargo damage/loss while in the possession of the carrier is their responsibility. There should be a declared value on all cargo and a mechanism for reimbursement for all losses or damages incurred. Carriers will also try to insert language in these agreements to mitigate the impacts of these losses. The claims policy and timing of claims reimbursements should also be detailed in the agreement and/or appendices.

After reading these two blogs, a shipper or carrier might be tempted to create an agreement without the assistance of legal personnel. There is an old saying that whoever has himself as a lawyer has a fool for a lawyer. Get legal help. While capturing the business components of an agreement is not too difficult, there is great benefit in making sure all of the terms and phrases are legally correct in every respect. There is value to creating a first draft of the agreement but engaging an expert in contract/transportation law to augment, edit and/or deliver the final product.

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