Does your Company Need a Motor Carrier Agreement to Manage its Freight Transportation?

Motor carrier agreements or contracts are documents signed between shippers and carriers that set out the parameters and processes under which two or more companies work together to provide freight transportation services. These documents, often prepared by lawyers (with input from freight management professionals), set out a range of service expectations and freight rates that define the relationship between the parties. While freight agreements have come into widespread use, the question is if and when these documents are necessary?

One could argue that if two or more parties are operating in good faith, do they need a legal document to circumscribe the nature of their relationship? If shippers and carriers are supposed to work together as partners in an open and trusting manner, does a formal, written agreement get in the way of a business partnership arrangement? Does it inhibit open and honest communication?

Do motor carrier agreements create a rigid framework that reduces flexibility? Are they detrimental to the sometime unpredictable and fluid nature of freight transportation? Does a formal agreement make it more difficult for a shipper to obtain additional equipment or after hour’s service? Do they place carriers with a limited set of equipment into a straight-jacket? Does the fear of punishment or service failure force a carrier to provide equipment and service to one client (that has a contract) at the expense of another client (that doesn’t have one)?

Some of these issues are valid concerns. The freight business is fast-moving. Shippers and carriers need to work together in a trusting relationship and adapt quickly and effectively to changing situations.

Freight agreements are not universally necessary for every shipper-carrier relationship. For companies with a small freight spend (less than $2 million on an annual basis), contracts are probably unnecessary unless all of the freight moves with one mode (i.e. small parcel) and with one carrier. For shippers who work in markets where there are limited choices, contracts are likely of limited value. Similarly, for shippers with multi-million dollar freight expenditures, there are likely niche carriers that service certain remote or hard to reach markets. On an annual basis, these costs may be less than $500,000 per year. There is likely no need for freight agreements to manage these carriers. In these instances, a rate agreement and transit schedule will likely suffice.

However, for shippers who spend 5, 10 or 50 million dollars (or more) on freight transportation, carrier contracts can be very beneficial. Here is the rationale.

A good motor carrier agreement addresses a range of important items. A well written contract will specify the types of licenses and permits that the motor carrier must have to perform work for the shipper. It lays out the quality of equipment and drivers that the carrier must employ to transport the shipper’s freight. It also details the services to be performed and how performance will be measured. It goes on to describe the “progressive discipline” process that will be in place, including timelines for corrective action, to ensure acceptable levels of performance are maintained over time. The agreement outlines the level of insurance required to protect the goods of the shipper and describes the process for damage or loss claims. It includes the rates and surcharges to be applied and the formula for rate increases in subsequent years. The transit schedule is usually attached as an addendum.

In other words, a good motor carrier agreement takes away a level of risk and uncertainty that can exist for both parties. It provides a detailed blueprint of all of the key elements of a successful shipper- carrier relationship over a multi-year period. Rather than restricting the nature of the relationship, a good agreement promotes a long term partnership. Check out the next blog where the components of a comprehensive, quality agreement are outlined in detail.

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