Logistics contract negotiation

Expert Insights
 Expert Insights Logistics contracts negotiation

The negotiation of a logistics services contract is a process that sometimes requires ample patience
and attention to detail. Especially in the case of warehouse services the contract duration and exit
clauses force the logistics service provider and the shipper to work together for a long time.

When starting negotiations it is wise to be pragmatic and start with the question: “Are there clauses that are nonnegotiable?” At
least this way a show stopper is detected early in the process. For the other clauses usually goes that reasonable argumented
objections to a clause can be settled by giving and taking. A contract where one party takes all has a weak basis and refusing to
give away anything will mostly lead to the other party walking away. The majority of contracts therefore are a result of a balanced
compromising process.

This edition of Expert Insights will cover a number of standard contract clauses for warehousing logistics that especially require
your attention. An open dialogue and understanding of the impact of these clauses on both sides of the table will hopefully prevent
them becoming hot potatoes during your negotiations.

We will cover the following clauses

1. Scope of the agreement
2. Exclusivity and/or minimum volumes
3. Liability for direct and indirect
damages
4. KPIs and bonus-malus
5. Terms and conditions
6. Contract term and termination clause
7. Price indexation
8. Choice of law and venue
9. Lien and retention rights

Scope of the agreement
Description
The scope of a logistics agreement refers
to the processes included in the contract
and results that characterize the service.
For logistics contracts this means a
detailed process description of the
services covered in the contract.
Why is this an important clause?
It is often not clearly described which
services are included in the scope of
the contract. This leads to ambiguity
of numerous following clauses. As an
example; Often the shipper will believe
‘Warehousing’ to include the entire range
of services from arrival of the goods to
the warehouse up to the moment the
goods leave the warehouse. In contrast,
from a Logistics Service Provider’s
perspective ‘Warehousing’ could refer to
storage only. Hence in case the contract
does not clearly specify the service
included in ‘Warehousing’, clauses on
KPI’s and liability can be interpreted in
various ways.
Considerations while negotiating
To avoid misunderstandings in the future,
make a clear description which services
will be rendered under the agreement
and avoid ambiguities. Well known
examples of grey areas include loading,
stowing and unloading
under a contract of carriage (always
check whether the agreed Incoterm
under the sales contract corresponds
with obligations of the carrier with
regard to loading or unloading).
It can be helpful to commence the
agreement with a preamble. A preamble
states the overall objective of the
agreement and it recites facts and
circumstances preceding the agreement
that are of relevance to one or both
of the parties. A preamble will help to
interpret the clauses of the agreement in
case of a dispute.

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Exclusivity and/or
minimum volumes
Description
In logistics warehousing contracts
exclusivity and minimum volumes
are usually expressed as a number of
pallets in storage as well as inbound and
outbound movements. When distribution
is included it will also include the number
of shipments. Exclusivity refers to the
right of a Logistics Service Provider to
the total volume of a shipper.
Why is this an important clause?
The single most important influencing
factor on logistics cost is volume.
Logistics by nature is a volume driven
Liability for direct and
indirect damages
Definition
Direct and indirect damages are damages
that occur due to an error on the part of
the service provider or shipper, or due to
another breach of one or more contract
obligations by either party. It is natural
that the shipper should want the service
provider to accept liability for damage of
any kind. On the other hand, the shipper
expects the service provider to offer
competitive rates, yet these rates will
have to include an insurance premium
to cover the risk of any damage.
Furthermore, service providers should
take care not to leave themselves liable
for potentially substantial secondary
industry. As volumes are also the most
important bargaining tool for shippers
in order to obtain discounts, there is a
short-term advantage in presenting the
most favorable volume scenario.
Nevertheless, substantial mismatches
in volumes once the contract is
started will in almost any case re-open
discussion on rates.
Considerations while negotiating
On one hand it is in many cases
difficult to precisely predict volume
developments. On the other hand,
less volume for the Logistics Service
Provider means the contract is less
profitable or even loss making. It is also
damages such as indirect damages and/
or consequential losses.
Why this is an important clause?
With a logistics contract, shippers
obviously want to make sure that the
logistics service provider is taking good
care of their products. A penalty in case
of damage to the product is a good
incentive for the products to be handled
with care and the utmost to be done
to avoid any damage. However, what
about damages that occur because
of damage to, or loss of, a product?
Examples include a missed/cancelled
order or a missed flight, or a delay in the
product’s delivery. Logically, the latter
two examples of loss happen because
the product was damaged/ late through
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Logistics contracts negotiation
important to realize that exclusivity
makes shippers more vulnerable in case
of underperformance of the logistics
service provider with limited possibilities
to quickly react to underperformance.
Cost/rates and volumes are
communicating vessels. Even if
exclusivity and volumes are not explicitly
mentioned in the wording of a contract,
in reality this does not necessarily
mean a shipper can freely change the
nature and volume of the business as
described in the tender documentation.
It is good practice to clearly describe
the implication of substantial drops or
increases in volumes and its effects
on the negotiated tariffs.
the direct or indirect fault of the logistics
service provider. The discussion about
the inclusion of a liability for the logistics
service provider is extremely complex
and often has more affinity with insuring
against business risk than the initial
goal of the liability, namely ensuring that
the products are handled with care.
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Considerations while negotiating
From a logistics service provider’s
perspective, the liability for damage
to products is a way for the shipper to
ensure that the service provider will be
doing its utmost to handle the products
with care so they will be delivered to
customers in pristine condition. From
a shipper’s perspective, the liability
cover for product damages in logistics
contracts is sometimes considered full
cover for all possible damages in the
supply chain. It might be considered a
natural impulse to allocate damage or
loss to the party in physical possession
of the goods. In trade and commerce,
however, it has become common
practice to limit the amount or extent
KPIs and bonus-malus
Description
Key performance indicators (KPIs) are
the metrics used to measure service
quality. As an example in a distribution
contract, a typical KPI would be the
percentage of on-time deliveries. Bonus-
malus is a system that allows a shipper
to withhold part of its payment for the
services in case of underperformance,
and it allows the 3PL to charge extra
when it has exceeded the agreed KPIs.
Why is this an important clause?
Quality usually comes at a cost. In
particular, quality levels that go beyond
the regular quality level for a logistics
operation require extra handling, thus
incurring additional costs. Shippers
obviously want the very best level of
service; 3PLs need to balance these
expectations against the associated
cost level.
of logistics service providers’ liability.
For some types of contract, liability is
limited by an industry standard or even
mandatorily limited by law (e.g. CMR).
Notably, this is the case for contracts
of carriage, where liability is commonly
limited to a certain amount per kilogram
of gross weight, depending on the mode
of transportation. Be aware, though,
that this limitation only applies to the
main obligations of the carrier. Other
obligations undertaken by the logistics
provider that are not subject to a
contract of carriage nor an industry
standard of liability can be arranged for
by contract. If a 3PL accepts a higher
liability for the goods, this will affect the
rates as this increased liability needs to
Considerations while negotiating
KPIs are a useful tool to measure the
carrier’s performance and also to clearly
outline the shipper’s expectations in this
regard. Shippers should carefully consider
which objectives need to be met in a
service level agreement (SLA). If a SLA is
meant to merely serve as a performance
monitor, it would be sufficient to include
it in the periodic
performance review. However, if the
SLA is meant to secure the quality levels,
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Logistics contracts negotiation
be re-insured with an external
insurance company. The logistics
provider usually agrees to be liable for
direct damages to the products up to a
certain amount per kilogram and/or
incident in line with the industry
standards. Liability for damages
exceeding this amount can only be
covered by a separate insurance
policy arranged either by the shipper
or by the logistics provider on the
shipper’s behalf. Since it is virtually
impossible to insure against indirect
damages and/or consequential losses,
logistics providers cannot accept liability
for these.
then the consequences of failing to do so
should be clearly stated in the SLA. Such
consequences usually include a
contractual fine, and a maximum
time to realise the required service
improvements. If these improvements
are not realised, this ultimately leads to
cancellation of the agreement.
Additional to the contractual fine,
a bonus could be agreed in case of
outperformance, thus giving the service
provider a stimulus for improvement. A
reasonable bonus-malus system should
be a double-edged sword: it can be very
motivating for 3PLs. The level of KPIs
should make it realistically possible for
the 3PL to exceed the targets.
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Terms and conditions
Description
Terms and conditions are part of a
logistics contract because of their
general nature. They will cover all areas
that are not specific to one contract but
rather apply to the company as a whole.
Matters that cover the performance
of the logistics service provider on
certain parts of the operation are not
incorporated in the terms and conditions.
Why is this an important clause?
Terms and conditions can be helpful
when drafting a contract because they
contain many standard provisions, so
that the contract itself can remain
lean and hence more transparent. The
problem with terms and conditions,
however, lies in the fact that they are
commonly drafted for the benefit
of one party only. Any contractual
balance reflecting the interests of both
parties to the agreement could easily be
Contract term and
termination clause
Description
The contract term is the duration of
the logistics contract. The termination
clause outlines the reasons/events during
the contract period that will justify an
early termination of the contract by the
shipper.
distorted by applying one-sided terms
and conditions.
Considerations while negotiating
Another problem with terms and
conditions is the well-known battle
of the forms, with the purchasing
party applying purchase terms and the
performing party applying conflicting
delivery terms. In practice, purchase
terms and conditions often are drafted to
be applied to a contract for sale of goods
or for the supply of services in general.
Why this can lead to discussions
For obvious reasons, the logistics service
provider benefits by maximising the
duration of the logistics contract. Some
logistics service providers stipulate a
minimum contract duration. The length
will depend on the effort and other
investments that are involved in starting
up and implementing the contract.
From a shipper’s perspective, a shorter
contract duration will enable a more
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Logistics contracts negotiation
As such, these purchase conditions are
usually less suitable to be applied to a
logistics contract, especially contracts
of carriage. An extra dimension to this
problem is that, in international or cross-
border service supply, the solution as
prescribed by law or jurisprudence varies
per state. Therefore, it may be especially
important to consider the choice of law
(and court). In general, logistics terms
and conditions that cover the interests
of both parties are important to address
all issues not directly stipulated in the
contract. However it is advisable to be
very cautious when including contractual
terms and conditions that differ
significantly from the general terms
and conditions. For some modes of
transport, a solution to both the battle
of forms and to the onesided nature
of terms and conditions lies in branch
terms and conditions that are drafted by
(representatives of) both purchasers
and service providers.
frequent renegotiation of contract
terms with the aim of reducing tariffs.
Common negotiation points include the
exact date that the contract is started,
the period during which a prolonged
contract needs to be agreed upon, and
the notice period and prolongation
period. Termination clauses are a ‘hot
potato’ because shippers regard them
as an ‘escape route’ in case of severe
problems. For the logistics service
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provider, termination of the contract will
almost certainly mean a large financial
loss because the investments involved
in setting up the operation cannot be
recuperated.
Considerations while negotiating
First of all, it is always advisable to
agree to a contract term and/or a term
of notice for cancellation. Avoid a legal
no man’s land by stipulating clear and
unambiguous termination clauses,
a termination date and a notice term.
In the absence of an agreement, a
reasonable term of notice would have to
be established by the court. The court’s
interpretation of ‘reasonable’ does not
Price indexation
Description
Price indexation is an annual exercise to
adjust logistics tariffs by means of a price
index in order to maintain the value of
the contract after inflation and market-
level price fluctuations.
Why is this an important clause?
The price index is the easy part, since
indexation is calculated on a macro
level by governmental institutions. An
often-heard argument is that indexation
should only apply to costs that are
subject to inflation. Furthermore it is
sometimes used as bargaining leverage in
always conform with the views of either
party. When choosing the term of the
contract,also pay attention to the
question of whether the contract
stipulates minimum order quantities
(guaranteed volumes) and exclusivity. If
so, the shipper must be sure that it can
fulfil both these clauses for the entire
contract term. However, even if no
guarantees on volumes are included in
the contract, the carrier will still in many
cases be entitled to a certain volume
that was generated in the preceding
period under the contract terms. In
other words, even if no minimum order
quantity was agreed to, the logistics
service provider will often still be able
discussions on continuous improvement.
Indexation on the basis of ‘market price
levels’ is the subject of even more
debate. Given the long-term nature of
most logistics contracts and the volatility
in the market, logistics service providers
state that it is impossible to predict
the cost of transport, for example, in
two years’ time. Indexation of labour
and rental costs on an annual basis is a
common approach in longterm contracts.
Considerations while negotiating
Consider which index will be used for
calculation carefully. The chosen index
must match the actual subject of the
contract as closely as possible. Some
components of the remuneration are
usually indexed separately, notably fuel
costs. If a separate fuel clause is included
in the contract, ensure that it works
both ways, i.e. that the purchaser
will be compensated when fuel costs
decrease and that the carrier will be
entitled to apply a surcharge when
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Logistics contracts negotiation
to demand at least a ‘sustained’ order
quantity.
Although contracts often
arrange for both topics in the same
clauses, shippers must bear in mind
that there is an important difference
between expiration of a contract and
cancellations during the contract term.
The latter is typically a consequence of
grave shortcomings on the part of the
logistics service provider. It is advisable
to state in advance in the contract which
shortcomings always qualify as ‘grave’
and thus as grounds for cancellation. This
is especially important in combination
with exclusivity.
fuel prices rise. Moreover, avoid
double indexation by ensuring that
the price indexation clause does not
also include price indexation for fuel.
Sometimes shippers want to trade off
the price indexation against continuous
improvement. However, it is best to
keep continuous improvement separate
from the indexation discussion and
include it instead in a separate clause. In
terms of ‘market price level’ indexation,
specifically transport services that have
little or no consolidation synergy (like
full truck loads, part loads or container
transport) fluctuate heavily on demand.
As these services are almost completely
subcontracted, it is not usually possible
to guarantee a fixed price for periods
longer than one year, and sometimes
even less. Own-operated services or
services with high volume consolidation
synergies are less sensitive to sudden
price-level fluctuations.
 Expert Insights Logistics contracts negotiation

Choice of law and venue Considerations while negotiating were caused by the service provider’s
Definition The choice of law and venue can be wilful misconduct. The qualification
This part of the logistics contract decisive in the outcome of a case, even of an act of wilful misconduct can be
describes under which law any future when uniform law from international important, since it deprives the carrier of
disputes will be settled and the location treaties applies like in the European its right to limit liability. From a practical
of the court that will be the venue for Union. Courts in different member states perspective, the logical approach is to
any lawsuits. can arrive at diametrically opposing use the law applicable to the country
interpretations! One particular example where the majority of the activities are
Why this sometimes leads to of a difference in interpretation is noted being executed.
discussions? when determining whether damages
When the shipper, the logistics service
provider and the future logistics
operation are all in the same country,
this clause is hardly an issue. It gets
more complicated when the shipper’s
head office is in Country A and the
future logistics operation is in Country B
(sometimes even on another continent).
In case of large contracts, there is the
added complexity of the location of the
logistics service provider’s head office
where its legal department resides.
Needless to say, all parties will prefer
their own country’s law and a court as
close to their home turf as possible.

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 Expert Insights Logistics contracts negotiation

Lien and retention rights sometimes not invoked between a shipper should carefully consider the
Description shipper and its service provider, but risks accruing from lien and retention
Lien and retention rights refer to the rather somewhere in the chain of rights being invoked somewhere in
right of the logistics service provider to subcontractors. It is sometimes difficult the logistics chain. A financially stable
withhold the shipper’s goods, or even to to prevent this from happening, but if logistics service provider orchestrating
sell these goods in case of unpaid bills. goods represent a certain value or if the various steps in the supply chain,
there is a particular interest in on-time centrally managing the subcontractors,
Why this sometimes leads to delivery and corresponding contractual is an important prerequisite to avoiding
discussions fines in the sales or supply contract, the lien and retention rights being exercised.
Obviously, the prospect of not being able
to access one’s goods is not very
reassuring from a shipper’s perspective.
There is also concern on the shipper’s
part that the rule could be used as
leverage during possible conflicts about
invoices. From the service provider’s
viewpoint, however, these rights offer
some degree of security that it will
receive payment for its services.

Considerations while negotiating

Problems with lien and retention rights
rarely arise directly in relation to the
goods that are actually in the custody
of the logistics service provider. Instead,
lien and retention rights are typically
exercised to enforce settlement of
unpaid bills with regard to previous
shipments or consignments. More
importantly, retention rights are

About the experts

Pieter Meijer, Legal Counsel
at EVO (Dutch Shippers Counsel) Pieter studied
trade and commercial law at the universities
of Amsterdam and Berlin. He has six years of
experience in trade law of logistics andcarriage
of goods. With a background in transportation
insurance brokerage, he now works as legal
counsel at EVO, the Dutch national shippers
counsel, where he advises members on logistics
contract negotiation and claims handling.
Rob Schluter, Legal Counsel
DSV Solutions Rob obtained his degree in civil
law at the University in Tilburg, The Netherlands.
He has specialised in the logistics industry since
1997. In 2010 he joined DSV in the position
of legal counsel for the Solutions division. He is
currently responsible for contractual negotiations
from tender to signing for large contracts within
DSV.