Try to get the proper balance between risk and reward.
The issue of who is liable for risk in a logistics contract is a thorny one which can turn nasty if it ends in court. Maritime lawyer Craig Neame explains why what is put down on paper does not always match the reality.
In today’s turbulent economic times, many companies have turned risk-averse, trying to shift the burden of unlimited liability on to their service providers, expecting them to shoulder all the costs in the event of an accident. This can often backfire on both parties, argues Craig Neame, maritime lawyer at London-based legal firm Holman Fenwick Willan.The first issue, he says, is that many large companies still use standard purchasing contracts for products and services alike.
“While they are carefully thought through, they are not really geared towards logistics activities like the storage of vehicles,” he explains. “They often deal with topics like title to goods, warranties about goods conforming to specifications, and obligations to obtain export licenses – all of which are irrelevant at best or confusing and problematic at worst. This is in neither party's best interests.”
In addition, these standard purchasing contracts often expect the logistics provider to accept unlimited liability. This means that, if an accident occurs, the logistics provider is liable for the full value of the goods and consequential loss covering anything from damage to the customer’s reputation to loss of sales or profits. This can be a challenge for logistics providers because their standard insurance policies will usually only cover limited liability. Some providers may be prepared to accept unlimited liability without extra insurance, but customers should only accept this offer if they are sure that the logistics provider's balance sheet will be strong enough to respond to claims.
“Having an insurer behind a logistics provider means faster settlement of claims, professional claims management and it also removes the emotion from the dispute, which helps sustain the relationship over the long term," says Neame.
Companies buying logistics services, he believes, need to develop specific logistics contracts which reflect their supply chain needs. Or, if they decide to stick to their generic contracts, they should modify the conditions to fit in with their logistics activities.
Having a clear logistics contract in place that both parties have agreed upon is essential for avoiding future strife. “It’s just as bad for the customer as for the service provider when contracts are ambiguous … [they] can end up arguing over the ambiguities which can destroy the relationship. They can also end up in a legal battle in the courtroom, which can be very costly,” he warns.
It may sound easy, but in reality deciding who is liable for what can be a minefield. Should you include or exclude strict liability in a contract with a service provider?
“You should ask yourself ‘what are you really engaging your logistics provider for – to be an insurer or a supplier of services?’,” says Neame, adding that most multinationals have large buying power for property insurance and are already paying a high premium to cover physical loss of their goods in case of an accident. “If I ask a logistics firm to buy an insurance policy for my shipment, they need to go out and buy another policy on top of what I already have, so I am paying twice for the same insurance.”
Nonetheless, some companies remain adamant that the service provider should accept unlimited liability for their goods. This can have a serious impact on the customer in terms of costs and quality. Not only will the extra insurance costs push up the price of the logistics quotation, but, even if the logistics provider puts the extra insurance in place, it rarely covers the total liability exposure amount because force majeure events tend to be excluded. “This means the customer might think he is fully covered when the reality is somewhat different,” says Neame.
Some logistics companies may refuse the business if they feel the extra insurance cost simply makes their offer unprofitable. As a result, the customer risks attracting what Neame terms “reckless” service providers who take shortcuts to come up with lower quotations but do not have adequate insurance in place. This can prove more costly in the long run if something goes wrong. “If the service provider goes bankrupt, for example, you could end up worse off – maybe your goods end up in the wrong hands or your cargo gets stuck en-route.”
So how much insurance cover should you take out in relation to a contract? “The insurance obligations and liability regime imposed on a logistics provider need to be onerous enough to keep him disciplined and dedicated to high standards of service, but not so huge that they are crippling and make his business unprofitable,” concludes Neame. “Try to get the proper balance between risk and reward. And, remember, the more liability you request, the more you pump up the rates for the services.”
Job title: Maritime lawyer at London-based legal firm Holman Fenwick Willan
Based: London, UK
Family: Wife, Yanna, and four-year-old daughter, Charlotte
Background: Responsible for managing Holman Fenwick Willan’s logistics and liner shipping practice across 14 offices globally. Clients include top-10 global freight forwarders, top-15 container shipping companies and leading RoRo operators; has been a board member of a large logistics company in the UK.
Hobbies: Cycling, running, theatre, music, history.