For many businesses, an
efficient logistics supply chain is a key indicator of its overall
profitability and ongoing success. The ability to get the goods to
market is paramount!
Many supply chains incorporate both the domestic and international
carriage of goods and warehousing. Each of these three aspects is
complex and together they touch on numerous areas of the law. When
structured correctly, both transport and logistics providers and
their customers benefit from long term relationships that provide
stability to their respective businesses.
All issues, both commercial and legal, can be negotiated when the
parties sit down to discuss a supply chain contract. Below are some
of the key legal issues that commonly arise when contracts are
considered.
Exclusivity
Most supply chain contracts are
concluded on the basis that the customer appoints the carrier
exclusively. This is acceptable provided that sufficient safeguards
are built into the contract to allow the customer to use an
alternate provider in certain circumstances. Examples of when a
customer may need to 'step outside' the contract include when a
force majeure event (act of God) impacts on the ability of
the carrier to perform the contract or when the customer requires
the carrier to transport or store goods or provide services for
which it does not have the capability.
Having a mechanism built into the contract enables the parties to
set the parameters of their relationship and avoid disputes. Most
importantly, it also means the customer's business does not grind
to a halt.
Price review mechanism
Supply chain contracts commonly operate
over several years and therefore, it is usual to have a review of
performance and rates during the course of the contract. Some
options for rate reviews include an agreed formula, a fixed
percentage increase/decrease, a CPI adjustment, determination by an
independent third party or a performance based KPI review. Agreeing
in advance on the basis for conducting rate reviews can minimise
disputes and provide certainty for both parties.
Chain of Responsibility
The introduction of 'Chain of
Responsibility' laws means all parties in a supply chain that
contribute to a loss are likely to bear some responsibility. A
service provider is primarily liable to ensure its employees and
agents comply with all relevant laws. However, if the customer
places demands on the service provider (such as requiring it to
meet unreasonable delivery windows), this may result in the carrier
breaching other laws (such as occupational health and safety
requirements) and, if an incident or loss occurs, the customer may
be held liable (with or without the carrier) for any injury, damage
or loss that results.
From the carrier's point of view, having a clause in the contract
requiring the customer not to make unreasonable demands may allay
concerns. On the other hand, a customer may want to insert a
warranty from the carrier that it will comply with all relevant
laws in providing the services. Finding a balance between the
parties on this issue is very important.
Indemnity and insurance
Understandably, carriers will attempt
to limit their liability as much as possible while customers will
try to push liability on to the carrier wherever possible. Often,
the middle ground will be to delineate those circumstances in which
the carrier (and any of its subcontractors) is directly liable (for
example, in the case of wilful misconduct or reckless or negligent
acts or omissions).
Liability for indirect and consequential losses is also a common
sticking point between the parties. Carriers will generally seek to
exclude these losses because they represent potentially large
contingent liabilities. However, for customers, indirect losses can
be substantial and an important part of their business. One
solution is for the parties to agree to minimum and/or maximum
claim amounts before any consequential losses may be covered.
For both parties, it is important to ensure appropriate insurance
is in place and to have their respective insurers examine any
contract before it is executed in case the terms of the proposed
contract result in rights of subrogation being lost under insurance
policies.
Exit arrangements
It may seem odd to be determining an
exit strategy for the contract before it has even begun, but
working through these issues up front often assists with an orderly
transition on the termination or expiration of the contract and can
result in less disruption to both parties' businesses.
We often suggest parties map out a process for the orderly handover
of the customer's goods, records, information and premises (if
applicable) to ensure the business of the customer is not adversely
affected.
It is also useful to consider whether the parties can terminate the
contract if certain events occur. One example is a situation where
the parties fail to agree on new rates. Having the process and a
workable timeline set out will assist the parties to ensure
termination is as amicable as possible.
Dispute resolution
There are occasions when the parties
need to resort to formal means to settle issues arising during the
term of the contract. Agreeing to a procedure to settle disputes
can reduce the likelihood of the parties heading directly to court,
which is costly and unlikely to foster a workable ongoing
relationship (although an appropriate provision allowing the
parties to go to court for urgent interlocutory relief is
advisable).
We often see parties agreeing to an internal process by which a
dispute is referred to more senior personnel within each business
to try to resolve the issue commercially. It is also important to
put timeframes in place so the process does not drag on.
If the internal process fails to defuse the dispute, mediation can
be a useful next step. A mediation clause typically specifies
timeframes, selection of a mediator, how the mediation is
conducted, the costs involved and confidentiality. In some cases,
particularly in international freight contracts, arbitration may be
the preferred means of dispute resolution.
Summary
The issues set out in this article are
examples of common 'negotiation' points in supply chain contracts.
If the parties address such issues at the start of their business
relationship, they may be better placed to avoid protracted or
costly disputes later.