Contracting with Transportation Intermediaries Practical Considerations and Formal Contracts

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1 Contracting with Transportation Intermediaries Practical Considerations and Formal Contracts Josh Hoyle AFN, LLC

2 Practical Factors to Consider Operational What is the broker s operation like? How does it find motor carriers? What are the various departments of the company and their functions? What kind of load management software system does it use? How are particular carriers selected by the broker for particular loads? To what extent does cost determine which carrier the broker will use, and to what extent are other factors considered? Which department makes those decisions? Medium and large freight brokers hire several thousand motor carriers per year. Although shippers tend to view a broker as a single carrier, it s important to remember that brokers represent a conglomeration of many carriers and, by definition, don t drive the trucks. 2

3 Practical Factors to Consider Carrier Compliance To an extent, a transportation intermediary is a reflection of its business rules for carrier compliance, i.e., the criteria the carrier must meet to be utilized by the intermediary. CARRIER COMPLIANCE STANDARDS Basic Safety Authority Insurance Contracts Advanced Searches for related entities, chameleon carriers, etc. Analyses that reveal fraudulent companies. For example, is there proof of the FMCSA having inspected the carrier? Does the intermediary have different criteria for carriers that haul different types of commodities? Does the intermediary administer their carrier compliance criteria itself, or does it outsource the task? And what type of carrier monitoring service does it use? 3

4 Practical Factors to Consider Effects of Carrier Compliance Policies A broker may decide to only require motor carriers to have active operating authority, DOT-mandated insurance, and to not have an Unsatisfactory safety rating. Does this increase the shipper s exposure to undesirable situations and liability relative to a broker that does deeper analysis? Scenarios to think about include thefts, delayed deliveries, double brokered loads. If having a criteria for usable carriers is important, then it also seems important to take measures to prevent double brokering. Once a load has been brokered/subcontracted by a carrier hired by a broker, the broker has not done any examination of the carrier actually transporting the load. 4

5 Practical Factors to Consider Freight Claims Handling How does the intermediary handle loss and damage claims? Does it simply forward the claim to the underlying carrier and see what happens, or does it take other measures to ensure valid claims are paid? Does the intermediary have a Freight Claims Department that specializes in dealing with carriers and their insurers in loss and damage situations? Broker Cargo Insurance and procedures when underlying carriers deny freight claims. Setoffs: Shipper-Broker and Broker-Carrier Useful information: Broker s average days to resolve claims, claims ratios and policies 5

6 Practical Factors to Consider Overage, Shortage, Damage (OSD) Incidences Does the intermediary have a department dedicated to handling these situations? Intermediaries interest in preventing freight claims can coincide with shippers interest in having efficient shipping procedures. Positive Broker-Carrier relationships help shippers avoid damage claims in refused freight situations. Useful information: OSD ratio, proportion of damage and shortage incidents reported by carrier to broker. 6

7 Practical Factors to Consider Freight Security Brokers and carriers may cooperate to promote cargo security. Broker may require carriers to drive X number of miles after leaving shipper before stopping. Broker may vet any storage yards being used. Do any security policies the intermediary uses apply to all loads, or only certain commodities, or only loads above a certain value? Tracking devices; some intermediaries have their own. Positive Broker-Carrier relationships and communication help shippers avoid thefts. How are security and other special instructions communicated by broker to carrier? Verbal? By whom to whom? Written Rate Confirmation Sheet? 7

8 Freight Transportation Contracts Overview It s important to have some idea of what you want in your contracts with your transportation providers, based upon your experience and knowledge. Transportation lawyers can write the agreements and protect you as best as possible from unnecessary liabilities and unwanted risks, but it s up to each individual company to determine what they want to ask and require of their business partners. Think about: What kinds of carriers do you not want to haul your loads? What failures might make you refuse to pay an intermediary? What promises might you make in exchange for benefits or discounted rates? 8

9 Freight Transportation Contracts Contract Terms and Conditions Terms Most transportation contracts that do not guarantee business to the provider automatically renew each year, with the ability to renegotiate rates and anything else prior to each term. If you think you might want to drastically change your contract terms in the near future, it might make sense to have the contract terminate at the end of the first term. Prohibition of Co-Brokering There s nothing wrong with co-brokering (one broker subcontracting to another broker) But, if you re impressed with the broker s ability to find, hire, and maintain good relationships with carriers, co-brokering would negate all of that. 9

10 Freight Transportation Contracts Contract Terms and Conditions Carrier Requirements Insurance. Most motor carriers have a $1 million Automobile Liability insurance limit and between a $100,000 and $250,0000 Cargo insurance limit. General Liability insurance, in the motor carrier context, does not have much to do with trucking operations. (If a shipper is contracting with a broker, it s the broker s liability insurance that will cover the broker s indemnity obligations.) Length of time in business Prohibition of double brokering by carriers Prohibition of carriers seeking payment from shipper Safety Ratings. Satisfactory/Conditional/Unrated. The large majority of motor carriers in the country are Unrated. Possibility of further inquiry language with regard to both Unrated and Conditional motor carriers. 10

11 Freight Transportation Contracts Contract Terms and Conditions Cargo Liability Brokers may assume primary, or motor carrier, liability for freight loss and damage. Broker Insurance Requirements Shipper s Interest vs. Contingent Cargo and limits Logistics Liability/Contingent Auto and Excess Liability coverage and limits Indemnification for lawsuits stemming from truck accidents involving bodily injury/death/property damage Payment terms including supporting documentation, possible setoffs, and chargebacks Indemnification for freight charges owed to carriers, surety bonds, performance bonds Procedures that are specific to the shipper s products, situation, relationships to, and agreements with its customers. For example, food shipments and difficulties associated with seal and temperature discrepancies. 11

12 Freight Transportation Contracts Guaranteed Business Benefits for both sides Convenience and reduced rates for shipper Guaranteed revenue for broker How much business do you want to guarantee? Full outsource? Only certain modes? Only non-expedited shipments? Only loads going to a certain customer, etc.? What about spot quote loads? Term and termination, early termination fees, causes include: Failure to pay by shipper Failure to achieve overall cost savings Failure to meet certain performance standards (on-time pickups and deliveries, claims ratios, e.g.) by broker 12