Logistics Contracts Explained (Part 2): Key Contract Terms, Payment and Liability

This is the second part of a two-part article examining key aspects of logistics contracts. Part 1, which explores common logistics contract scenarios, can be accessed here. In this article, we consider a number of recurring legal issues and provide practical guidance for logistics providers when entering into, managing and negotiating logistics contracts across those scenarios.

As with all commercial agreements, logistics contracts are highly fact-specific and depend on their individual terms. The guidance in this article is therefore intended to provide general principles only in several key areas. Our specialist logistics and commercial contracts team can advise on the specific risks and obligations arising under individual logistics contracts, and would be pleased to discuss any issues you may be facing – please contact us using the details below.

How long is the contract for?

Informal/one-off contracts: many logistics contracts which are not based on a formal written agreement are for a single job only where the duration of the contract will be only for as long as it takes that piece of work to be undertaken. 

Specific written agreements: specific written agreements tend either to have fixed periods (e.g. a 12-month contract) or rolling notice periods (where the contract will continue until terminated by a period of notice provided for in the contract).  Written contracts often have provisions which enable them to be terminated before their set contact period expires for breach of the contract or, for example, if ownership of the provider changes hands.  Logistics providers should ensure that termination provisions are fair and even-handed.  For example, rights to terminate for breach should be available to both parties, and not just the customer, be for serious or persistent breach only, and include a right to terminate for non-payment or persistent late payment.  Providers should look out for:

• clauses which allow only the customer to terminate the contract early by giving notice during the contract period;
• termination rights which unfairly favour the customer; and
• automatic renewal terms under which the contract continues for another, fixed period on the same terms unless terminated by notice which has to be given no later than a set date before the fixed period expires.

When will the logistics provider be paid and how can prices be increased?

Informal/standard industry terms contract: in an informal contract or a contract on industry standard terms only, time for payment will often be agreed by email or phone call.  If there is no other agreement, payment on an informal contract will need to be made within a reasonable time.  If industry standard terms are used, time for payment will be as set out in those terms.

Specific written agreement: in a specific written agreement, time for payment and rates will usually form part of the contract’s terms.  Logistics providers should ensure that:

• there is an effective ability to negotiate rate revisions periodically and an ability to exit the contract if they cannot be agreed;
• there is an entitlement to automatic rate increases to cover increases in fuel costs;
• the time for payment of invoices is appropriate and that the customer does not have the right to withhold payments inappropriately in the event of any dispute; and
• any contract which is on an open book basis should include all relevant categories of cost as recoverable and that any clawback mechanism is fair and proportionate.

Liability Limits

Informal agreements: perhaps the most significant disadvantage of an informal agreement is that it will not include any effective limitations of the logistics provider’s liability.  This means that if things go wrong, there will not be any contractual restriction on the type of claim that can be brought, the damages that can be recovered or the time in which a claim must be bought.  This is likely to expose a provider to the risk of substantial uninsured losses. 

Industry standard terms agreements: trade associations such as the RHA, BIFA and UKWA all include limitations of liability in their standard terms.  These not only protect the logistics provider but will also be likely to have a direct correlation with the provider’s goods in transit and other insurance cover. 

Specific written agreement: in a specific written agreement put forward by a customer, it would not be unusual for its terms, if they include limitations of the provider’s liability, to extend them beyond industry standard limitations.  Care should therefore be taken by providers to understand the liability position put forward and to negotiate appropriately.  A frequent compromise is for industry standard terms limitations to apply but with agreed extensions to the financial claim limits.  Any agreed position should be carefully checked against insurance cover to ensure that there is no liability gap.

Key Performance Indicators

Specific written agreements: KPI’s are likely only to be of significance in longer term logistics contracts.  In essence, they will set out a series of requirements (for example, in relation to timing of collection and delivery) which will be regularly measured throughout the life of the contract.  If the provider fails to comply with them at any time that they are measured, the contract will set out the consequences of that non-compliance.  Typically, those consequences will vary from price reductions or reimbursement obligations on the provider to, at their most extreme, contract termination.  Providers will need to ensure that they read and negotiate KPI’s carefully so that they are confident that KPI’s will be readily deliverable and that they are familiar with the consequences of failing to meet any KPI’s.  Any KPI’s which are not reasonably achievable or any consequences of failure to meet them which are unfair or disproportionate should be negotiated. 

TUPE

Specific written agreements: under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE), if a contract comes to an end, the employment of those who are engaged by the outgoing service provider wholly or mainly in the provision of that service can be automatically transferred to the successor provider.  In general, any liabilities arising from that earlier employment would also transfer to the new provider.  This means that employees can be automatically transferred into a logistics provider on their taking over an existing contract or the provision of a service which is newly contracted out, and they can be automatically transferred out of the provider if the contract ends.  Contracts for activities of this nature are frequently drafted by customers and they often provide for TUPE transfers and how they are dealt with between the parties in a manner which is more protective of the customer than the provider. 

It is not unusual for customers to draft contracts to include limitations on who can be employed in the service and both restricting any changes to their terms and imposing obligations on the provider to provide information about relevant employees on an ongoing basis in the latter stages of the contract.  They can also set out substantial indemnities in relation to matters which concern those employees, their employment both before and after the transfer and in relation to the overall transfer process. 

Providers should:

• ensure that they are protected against an influx of employees in circumstances where they are unaware either of their identity or the terms on which those individuals are employed;
• ensure that provisions relating to potential transfers of employees out at the end of the contract are fair and proportionate between the parties; and
• ensure that the customer indemnifies the provider against unexpected transfers, any liabilities arising from a transferring employee’s employment pre-transfer and the failure of the provider or the predecessor contractor to comply fully with the TUPE regulations.

Contact us

If you are a logistics provider navigating contract terms relating to payment, liability limits, performance obligations or TUPE, Ian Waine, Senior Partner at Prettys, provides specialist legal advice on logistics contracts and wider commercial agreements. Ian regularly advises on reviewing, negotiating and restructuring logistics contracts to manage risk and ensure terms remain commercially workable. You can contact Ian at iwaine@prettys.co.uk.

You can view our full range of legal services for the logistics sector here