Logistics Contracts: The 10 Commandments from the Perspective of the Logistics Service Provider (Part 1)

The proper drafting of logistics contracts is a complex task. To some extent one can rely on (mainly your own) sample agreements. Nevertheless, each contract has to be viewed and drafted individually.

As a general rule, the company that is seeking logistics services (Buyer, Principal) will conduct a tendering procedure and submit its own sample agreement from which the service provider may only deviate to a limited extent. Quite often these sample agreements are drafted in the English language and have been approved by the Buyer´s legal department. Particularly in those cases it is important that the logistics service provider knows what he is up to.

The most promising project may become a disaster if it cannot be carried out profitably or if it entails incalculable risks of liability!

From the perspective of the logistics service provider, the following 10 aspects are of particular importance:

1. Services must be described accurately and conclusively

The logistics service provider should make sure that the services he is supposed to render are accurately and conclusively described in the contract or its attachments. He must know what is expected of him and which services levels he is supposed to achieve. As a rule, the company seeking logistics services will place the utmost importance on the fact that the remuneration is fixed and may not be increased during the term of the agreement. The same should therefore apply for the description of the services.

If you agree on certain service levels, which is often inevitable, the logistics service provider should ask himself if he is really capable of fulfilling the service levels always and during the whole term of the agreement. If he lacks certain experience within a particular field of business, it is advisable that there are no sanctions during the first 3 or 6 months if the service levels are not met.

2. Adjustment of remuneration

Companies seeking logistics services (Buyers, Principals) always argue that they need fixed prices for the whole term of the agreement. For the logistics service provider on the other hand, the problem is that his price calculation often depends on statements he received during the tendering procedure, for instance quantities, amounts, timelines and so on. If you take a closer look at the tendering documents, it is often the case that the Buyer does not make any promises and does not give any guarantees with respect to these factors, but that they are often kept quite vague. More often than not those decisive factors are explicitly described as non-binding. In this case, the logistics service provider cannot rely on such figures. For calculation purposes, however, it makes a great difference whether for instance 10,000 parts have to be stored and picked per month or, which is often the case with certain products, there will be 15,000 parts in November (holiday season, Christmas) and only 3000 parts in May. Under German law, section 313 of the German Civil Code may offer some help for the logistics service provider. But this is in no way certain. It is always better to take care of that problem during the process of contract negotiation, for instance by agreeing on certain amounts and quantities as basis for the calculation of the remuneration.

3. Adequate limitation of liability

Logistics contracts are a mix of certain standard type contracts. They contain elements of storage contracts (sections 467 et seq. of the German Commercial Code) and of course and above all elements of service contracts. The latter particularly applies to pick and pack services. Those different legal frameworks contain different rules of liability. The warehouse keeper will always be liable for loss and damage to the goods as long as they are in his custody. This liability is basically irrespective of culpability and usually unlimited, unless it can be proven that the damage would also have occurred if the care of a diligent businessman had been applied. Liability is such implied.

In case of transport, on the other hand, liability is limited by law (see sections 425 et seq. of the German Commercial Code). Particularly section 431 Commercial Code states a maximum amount of liability. But in this context one must be aware of the fact that big players usually demand that such limitations of liability shall not apply. In this case it is particularly important that the logistics service provider is in close contact with his liability insurance carrier to make sure that all potential damages are covered by his insurance policy. Those damages may include penalties and third-party damages, but be sure that those types of damages are not excluded from your insurance policy.

4. Liens and right of retention

German law gives the logistics service provider the right to retain goods if the Buyer does not pay the bill. Those liens and rights of retention are both laid down in the commercial code as well as the standard conditions of forwarding companies. Problems may arise if the goods are not owned by the Principal but by a 3rd party, or if the title to the goods has already been transferred to a financial institution. Liens and the right of retention are important tools to make sure that the remuneration is paid fully and in due time.

5. Term and termination

If the logistics service provider has to invest a considerable amount of money in order to equip the storage capacities for the particular purposes of a contract, he should make sure that the minimum duration of the contract is long enough in order to make this investment worthwhile. In this context, it would be particularly dangerous to agree upon special termination rights that allow the Principal to terminate the contract prematurely, for instance if certain service levels are not met. By doing so, the logistics service provider may become dependent on the Buyer‘s goodwill. The solution may be that the Buyer has to bear a part of the investment cost if the contract is terminated earlier than aggreed. On the other hand, one must not forget that the right to terminate a contract with immediate effect if there is an important reason, that is termination for cause, must always be possible under German law.

(Part 2) will follow

The comments above give an overview of the issues that should be taken into consideration when drafting a logistics contract. Of course, logistics service providers are often under pressure to secure a deal in order to make full use of their storage capacities. In tendering procedures, the logistics service provider is often in the situation that he must quote a good price to get the contract. Sometimes the good price is even a prerequisite in order to stay in the bidding process. Nevertheless, you should always bear in mind: Not entering into a contract (=No contract) may sometimes be better than a bad contract that will create losses for a number of years if the calculation has been wrong or overly optimistic or because the risk of liability has been underestimated or simply ignored.

Dr. Wolfgang Gottwald
Attorney at Law