Over the last year, we have acted for both suppliers and customers of logistics services and one of the main issues that crops up time and time again as part of contractual negotiations is liability.
Under any type of contract, a party will want to limit to what extent they will be liable to the other party for losses the other party incurs which are attributable to that first party. Logistics contracts are no exception.
The risk of loss of or damage to the goods
One of the types of losses most likely to arise under a logistics contract is loss of or damage to the goods. This could arise either whilst the goods are in transit or when being stored at the supplier’s warehouse.
From the customer’s perspective, its goods are one of its most valuable assets, so it will be of vital importance that it protects itself against any loss or damage caused to the goods whilst the supplier is performing the services.
From the supplier’s perspective, it will be aware of the customer’s concerns about the safety of the goods whilst they are in the supplier’s possession and will be keen to limit its liability in respect of any loss or damage caused to the goods but also to mitigate against such loss or damage occurring in the first place.
Storage and handling instructions
One way in which both parties can seek to reduce the risk of damage being caused to the goods is agreeing on how they will be stored and handled during transportation. To this end, the customer will usually include a clause in the contract which requires the supplier to comply with its instructions in relation to the storage and handling of the goods.
The supplier will often have no issue with agreeing to such a clause, but, in the interests of certainty for both parties, it is useful if such instructions can be recorded in writing, typically in some form of policy appended to the contract.
The customer should also share such storage and handling instructions with the supplier well in advance of the start date for the contract. In this way the supplier has time to familiarise itself with the customer’s requirements and implement any changes to its existing policies and procedures in order to ensure compliance.
From a practical perspective, consideration should be given to:
- at what temperature the goods can be safely stored;
- under what atmospheric conditions the goods should be stored;
- how long the goods can remain in storage;
- whether the goods need to be labelled so as to distinguish them from other similar goods;
- the strength/resilience of the goods, for example:
- can they be stacked in large numbers;
- can they be stored underneath other goods;
- when being transported, do they need to be held a certain way up, handled with care or cushioned by protective cladding.
Tracking and reporting
With a view to reducing the risk of losing the goods, the supplier will often be required to carry out stock checks on the goods it has in its warehouse and report the results to the customer. The customer will also want to include a right in the contract for it to enter the supplier’s premises to carry out its own stock checks on the goods from time to time. However, the supplier will want to restrict this right as much as possible to avoid causing disruption to its business operations.
Consideration should be given as to what should occur in the event that there are any discrepancies in the amount of goods held by the supplier against the amount of goods the customer requires it to hold or store, with whatever is agreed being reflected in the contract, for example:
- will the supplier be required to compensate the customer for any discrepancy, or will it be allowed some leniency if the discrepancy is less than, for example, 3% of the total goods. This will be particularly relevant when the supplier is storing liquid/gaseous goods which could be subject to natural evaporation or leakage.
- where the supplier is required to compensate the customer, will this be done by a service credit being applied against the supplier’s next invoice or will the supplier simply have to make a payment to the customer;
- in the event of significant and/or repeated loss of goods, would the customer want to have any additional remedies at its disposal, for example, the ability to terminate the contract or appoint a third party to perform the services at the supplier’s cost.
To avoid or reduce the amount of physical stock checks the supplier must carry out or be subject to, the supplier may wish to invest in technology that allows the customer to remotely monitor the stock levels of its goods within the supplier’s warehouse and track orders as they are made and responded to on the supplier’s database. The supplier will need to ensure that the appropriate licences are in place in order for it to allow the customer to do this.
Of course, even the most prudent of parties cannot always prevent loss or damage being caused to the goods. In such circumstances, the contract will need to set out the extent of the supplier’s liability for loss or damage to the goods. These provisions are often heavily negotiated.
The supplier will often seek to limit its liability for loss or damage to goods to a fixed amount per tonne or per kilo, whereas the customer will wish for the supplier’s liability to extend to the actual value of the goods per tonne or per kilo. The disparity between these two figures can be the subject of intense negotiation and disagreement, although there are ways the parties can resolve this.
The obvious way to do this is through insurance. The supplier may be prepared to obtain insurance to cover the additional risk up to the liability cap the customer wishes to impose under the contract. This will give the customer the protection it requires, although the supplier will likely seek to pass the cost of obtaining such insurance onto the customer by way of an increase to the charges.
Alternatively, the customer will often find it is cheaper to insure the goods itself by extending its own insurance cover – this also has the added benefit of allowing the customer to take control of any insurance claims that need to be made in respect of lost or damaged goods. Before agreeing to do this, the customer will need to confirm with its insurance broker whether it is willing to insure the goods whilst they are in the possession of a third party.
If the parties agree to effectively share liability for loss or damage to the goods by the supplier obtaining insurance up to a certain amount and the customer obtaining insurance for anything in excess of this amount, then the agreement will need to be drafted to reflect this.
The customer could also seek to move the supplier away from attempting to link its liability to a fixed amount per tonne or per kilo of the goods. This might be where the goods are light in weight but valuable (for example, jewellery or CDs/DVDs) and the sum the supplier is likely to propose will not represent the true value of the goods in question. In such cases, the parties could agree to limit the supplier’s liability to a fixed sum, to be agreed between the parties. Again, what is a reasonable sum is a matter for negotiation, but approaching liability in this way may result in a more balanced position for both parties.
The potential losses which can arise from lost or damaged goods under a logistics contract is an important matter which needs to be given significant consideration by both parties, both from a practical and legal perspective. However, negotiations can become protracted and put potential deals in jeopardy or leave one party working at a disadvantage under a contract.