Third-Party Logistics & Contractual Complexity: Navigating enhanced liability

In a hardening insurance market, understanding obligations and legal responsibilities are crucial for businesses, yet third-party logistics (3PL) contracts may be rendered or difficult to navigate due to the growth of ‘enhanced liability’ EL clauses.

In a hardening insurance market, understanding obligations and legal responsibilities are crucial for businesses, yet third-party logistics (3PL) contracts may be rendered or difficult to navigate due to the growth of ‘enhanced liability’ EL clauses. In a business-to-business contract, each party has different expectations and obligations — one side pledges to offer a service and the other offers payment in exchange. What is common to both parties, however, is the mutual desire to protect the business from risk in the form of financial loss, reputational damage, or business interruption. If we apply these principles to 3PL contracts, cargo owners have a vested interest in protecting their assets from damage or loss by including EL clauses to shield themselves from liability in the event of a peril. An EL clause acts in this context as a risk redistribution device, as the cargo owner transfers the risk away from its own balance sheet and onto the freight forwarder while the goods are in their possession during transit.

Certain guidelines are already in place to safeguard 3PLs. Standard Terms and Conditions (STCs) of trade – as set out by industry bodies such as BIFA and RHA[1] – outline standard terms of service that are well known within the industry, and which allow freight forwarders to limit their negligent liability to a fixed monetary value per unit of weight. However, unwitting logistics service providers are at risk of accepting  ‘all-risks’ EL clauses, which would overrule the STCs and result in the carrier assuming full responsibility for physical damage or loss to cargo. As a result, the freight forwarder is vulnerable to increased operating costs, jeopardised claims performance, and reputational threats stemming from potential incidents following poor packing or stowage, for example.

How could logistics service providers adapt to the new risk environment?

While the threats of all-risks EL clauses may appear daunting, all is not lost for the service providers who identify these terms and establish contractual ‘guard rails’ to mitigate the risk. Negotiation and transferring the risk through the use of insurance are the primary solutions available to 3PL companies, which can be considered both in isolation and conjunction when entering into a new contract.

Shipper’s Interest Cover, which mirrors the principles within marine cargo insurance policies, allows freight forwarders the opportunity to offer insurance to cargo owners who are placing the goods in their care custody and control for the full value of goods carried. Although the cover is governed by the Institute Cargo Clause A – the most comprehensive form of cover – exclusions will still apply; for example, the risk of inherent vice in the cargo itself. In the instance of these residual business risks, service providers must come to an explicitly stated contractual agreement with the cargo owner as to who will be liable and in which circumstances. Amongst these terms, instructions for the storage and handling of goods should be established, to avoid responsibility for inherent vice.

The sector’s lean margins place mounting pressure on 3PL companies to offer competitive rates, yet the procurement of Shipper’s Interest cover may increase the customer’s quote, depending on the freight forwarder’s incurred costs. Where cargo owners decline the provision of this insurance, negotiations will become even more crucial to establish contract certainty, and it may be prudent to seek legal advice.

Our Key Three Takeaways

  1. Perform a risk assessment. The revenue earnings should be the first consideration of a 3PL company before any contractual amendments are made. Certain freight forwarders may have the appetite to accept all-risks EL clauses with little to no insurance protection or negotiations, whereas others may be strongly averse to the risk. When finalising the contract, consider whether the income gained outweighs the potential cost of liability and whether the company can afford to pay out in the event of a peril.
  2. Procure protection through risk transfer. Many companies will conclude that purchasing Shipper’s Interest cover makes the best economic sense for their particular business model. In this instance, the variable rate for the deal should be discussed with the customer, along with any further negotiations of EL clauses.
  3. Consult the experts. Lawyers with expertise in negotiating marine contractual liabilities and handling the arising claims can advise on terms and wordings to ensure that all parties achieve contract certainty and understand their respective liability requirements.

Unsurprisingly, the discussion around enhanced liability clauses has become more prevalent over the last decade, as cargo owners react to an increasingly volatile risk environment and seek ways to protect themselves. However, the complexity of navigating liability terms and the associated potential risks highlights the value of achieving contract certainty through in-depth communication. Transferring risk through insurance remains a viable option for many freight forwarders – however, well-established risk management strategies and diligent negotiation will always be the first line of defence.

[1] BIFA - British International Freight Association /  RHA - Road Haulage Association

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