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CONTRACT CARRIAGE AGREEMENTS

MATCHING EXPECTATIONS AND DELIVERABLES
Co-Authored, Rayovac

Executive Summary

Freight transportation in the United States under went an important change on January 1, 1995. Practices and procedures associated with freight transportation, except for safety, would now operate in an open or market driven environment because the Interstate Commerce Commission (ICC) and the respective state regulatory agencies (DOT’s) were terminated. Notwithstanding the fact that the rules and regulations of the past were eliminated, the operating environment, mindset and fundamental principles remain as the viable structure and frame of reference for freight transportation. The areas of greatest change occurred with the significant increase in the number of carriers and the “blurring” of the former distinctions.

Freight transportation together with its associated and attendant issues, in the United States, continues to modify their performance and behavior. Freight transportation is in the public domain; and because neither appropriate transition plans nor impact was sufficiently considered by the Motor Carrier Act of 1995, the subsequent void continues to cause the current operating posture to be subordinated to historical processes and practices.

The purpose of this white paper is to provide a method of approach for the development of Contract Carriage relationships. Of equal importance is to provide a process to assure that such contractual relationships achieve the parties “expectations and deliverables”. Simultaneously, the differences between the types of motor freight transportation in the United States will be examined.

Click here to read the entire paper

Contributor

RAYOVAC

Rick Kindle, Director – Global Traffic and Distribution for Rayovac Corporation is a seasoned veteran with thirty (30) years of experience in transportation. His professional career has spanned six (6) companies with products ranging from Glass, Vacuum Cleaners, Pool and Spa heaters. Mr. Kindle holds a B.S. in Business Administration with his major concentration in Transportation from East Tennessee State University. Rick is an active Member of the Transportation Consumer Protection Council (TCPC).

RAYOVAC is one of the world’s largest consumer battery and lighting device companies with revenues of over $1 billion. Rayovac products are sold in more than 115 countries. The company also markets the number one selling rechargeable brand of battery in the U.S. and in Europe and is the world leader in hearing aid batteries.

Global headquarters are located in Madison, WI. with manufacturing facilities located in Wisconsin, Latin America, United Kingdom and Europe. In addition, the Company maintains Distribution Centers in Illinois, Tennessee, California, Canada, Latin American, United Kingdom and Europe.

Historical Overview

Between August 9, 1935 and January 1, 1995, there were three (3) forms of freight motor carriage recognized in law:

1. Common Carriage was defined as a carrier that held themselves out to the general public to perform the transportation and related services that were identified in their grant of authority. Such authority was issued by the Interstate Commerce Commission or the various state regulatory agencies. Corresponding tariffs were maintained at those agencies and other legally and lawfully demanded locations, such as terminals.

2. Contract Carriage was defined as performing dedicated transportation services for up to nine (9) separate shippers, pre-1983 and an unlimited number post 1983, in accordance with a required permit that was obtained from the same agencies described above. A continuing contract together with a “schedule of minimum rates and charges” was kept on file at the granting agency as well as at other legally and lawfully demanded locations, such as the shippers’ and carriers’ facilities.

3. Private Carriage was defined as performing transportation services “in the furtherance of the primary business enterprise”. As an example, a manufacturer or distributor that transported their products in company registered equipment and whose drivers were under complete dominion and control of the manufacturer or distributor.

The descriptions of motor carriage today clearly resemble the descriptions of yesterday; the primary difference resides in the fact that the legal structure that surrounded those descriptions no longer exists in a primary forum, the former ICC and the DOT’s.

Common vs. Contract Carriage

While there are a number of differences within Contract Carriage, pre and post 1995, the fundamental differentiator still exists today. Contract Carriage is a dedicated transportation service whereby the shipper and carrier agree to conduct their business relationship on the basis of a very specific set of business rules and obligations, including, but not limited to levels of liability, all of which are uniquely negotiated. Common Carriage relationships exist generally and their operating activities are applicable to all shippers and receivers alike; liability is universal amongst all. However, the defining lines between Common and Contract Carriage since de-regulation have been significantly blurred.

Contract, Common and Private Carriage

Notwithstanding the dramatic change in 1995 from a governmental regulated atmosphere to a market driven environment, today’s freight transportation culture and operating considerations bear a strong resemblance to those that were in place during the era of transportation regulation. Clearly, time continues to test the historical operating style and practices, however, the body of law that formed the frame of reference for disputes remains, although in a new forum.

Because of the well settled Motor Carriage body of law established during the era of regulation, and because the historical mindset, fundamental principles and culture are in transition, it would be prudent to model current Contract Carriage Agreements consistent with that frame of reference. The Contract Carriage Agreement model may vary only slightly from its predecessor, but its surrounding body of law remains and it has been tested. It continues to operate in a known environment that has reasonably clear issues and resolution paths. Additionally, this method of approach carries with it operating styles, methods and perspectives that have proven to be reliable and predictable.

Platform and Focus

The doctrine of Stare Decisis, “to abide by or adhere to, decided cases” (Black’s Law Dictionary) is the basis upon which adversarial and statutory issues are decided. Decided cases are the platform and focus that are the underlying body of law for processing current and future legal contests. Likewise, by utilizing historical decisions as a basis to determine current processes and relationships, reasonable conclusions can be forecasted from predicable issues. By invoking the principles and fundamentals from decided cases we are enabled with a logical process upon which to form reasonable opinions and subsequent decisions.

With the demise of the ICC and the DOT’s, both of which are properly described as quasi judicial agencies, that body of associated case law remains as the platform and focus because it is the primary library of decided freight transportation issues and contests. In further support of modeling current Contract Carriage Agreements and relationships consistent with this body of transportation case law, we must first recognize that Contract Carriage legal issues were, for the most part, decided within the quasi judicial agencies, but cases could and did move between these quasi judicial agencies and the general courts under the “rule of primary jurisdiction”; next, we must recognize that both shared the same case law. With the courts of general jurisdiction as the only available transportation forum since 1995, we still have the same historical basis, continuity and body of case law through which transportation contests will be decided. Thus, it is reasonable to conclude that modeling current Contract Carriage Agreements and relationships after those that occurred during the 60 years of regulation is an appropriate method for today’s considerations.

Description of Contracts

A contract, generally speaking, is the representation and culmination of the negotiations and deliberations of the parties. At some point, the appropriate information is reduced to a writing; this form best addresses any questions or issues that might arise as well incorporating the basis for the “best evidence” rule. Contracts do not have to be written, but written contracts are best suited for transportation agreements because of the complex nature of the agreement. Further, written documents form a more definitive record and reference than an oral contract and referring to a document is mutually beneficial.

Contracts should be concise and mutually understood by the parties. Should a dispute occur, any interpretation by a third party could be unsatisfactory and possibly not beneficial to either party. Once established, the parties could test those conditions that maybe subject to interpretation. An exchange of correspondence could address those conditions and then serve as support should the issue ever arise. The advantages of having a “standard agreement” are manifold, not the least of which is the elimination of having to go through the developmental process more than once. With a standard agreement, perhaps with simple modifications such as in the specific requirements area, over time you establish an agreement that has withstood the tests of time and use.

Another condition that should be taken into consideration when developing a contract is that the burden of achieving mutual understanding is placed squarely on the shoulders of the writer. As such, any disputes involving interpretation would probably be resolved in favor of the other party.

There are many forms or types of contracts, as an example, sales contracts, property contracts and transportation contracts. Each form or type carries with it its specialized laws and unique requirements. Contract Carriage Agreements are required to contain the same fundamental legal elements, such as consideration, that any other legal and lawful contract is required to contain.

Without any equivocation whatsoever, it is strongly recommended that appropriate counsel should be sought when developing any legal instrument and therefore, the information contained herein is for the sole purpose of providing general information and not for the purpose of conveying information of a legal nature.

Transportation Contract Distinctions

The genesis of Contract Carriage Agreements have their roots in the formal legal structure of general contracts, enhanced with the addition of those special transportation issues that arise at the time a carrier and shipper agree to dedicated transportation services.

Freight transportation recognizes, at least, two distinct types of contracts: “Legal Terms”

The Bill of Lading Contract is a Contract for carriage that addresses a “single shipment”, it cannot not stand in the place of Contract Carriage Agreement; it is also receipt for merchandise.

Contract Carriage Agreements are for the purpose of creating a long term or “continuing contract” covering multiple shipments and they do not act as a receipt for merchandise. The Contract Carriage Agreement should not be used as a Bill of Lading.

This distinction and use of the transportation contracts are critical because they serve entirely different purposes; they are not interchangeable.

Contract Carriage Agreement Elements

The specific contract elements that were required during regulation so as to distinguish amongst the three (3) forms of motor carriage and to identify the particular requirements of the shipper were known as, “the distinct needs” provision. Absent the distinct needs provision, it would be difficult and perhaps impossible to effectively distinguish between Common and Contract Carriage. The inability to distinguish between these two types of carriage could cause severe and imposing liability issues. Specific rules were imposed as tests to distinguish between these types of carriage.

The “distinct needs” test used to distinguish between these forms of motor carriage contained unique shipper requirements and corresponding Contract Carrier obligations. These “needs” are unacceptable in Common Carriage relationships, unless provided by the Common Carrier in their rules tariff on per shipment basis. Below is a general description of some examples of these distinct needs:

1. specific delivery schedules

2. customized equipment

3. specially trained drivers

4. unique computer Links

5. Price Adjustment Clauses

6. Reports

7. Claims Or Credit Terms

8. Incidental Transportation Services

9. Special Facilities For Cargo Transfer Trailer Storage

10. Special Vehicle Maintenance

There were about twenty-five (25) of these “needs” that were used as standards in support of a carrier obtaining a “permit” from the requisite governmental agency. Additionally, they should truly represent those specialized services that the shipper actually requires.

Other specifics with respect to product type must also be addressed. As an example, Title 21 CFR Subpart E part 110.93 speaks to statutory requirements for transporting foods. In this regard, it would be appropriate to place these requirements in the contract. The following language is a direct copy of the respective provision, “that the finished food shall be transported under conditions that will protect food against physical, chemical, and microbial contamination, as well as against deterioration of the food and the container.” By placing this demand within the contract, the carrier is now legally bound to comply with this law. One of the benefits of placing the carrier on notice is shipper protection from carrier error.

Reasonableness is the operative word in contracts. As an example of the “reasonableness test”, the following question could be asked, “what could either party reasonably conclude with respect to the contractual obligations regarding their action or inaction. Consequently, if spoiled food was delivered because of the carrier, inclusion of the provision has placed the carrier in the position of reasonably understanding the results of his failure.

Today’s Transportation Environment--Deregulation and Customer Satisfaction

Transportation regulation today is limited to safety. Effective January 1, 1995, there was no longer any financial regulation. Consequently, the influence that distinction between the three (3) forms of motor carriage once had, no longer exists; what remains is the form and function. That is, the emphasis and influence of the distinction remains to a certain extent with respect to selection of the motor carrier type, but the body of law that is the basis for decisions regarding questions and challenges remains intact.

At Rayovac, customer delivery requirements play a key role in driving success. According to Rick Kindle, “any company that has been in the consumer retail business for the last 10 years or so can tell you that customer requirements concerning handling and delivery have become more and more stringent and demanding”. “The probability of carrier errors associated with these demands has increased as well.” He further points out that, “In today’s world there are many other considerations such as delivery appointments, driver unloading, and driver sort and segregate services as well as special paperwork demands that must be addressed.

With customer delivery demands and more than 140,000 motor carriers offering transportation services, there appears to be an increase in the number of carriers offering multiple types of carriage. Carriers offering multiple types of carriage during regulation, were described as carriers “holding dual operating authority” Regulation recognized the issue and provided for it appropriately. Selecting “dual operating carriers” and building your contracts around the historical transportation body of law, will provide the same level of preparedness as that of selecting “pure” contract carriers.

Method of Approach and Process

An effective method of approach for the development of a Contract Carriage Agreement begins with understanding the transportation services that are required to support, as an example, the business philosophy, customer demands, geographic considerations, terms and idiosyncrasies. This information should then be compiled into a “Transportation Purchasing Profile”. The “profile” is in and of itself a useful document as it describes, at the very least: how transportation services will be purchased; the underlying philosophy that drives purchasing; the decision criteria used; and the standards used for carrier selection. Upon completion of the “profile”, a modified copy should be prepared to meet the requirements of a bid request. In this form, the bid request should be distributed to pre-selected carriers that, at a minimum, conform to the mandates of the profile. Carrier responses should be compared to a standard and scored.

This method of approach reinforces the importance of first establishing a formalized profile while simultaneously achieving efficient and effective articulation of the transportation posture and business rules, both internally and externally. Next, it continuously reinforces the basis upon which final selection will be made and concurrently allows all of the carriers to develop an understanding and appreciation of the objectives of the intended relationship, early into the process. Carrier education as to shippers needs is critical for performance. Lastly, the process concludes rapidly and effectively with the implementation of the contract.

Agreement Standards

There are certain transportation contractual standards that should be considered. As an example, the following provision titles should be included. The order of the titles is important but the examples shown below are not necessarily presented in the appropriate order:

Description of the Parties

Shipper and Carrier Commitment

Indemnification

Insurance

Relationship of the Parties

Charges and Payment

Time frame

There are other necessary provisions that must be included to meet the legal test for an acceptable contract. Proper counsel should be sought to confirm that the contract meets all of its necessary requirements.

Negotiation Strategies

Strategies will differ with every relationship. In our previous white papers in this series, “Freight Transportation Purchasing Philosophy”, “Purchasing Freight Transportation Effectively” and “The Role of the Logistics Leader in Driving Supply Chain Value”, we presented the view of three different companies, Toyota-NAPO, Welch Foods and Frito-Lay. Within this paper, an additional view is also presented; Rick Kindle of Rayovac discusses their considerations. The information presented in these white papers contain a number of appropriate views that could also be incorporated into strategic planning and development of negotiation postures.

Negotiating for contract carriage services are essentially the same as negotiating for any other service. The key difference between Common and Contract Carriage lies in the fact that the Contract Carrier is providing dedicated services. It is probable that, at least, some of the required services are of such a nature that they will incur obligations that are not generally associated with common carriers. In this regard, both the organizational structure and equipment provided by the contract carrier may be unique. The Contact Carrier is the next closest type to private carriage and it is appropriate to cost out a private fleet and attendant costs in order to determine the cost effectiveness. Therefore, the overall negotiation strategy could be conditioned by an understanding of the Contract Carrier’s costs and perhaps assigning an agreed to profit would achieve a mutually beneficial result.

Another very effective negotiating cost alternative is used by Rick Kindle at Rayovac.

“We always negotiate an FAK class that is equal to or less than our lowest rated class item. For example, batteries are an actual class 60 while flashlights without batteries are a Class 100. As our primary product that we ship is batteries we use this leverage to obtain the FAK 60 for all of our freight. We certainly do not “give away the store” but we want our carriers to make a reasonable profit on our freight. This does nothing but make our freight more attractive and goes a long way in insuring that the carrier meets our service expectations.”

Conclusion

There are, at least, several primary objectives of a Contract Carriage Agreement:

1. Develop a document that will provide the parties with a highly specific set of mutually agreed to business rules

2. Assure the parties that there expectations are achievable and sustainable

3. Be able to re-use the Agreement so as to achieve the necessary continuity amongst all of the shippers’ contract carriage relationships

4. Have a contract that is clear and concise, thereby minimizing ongoing interpretation and disputes

There are alternative methods for achieving these objectives beginning with understanding the transportation and related service needs and why they exist. The “Transportation Purchasing Profile” has been presented and represents an effective method. Several other methods exist and they have been addressed within our three other white papers in this series.

Specimen Contract

We have developed a standard Contract Carriage Agreement that has passed the tests of time and use. If you would like to receive a copy, please direct your inquiry to jwest@transportgistics.com

About TransportGistics, Inc.

TransportGistics is a global, multi-product and services company that provides market leading, simple, incremental solutions for transportation management and logistics functions within the supply chain.

TransportGistics commitment to education is portrayed through its advancement of professional logistics and transportation programs. Its white paper site presents important and timely transportation and logistics subjects each month, and is regularly visited by more than 22,000 companies, universities and governments, worldwide.

Through its question and answer section, TransportGistics and its readers are actively engaged in asking and answering questions. This activity has allowed us to create the Logistics Forum for the Exchange Ideas and Information.

TransportGistics, Inc. is an active partner at the Center of Excellence in Wireless Internet and Information Technology at the State University of New York-Stony Brook.

Continuation

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com .

Disclaimer

The information presented herein represents the opinion of the author but not necessarily the opinion of TransportGistics, Inc. nor is it presented as a legal position or opinion.

All content copyright by TransportGistics, Inc.  All rights are reserved.  The authors of the articles retain the copyright to their articles. No material may be reproduced electronically or in print without the express written permission from the individual authors and/or TransportGistics, Inc. (papers@transportgistics.com)

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