The challenges inherent in contracting with logistics and transportation intermediaries differ depending on the type of third party involved: an asset-based third-party logistics (3PL) company or a non-asset-based 3PL, a freight forwarder or a transportation broker. Savvy shippers should know the law governing each type of 3PL in order to protect their companies' interests.

The following are some guidelines on what shippers should—and should not—do when contracting with third parties. The legal cases used to illustrate these guidelines are discussed in my book, Transportation, Logistics and the Law, 2nd Edition. Page citations, indicated by number, can be found in the Editor's Note.

When a shipper receives a business proposal from a 3PL, one of the most important issues to consider should not be how much money the third-party provider claims it will save. Rather, it's whether the 3PL could have a conflict of interest that might lead it to make decisions that are unfavorable to its shipper client. (This assumes that the 3PL's ownership, staff, financial condition, track record, and reputation have already passed scrutiny.)

The answer will vary depending on whether the third party is asset-based (a subsidiary of an asset-owning company, such as a motor carrier or warehousing company) or non-asset-based.

(a) Asset-based 3PLs

Asset-based third parties may be subject to conflicts of interest if they are pressured to use their parent companies' facilities and services rather than those of a competitor. They also may be constrained by a parent's policies and procedures, particularly in regard to claims resolution. These can create conflicts if those policies are unfavorable to the shipper.

One way to detect and avoid such conflicts is to ask a few questions about how the 3PL and the carriers it selects will resolve specific types of claims. For example, if a shipment is lost or damaged and the shipper replaces it with another shipment, will the carrier selected by the 3PL insist on paying only the "manufactured cost" of the goods, or will it pay the full invoice value? Some carriers (and their cargo insurers) attempt to evade liability for the full invoice value required by law. Their theory is, if the manufacturer has collected its full invoice price on the replacement shipment, the carrier's payment of the invoice price would result in the manufacturer making a "double profit." That theory has been soundly rejected by the courts. See Polaroid Corp. v. Shusters Express, Inc. ¹ This landmark decision has been followed in other jurisdictions.

Consequently, a shipper that is considering hiring a 3PL should include provisions in its contract requiring the 3PL to select carriers whose claims policies include reimbursement for full invoice value rather than for manufacturing costs. Other claims scenarios that may determine a 3PL's true "colors" include: denial of concealed-damage claims and claims on "shipper's load and count" shipments without regard for what actually happened in transit; declining claims for an uncertain amount when filed in time but the exact amount of the loss could not be determined until after nine months have passed; and so forth.²

The same potential for a conflict of interest occurs with respect to carriers' Rules Tariffs. Will the 3PL use carriers that publish unreasonable penalties for late payment of freight charges? Some carriers continue to publish a "loss of discount" penalty for payments made beyond their published credit period; that period usually is 30 days, but some are only 15 days. The Surface Transportation Board (STB) has prohibited members of motor carrier rate conferences from publishing loss-of-discount provisions, but they may still be found in some individual carriers' tariffs. The STB's predecessor, the Interstate Commerce Commission, previously ruled that a 35-percent penalty was unreasonable as it bore no relationship to the cost of collecting past-due freight charges. Nevertheless, some carriers continue to publish that level of penalty in their tariffs.

These penalties can be very costly if enforced. For example, when less-than-truckload carrier A-P-A sued a shipper that it alleged owed $106,924 because it had not paid its freight charges within 15 days, as required in its tariff, A-P-A's penalties inflated the lawsuit to an astronomical $881,989—an increase of 825 percent!

(b) Non-asset-based 3PLs

Another type of 3PL is the non-asset-based third party, many of whom are also known as "transportation consultants." These companies generally have no ties to carriers, and will use their experience and knowledge of the transportation market to negotiate the best deal for their clients. Thus the selection process largely comes down to examining their expertise and track record regarding the services they provide to shippers.

Look for a third party/consultant that offers the specific service required, such as pre-audit, post-audit, freight claims management, contract negotiation, and rate negotiation, to name a few possibilities. When working with a non-asset-based provider, be certain to draft a contract describing the specific services to be performed and the agreed-upon costs and fees. Continued...

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