Contracts Matter

June 11th, 2013 - How to draft an agreement that protects against damaging disputes

At a time when companies are increasingly opting to outsource logistics, signing the right contract is essential to avoid potentially costly conflicts.

Fifty-three percent of French groups hired external providers in 2010 compared to just 15 percent in 2001, according to figures from France’s Association  Française pour la Logistique (Aslog).

That’s still way behind the 80 percent of transport operations outsourced in 2010 but the trend is clear as companies seek to streamline complex domestic and international trades.

Logistics operations do not always enjoy the same legal protection as transport services, however. Transport services in France, for example, are legally covered by a default contract in the absence of another agreement while that is not true for logistics services, notes Yves Lafargue, founder of Paris-based consultancy Cofinter.

“Companies without a logistics contract risk dissatisfaction and legal disputes,” warns Lafargue, who is also adviser to France’s logistics arbitration chamber. Common causes for dispute include delayed or damaged deliveries and significant changes to the volumes transported, he adds.

Simple steps such as the drafting of a contract with clear specifications and a spirit of collaboration could help resolve most of these conflicts, Lafargue says.

Industry associations such as the Fédération des Entreprises de Transport et Logistique en France provide guides and advice, allowing bigger companies to draft a logistics contract themselves. Small and medium-sized groups may require outside legal advice for the first contract they sign, he adds.

Crucially, companies should make clear tender specifications before signing the contract, says Lafargue, whose clients include the World Bank and French railway group SNCF.

These specifications define details such as storage requirements, the working week and how information will be transferred between the client and the provider. The responsibility of each party must be outlined including details such as whether the provider weighs the goods or checks their quality on arrival at the warehouse.

“The vast majority of disputes arise because these specifications are not clear,” Lafargue notes.

Lafargue also recommends including the concept of collaboration between the company and its logistics provider into the contract. This could mean setting a schedule for monthly meetings to examine ways for both sides to improve their performance, for example.

In addition, Lafargue advises against contracts with a fixed time frame. “It’s better to leave the door open,” he says. “Open-ended contracts last the longest.”

Lafargue also recommends legal agreements focused on results rather than resources. In this way, the logistics provider commits to delivering the goods to a certain destination within a certain number of days, rather than providing specific resources such as lorries or warehouse space.

“Costs usually come down when companies focus on results because they tend to overestimate the amount of resources needed,” notes Lafargue.

Finally, contracts should define procedures in the event of a dispute. Top of the list should be an initial meeting that resolves 90 percent of conflicts, Lafargue estimates. Next steps include mediation through institutions such as the Centre de Médiation et d’Arbitrage de Paris and dispute boards offered by the Chamber of Commerce. The courts remain the final resort.

In general, Lafargue recommends providers and their clients adopt a partnership approach. “The more collaboration you can work into a contract the better,” he says. “That’s the best way of protecting against disputes.”

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