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Advice for freight forwarders during the contracting process

The contracting process is crucial for freight forwarders – not only to mark the start of a new business relationship, but also to manage one’s risk and avoid undue liability exposure. It is important to have proper management controls in place from the outset to avoid common and unnecessary pitfalls. FIATA, through its Advisory Body on Legal Matters (ABLM), is therefore developing a best practice guide (to be released mid-2021) with general considerations for freight forwarders during any contracting process and this article provides a preview.

1. Conduct appropriate assessment of commercial opportunities and risks

From the moment that the initial prospect of a new business contract arises, freight forwarders should be alert and ready, with strong management controls in place to facilitate a smoother contractual process and avoid unnecessary mistakes. Designation of a central point, proper record keeping, and a clear internal validation process is important.

Freight forwarders must ensure that appropriate due diligence is conducted to know exactly who they are going into business with and which goods they are handling. Many risks can be  substantially mitigated at the pre-contractual stage, simply by having proper due diligence procedures in place. One needs to know with whom they are contracting, whether they are a genuine, financially viable entity, and whether dealing with that entity or goods may breach international or autonomous sanctions or require permits or approvals to carry. This is ever more crucial when contracting in unfamiliar jurisdictions, which may require a more comprehensive due diligence process.

2. Negotiation of key terms

At the negotiation stage, it is important to involve legal counsel and/or decisionmakers i.e. those who have the authority to agree and who understand contractual terms. Where possible, the involvement of in-house legal counsel who knows the intricacies of the business can be a critical advantage to be able to balance the ideal contractual terms with practical solutions. 

It is also important to watch out for the concept of ‘battle of the forms’, which arises when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own terms. This can commonly occur, for example, when two parties are exchanging pre-printed forms or documents with their own standard terms and conditions on the back. All communication exchanged in the context of a negotiation or preliminary traits should therefore be carefully managed, prefaced by clear statements to the effect that no message expresses consent to any conditions or clauses, unless explicitly stated.

3. Drafting and review of contract

The drafting and review stage is a vital occasion to ensure that the contract appropriately covers the obligations of both parties, and what happens if something goes wrong. This means ensuring all essential clauses are included, that the contract does not inadvertently bind a freight forwarder to unachievable or onerous obligations, and that proper provision is made to manage any ensuing disputes. Contracting in unfamiliar jurisdictions can also involve greater risks and present greater challenges in the event of a dispute, and it is important to ensure those risks are correctly assessed. Insurance cover is also a key consideration.

National standard trading conditions will often be adopted by one’s national forwarding association, and should already cover most common issues that arise in accordance with local legislation and specificities. The FIATA Model Rules may form an important basis for this, and it is important to check with one’s national association for further information.

Here are a few of the key contractual clauses to consider:

  • Liability: Limitation of contractual liability to a specific monetary value, and exclusion of liability for indirect loss/consequential damages.
  • Security (letter of credit, liens, pledges):  Provision for how to deal with the goods in the event that something goes wrong, and the form of security one can have over the goods.
  • Indemnity clauses: Each party should warrant that it is free to enter into the agreement and indemnify the other party for breach of such warranty.
  • Governing law and jurisdiction: Clause stating the applicable governing law and jurisdiction – where possible, this should be a familiar jurisdiction, usually the one in which your business is established.
  • Dispute resolution: Determination of course of action in case a dispute arises.
  • Entire agreement clause: Clause stating that the contract constitutes the entire agreement of the parties in respect of the subject matter.

Where a template contract is used, freight forwarders should exercise caution and ensure a careful review of the clauses to ensure that they are appropriate, and do not breach relevant local legislation. Freight forwarders should look out for contradictions and overriding provisions, including ensuring consistency between the terms of the contract initially signed and the terms of the bill of lading or other relevant transport document.

4. Signature and execution of the contract

An easy mistake to fall into is inadvertently binding oneself into a contract without even realizing it, either due by some other means e.g. email or oral, or due to another internal person binding the company to a contract despite not necessarily having approval from the board or authorized decisionmaker. Clear authority levels should be established, specifying the authorized signatories of the company. Always check the final document before signature to ensure that it correctly incorporates all the necessary terms.

5. Performance of the contract

Poor management regarding storage obligations and management can prove costly. Missing rates reviews, for example, can mean that a company has to pay higher-than-necessary rates, or risk being subject to penalties due to renewal dates being missed. Again, holding a central database and contact point can be helpful to ensure that this does not occur. Such system should also take note of the details of the contract and any terms that may be onerous to ensure care is exercised.

In a nutshell

Careful review and proper procedures are key. For more in-depth information, look out for ABLM’s best practice guidance on contract management, coming soon. In addition, FIATA members may find ABLM’s other recent best practice guides of interest – in 2020 it published a Best Practice guide on Abandoned Goods, and in 2019 it published best practice guides on the Prevention of Bribery and the Prevention of Cybercrime

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