The Importance of Reviewing a Contract
January 18, 2017
Author: Cris Houlihan, Sales Executive
In today’s world, contracts play a significant role in business relationships and can play a key role in determining liability in the event of a claim whether you are a motor carrier, broker, freight forwarder, or warehouseman. They can be the difference in your insurance covering a claim or you paying hundreds of thousands of dollars out of pocket. It is vital to understand exactly what you are signing to ensure you are putting yourself in the best possible position, especially when many shippers today demand that their own terms and conditions are met to conduct business. The last thing you want is to take on liabilities you didn’t believe you had.
Contracts are signed agreements between two or more parties which outline the particular responsibilities of each party such as agreed upon rates, loading practices, indemnification, governing laws, and insurance. While companies should always have their transportation specific attorney review their contracts before they execute them, there are key aspects to look for. All contracts should focus on clarity and equity and be easily understood by all parties. Many times, companies believe that the contract will only be seen by the parties involved. The reality is that these contracts may be viewed by many third parties such as attorneys, insurance adjusters, and the courts. If the contract is unclear, it is important to modify the wording and even include definitions within the contract if necessary, especially because many shipper contracts are designed to protect the shipper and not you. The purpose of the contract is to be mutually beneficial so gaining this clarity is important in maintaining healthy business relationships.
Another area of concern relates to compensation for a loss based on different variations of how the value is calculated. For example, contracts should specify if the value will be determined on a price per pound of total wholesale, retail, or replacement value. The diminution of value or market value also creates a gray area in determining appropriate indemnity costs. The courts’ interpretations of contract terms vary widely so it is essential to make sure the calculations are accurately defined.
Dictating specific amounts of control in a contract can be tricky as well. For example, some shippers or carriers may push it to the extreme by enforcing, in finite details, how the load should be handled after it leaves their possession. The result of this overbearing contract can lead to many legal complications and unfavorable liability.
When entering into a contract, many companies believe that their insurance will cover them in the event of a claim. It is extremely important to remember that many insurance policies do not automatically cover contractual liability. In addition, some insurance policies only respond if the contract deems the carrier or broker to be legally liable which can create even more confusion if the contract does not specify each party and their responsibilities. The contract should address cargo, injury, and property liability due to a claim. The insurance section should be reviewed by your insurance agent/broker to make sure the limits, deductibles, coverage, terms, and other requirements are sufficient and feasible.
Contracts are a crucial element to business relationships and they can create a major headache if they aren’t properly reviewed. The risk of not paying close attention can be detrimental to any successful business. A long term business relationship must benefit both parties so always be sure that clarity is the focus point in any contract. Without clarity and equity, a contract is a recipe for disaster.
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