Third Party Logistics (TPL and 3PL) Agreements
Few lawyers have experience in drafting or negotiating third party logistics agreements. An attorney drafting a third party logistics contract must first know the differences in procurement logistics, production logistics, distribution logistics, spare parts logistics and reverse logistics.
Procurement logistics is geared to provide a manufacturer with all the raw materials, tools and supplies and replacement parts necessary for the manufacture of their goods. Production logistics covers the supply and transport activities in the production process and the delivery of products to distribution warehouses.
Distribution logistics covers the shipment of goods from the manufacturer to the consumer via the sellers. Spare parts distribution is for after-sales service and can be on short notice. Reverse logistics is for used goods, worn out goods, exchanges of parts, returns, empties and packaging.
Types of Third Party Logistics Providers
A third party logistics provider is one who specializes in an integrated operation of which typically includes warehousing and transportation services, but may also include cross-docking, inventory management, tracking and tracing, specialized packaging, pick and pack, security systems and freight forwarding which can be customized to their customers’ needs.
Some third party logistics providers, known as lead logistics providers, are non-asset-owning 3PL providers who have specialized expertise valuable to their customers and low overhead costs. They also have lower negotiation power as a result of not owning logistics assets such as tractor trailers. Most 3PL providers prefer to own assets in order to maximize their efficiency and improve their negotiating power.
First party logistics providers (1PL) specialize in specific types of goods or shipping methods in one geographic area, country or state. Second party logistics providers (2PL) provide their specialized services in a larger or national geographic area. They also provide resources such as trucks, forklifts, pallets, warehouses and the like.
Third party logistics providers, on the other hand, have system integration. While a 2PL only provides standardized services, the 3PL provides services that are customized on the needs of their customer. As customizing costs money, their contracts are generally long term to ensure profitability for the third party logistics provider over the term of the contract.
Fourth party logistics providers (4PL) are non-asset providers performing functions such as packaging, freight quoting, financial settlement auditing, tracking, customer service and issue resolution, but they do not employ truck drivers or warehouse personnel and own no trucks, storage trailers, pallets, or warehousing. They do as a general rule, however, have expertise in the freight industry and in information technology and they provide a role of a freight agent or broker. They will thus endeavor to choose the best 3PL for a customer’s logistics activities.
Finally, fifth party logistics providers (5PL), also non-asset providers, provide supply chain management services and customized consulting to their customers.
Sometimes 3PL providers offer on-demand transportation which can be very profitable to the 3PL that obtains this business. They may offer full truck loads, less-than truck loads, and specialize in expedited shipping for the occasional shipper.
Negotiating Third Party Logistics Contracts
Most companies have sparse knowledge of what to seek in a logistics contract. Either it’s their first time outsourcing logistics to a TPL, or the last time they negotiated a 3PL, it was many years ago and the staff members involved in the negotiation have left their organization or moved to other positions and have only a distant memory of the negotiations.
Few in-house legal departments and few law firms have the specialized knowledge necessary to ensure a third party logistics contract provides the most favorable terms to their client. The third party logistics provider on the other hand, negotiates scores of similar 3PL contracts each year and is in a significantly stronger negotiating position.
Companies also tend to hurt themselves further by beginning contractual discussions with a TPL only after the tender of their business has already taken place and time is of the essence to begin seeing the benefits of outsourcing affect their profitability. In such a situation, few managers will have the confidence to pause or stop a project if certain terms cannot be agreed upon.
As with any negotiation, the party who draws up a 3PL contract (usually the third party logistics provider) is in a significantly stronger position than the company’s representative who may feel they have little negotiating power to make wholesale changes to the contract which has been provided to them to look over.
While price and performance are clearly among the most important terms to be negotiated, a third party logistics contract must be negotiated not only for the good times, but also for the bad times in the event the parties’ relationship turns sour.
Drafting Third Party Logistics Agreements
The company’s ability to end a third party logistics contract must be protected in order to provide them with the right to cancel the TPL contract and any warehouse rental contracts and to retrieve any products warehoused in the event the 3PL’s performance deteriorates. The right to indemnification is essential in the event a warehouse is flooded, food products are mislabeled, lawsuits are filed or negative publicity results. Force majeure and indemnification clauses as well as any disclaimers, exclusions and limitations of liability must thus be drafted carefully.
Companies outsourcing their logistics must also be protected from having to pay twice for their transportation services in the event a 3PL fails to pay for those services rendered on the company’s behalf. Without proper contractual provisions, a company may be left open to the possibility of first paying the third party logistics provider, and then being required to pay the carrier for the same services in the event the 3PL defaults.
One way to protect a manufacturer is to require proof from the 3PL that all 3PL contracts with carriers have specific provisions wherein the carrier agrees that their sole remedy in the event of non-payment is to look to the 3PL and not the manufacturer or producer of goods.
The lawyer negotiating on behalf of a manufacturer or producer must also be aware that the third party logistics provider may be affiliated with the carriers they use, thus creating a conflict of interest when goods are lost, damaged or hijacked.
The Law Offices of Sebastian Gibson can be contacted at (760) 776-1810 or toll free at (855) WHAT NOW. With offices in Orange County’s Newport Beach and Palm Desert in the Palm Springs and Coachella Valley area, we provide exceptional legal representation to victims of personal injury big rig and tractor trailer truck accidents, to entertainment clients and to both individuals and companies in a wide variety of business and contract matters throughout California, the U.S. and to international clients as well. The Sebastian Gibson law firm is the firm to come to for assistance in the logistics, warehousing and trucking industry and for UCC matters.
ABOUT THE AUTHOR: Law Offices of R. Sebastian Gibson
Sebastian Gibson has been named as one of the Top Lawyers the last 5 years running by Palm Springs Life Magazine. With dual law degrees in California and in Great Britain, and experience in both the U.S. and U.K. With offices in Palm Desert and Orange County, the law firm provides legal services in the fields of logistics, trucking, business, corporations, contracts, big rig and tractor trailer truck accidents, insurance law, personal injury, and wrongful death.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.