Long-Term Contracts: Promises and Pitfalls

Q: A couple of years ago, we signed a long-term contract with one of our best motor carriers. We got the lawyers involved, and it was a pretty comprehensive deal including rates, a provision for fuel surcharges, an inflation index, penalties for things such as late deliveries, failure to provide equipment when we need it, liability for loss and damage, just about anything you can think of. We set it up for a five-year no-cancellation term, which still has nearly three years to run.

Well, the first thing is that the carrier subsequently changed hands, and we think the new owners aren’t entirely happy with the contract. So far, though, they’ve honored it.

But now a problem has come up. We had to close one of our distribution centers after it was damaged badly in a storm and move to another facility. The new location is no more than a couple of blocks from where the old one was, so we didn’t even consider this in connection with our contract.

The carrier, however, says differently. It says the contract was specific about locations, down to giving addresses, and therefore the new one isn’t covered. It’s demanding a significant increase in rates to serve the new facility.

My view is that the carrier is being unreasonable about this. I guess you could say it’s right in terms of the letter of the contract, but it’s not honoring its spirit. I mean, what possible difference can a couple of city blocks make? Certainly, it’s not enough to justify the big rate differential the carrier is seeking.

How can I make the carrier reconsider its position here? Is some kind of lawsuit in order? What do you think?

 

A: I think you should be very careful what you wish for, because you just might get it.

In fact, a contract is a fairly good way of assuring just that. It spells out the obligations of both parties in as clear terms as they can devise, and thus ensures that each gets — well, perhaps not what he, she or it might have wished for, but at least what they’ve been able to negotiate with each other.

What it doesn’t do is provide flexibility. Indeed, the legal function of a contract is to make the parties’ relationship as rigid and unchanging (and unchangeable) as possible. In establishing a contractual agreement, the goal of both parties is to eliminate surprises that they may spring on each other, and so far as I can tell from your inquiry, you succeeded admirably in doing so.

The real world in which that contract must function, however, isn’t always so cooperative; willy-nilly, it’ll spring surprises on you. It sprang one on each of you in this case — first, the carrier’s change of ownership, and second, the forced relocation of your DC. Between them, they’re sabotaging your agreement.

This is one of the reasons I say long-term contracts are a poor idea in today’s volatile business world. Now, I’m not saying that about long-term business relationships, which I consider a very good idea. But leave yourselves free to, once a year or so at least, reconsider the terms in light of changing circumstances. Had you done so, you wouldn’t have this problem.

Yes, you could sue the carrier. If the contract is as specific as you say, I’m not sure you’d win (and I expect your lawyers are telling you the same thing, or you wouldn’t be asking me). But even if you did, you’d poison the relationship beyond repair. Is that what you really want?

It sounds like you got a very favorable deal in bad economic times that doesn’t look so good to the carrier now that the economy is recovering. You want to hold the carrier to its deal according to the letter of the contract, but duck that letter in favor of some “spirit” of the agreement in another area. You’d like, that is, to have your cake and eat it, too. Sorry, but it usually doesn’t work out like that.

In my opinion, your best bet is to work out an agreement with the carrier to dump the existing contract and renegotiate. You’re not, of course, limited to your current carrier if you do this; you can seek competing bids. Or, faced with the possibility of losing your traffic, the carrier might reconsider about the new DC. But otherwise I think this contract’s a dead ’un. Let it lapse and move on. 

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

 

 

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