Law Offices of Seaton & Husk, LP

When Winners Become Losers
By Henry E. Seaton
June 2008
Reprinted from etrucker.com

Q We are a small carrier, and a major shipper is putting freight we have enjoyed for years out to bid. We have been asked to sign an unconscionable contract as a predicate for bidding on the traffic, and the bid terms say the low-cost bidder may not be awarded the contract. What, if any, recourse do we have?

There is nothing illegal or improper about the shipper’s actions, although, as a carrier representative, I deplore the process. I am seeing a new season of shipper arrogance occasioned by the high cost of transportation and shrinking demand in which such practices are reappearing frequently. The pro forma contracts that carriers are asked to sign as a prerequisite for bidding most often are overtly biased in favor of the shipper. These contracts include unfavorable provisions in addition to the typical departures from general principles of federal transportation law, such as unilateral offsets, extended payment terms, excessive insurance requirements, blatant homer provisions and overly broad indemnification language.

One objectionable provision often included in these biased contracts is waiver of the shipper’s duty to mitigate damages, giving the shipper the “sole discretion with respect to salvage.” When coupled with policies for the total destruction of perfectly good product where seal integrity is not maintained, this waiver can result in significant uninsured losses.

Also, such contracts typically contain “most favored nations” clauses requiring you to warrant that the rates you charge are no higher than the rates charged for any comparable freight, regardless of your other customers’ volume commitment. In return, if you can meet the draconian insurance provisions and are willing to accept the risk of the contract, you gain the right to participate in the auction – only to watch the rate on the traffic drop below your projected cost. There seem to be other bidders with the flawed assumption that they can lose revenue on each mile run and somehow make it up on volume.

Clearly, transportation has become a commodity, and economic factors have resulted in the shippers reentering the marketplace for a new round of potential cost-cutting. Study the shipper’s contract to determine if you want their business at any cost. If you can’t change the more draconian terms, perhaps you should pass on the bidding process. If you can live with the terms of the contract as modified and enter the bid process, you should take care to determine when the “best and final” bids will be received. A number of clients determine their best and final rate at the outset and simply monitor the bidding process. If the bid falls through their floor rate, they simply turn off the computer. You win no prize if you earn the right and assume the obligation to provide transportation at a loss.

I cannot begin to predict how long the “season of shipper arrogance” will last or how much below-cost pricing will result. Exacerbating the problem is fierce competition from intermediaries that unwittingly accept harsh contract obligations and below-market pricing schedules with little alternative but to pass along their problems to the service providers less their commission, if possible.

Until demand increases or the supply of trucks diminishes, I expect to see more reverse auctions and objectionable shipper contracts. I only can counsel that you take a cautious approach to such bidding processes and, given the risk of trucking, ensure that your margin of profit ultimately is preserved.