Third Party Logistics: Getting the Relationship Done Right

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With the continued increase in the outsourcing of the supply chain, reliance upon third parties to provide logistics also continues to increase. Logistics, the management of business operations, such as the acquisition, storage, transportation and delivery of goods along the supply chain, lies at the core of all commerce and trade. The demand for multiple carriers servicing distant geographic regions has, in turn, increased exposure to business failure in the supply chain through increased potential liability. Limiting exposure to unnecessary liability is a concern for all participants -- transport buyers (shippers), intermediaries (third party logistics providers or 3PLs) and carriers. The role and responsibility of each of these parties needs to be established at the outset of the relationship.

Even though 3PL is a relatively new term, there is nothing new about contractual relationships with third-party providers of transportation and logistics services. Canadian courts have long dealt with the contentious issues that arise from operating a multiparticipant supply chain. The specific facts underlying each relationship are critical to the determination of liability, necessitating a thoughtful approach to establishing and maintaining one’s business relationship with logistics partners.

Without a well-defined relationship, even the most wellintentioned logistics partners are exposed to unnecessary liability. These issues may be of little or no concern when one is first establishing the relationship. However, when problems arise that are beyond your control (particularly if they are internal to your logistics partners), the repercussions can be quite severe. Recent court decisions have established that a party will not necessarily be protected notwithstanding the fact that it has done nothing wrong.

All too often, problems arise in the operation of a multi-party supply chain where the failure of one logistics partner has unwelcome repercussions for its fellow logistics partners, often far in excess of what they would reasonably have anticipated. The underlying theme throughout these cases is the failure of the parties to establish at the outset a clear and legally-binding relationship. In the absence of certainty, the parties are left to the discretion of relatively inconsequential factors being the determining factors in the court’s decision.

In Mediterranean Shipping v. BPB Westroc, the shipper found itself having to pay twice for its shipments – once to the insolvent intermediary and a second time to the carrier. Conversely, in Earl Paddock Transportation v. Accuride Canada, the shipper was not found liable to the carrier where the intermediary was insolvent and had failed to remit payment on the carrier’s invoices. With the slightest variation in the facts, liability can swing from one of the logistics parties to another.

Permitting chance and circumstance to dictate resolution of your legal problems is not a sensible approach to conducting business. It is wise not to emulate the mistakes of your competitors when establishing your logistics operations by failing to take the proper precautions to protect yourself. The Courts have not hesitated in admonishing parties who have taken inadequate legal precautions, as no party to a multi-party logistics arrangement can legally-binding relationship with their supply chain partners.