Updated November 10, 2020:

Third-Party Logistics Services Agreement Basics

A third-party logistics services agreement is a contract between a contracting party and a third party logistics services provider (3PL), which is a business that takes, holds, and transports consumer goods but does not take ownership of those goods. 3PLs will provide one or several of these third-party logistics services:

  • Public or contact warehousing.
  • Freight or transportation management (including service claims, freight accounting, and technology).
  • Freight consolidation.
  • Distribution management.

These businesses arrange shipments and manage and provide advice pertaining to transportation for freight carriers, shippers, and other transport entities. They include:

  • Freight forwarders.
  • Brokers.
  • Consolidators.
  • Rail transporters.
  • Sea lane shippers.
  • Air cargo agents.

Almost any company that provides some manner of logistics service will refer to itself as a 3PL. Ideally, they will provide bundled services, which may include:

  • Warehousing.
  • Transportation.
  • Inventory management.
  • Cross-docking.
  • Packaging.
  • Freight-forwarding.

Some 3PLs, however, may specialize in certain aspects of transportation. These 3PLs may be:

  • Transportation-based 3PLs.
  • Warehouse/distribution-based 3PLs.
  • Forwarder-based 3PLs.
  • Shipper/management-based 3PLs.
  • Financial-based 3PLs.
  • Information-based 3PLs.

A third-party logistics services contract will define the terms of the service the 3PL is to provide, as well as protect profits and indemnify the contracting party for damages and other, unforeseen costs.

Drafting a Third Party Logistics Agreement

Third-party logistics agreements are among the most complex agreements that can be encountered in business, so it is best to have an attorney assist you with this process. Some of the terms that you and your attorney should be familiar with include:

  • Procurement logistics. This refers to providing a manufacturer with tools, supplies, replacement parts, and raw materials for production purposes.
  • Production logistics. This refers to transport and supply activities related to production and product delivery to distribution warehouses.
  • Distribution logistics. This refers to shipping goods from the manufacturer to consumers through sellers.
  • Reverse logistics. This refers to the management of used goods, parts or product exchanges, empties, returns, and packaging.

There are also a number of areas of the contract that should be paid special attention to by the negotiating agent if a contract is to be drafted that will not be unfavorable to their client. These include:

  • Termination. The ability of the contracting party to terminate the TPL contract, any warehouse contracts, and retrieve warehouse products is essential if the 3PL’s performance should deteriorate.
  • Indemnification. Indemnification rights are essential to secure as a safeguard against warehouse damage, product mislabeling, lawsuits, or negative publicity. Indemnification and force majeure clauses, as well as any exclusions, disclaimers, and liability limitations, should be carefully drafted.
  • Double payment. Companies that outsource their logistics need to protect themselves from paying for transportation services twice, which can occur if they pay 3PL only to have it default on its end, thus requiring a payment to the carrier, as well. To avoid this, a specific provision should be added to the contract that requires the 3PL to provide proof that its contracts with the carriers require only them to provide satisfaction to the carriers, not any other party.

Few companies, in-house legal departments, and law firms have the knowledge-base to ensure they are achieving the most favorable terms during 3PL contract negotiations. 3PLs, on the other hand, negotiate 3PL contracts on a regular basis and thus will have a distinct advantage when it comes to negotiations unless you actively seek out and employ the services of an expert in the field.

Furthermore, many contracting companies put themselves at a disadvantage by not beginning contractual negotiations with a 3PL until after their business is up and running and time is at a premium to get a shipping contract in place. In such a situation, the 3PL, which is well-versed in such contracts, will be able to negotiate highly favorable terms, because even if undesirable terms are noticed by the contracting party, the party may not be willing to halt a project for the time it takes to negotiate more favorable terms.

Thus, a fair amount of planning is required to negotiate the most favorable third-party logistics services agreement possible. If you need further help to understand the third-party logistics service agreement, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.