Contract logistics contracts and eye level partnership – now it is time for proof!

While supporting contract negotiations for my clients, there is one word that always comes up sooner or later: ‘eye level’. And of course, as this phase of initiating a long-term partnership is characterized by general politeness, positivism and solution orientation, there are also many assurances from the negotiating parties on critical scenarios that in such an (unthinkable) case ‘you’ll in any case come to an agreement’. Paradoxically, most contracts I have seen rarely contain any concrete content on what ‘eye level’ – rather meant as a synonym for ‘fairness’ – means in concrete terms for both companies.

Don’t get me wrong – I’m not a proponent of regulating all conceivable scenarios in logistics contracts, which is impossible anyway. Rather, I am a big fan of designing long-term contracts in such a way that they also reflect the ‘spirit’ of the joint business relationship. Thus, in addition to hard facts and figures, contracts shall also comprehensively regulate the basic (common) understanding of the manner & manner of the companies’ relationship.

Of course, in case of significant deviations between planning basis for the logistics solution and the actual situation at a later stage, individual solutions according to the actual options of adaptation for both parties are to be found. In this regard a solution also depends on the ‘sense of proportion’ of the acting managers of both companies. However, the more general conditions – a kind of common value system – are agreed upon prior to signing a contract, the less conflicts the partners will have at a later stage. I even think that this is ultimately not due to the individual content of this ‘value system’, but rather caused by the opinion-forming process that both parties go through before the contract is signed. In this stage I often try to use the analogy of the ‘business marriage’ which is established with the conclusion of the contract. The more transparent both parties understand what this marriage means, the easier it will be for them to remove all obstacles in the future.

In concrete terms, this does not mean e.g. signing a ‘negotiation clause’ how adjustments to price schemes could look like when changes in quantity and/or structures go beyond tolerable limits. Rather, it should be regulated e.g. for cases of significant (quantity) changes, which costs the service provider always has to compensate. But at the same time a regulation has to be agreed upon which costs the client has to reimburse under all conditions, or what is an adequate minimum margin that the service provider always is allowed to charge (provided that it complies with the service levels).

Yes, you’re right: this is indeed a challenging exercise in practice, which has to consider that (a) both parties have to deal with the factual, economic and legal constraints of the other party and (b) both companies have to achieve almost the same transparency about all the economic pivotal points of the business relationship. Especially regarding the latter point, both companies are required to actively create this transparency for the other party and – even in a negotiation situation – ultimately play with open cards. Ideally, this is waht both partners expect and strive for in this business marriage.

The current situation caused by the Covid-19 virus now produces many scenarios which are typically not at all foreseen in logistics contracts: Some logistics centers can barely cope with the flood of orders while others suffer from a lack of volumes. Now it becomes apparent whether the client and the service provider have made sensible provisions in their contracts on the one hand, and whether, on the other hand, both parties actually have at least a ‘common spirit’. This might help to master the major challenges on an equal footing and in all fairness.

I may appear somewhat pessimistic, but I fear that it is just now becoming obvious how many contracts require to be adjusted in that regard … Therefore, here is one take-away for the post-crisis period: Renegotiation always (!) works and any adaptation of today’s contracts will – in my opinion – often make sense for both parties.

Do you have other experiences? I am happy to receive your feedback.
Stephan Meyer