Early-termination agreements, which penalize parcel shippers for diverting traffic from their carriers and causing volumes to fall below contractually pre-set levels, have been around for years. About a decade ago, they became more commonplace. Since 2020 when the parcel-delivery industry became a seller’s market, they have become a contract staple, much to shippers’ chagrin.
Early termination agreements are imposed unilaterally by the carriers and do nothing to help or protect shippers. They have the effect of allowing carriers, without consequence to them, to alter contractual language, said one of three industry sources interviewed for this story. All requested anonymity to speak candidly.
The major carriers have insisted upon the provisions throughout the pandemic era as delivery demand spiked and shippers had little or no leverage. As volumes have leveled off due to less e-commerce activity, shippers seem to stand a better chance of excising the language.
Still, the provisions are difficult to exclude if UPS Inc. (NYSE: UPS) and FedEx Corp. (NYSE: FDX) insist on them as a condition of doing business, according to one of the sources interviewed for this story. Because of their one-sided nature, “there is little incentive for [the carriers] to remove these clauses even as market conditions change,” said one of the sources.
“Sometimes, the best a shipper can do is negotiate down the penalty or convince [the carriers] to modify some of the more punitive phrases,” said the source. Penalties can also be triggered by requests from shippers that additional volume incentives be written into the contracts.
All national contracts have 30-day escape clauses unless the early-termination language overrides them. Escape clauses of 30 to 90 days are common in regional carrier contracts.
UPS is considered the more aggressive and punitive of the two national carriers in enforcing early-termination provisions, according to two of the industry sources. Before Carol B. Tomé took over as UPS CEO in June 2020, bringing with her a hard-nosed attitude toward shipper pricing, it was rare for a UPS early-termination penalty to exceed 2% to 2.5% of a customer’s parcel spend, depending on the circumstance. Today, some shippers are being hit with penalties three times that, one of the sources said. UPS did not respond to a request for comment.
FedEx has not increased its early-termination penalties as much as UPS, nor has it enforced them as stringently, one of the sources said. However, the language has become what the source called a “default part” of FedEx’s shipper contracts.
In years past, UPS exempted a shipper from early-termination penalties if a decline in volumes was due to circumstances beyond the shipper’s control. This generally took the form of a general downturn in the customer’s business. That language can still be found in some contracts, but it is less common, according to one source. UPS has tried to enforce early-termination clauses even if the volume reductions were due to the carrier turning away a shipper’s business, the source said.
UPS effectively waived early-termination penalties during the chaotic peak holiday delivery season when it capped the volumes of some large shippers due to massive e-commerce demand. However, during last year’s holiday cycle, UPS threatened to enforce the clause against certain companies if they didn’t restore the level of traffic that UPS forced them to divert during the prior year, according to one of the sources.
“That action “created some deep animosity toward UPS among those shippers since they had struggled on short notice to replace the capacity they reasonably assumed they had with UPS,” one source said.
At UPS, early-termination language typically consists of two parts. The first, which is classified as “early termination,” generally allows UPS to levy a 2% penalty on a shipper’s net spend over the prior 52 weeks should a shipper formally cancel a contract or seek to renegotiate the discounts or incentive bands in the original agreement. That scenario rarely plays out.
The second is more common in light of the bevy of new and increased delivery surcharges and historically elevated base rates. Known as the “minimum commitment” clause, it allows UPS to assess a 2.5% fee based on a portion of a shipper’s net spend over a more time-defined period, generally the most recent quarter.
The minimum commitment clause can be enforced if a shipper formally expresses a preference for another carrier or fails to tender enough volume to achieve the pre-set minimum average monthly spend threshold.