Early-termination agreements, which penalize parcel shippers for diverting traffic from their carriers and causing volumes to fall below contractually predetermined levels, have been in place for many years. They become more common around a decade ago. They have become a contract mainstay since 2020, when the parcel-delivery sector became a seller’s market, much to the anger of shippers.
Carriers impose unilateral early termination agreements that do little to aid or protect shippers. They have the effect of allowing carriers to change contractual language without consequence, according to one of three industry sources consulted for this report. All requested anonymity in order to speak freely.
Throughout the pandemic era, when delivery demand skyrocketed and shippers had little or no leverage, the big carriers insisted on the provisions. Shippers appear to have a greater chance of removing the language now that volumes have leveled off due to decreased e-commerce activity.
According to one of the persons interviewed for this story, the conditions are tough to eliminate if UPS Inc. (NYSE: UPS) and FedEx Corp. (NYSE: FDX) insist on them as a condition of doing business. Because they are one-sided, “there is no motivation for [the carriers] to delete these restrictions even when market conditions change,” according to one of the sources.
“Sometimes, the most a shipper can do is negotiate a lower penalty or persuade [the carriers] to change some of the more punishing words,” the insider said. Penalties can also be triggered by shipper demands for higher volume incentives to be incorporated into contracts.
Unless the early-termination wording overrides these, all national contracts contain 30-day escape clauses. In regional carrier contracts, escape provisions of 30 to 90 days are frequent.
According to two industry sources, UPS is the most active and punishing of the two major carriers when it comes to implementing early-termination conditions. Before Carol B. Tomé took over as UPS CEO in June 2020, bringing with her a tough stance on shipper price, a UPS early-termination penalty rarely exceeded 2% to 2.5% of a customer’s package cost, depending on the circumstances. According to one of the sources, some shippers are now facing fines three times that amount. UPS did not respond to a comment request.
According to one of the individuals, FedEx has not increased its early termination penalties as much as UPS, nor has it implemented them as strictly. However, the language has become a “default feature” of FedEx’s shipper contracts, according to the source.
Previously, UPS exempted a shipper from early-termination penalties if a drop in volumes was caused by reasons beyond the shipper’s control. This typically manifested as an overall slump in the customer’s business. According to one source, the language can still be found in certain contracts, but it is less common. According to the source, UPS has attempted to enforce early-termination clauses even when volume reductions were caused by the carrier declining a shipper’s business.
When UPS curtailed the volumes of some large shippers owing to high e-commerce demand, it effectively waived early termination penalties during the hectic peak holiday delivery season. However, according to one of the individuals, during last year’s holiday season, UPS threatened to enforce the condition against particular companies if they didn’t return the level of traffic that UPS forced them to redirect the previous year.
“That decision “generated some significant antipathy among UPS among those shippers,” one source said, “since they had struggled on short notice to replace the capacity they legitimately expected they had with UPS.”
Early-termination language is often divided into two sections at UPS. The first, known as “early termination,” normally authorizes UPS to assess a 2% penalty on a shipper’s net spend over the previous 52 weeks if the shipper formally cancels a contract or attempts to renegotiate the discounts or reward bands in the original agreement. That circumstance rarely occurs.
The second option is more typical, given the slew of new and increasing delivery surcharges and historically high base prices. The “minimum commitment” clause authorizes UPS to charge a 2.5 percent fee based on a percentage of a shipper’s net spend over a longer time period, often the most recent quarter.
If a shipper formally expresses a preference for another carrier or fails to tender enough volume to meet the pre-set minimum average monthly spend criteria, the minimum commitment provision can be enforced.
