Planes, trains and AI-mobiles: The legal complexities of 5PL

28 July 2023

Logistics has come a long way in a generation: from simple job-by-job consignments to fully-outsourced managed supply chains. With the advent of ‘fifth-party logistics’, or 5PL, the industry is in the process of fully embracing the latest technologies to integrate the full requirements for e-commerce businesses in sales fulfilment as well as efficient logistics services. As a result, providers seeking to extend into 5PL offerings are adopting cloud-based software stacks and incorporating artificial intelligence to maximise supply chain efficiencies for their customers. These initiatives inevitably involve grappling with the unique complexities of IT contracting.

Although the definition of the term ‘5PL’ is far from settled in the industry, generally it is used to refer to a version of the 4PL supply chain management approach maximising technology solutions, including artificial intelligence, cloud computing and robotics. It also is closely associated with a focus on e-commerce integration, effectively removing the storefront as an interface between the logistics supply chain and the end customer.

Integration of high-tech solutions into supply chains offers logistics providers and their customers with considerable potential efficiency gains – but equally requires close attention to the specific issues presented by technology contracting.

Data: the new black gold

It is trite to point out the value of data in the modern economy, but there are particular implications logistics providers should be aware of. 5PL providers receive and generate volumes of data on behalf of customers, and in using hosted IT solutions, place it in the hands of technology companies. Providers therefore need to be conscious both of the promises made to their own customers in their 5PL contracts as to how they will use data, as well as what their technology contracts permit their service providers to do with that data.

Customers in different industries and accessing different global markets may have different sensitivities based on regulatory requirements, while tech providers routinely seek broad rights to use data for their own business improvement purposes. Providers may see value for themselves in the data they collect and generate. All these competing priorities need to be balanced and reflected consistently across customer and procurement contracts.

AI applications add another layer of complexity, by potentially seeking to ingest data for training purposes. It is not always clear who has the rights to allow such use of data, particularly if it is protected by confidentiality obligations.

All care, no responsibility

Providers of hosted technology services are quick to provide assurances of their data security measures. Dig deeper, however, and in almost all cases such assurances are given in the most generic terms possible. It is incumbent on users of such services to seek more detailed assurances and obtain guarantees against detrimental changes over the course of a contract term.

Equally, technology providers default to broad disclaimers and exclusions, and low liability caps. Logistics providers need to consider how this interacts with indemnities provided to 5PL customers. Risks potentially associated with cloud or AI touchpoints in particular may need to be distinguished and treated differently to the usual approach for 3PL and 4PL services or the position under international terms of trade.

Too many hands

These risk issues are compounded by the many layers of subcontracting involved in most complex cloud-based solutions. Services are often a conglomeration of hosting provider, core software provider, multiple integration providers, and sometimes separate support and professional service providers. Each such provider will generally take the same approach to limiting their individual liability – and even where disclaimers or exclusions do not apply, a 5PL provider will have difficulty ascribing responsibility and achieving enforcement without clear contractual relationships.

As an additional challenge, the major hosting providers tend to wield such substantial market power that their terms are effectively non-negotiable. Technology service providers will generally pass through those terms, including any changes over time.

Keeping it in the family: offering proprietary solutions

One way to reduce the complexity of dealing with many tech providers is to develop proprietary solutions to offer customers. In seeking to leverage this in-house approach, 5PL providers need to ensure freedom to operate by acquiring all necessary rights from developers and avoiding the potential pitfalls of open source software. Specifications, implementation and support all need to be put in place to ensure continuity of customer service.

Beyond the challenges of standing up such a solution, 5PL providers also need to consider the terms and conditions to apply. Even with a bespoke development, there are likely to be third party product terms to manage, as well as finding a balance between expected logistics industry terms and those typical in tech contracting.

HWL Ebsworth’s Technology and Transport teams have extensive experience in advising on all aspects of operational global logistics and technology contracting. If you need help tackling technology contracting in logistics, please do not hesitate to contact us for further information on how we can assist you.

This article was written by Luke Dale, Partner, Danella Wilmshurst, Partner and Nikki Macor Heath, Special Counsel.

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