Special risks to look for during due diligence procedures on a company in the logistics sector

Introduction

Numerous challenges confronting the transport and logistics sector directly affect M&A deals in this global industry. An expected recession reducing global transport volumes, staff shortages, burdens on the supply chain, the residual effects of the pandemic, and increasing energy and raw material prices have all caused severe difficulties for the sector.

In addition to these obvious risks affecting the market in general, several less present sector-specific topics require special consideration prior to any transaction due to their economic impact. This article looks at four such issues: the legal uncertainty surrounding the limit of financial liability for transport (see point 2); impending fines for the violation of cabotage provisions (see point 3); the effects of Part I of the EU mobility package on the transport industry (see point 4); and the risks of liability from commissioning freight forwarding (see point 5).

Legal (un)certainty with respect to limits of liability for cross-border multimodal transport, including transport by sea

A special feature of the liability regime under transport law is that the carrier is generally liable for damage to goods under their responsibility, irrespective of fault. As a trade-off, financial liability is limited. Limits of liability differ depending on the mode of transport (e.g., truck, ship, aircraft). When a contract of carriage provides for various modes of transport (e.g., road transport and shipment by sea), the limit of liability that applies to the stage in which the damage occurred will be the applicable limit of liability for the whole carriage. But which law applies when the stage is unknown?

Overlap of the contents of the regulation

Where a freight forwarding contract involves various modes of transport, including transport by sea, the first sentence of section 23.1.2 of the German Freight Forwarders’ Standard Terms and Conditions 2017 (Allgemeine Deutsche Spediteurbedingungen 2017, ADSp 2017) provides that, when the place of damage is unknown, the freight forwarder shall be liable for 2 instead of 8.33 special drawing rights (SDR) per kilogramme of freight (approx. 2.50/kg). In other words, where the place the damage occurred is unknown, the limit of liability under maritime law shall apply.

If the freight was forwarded across borders, carriage by various forms of transport, including transport by sea, can also be subsumed under the first sentence of section 23.2, second case, of the ADSp 2017. According to this provision, in the case of cross-border transport, the freight forwarder’s liability will be limited to the maximum statutory liability. Where the place of damage is unknown in cross-border freight forwarding via various forms of transport, liability is limited to 8.33 SDR per kilogramme (approx. EUR 10.00/kg) under § 452 of the German Commercial Code (Handelsgesetzbuch, HGB) in combination with § 431 (1) of the HGB.

The first sentence of section 23.2, second case, of the ADSp 2017 concerns cross-border freight forwarding and applies to both unimodal (= one form of transport, e.g., truck) and multimodal transport (e.g., truck and ship). In the case of multimodal transport including transport by sea, the rule in the first sentence of section 23.1.2 of the ADSp 2017 overlaps, which, in contrast to § 431 (1) of the HGB, establishes a maximum liability equivalent to two special drawing rights, without any distinction between cross-border and other modes of transport.

For legal scholars, there is a question of some dispute whether, in the case of an overlap where the place of the damage is unknown, the first sentence of section 23.1.2 of the ADSp 2017 applies as a special rule because freight forwarding including transport by sea will generally be cross-border, or whether the first sentence of section 23.2 second case of the ADSp 2017 applies to all cross-border freight forwarding, which would almost quadruple the amount of liability.

Perhaps for the first time, the Higher Regional Court (Oberlandesgericht, OLG) in Stuttgart addressed this question in August 2021. Reversing the logistics-friendly decision of the Regional Court of Ulm at first instance, the OLG held that the ADSp 2017 are general terms and conditions for the logistics sector. Accordingly, any doubts about the interpretation of ADSp 2017 should be resolved to the detriment of the user (§ 305c (2) of the German Civil Code, BGB)- The first sentence of section 23.1.2 of ADSp 2017 must, therefore, be understood as only applying to domestic freight forwarding using multiple forms of transport, including sea transport.

Based on this judgment, the liability of logistics companies for cross-border freight forwarding using multiple forms of transport, including sea transport, quadrupled from approx. EUR 2.50/kg to approx. EUR 10.00/kg.

Federal Court of Justice clarifies position

On 27 October 2022, the Federal Court of Justice (Bundesgerichtshof, BGH) handed down its highly anticipated judgment on the appeal (Case No. I ZR 139/21); it was published at the beginning of March 2023. The BGH annulled the judgment of the OLG Stuttgart and sent it back for retrial. In the Court’s view, where the place of the damage is unknown, the maximum liability limit for cross-border freight forwarding with multiple modes of transport, including sea transport, is two special drawing rights per kilogramme in accordance with the first sentence of section 23.1.2 of the ADSp 2017. In such cases, the first sentence of section 23.1.2 of the ADSp 2017 is lex specialis compared to the first sentence of section 23.2, case 2 of ADSp 2017 (Judgment of the BGH of 27 October 2022 in Case No. I ZR 139/21 – juris Ls.).

The preamble of ADSp 2017 recommended that the participating economic actors – freight forwarders on the one hand and shippers from trade and industry on the other - apply these standard terms and conditions from 1 January 2017. This is the relevant public that determines the interpretation of the provisions (at margin no. 38). This group would not accept that rule established in the first sentence of section 23.2, case 2 of ADSp 2017 constitutes a reverse exception to the rule established in the first sentence of section 23.1.2 of ADSp 2017, further restricting the scope of a rule to only domestic freight transport when that rule is already significantly reduced to multiple forms of transport including sea transport with an unknown place of the damage (at margin no. 42). An interpretation, which would see the first sentence of section 23.1.2 of the ADSp 2017 apply only to transport which was domestic and not cross-border and which included sea transport and where the place of damage was unknown, is a theoretically conceivable but practically implausible interpretation that cannot be seriously considered. Such an interpretation would render the rule set out in the first sentence of section 23.1.2 of the ADSp substantially pointless because the provision would have almost no practical application considering the minor importance of domestic transport by sea (at margin no. 43).

Impact of the BGH judgment on the limit of liability

In its judgment, the BGH sent a clear signal concerning the interpretation of the ADSp 2017. At the same time, it referred the case back to the OLG Stuttgart, so the issue is still not entirely resolved. When performing a due diligence analysis on a logistics company that is frequently involved in cross-border freight forwarding, including sea transport, you should assume a liability risk of 8.33 SDR per kilogramme for any calculations.

Potential fines from breaches of cabotage provisions

When performing due diligence on an internationally operating logistics company, pay special attention to any infringements of public law provisions on road haulage. Potentially, six-figure fines can be imposed.

Breach of cabotage provisions

Fines for infringements of cabotage provisions are a typical risk. Under road haulage law, cabotage is the transport of goods using vehicles and combinations of vehicles with a total weight of more than 3,5 tonnes where the loading and delivery sites are in the same state and the haulier does not have a registered office or branch in that state; in other words, domestic transport by foreign companies.

Under the first sentence of Article 8 (2) of Regulation (EC) 1072/2009, once the haulier has conducted an incoming cross-border carriage from another EU Member State or a third country and delivered the goods in the host Member State (e.g., to Germany), the haulier can undertake up to three further domestic/cabotage operations with the same vehicle within 7 days (small cabotage). Only once the vehicle has conducted another cross-border carriage can the haulier conduct three further cabotage operations within Germany.

Article 8 (2) of Regulation 1072/2009 provides that companies with EU licences can carry out cabotage operations not only in the host Member State following incoming international carriage (the country that the goods are unloaded after crossing the border), but also in other Member States, as long as any cabotage operation within a Member State is concluded within three days of the unladen entry into the territory of that Member State (large cabotage).

The haulier must be able to provide clear evidence for the cross-border carriage of goods to the host Member State and for every subsequent cabotage operation under Article 8 (3) of Regulation 1072/2009. In addition, for cross-border transport, the haulier must have a Community licence, as well as a driver’s attestation if the driver is a national of a third country (Article 3 of Regulation 1072/2009).

Legal consequence: administrative offence with fines

The infringements of the cabotage provisions of Regulation 1072/2009 is an administrative offence under § 19 of the Road Haulage Act (Güterkraftverkehrsgesetz, GüKG), and fines of up to EUR 200,000 can be imposed. We therefore recommend performing an in-depth analysis of this issue as part of the due diligence procedure.

Effect of the new EU mobility package on the transport industry

When analysing a logistics company as part of a due diligence investigation, the not yet fully foreseeable effects of Part I of the EU mobility package on the transport and logistics sector should be taken into account. On 8 July 2020, the European Parliament discussed Part I of the package and a majority voted in favour of the reforms it contains. These include rules for the posting of workers for professional drivers, access to the market and the profession, as well as social legislation. Many of the new rules have only applied since February 2022 making it impossible at present to accurately assess the effects on the transport and logistics sector. These practical uncertainties should influence prices for the transaction.

Specific rules on the posting of workers for the road transport sector

Since 2 February 2022, minimum wage rules have applied under Directive (EU) 2020/1057 of the European Parliament and the Council of 15 July 2020 laying down specific rules with respect to Directive 96/71/EC and Directive 2014/67/EU for posting drivers in the road transport sector.

Article 1 (1) of Directive (EU) 2020/1057 in connection with Article 2 (1) of Directive 96/71/EC provides that every employee shall be considered “posted” when they perform their work in another EU Member State for a limited period. The European directives apply to all drivers employed by companies located in the European Union. Bilateral journeys, i.e., the transport of goods from the home state to another Member State or a third country, and transit journeys fall outside the scope of the Directives. However, Article 1 (7) of Directive 2020/1057 expressly provides that drivers performing cabotage operations shall be considered posted (see under 3). Companies posting drivers within the meaning of the Directive must provide the relevant authority of the host countries with a posting notification containing the identity of the logistics company and details of the Community licence, the contact details for the transport manager, information about the driver (name, address, drivers’ licence number, etc.) and the number plate of the vehicle. In addition, the company must ensure that it complies with the statutory terms and conditions of employment in the host country. This includes driving and rest periods, as well as minimum wage and overtime rates.

If international logistics companies regularly carry out cabotage operations, the obligation to pay the minimum wage applicable in the relevant host state for the duration of the posting can constitute a significant cost factor., Minimum wages within the European Union range from EUR 2.41/hour (Bulgaria) to EUR 13.80/hour (Luxembourg). Although it does not have any statutory minimum wage provisions, since 1 January 2021, Denmark has required drivers carrying out cabotage operations in Denmark to receive the minimum wage agreed under the relevant Danish collective wage agreement; currently, this is EUR 22.15/ hour.

Licence obligations for cross-border transport with vehicles with a maximum admissible weight of more than 2.5 tonnes

Since 21 May 2022, when performing the due diligence on a logistics company that is not primarily involved in transport, you should verify whether the company is carrying out “smaller cross-border operations” using small transporters. Be aware also of companies that have not needed a road haulage licence or a Community licence until now because they only transport goods with a vehicle, the permissible laden mass of which does not exceed 3,5 tonnes (passenger car). In Germany, only the commercial transport of goods for a fee with vehicles with a permissible laden mass exceeding 3,5 tonnes (trucks) requires authorisation, §§ 1 and 3 of the Road Haulage Act.

Since 21 May 2022, companies require a Community licence when they carry out cross-border haulage with motor vehicles with a permissible laden mass exceeding 2,5 tonnes, Article 1 (4) (aa) of Regulation (EC) 1071/2009. Companies that did not previously require a Community licence because they carried out cross-border road haulage using solely transporters below the 3,5-tonne limit might now need to apply for a Community licence under Part I of the new EU mobility package. Failure to do so can result in fines of up to EUR 20,000 (§ 19 (2) No. 1 and (7) of the Road Haulage Act).

Prohibition against spending weekly rest periods in the vehicle

Since 21 February 2022, transport companies have had to contend with a widely discussed new rule which – at least in Germany – is not pragmatically workable. When performing due diligence on a logistics company, consider the percentage of vehicles operating long-distance haulage which don’t return to the place of business over the weekend. Significant costs could be incurred for these vehicles and the drivers in the future.

Under Article 1 (6) (c) of Regulation (EU) 2020/1054, drivers may not take regular weekly rest periods (normally from Friday to Sunday evening) in a vehicle. Instead, drivers must take their rest in suitable gender-friendly accommodations with adequate sleeping and sanitary facilities. Employers bear the costs of this accommodation. According to § 8a (1) second sentence of the Act on Driving Personnel of Trucks and Trams (Gesetz über das Fahrpersonal von Kraftfahrzeugen und Straßenbahnen, FPersG), companies shall have responsibility for ensuring that the regular weekly rest periods are respected when these are spent in the vehicle or at a location without suitable sleeping facilities. Fines of up to EUR 30,000 can be imposed for infringements.

This rule does not clarify what is meant by “suitable sleeping facilities”. Do companies have to book a hotel or rent a holiday house for their drivers? Is a youth hostel or container sufficient? Transport law experts often discuss whether this lack of clarity is sufficient for the provision to be considered unconstitutional because it infringes the requirement of certainty (Article 103 (2) of the Basic Law, Grundgesetz, GG).

Irrespective of the costs and possible fines, the new rules pose significant practical problems for logistics companies: few accommodation facilities have parking spaces for trucks. Drivers, therefore, need to be transferred from rest areas to their accommodation. Who will guard the truck and cargo during this time? Insufficient numbers of car parks with attendants in Germany mean the issue of “truck tarp slicers” (thieves) will become more acute as trucks remained parked on weekends. Companies face the dilemma of either complying with the transfer rule and risking the loss of the unguarded cargo, or risking fines of up to EUR 30,000, which must be recorded in the central commercial register and can jeopardise the company’s trustworthiness.

Liability for commissioning freight forwarding

Beware of freight forwarding: another special risk for logistics companies. A freight forwarding contract (Lohnfuhrvertrag) involves a “manned” transport, such as a truck, being made available for use for any desired cargo and journey on instruction by the principal (here: the target). Freight forwarding contracts can take the form of service agreements, works agreements, leasing agreements or mixed contracts. If the contractor is otherwise obliged to ensure successful transport, the contractor will become a freight forwarder. The question of how a freight forwarding agreement should be classified from a legal perspective and what the legal consequences of this classification are for a freight forwarder, which uses its personnel to carry out transport for other companies, should be considered on a case-by-case basis (BGH, RdTW 2016, 215 at Margin No. 10).

The risk with this approach arises when logistics companies work as principals for freight forwarders. Freight forwarders will only be liable vis-à-vis the principal, irrespective of negligence, when the freight forwarding agreement is classified as a contract of carriage within the meaning of § 407 of the HGB. Where this is not the case, the freight forwarder will only be liable if they commit a wrongful act. When making drivers available, this can be limited to any fault when selecting an agent (culpa in eligendo) (OLG Nuremberg, RdTW 2015, 300 at Margin No. 22 and 23). In contrast, the principal will be liable vis-a-vis its customer, regardless of liability under the freight forwarding agreement.

Summary

Transport and logistics companies are subject to a range of special regulations that don’t apply to other companies, particularly with respect to strict liability for goods under their care. This liability and several special public laws that only apply to road haulage and can result in the imposition of fines if infringed make it worth taking a closer look at issues beyond the typical risks of a corporate acquisition when performing a due diligence analysis on a transport and logistics company.

Dr Philipp Hohmann
Dr Martin Rappert

The original of this article was first published in German language in the M&A Review Sonderrisiken bei der Prüfung von Logistikunternehmen im Rahmen einer Legal Due Diligence - M&A Review (ma-review.de) and this English translation is made and published with the permission of the M&A Review