Imagine this scenario: A manufacturer of health and beauty products partners with a third-party logistics provider (3PL) to handle their fulfillment operations. During their startup phase, the 3PL misses agreed-upon performance requirements defined in the customer’s service-level agreement (SLA). The customer initially waives the penalties and agrees to amended terms, but later they accuse the 3PL of breaching those same metrics. Meanwhile, the customer secretly establishes a new relationship with different 3PL, demands millions of dollars in concessions from their original 3PL, and then walks away, resulting in a legal battle over tens of millions more in damages.
Scenarios like this aren’t rare. I know, because I’ve served as an expert witness on more than 50 cases related to warehousing, fulfillment, distribution, and logistics. I’ve been retained by 3PLs and by businesses who hired them, and I’ve seen how trust can evaporate, turning 3PL relationships from symbiotic to adverse, potentially deteriorating into costly and time-consuming litigation.
In my experience, even the most promising 3PL partnerships can derail. But it doesn’t have to be like this. Logistics professionals on both sides of the relationship — 3PLs and their customers — can avoid certain costly mistakes that can turn their once healthy partnership into courtroom drama. Here are six of the most common and costly causes of 3PL disputes:
1. Service-Level Failures
At the heart of most 3PL disputes is performance. On-time shipment rate. Order accuracy. Inventory accuracy. And other industry-standard performance metrics and key performance indicators (KPIs). As I’ve stated many times in my expert reports and testimonies, SLAs govern 3PL performance. (You can’t manage what you don’t measure, right?) If a 3PL doesn’t meet its KPIs — or worse, if KPIs are not clearly stated in their SLAs — then their customer’s service levels are likely to suffer. Tightly written, well-defined SLAs create accountability, while vague, ambiguous, or nonexistent SLAs open the door for argument.2. Contract Ambiguity
Many 3PL disputes stem from the contract itself. Although 3PLs generally prefer to use their own standard logistics service agreements (LSAs), these can be poorly written. They can contain vague statements of work (SOWs), nebulous service descriptions, or unclear penalty and termination clauses that can create confusion about operational responsibilities and expectations. Weak or ambiguous contract terms complicate efforts to determine accountability when something goes wrong. Plus, contract terms that strongly favor 3PLs are sometimes overlooked by customers unfamiliar with 3PL contracting nuances. As a result, 3PL disputes often hinge on language that seemed harmless during contract negotiation but proved costly when the operations came under stress.
3. Capacity Limitations at Times of Peak Demand
As my dad often said, “When your head’s in the freezer, and your feet are in the fire, on average you’re doing pretty well.” Customer demand is often unpredictable, and factors such as seasonality, economic cycles, product launches and promotions, weather events, regulatory changes, material shortages, and major disruptors like COVID or trade tariffs can produce wild swings in demand. If the 3PL can’t scale up its capacity — labor, dock space, processing capacity, etc. — the customer relationship is often strained by missed orders and backlogs. Too often, a dispute develops when potential demand swings and related volume commitments aren’t considered or discussed when a business hires a 3PL.
4.Inventory Losses or Damage
Another common trigger of 3PL disputes is inventory accountability during handling and storage. These disputes often involve claims of lost, stolen, or damaged inventory, and they can be severe — sometimes giving rise to multi-million-dollar lawsuits. For example, I’ve seen cases where poor tracking of expiration dates led to millions of dollars in inventory losses. I’ve also seen a case involving a customer who had mislabeled their cases with incorrect item quantities and later blamed the 3PL for stealing their inventory. Typical LSAs preferred by 3PLs limit the 3PL’s liability, but not the customer’s losses. When the parties disagree on the value of the lost or damaged inventory, the party who is responsible for the losses, or the root causes of the losses, tensions escalate.
5.Unexpected Billing and Accessorial Charges
Activity-based costing and billing, commonly called “accessorial” charges, are fundamental elements of most 3PL agreements. These charges are typically volume-based fees for specific activities and value-added services (VAS) performed by the 3PL for their customer. Often, 3PL customers are blindsided by these accessorial charges, typically due to unclear expectations or unrealistic assumptions by one or both parties, so these fees are a common flashpoint for 3PL disputes.
6.Breakdown in Communications
Even if effective contracts are put in place between a 3PL and their customer, the partnership can falter if expectations aren’t aligned. Misunderstandings often occur when a customer unreasonably believes they should receive exclusive, privileged service from their 3PL, but the 3PL serves them in a more standardized way. Misunderstandings also arise when 3PLs operate in a vacuum, without regular reporting or business reviews to discuss the health and success of their relationship with the customer. Poor communication practices, slow responsiveness, lack of shared data and explanations, unreasonable expectations, lack of escalation protocols, and lack of accountability frequently amplify tensions to the point where litigation between the 3PL and their customer becomes inevitable.
What Can You Do to Prevent 3PL Disputes?
In many of the cases I’ve supported, the legal disputes could have been avoided if those involved in establishing these relationships had applied industry best practices with rigor and foresight. Whether you're a 3PL or a 3PL customer, the keys to a successful long-term partnership are mutual clarity, accountability, and communication.
First, document everything. Get both parties on the same page, literally, by clearly defining metrics and KPIs, responsibilities, volume expectations, and business rules in the contract documents (i.e., the LSA and SLA). Avoid vague terms. Spell out the details of escalation procedures, amendment processes, and penalties. Ensure the contract reflects the actual way the business intends to operate.
Second, forecast and flex. Account for capacity requirements driven by factors like seasonality, promotions, and potential disruptors in your volume projections. Plan contingency strategies for the times when exceptions occur. As the relationship moves forward, discuss any needed changes early, before they become a problem.
Third, regularly take the temperature of the relationship. Avoid surprises. Don’t wait for business review meetings before bringing issues to the attention of the other party. Establish and maintain a cadence of structured communication with shared metrics, root cause analysis, and action plans.
Fourth, educate each other. A 3PL needs context about their customer’s business, and a customer needs to be knowledgeable about their 3PL workflows and limitations. When each party understands the other party’s goals, challenges, and constraints, they can make better decisions to ensure mutual success.
Finally, don’t avoid the hard conversations. If you’re dissatisfied with what the other party is doing, bring it up early—but be professional, respectful, transparent, and constructive. Most of the cases I’ve seen began with minor operational challenges that were left unaddressed, causing disputes and eventually escalating into major litigation between a customer and their 3PL.
Summary
These six most common causes of 3PL disputes aren’t theoretical — they’re based on more than a dozen cases on which I’ve served as an expert witness. I’ve found that the most successful 3PL relationships aren’t built just on rates and capabilities; they’re also built on mutual trust, alignment, and accountability. However, things can go wrong, even in strong 3PL partnerships. Ineffective contracts, misunderstandings, and unspoken expectations can lead to frustration, and often, unfortunately, to costly legal disputes. But I’ve found that most litigation is preventable.
By defining mutual expectations, communicating openly, and collaboratively reviewing performance, 3PLs and their customers can avoid the traps that turn operational partnerships into legal battles and focus instead on mutual success.
Stephen (Steve) T. Hopper, P.E., is Founder & Principal of Inviscid Consulting. Inviscid helps businesses drive down operating costs and boost service levels in their warehousing, fulfillment, distribution, and logistics operations. He can be reached at steve.hopper@inviscidconsulting.com or 404.832.5326.
This article originally appeared in the May/June, 2025 issue of PARCEL.
