Legal Briefs: Just who do you think you're dealing with?

Last fall, in the CEO's office:

CEO:
"Good news.We just sold a number of machines to a Coca Cola bottling company. They need them fast."

Shipping Manager:
"Don'tworry,I'llhave our logistics provider make transportation arrangements."

Today, in a federal courtroom:

Judge:
"I find thatthe logistics provider is not liable for the damaged and destroyed machines."

No one wants to be in that shipping manager's shoes, trying to explain the judge's decision to the CEO. Yet, that's essentially the situation that ended up in a federal court in California recently.

Such a scenario highlights an increasing problem a number of shippers have experienced when something goes wrong, leading them to ask in frustration: Just what type of transportation entity are we dealing with?

Way back when (i.e., before the Interstate Commerce Commission was abolished in 1996), there were carriers — such as railroads and truckers — as well as freight forwarders and brokers. The law was pretty clear as to who could do what and what were the responsibilities of each. The ICC kept each in line, making sure that the lines between them did not become blurred. Shippers basically knew what kind of transportation entity they were dealing with and what were the responsibilities and obligations of each.

The growth of integrated transportation service providers has been, in most cases, a value-added boon for shippers. One-stop transportation shopping can reduce shipper in-house overhead because they do not need as large a staff to make arrangements and monitor traffic. It has also raised the level of professionalism of logistics managers as they can deal with providers who offer a range of options.

However, problems develop when something goes wrong with a shipment. While traffic management can be outsourced — creating a relatively seamless web of transportation services — the seams can sometimes come apart in a courtroom.

Shippers should know exactly what type of legal entity they are dealing with. For instance, they may book shipments on a regular basis with a motor carrier. Under the Carmack Amendment, the legal liability of a motor carrier for loss or damage is clearly set. However, many motor carriers are also licensed by the Federal Motor Carrier Safety Administration (FMCSA) as brokers. A shipper may tender many shipments to the motor carrier, who then transports it under its motor carrier registration. But, on occasion,-the shipper may tender certain loads not normally handled by the particular motor carrier, such as hazmat shipments, shipments needing flatbed service, temperature control or other specialized service.

The "motor carrier" may take these in its capacity as a broker, rather than as a "motor carrier," and arrange for specialized motor carriers to transport the load. The shipper may not be aware that the "motor carrier" is actually handling this as a broker — either because the motor carrier itself is also a registered broker or an affiliated company is a broker.

If the specialized load is lost or damaged, the "motor carrier" may suddenly reveal it was actually functioning as a broker, since Carmack liability pertains to motor carriers and freight forwarders, not brokers. Okay then, if the shipper can't hold the broker liable under Carmack, maybe the broker is liable under some other legal theory. However, as the recent case concerning transporting machinery for the Coca Cola bottler demonstrates, that may not be easy.

Shippers have attempted to hold brokers liable under legal theories of negligence. Shippers have claimed that the broker is responsible for claims because it was negligent in selecting the carriers. Basically,the shipper alleges that a broker breached its responsibility by failing to investigate carrier's safety record, claims history and insurance status. These arguments have generally failed because the courts find that the broker did use a properly permitted carrier, had done some investigation of the carrier, and had no particular reason to suspect a problem.

So, how does a shipper protect itself?

  • Know what entity you are dealing with. Because one company may be able to wear several hats (motor carrier, domestic freight forwarder, broker, ocean freight forwarder, air forwarder, etc.), get in writingwhich type of entity will be handling your load.
  • Have it in your contract that whatever entity you deal with will be liable for lost and damaged items. This takes such claims out of Carmack or state negligence laws and makes the transportation arranger liable as a matter of contract law.
  • Get insurance. When something goes wrong, the insurance company pays you and then it has the hassle of collecting from others.
  • Deal with established companies that have a good service record. A great deal from someone you never heard of and can't check out may be no deal at all.

James Calderwood is a partner with the law firm of Zuckert, Scoutt & Rasenberger L.L.P., in Washington, D.C., where he concentrates on transportation matters. He can be reached at [email protected].

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