When the Middleman Doesn't Pay

Liability for payment of freight charges has evolved into a complex legal problem that seems to be arising frequently when a shipper has arranged for a middleman (termed “3PL”, “broker”, “forwarder”, “logistics manager” or whatever) to arrange for the transportation of the shipper’s freight. After the carrier delivers, the carrier looks to the middleman (let’s call him a “broker” because that is the term used in the US Code) to pay it. However, what happens if for some reason the broker does not or cannot pay the carrier?

As one can expect, the carrier then says to the shipper: “I hauled your goods and the broker you hired engaged me on your behalf so you, shipper, pay me.” The shipper responds that it paid the broker who was to pay the carrier and it will not pay twice.

One of the reasons some people are lawyer averse is because lawyers can not always give straight forward answers to straight forward questions. This is one of those circumstances.
In this scenario, is the shipper liable to the carrier for the unpaid freight charges?
The answer is that it depends on the paperwork covering the shipment. This is what makes the issue legally complex.

Under a decision earlier this year by the US Court of Appeals for the Sixth Circuit the shipper could be liable to the carrier even though it had already paid the broker. The key is what kind of contracts exist among the three parties, including any bills of lading that have passed.

The appellate court decision involved a series of shipments by Sears Roebuck & Co. arranged by a broker named National Logistics Corporation (NLC). According to the court decision, NLC was engaged by Sears to provide brokerage services, freight bill auditing and other services for Sears. As part of its brokering services for Sears, NLC arranged for a motor carrier, Oak Harbor Freight Lines, to transport some of Sears' freight. Oak Harbor was to bill NLC and be paid by NLC.

For years Oak Harbor had a written contract with NLC. Interestingly the contract said that the “shipper” would pay Oak Harbor if NLC did not. For certain shipments Oak Harbor used a straight bill of lading which indicated that Sears was the consignee (these were shipments being returned to Sears). For outbound shipments Sears generated the bills of lading itself and, among other things, instructed carriers to send their freight bills to NLC.

The court decision says that generally Oak Harbor, the motor carrier, would send its freight bills to NLC within three days of delivery. NLC audited the invoices and collected the money from Sears. NLC then paid Oak Harbor. Sears terminated NLC with, at that time, over $400,000 due from NLC to Oak Harbor for hauling Sears freight. Of this amount Sears had already paid NLC $220,000. Oak Harbor tried to collect from NLC, but to no avail. So it sued NLC and Sears.

Sears claimed it was not liable, but in a battle over the wording of the contracts and the bills of lading used in the transactions the lower court said Sears was liable. The Court of Appeals agreed.

Shipper liability in third party payment (or really non-payment) situations turns on the wording of the legal documents. As a general proposition the “consignor remains primarily liable” to a carrier, at least this is what the US Supreme Court said in 1982. However, this liability can be contracted away, so it is very important that all parties know what they are signing.

For instance, a bill of lading may contain what are known as “nonrecourse” and “prepaid” provisions. If they have been separately signed or otherwise indicated by the parties then the consignor may well be released from any obligation to pay the carrier.

These bill of lading provisions may, however, be overridden by a transportation contract that is drafted to cover a number of shipments over a period of time. If for instance a transportation contract says that the carrier has to look to the consignee not the consignor for payment then the consignor may be off the hook no matter what a bill of lading says.

While a bill of lading is a type of contract for carriage it is most often used for one-time, individual shipments and is not intended to cover a series of shipments over time, that is what a transportation contract covers. Well drafted transportation contracts usually state that they take precedent over any conflicting language in a bill of lading. In such cases a bill of lading becomes only a routing document and delivery receipt. This is one reason many large shippers no longer use bills of lading.

This matter involving Sears, a motor carrier and a middleman (broker) is all too typical of what sometimes happens in today’s logistics markets. Various parties have each entered into contracts with one another (Sears with the broker and the broker with the carrier) at different times with different terms and concepts that may contradict each other. I have seen some of these contracts which are hopelessly out of date by referring to sections of the US Code and federal regulations that no longer exist. The issues become more confused when bills of lading are signed for individual shipments. There simply are no “standard” bills of lading anymore so their terms may vary.

Confused? When the middleman does not pay, the carrier will almost certainly go after the consignor and consignee. Any court action will probably result in the judge trying to make sense out of a confusing mess of conflicting documents.

BIO

James A. Calderwood is a partner with the law firm of Zuckert, Scoutt & Rasenberger, L.L.P., in Washington, D.C., where he concentrates in transportation matters. He can be reached at jacalderwood@ZSRLAW.COM. This column is designed to provide information of general interest. It cannot substitute for in-depth legal analysis of particular problems. Readers are urged to seek counsel concerning individual situations.

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