The do's & don'ts of third-party contracts (page 2)

-- Logistics Management, 2/1/2005

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Transportation Brokers

The problem most commonly encountered when dealing with transportation brokers is their failure to pay the carriers they hire. If this occurs, both the shipper and its receiver will be dunned and/or sued by the carrier, even if the shipper has already paid the broker. Although there are defenses against such actions, a better solution is to enter into a contract with the broker that requires the broker to contract with every carrier it uses.

That broker-carrier contract must contain a provision whereby the carrier designates the broker as its agent for the collection of freight charges from the shipper. Both contracts—the one between the shipper and the broker, and the one between the broker and the carrier—are necessary, otherwise the carrier will not be bound to this agency agreement. Drafting these contracts is the easy part; ensuring that brokers enter into a contract with every carrier is the tougher task.

If a shipper has no contract with the broker and the carrier is seeking payment from the shipper, the pivotal issue is whether the carrier has extended credit to the broker rather than to the shipper. Court decisions have held that the shipper is not liable to the carrier in such circumstances.³

Other issues that should be addressed relate to the carrier's liability terms, claims practices and policies, time limits, cargo insurance terms, indemnification clauses, credit terms and penalties, and protection against "back-solicitation."

Brokers present a special challenge with respect to cargo insurance coverage. Because brokers have no legal liability for cargo loss and damage (unless they voluntarily assume it by contract), they may not purchase a cargo liability policy. However, the insurance industry has created a "Contingency Cargo Liability Policy," which offers to pay a claim for which the carrier is liable if the carrier and its insurer fail to pay it. Shippers that are presented with such a representation would be wise to request that the insurer furnish a written agreement, signed by a corporate officer, to pay such claims even though the broker has no insurable interest in the goods. There's good reason to do so: Some insurers have been known to renounce the policy when a large claim is filed, on the grounds that the broker had no insurable interest in the cargo.

Freight Forwarders

Do's and don'ts of contracting with freight forwarders depend on which type of freight forwarder is involved. There are several categories: surface freight forwarders, which are "carriers" under the Interstate Commerce Act and the Carmack Amendment, as per 49 U.S.C. § 14706; ocean freight forwarders, which are not carriers, as per 46 USC § 1702 (17)(A); and airfreight forwarders, which are "indirect carriers" that are subject to the same liability laws as airlines.

(a) Surface freight forwarders

Before signing a deal with a surface freight forwarder, the shipper should request a copy of its permit (registered with the Federal Motor Carrier Safety Administration) and its cargo policy, including a "BMC 32" endorsement. Surface freight forwarders are the only type of intermediary that must maintain this endorsement, which makes the insurer directly liable to the claimant for up to $5,000 per vehicle or $10,000 per occurrence, without regard for any exception or deductible that may be in the policy. The BMC 32 endorsement is also mandated for interstate truckers.

All shippers should insist on seeing evidence that the freight forwarder actually performs shipment consolidation and break-bulk operations. If it doesn't, and you experience a transit loss, a court could rule that the forwarder acted only as a broker, which is not liable for such losses.

(b) Ocean freight forwarders

These intermediaries, acting as the shipper's agent, make transportation arrangements, prepare shipping documents, and handle documentary transactions with carriers. Those transactions typically involve ocean bills of lading, which are contracts of carriage.

Since ocean carriers have a record of attempting to treat the entire container as the "package" in order to limit their liability to $500 whenever possible, shippers and their agents must take extraordinary measures to express and enforce their intent to treat the smallest unit of packaging as the "package" on the ocean carrier's bill of lading.

The Nov. 9, 2004 decision by the U.S. Supreme Court in Norfolk Southern Railway v. Kirby requires changes in the way importers deal with ocean freight forwarders. Two bills of lading were critical to that case. The first was a consolidator's bill of lading issued by an Australian ocean freight forwarder to Kirby, the shipper. The second was issued by the ocean carrier to the freight forwarder. Continued...

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