The do's & don'ts of third-party contracts (page 3)

-- Logistics Management, 2/1/2005

Page 3 of 3

The ocean carrier subcontracted with the Norfolk Southern Railway to carry Kirby's shipment of 10 containers from the port of unloading to the destination. En route, the containers were destroyed in a derailment. The shipper believed that it was entitled to a payment of the full invoice value of $1.5 million under its contract with the freight forwarder. But the ocean carrier and the railroad contended that the shipper was bound by the terms of the bill of lading that the ocean carrier issued to the freight forwarder. That bill of lading limited Norfolk Southern, as the ocean carrier's subcontractor, to a liability of $500 per container.

The Supreme Court ruled that the ocean freight forwarder acted as the shipper's agent when it entered into the second bill of lading, therefore the shipper was bound by the terms of that bill of lading. Thus the shipper recovered only $5,000 for all 10 containers.

That decision overruled the law in some U.S. Circuits that there must be privity of contract between the shipper and the inland carrier in order to apply the inland carrier's liability limitations. Those cases held that the ocean freight forwarder could not bind the shipper to deals it made with the inland carrier without the shipper's consent. In the future, importers should assume that the ocean carrier's limitation will be $500 per package, and that such a limit will extend to inland carriers unless they require that a different liability be inserted in all contracts governing their cargo throughout its entire journey.

Shippers also need to be certain that their forwarders or consolidators have cargo insurance policies that will cover the desired amount of coverage and pay for all losses. So-called "All Risk" policies are not as comprehensive as many shippers assume; up to 93 exclusions have been identified in such policies.⁴

(c) Airfreight forwarders

It has been estimated that 80 percent of "air" shipments actually are shipped on a truck under an air waybill that purports to limit liability to 50 cents per pound. If such a shipment is lost or damaged in transit, the airfreight forwarder will attempt to pay only 50 cents per pound rather than the full invoice value as required of motor carriers under the Carmack Amendment.

The only lawful basis for such entities to move airfreight shipments on trucks is a statutory exemption that applies when the goods make a prior or subsequent movement by air [49 U.S.C. § 13506 (8)(B)]; or when trucking has been necessitated by adverse weather conditions, mechanical breakdown, or conditions beyond the control of the carrier or shipper. [Id., sub-paragraph (8)(C)].

In practice, however, much of this traffic is being trucked in violation of the statutory exemptions. When lost or damaged, these shipments are subject to the Carmack Amendment, which makes the carrier liable for the full invoice value unless the shipper has given its written consent to lower the carrier's liability in return for a lower rate. It doesn't matter whether the carrier issued an "air waybill" that specifies the traditional airline liability limit of 50 cents per pound. If the ground movement did not meet the qualifications for the statutory exemption, it is subject to the Carmack Amendment's "actual loss" standard. See Hartford Fire Insurance Co. v. LTD Air Cargo, Inc., d/b/a/ LTD Express, et al.⁵

Make the Investment

Shipping through intermediaries of any type requires shippers to be knowledgeable ("sophisticated," in the courts' terminology) in the laws governing those entities. It also requires shippers to have a thorough understanding of the legal consequences of the arrangements and contracts they enter into. In short, education and training in this area is not an expense—it's an investment!

Summary of Regulatory Requirements Governing U.S. Intermediaries

Company Type	Make Tariff Available on Request	File Tariff	Must be Reasonable*	Cargo Insurance	Cargo Liability
Third-Party Logistics (3PL)	(See Note 1)	No	No	No	No
Truck Broker	No	No	No	$10,000 surety bond (See Note 2)	No (See Note 2)
Surface Freight Forwarder	No	No	No	Yes, BMC-32**	As per Carmack amendment
Ocean Freight Forwarder	No (See Note 3)	No	No	$50,000 bond, 46 CFR, 515.21(a)(1)	No
Airfreight Forwarder	Yes, 49 USC 41707, 14 CFR 221.177, 14 CFR 253.4	No	Yes, Common law	No	Common law and tariffs
"Reasonable" is defined as being similar to current market rates for similar or identical services. *A BMC-32 Endorsement to a carrier's insurance policy provides cargo liability coverage in the minimum amounts of $5,000 per vehicle or $10,000 per occurrence. Note 1: Third-party logistics companies are not regulated. However, if they conduct operations that fall within the definition of a broker, freight forwarder, or motor carrier, they are subject to those regulations. Note 2: Brokers are not liable for transit damages, but may be liable for damages resulting from their negligent selection of a carrier. Note 3: Ocean freight forwarders are not carriers, as they do not issue their own bills of lading. Adapted from Transportation, Logistics and the Law

Author Information

William J. Augello, founding director of the Transportation Consumer Protection Council, is the author of Transportation, Logistics and the Law, and is an adjunct professor at the University of Arizona. Mr Augello may be reached at williamaugello@comcast.com.

Transportation, Logistics and the Law

Although transportation has largely been deregulated, federal laws and regulations still apply to many aspects of transportation and logistics. Yet many shippers appear to lack an understanding of how legal issues may affect their daily operations.

Transportation, Logistics and the Law, by William J. Augello, Esq., can help fill that knowledge gap. The completely revised second edition explains the laws governing transportation and logistics, as well as the impact of court cases involving shippers, carriers, and intermediaries. More information about the book and related educational seminars is available online at www.transportlawtexts.com.

Previous 1 2 3