Law Offices of Seaton & Husk, LP

Truly Stuck in the Middle
By Henry E. Seaton
May 2004
Reprinted from etrucker.com

Q Is a property broker liable for cargo claims if the carrier does not pay or has faulty insurance? And must we pay the carriers we hire if the shipper goes bankrupt and does not pay the freight charges?

A Think of a property broker like a real estate agent or broker who brings together a willing buyer and seller of a house. The agent or broker doesn’t have to buy the house if the seller defaults. Nor does it warrant the condition of the house to the buyer.

Absent a contract overriding it, the bill of lading is the primary transportation contract between the shipper (or consignor) and the carrier. The carrier, not the broker, is liable under the Carmack Amendment for any cargo loss or damage during transit (49 U.S.C. Sec. 14706). And the shipper or consignor is primarily liable for payment of the freight charges (49 U.S.C. Sec. 13706).

Case law confirms that a broker has no liability for cargo loss or damage. Similarly, the broker regulations suggest, and several circuit courts have held, that the broker’s primary obligation is to receive the payment of freight charges in trust and to pay the motor carrier it retains upon receipt. The broker regulations require a transaction-by-transaction accounting of freight charges (49 C.F.R. Sec. 371.3).

Unfortunately, the duties and obligations imposed by regulations aren’t enough to satisfy the demands on property brokers in today’s competitive marketplace. All too often, brokers feel compelled in contracts to guarantee the payment of freight claims to shippers and the payment of freight charges to carriers. Such guarantees are enforceable as a matter of contract law, and there is no statutory prohibition against them. Yet, a new broker is writing a prescription for disaster by assuming these liabilities by contract.

Cargo claims
To escape the pitfalls of substandard cargo policies and lengthy claims processing by carriers, many shippers now try to settle cargo claims simply by offsetting the amount they think the claim is worth from freight charges due to the broker. Inevitably, the broker had planned to use those withheld funds to pay other carriers that provided damage-free service. So now the broker has no money to pay these carriers their undisputed charges.

Ideally, brokers should have sufficient cash reserves to handle their undisputed freight payments. But new brokers in particular lack the capital to bankroll cargo claims and have little ability to indemnify themselves against these cash flow shortfalls. Contingent cargo insurance can be expensive and hard to find. Moreover, brokers can’t easily avoid potential uninsured losses unless they want to examine each carrier’s cargo policy very carefully.

In this environment, your safest course of action is simply to specify by contract that the shipper will file cargo claims with the underlying carrier and follow the federal claims rules with respect to adjusting such claims. At best, you can negotiate with both shipper and carrier to resolve claims by arbitration or mediation to reduce court expense and delay for all.

Payment of freight charges
Every motor carrier you hire expects to be paid within 30 days or within some reasonable specified time. Unless you are careful, your payment terms can be considered a guarantee of payment, even if the shipper does not pay you. All too frequently, I fear, sincere but inexperienced brokers dump all of their freight charge receivables into an unsegregated account, paying their operating expenses when due and the carriers when promised. They may be solvent and profitable on their accrual basis, but this method of operation is still a prescription for disaster when a major shipper goes bankrupt or exercises an offset.

When a broker uses money received from shippers to pay other carriers on the delinquent accounts of a defaulting shipper, it has robbed Peter to pay Paul. The carrier that doesn’t get paid inevitably takes recourse to the shippers on the bill of lading, so the broker now has compromised its good will with its remaining solvent customers.

To avoid this predicament, brokers should place collected freight charges in a constructive trust until underlying carriers are paid. That way, if the broker must pay a carrier on a delinquent account, those funds will come from the broker’s working capital and not from monies collected in trust for payment of freight charges to others.