DOUBLE PAYMENT DILEMMA

DOUBLE PAYMENTS INVOLVING A BROKER

Reproduced with the Permission of Miles L. Kavaller

Consider the following scenario:   Your company, a shipper does business with an ICC licensed freight broker as well as directly with motor carriers.  Because the broker has experience with certain shipments, say for example, those requiring flatbed equipment, the broker makes all of your company's transportation arrangements for that traffic.  The broker arranges for transportation with a carrier whose driver picks up the shipment from your facilities.   Your bill of lading does not name the carrier whose identity is unknown until the driver arrives at your company's facilities at the time of the scheduled pickup.   Instead, the bill of lading contains the name of the broker in the space calling for the name of the carrier.  The driver picks up the shipment, signs the bill of lading and later crosses out the name of the broker and inserts the name of the carrier on the bill of lading.  The broker issues a freight bill invoice in the amount of the agreed transportation charges which is promptly paid by your company.   Some months after the transportation of this shipment and others like it, the broker goes out of business.  Your company learns that the broker did not pay the carrier and the carrier has now demanded payment of its freight charges.  Will your company be successful in persuading the carrier not to bring a lawsuit or if litigation is commenced, can it prevail in court?

The courts have dealt with this not uncommon scenario and generally rule in favor of the shipper.   In Southern Pacific Transportation Company v. Commercial Metals Company, 456 U.S. 336 (1982) the United States Supreme Court recognized that in cases where a shipper/consignor or consignee has previously paid the freight bill, and relied on the assumption that the carrier has paid for its freight services, equity may bar the carrier's recovery.  Thus, equitable considerations disfavor the placement of duplication of liability upon an innocent party.  That was the result reached in Consolidated Freightways Corporation v. Admiral Corporation, 442 F.2d 56 (7th Cir. 1971) where the consignee was sued for payment of freight charges where the bills of lading were marked prepaid.   When the consignor went out of business, having failed to pay carrier's charges, the carrier turned to the consignee.  The court ruled that the carrier was estopped from collecting those charges.

Similar results have been reached in Olson Distributing Systems v. Glasurit America, 850 F.2d 295 (6th Cir. 1988); Farrell Lines, Inc. v. Titan Industrial Corporation, 306 F. Supp. 1348 (S.D.N.Y. 1969), affirmed, 419 F.2d 835 (2d Cir. 1969), cert. denied, 397 U.S. 1045 (1970) and Glosson Enterprises, Inc. v Rexcel Company, 1984 Fed. Car. Case 83, 137 (D. Mass. 1984) at pages 58536-58538.  Freight charges had been billed by and paid to third party brokers or an unlicensed freight forwarder with whom the carriers had contracted for transportation and to whom the carriers had extended credit.  In each of these decisions, the courts found against the carrier and in favor of the defendant shipper on equitable estopped and other grounds.

But many carriers continue to deal with third parties despite the risk of non-payment of freight charges. Some carriers have incorporated provisions in their tariffs which obligate the shipper, as a guarantor of payment, to pay the carrier's charges if they are not paid by the third party broker.   Such tariff provisions were enforceable under the filed rate doctrine.   However, the passage of the Trucking Industry Regulatory Reform Act in 1994 ICC filed tariffs for motor common carriers, with the exception of household goods carriers, were declared null and void.  While there are no recent court decisions, I would suspect that a motor carrier would have a difficult time enforcing the unfiled tariff provision in the absence of evidence that the shipper/consignor or consignee had actual knowledge of its requirements.

DOUBLE PAYMENTS INVOLVING A FREIGHT FORWARDER

In the prior article,  I discussed whether, for a prepaid shipment, a shipper could be required to pay a carrier when a broker failed to do so. This article will address the same scenario involving a freight forwarder.

The definition of a forwarder is contained in various statutes such as the Shipping Act, the ICC Termination Act, and the California Public Utilities Code. Basically, a forwarder is a carrier which, in the usual and ordinary course of its activities, assembles or arranges for the assembly of LTL or LCL into TL or CL quantities, uses rail, motor or air carriers to perform the line-haul transportation (forwarders which use ocean carriers are non-vessel operating common carriers [NVOCCs]; those which use air are "indirect" air carriers) and provides, or arranges for break-bulk and delivery at destination. A forwarder issues a bill of lading to the shipper and therefore assumes liability for the safe transportation and delivery of the shipment from origin to destination. Because forwarders also receive a bill of lading, they are shippers with respect to the rail, motor or air carrier which performs the line-haul transportation. And they are contractually responsible for the payment of the line-haul carrier’s freight charges.

But can the shipper whose freight is being transported and who obtained the services of the forwarder be required to pay the charges of the line-haul carrier where the forwarder fails to do so, either because of insolvency or even bankruptcy? A recent decision by the U.S. Court of Appeals for the 11th Circuit in Atlanta addressed this issue in National Shipping Company of Saudi Arabia v. Omni Lines, Inc., 106 F.3d 1544 (11th Cir. 1997). The decision adopted a rebuttable presumption for shipper liability and requires the examination of : (1) whether the carrier extended credit to the forwarder or the shipper where the bill of lading shows the charges as "freight prepaid" and (2) the terms of the bill of lading (for example: "Full freight to destination shall be considered completely earned upon receipt of the Goods at Point of Origin whether the freight be or intended to be prepaid or to be collected at destination ").

The district court granted summary judgment ( a ruling on the law without a trial where there are no genuine issues of material fact in dispute) in favor of Omni Lines, Inc., the shipper, finding no liability to the carrier. The appeals court reversed the summary judgment for the defendant shipper stating that there are material fact issues which the district court had to decide. The ultimate outcome is not reported, although my guess is the case was settled.

In its opinion, the appeals court acknowledged that its decision would be inequitable since both the shipper and the carrier did what they were expected to do. Either the shipper would pay twice or the carrier would not be paid at all. This court also recognized other court decisions applied the "equitable estoppel doctrine" which bars carriers from recovering freight charges where the shipper was justified in believing that the carrier had been paid for its services, basing its belief on the freight prepaid notation on the bill of lading. This court however was persuaded by other cases in the 5th Circuit (based in New Orleans) which held that shippers remain liable for the payment of carrier freight charges unless it can be established that the carrier intended to release the shipper from its duty to pay under the bill of lading, even where it had paid the forwarder. Whether the 9th Circuit which covers California will follow this line of cases is hard to say but I would predict the 9th Circuit would go with the "equitable estoppel doctrine".

This case is yet another example that great care must be exercised when dealing with middlemen such as forwarders or brokers. A cautious and astute shipper can protect itself by drafting contract terms, which place freight charge liability solely on the broker or forwarder. Further, the shipper can insist that before any traffic moves, the carriers with whom the broker or forwarder deals agree (in writing) to look only to the forwarder or broker and not to the shipper for payment. Only then will the risk of being subjected to the double payment dilemma be eliminated.