TIA model contract not pretty
By Henry E. Seaton

August 2006
Reprinted from etrucker.com


Q We are a small brokerage operation and are in receipt of the newly published TIA broker-carrier contract. In your opinion, is the model contract suitable for a brokerage operation, and will it be acceptable to motor carriers?

A Detailed analysis of this contract is not possible in the space provided here. At the outset, this contract was not endorsed by the American Trucking Associations and accordingly is unlikely to receive broad acceptance by sophisticated motor carriers. While it treats many of the contract issues in an acceptable manner, there are several minor issues – such as carrier liability before pickup and after delivery, and mandatory arbitration – and one major issue that have raised strong carrier objections.

The big issue is the question of the payment of freight charges. Carriers, and most courts, view the shipper or consignor as primarily liable for the payment of freight charges and treat the broker or other intermediary as the shipper’s agent. By expressed waiver or written agreement, a carrier can give up its collection remedies to the shipper, but a carrier has no economic incentive for doing so. The TIA model contract makes the broker “solely responsible” for payment of the carrier’s charges. If the broker does not pay the carrier after a certain period of time, and after written notice, the carrier can turn to the shipper – but only for monies that have not been paid previously to the broker.

Inherent in this language is an implicit waiver of recourse to the shipper to the extent it has paid the broker. This runs contrary to the prevalent carrier view that if the shipper selects its third-party logistics firm (3PL), it ultimately should be responsible for the 3PL’s faithful transmission of monies to the carrier.

Properly seen, I believe the TIA’s treatment of broker payment responsibilities should be as troubling to small brokers as it is to carriers. The model contract takes a broker who arguably is responsible only for transmitting shipper payments upon receipt, and turns it from an agent into a principal, which is solely responsible for paying the carrier even upon default of the shipper.

In many of the logistics contracts I review, sophisticated 3PLs are taking exactly the opposite view, warranting to the carrier only that they faithfully will invoice their customer and transmit payments upon receipt, advancing payments on account only. They recognize, I believe, that if a rust-belt customer unexpectedly declares bankruptcy, their unrecoupable liability easily could become far more than they can afford.

Under this scenario, the $10,000 broker’s bond does not begin to provide adequate collateral for the broker’s protection or the carrier’s credit assurance. Thirty-day terms, plus two weeks worth of works in progress, easily can bankrupt a small broker with little cash reserves.

Before you as a small broker consider accepting the sole payment obligations of this model contract, answer two questions: Do you have sufficient earned surplus or lines of credit to fund your carrier accounts payable if your largest client declares bankruptcy or offsets for a catastrophic claim? If the answer is yes, and you are willing to accept that risk, are you willing to offer that amount of credit assurance?

Every motor carrier starts from the position that the 3PL and its customer, the shipper, jointly and severally are liable for the payment of freight charges and that it has recourse to the other upon default of its primary obligor. No offense, but in the absence of proving that the broker has sufficient collateral at stake, I think a carrier is more apt to accept a brokered load with ultimate recourse to the consignor than to waive that recourse and look solely to the broker.

It may not be in either your or your carrier’s best interest to insist upon the payment terms set forth in this model contract.

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