Avoid the Perils of Being Carrier and Broker
By Henry E. Seaton
January 2000
Reprinted from etrucker.com

With drivers in short supply and freight plentiful, many small carriers accept shipments they cannot deliver with their own equipment. If you hire another carrier to provide service on your behalf, you can act either as carrier or a broker. Your choice has potential legal consequences.

The 1995 Interstate Commerce Commission Termination Act redefined "motor carrier" to allow carriers to arrange for movement of property. A broker is a person or company other than a motor carrier that arranges for transportation for compensation. Many small carriers don't understand the legal distinctions between carrier and broker status.

Carriers have traditionally been allowed to obtain both carrier and broker authority. As carriers, they have accepted loads under bills of lading contracts and then, as brokers, tendered those loads to subcontractors. Similarly, many pure brokers encourage use of their name as the carrier on bills of lading because it isolates their customers from the actual carrier and advances their own credibility.

Neither practice is wise - or entirely legal. Broker regulations provide that a broker shall not, directly or indirectly, represent its operations to be that of a carrier. Any carrier claiming to act as a broker in its own name - or any pure broker claiming to be a carrier - violates this regulation and risks litigation for cargo claims, physical damage and personal injury that brokers, in the absence of negligent entrustment, could otherwise avoid.

If you allow yourself to be named as the carrier on the bill of lading or represent yourself as the carrier on a load you actually broker, you may face a lawsuit - even if you prevail on contract indemnity. Absent special arrangements with your insurer, you may have no coverage as a carrier on loads you arrange. If you are a pure broker, you are subject to a lawsuit if you are named on the bill as the carrier.

To avoid litigation, establish a separate but affiliated brokerage or logistics company with its own name and docket number. By contract and by tariff, reserve the right to handle shipments entirely through your broker affiliate. Warrant that your affiliate will pay the carrier and that the service provided meets your shipper's contractual standards. Then instruct the subcontracting carrier to execute the bill of lading in its own name, ensuring the bill clearly shows your broker affiliate as the third party to be billed. Do this, and you will have reasonable protection against suit. Although the 1995 statute allows you, as a carrier, to arrange for transportation without being a broker, the practice outlined above is safer.

Setting up a broker affiliate to handle excess freight makes for simpler compliance with regulations that require segregation of broker revenue from non-broker revenue. It also makes it easier to steer clear of liabilities and claims issues. Establishing an affiliate also makes for easier accounting to insurance companies and state revenue departments, which require carrier payments based on revenue and profit. And you can analyze your "pure" carrier operations as a distinct profit center more easily.

If you set up a broker affiliate correctly, you can spare you shippers and subcontracting carriers confusion and protect yourself from potential liability that could arise from failure to define your role in brokered transactions.

Resources:

For the formal definitions of motor carriers and brokers, see 49 U.S.C. Sec. 13102 at www.truckingco.com/resources. For regulations concerning brokers, see 49 CFR 371 at the same location.

For legal precedents regarding carriers acting as brokers and vice versa, see Franklin Steel v. Marlo, 749 F.2d 30 [4th Cir. 1984] and Maggard Truck Lines v. Dieten [MD.Ga. 1983].