Who Pays the Freight?
By Henry E. Seaton
Reprinted from etrucker.com
Q Who is ultimately liable for paying freight charges in model broker-carrier contracts? The recent model contracts I’ve read either seem to disagree on the issue, or they aren’t specific enough regarding liability.
A In my August 2006 column (“TIA model contract not pretty”), I pointed out that motor carriers’ major dispute with the Transportation Intermediaries Association model contract related to the ultimate liability for payment of freight charges. The TIA model contract leaves carriers with only very limited recourse after notice to shipper.
The motor carrier industry was right not to surrender recourse to the shipper for unpaid freight charges. Consignor liability is the law in most circuits in the absence of an expressed waiver. Moreover, under the conduit theory of broker liability, all parties are best served if the broker receives the payment of freight charges in trust to the extent the money is owed to the carrier. As an honest middleman, a broker should transmit the carrier’s portion of the freight charges upon receipt and not attempt to pledge or borrow against uncollected receivables to the extent those funds are due and intended by the shipper for payment to the unpaid carrier. A broker can protect a shipper from the possibility of double payment by establishing a constructive trust by contract and agreeing that funds intended to pay for particular shipments will not be diverted or pledged as collateral to pay unrelated creditors and obligations.
Having opposed the TIA contract on the issue of shipper recourse, the American Trucking Associations could have used its model contract to reaffirm precedent and clearly define the property broker as the custodian of freight charges to be paid to the carrier. ATA did not do that. And by making the broker an independent contractor and not ultimately a conduit for discharging the shipper’s payment obligation, the ATA model contract, I fear, leaves this issue open to mischief by state courts applying conflicting laws that deny the uniformity of bill of lading recourse and federal precedent.
Section 3.2(c) of the ATA model contract specifies that a broker must pay the carrier within the agreed time limits regardless of any nonpayment to the broker by the shipper. While this provision is carrier-friendly, the broker’s role is unclear. Is the broker primarily liable for paying the freight charges? Or is it merely a guarantor of timely payments? I fear this language might encourage a broker to use timely payments from solvent shippers to pay carrier obligations on delinquent accounts. This diversion of freight charges to pay freight bills of defaulting shippers can lead to broker insolvency, as well as deny a carrier its legitimate payment.
This possibility of a major customer default is the reason numerous sophisticated brokers will not guarantee payment of freight charges incurred for the account of rust belt shippers with junk bond status. Smaller brokers should recognize the credit risk involved in guaranteeing payments notwithstanding shipper insolvency and the possibility of offset. Clearly, cash reserves or a letter of credit equal to the outstanding receivable of a broker’s largest customer is needed to assure that a broker can meet its payment obligations and not be dragged down by a single shipper’s insolvency under this scenario. The measly $10,000 broker’s bond offers no adequate surety for this, and neither brokers nor the carriers who haul for them evaluate the broker’s creditworthiness in this manner.
A better approach seems to be for brokers to agree to segregate freight charges and to transmit them as a fiduciary to subcontracting carriers upon receipt. In this regard, the broker regulations at least require an accounting on an invoice-by-invoice basis of when a shipper was billed, when the freight charges were received, and when the carrier was paid (49 C.F.R. §371). This basic fiduciary accounting responsibility is not spelled out in the ATA contract.
While nothing in a shipper/broker or broker/carrier contract should preclude a broker from paying its carriers before it received payment from its customers, both agreements should make clear that the broker acquires the carrier’s collection rights in freight bills by assignment and via payment from unencumbered reserves.
If the stakeholders – shippers, brokers and carriers – all could agree on this principle, I believe the double-payment issue would largely go away. Large and small brokers would stand on more equal footing. And the role of the broker and carrier would be enhanced in bankruptcy as creditors with protection against preferences.
In the absence of required fiduciary accounting, either the shipper or the carrier ultimately must bear the risk of broker nonpayment. A carrier-drafted contract clearly should preserve recourse to the shipper upon default of the broker.