Broken by Double Brokering
By Henry E. Seaton
May 2008
Reprinted from

Q We are a small broker engaging in transactions over the Internet. We have been burned by people accepting loads as a carrier and then “double brokering” the loads to third parties with whom we have no contract. This has resulted in claims problems and demands for payment by the actual carrier when the one we hired does not transmit our payment to them. What can or should a broker do to protect itself?

A I first wrote about your predicament in an article entitled “The scourge of double brokering” (CCJ, May 2003). Brokers have four good reasons to verify that the ultimate transportation service provider is the one with whom they entered the contract:

Double payment responsibility. A reoccurring problem in transactional brokerage results from the acceptance of loads by entities with carrier and broker authority in the same name. Suppose that the entity accepts the load as the carrier, tenders it to someone else, and then fails to transmit the payment. This exposes the consignor and the lead broker to double payment liability when the actual service provider does not get paid. The case law supporting the actual carrier’s recourse to the shipper is increasing, as now the 9th Circuit has joined the 4th, 5th, 6th and 11th in decisions favorable to the carrier that actually provided service. [See Oak Harbor Freight Lines Inc. v. Sears Roebuck & Co., 513 F.3d 949 (9th Cir. 2008).]

Vicarious liability. With just cause, shippers and brokers increasingly are concerned about possible liability for personal injury accidents for negligent hiring or negligent entrustment when the ultimate carrier is proven to be unsafe. All too frequently, brokers are required either to warrant the safe operations of the carriers they retain, or to indemnify their shippers against negligent hiring and selection. For this reason, brokers simply must be able to verify that the service provider that actually handles the load is a carrier that they have determined is licensed, authorized and insured. When a shipment is double-brokered without your knowledge, any ability to control the supply chain is lost.

Claims liability. When shipments are double-brokered, the lead broker loses any assurance that the carrier in actual possession and control is insured adequately or can otherwise afford to pay a cargo claim. Moreover, chances are good that the cargo insurance of the entity with which it contracted will afford no coverage for a loss incurred as a result of the double brokerage.

Supply chain security and theft. The increasing importance of Transportation Security Administration regulations and cargo theft prevention exacerbate the potential for problems resulting from unapproved double brokering. When shipments are double-brokered without your knowledge, you lose any ability to confirm that the driver is credentialed to handle hazmat, air freight, etc. It absolutely is essential to supply chain security that the actual service provider be known and identified properly to comply with various Department of Homeland Security and TSA requirements, as well as to ensure that larceny by fraud is not committed easily.

Unfortunately, because of these four problem areas, shippers increasingly require brokers to assume carrier liabilities and warranties that ignore the broker’s role as an intermediary and subject the broker to additional third-party liability. Rather than stepping into that liability trap and accepting carrier responsibilities as a “provider of services,” there are several things you can do to reduce the risk of unapproved double brokerage and limit your exposure:

• Include in your broker-carrier agreement a warranty that the carrier you retain will not double-broker the shipment, and affirmatively will provide service from origins and destinations in equipment that it owns and/or operates.

• Check out the carrier you hire to ensure that it is licensed, authorized and insured.

• Provide the name of the carrier to the shipper at time of pickup and stress the importance of matching the provided name with the carrier’s name on the door of the tractor. (You do not want your name on the bill of lading as the carrier of record for liability reasons.) Both you and the shipper have a vested stake in ensuring that the shipment is entrusted to the one you hired.

• When you receive the proof of delivery with the invoice for payment, check to make sure that the carrier you hired is the party that actually provided the service. If it is obvious that your contract has been violated by double brokerage, require a written release from the named carrier before transmitting payment.

It does not appear that the problem of double brokerage is going to become any better until reputable brokers follow these best practices consistently. The root of the problem is the existence of undercapitalized middlemen representing themselves as carriers and then brokering out the freight to others.

You can’t solve the problem by ignoring it, however. In fact, creditworthy brokers only compound the problem by accepting carrier responsibilities and allowing their name to be misrepresented on the bill of lading as the “carrier in possession and control.” While contingent cargo insurance and contingent liability insurance may assuage the shipper’s fear of an uninsured cargo loss and vicarious liability, insurance is no substitute for good practice.

The bill of lading is a receipt for goods that traditionally is issued by “the party in possession and control of the shipment.” It just makes sense that this receipt be issued by the party hired to transport the shipment and that the shipper not surrender its precious cargo to an unauthorized third party. Candor requires nothing less.
(703) 573-0700
Copyright© 2006 Law Office of Seaton & Husk, LP. All rights reserved.