Law Offices of Seaton & Husk, LP

Brokers’ Role Must Be Fixed
By Henry E. Seaton
November 2006
Reprinted from etrucker.com

Q The American Trucking Associations has now issued a model broker-carrier agreement. Is this an acceptable starting point for carrier negotiations?

A The ATA Broker-Carrier Agreement comes on the heels of the Transportation Intermediaries Association’s model contract that was issued in June. (See “TIA model contract not pretty,” CCJ, August 2006.) When the two associations could not agree on a model contract, I expected each organization to issue a version that protected its constituents’ respective interests.

Although I have great respect for the ATA and its counsel, in my view the model contract it issued is a muddled document that neither defines the role of the broker as a true intermediary, nor adequately protects motor carrier interests. Due to the scope of the issue, I will address broker/carrier relations in the context of this model contract in this column over several months.

Essentially any contract for motor carrier service involves the legal enforcement of two promises: (1) The carrier’s promise to make timely and intact delivery of goods in return for (2) the shipper and/or its agent’s promise to pay the freight. Historically, motor carrier liability for cargo loss or damage was established by statute, and the shipper and consignee’s liability for payment of freight charges was established by the bill of lading contract and case law.

Property brokers, like tour brokers, acted as nonexclusive agents, arranging for transportation for compensation; they accepted only clearly defined non-carrier responsibilities. Like real estate agents or stockbrokers that earn commissions from bringing together willing buyers and sellers of commodities, the property broker traditionally accepted no liability for performance of the services it arranged – and no responsibility for payment in the absence of receipt from its customer.

This concept of the property broker as an “agent/arranger” occasionally is referred to as the “conduit theory.” Under it, absent negligent entrustment, a broker is not responsible for cargo loss or damage. (See CGU International Insurance, PLC v. Keystone Lines Corp., 2004 U.S. Dist. Lexis 8123; Golden Triad Carriers v. Paco American Corp., 1990 Fed. Carr. Cases, 83,515; Chubb Group of Insurance Companies v. H.A. Transportation Systems, Inc., 243 F. Supp. 2d 1064 [C.D.Cal. 2002]). Similarly, as a conduit, the broker or middleman owes a fiduciary duty to transmit freight charges upon receipt. But the broker is not the primary obligor and does not accept unconditional payment liability in the absence of a guarantee or other specific undertaking.

As the role of the property broker has morphed into more elaborate 3PL agreements, intermediaries have – improvidently, I believe – accepted direct liability as a principal for carrier duties with respect to the safe delivery of cargo, as well as the shipper’s primary obligations for the payment of freight charges. The resulting “principal/provider” motif is fundamentally different from the traditional “agent/arranger” role of property brokers.

Is the broker an arranger of a bilateral agreement between the carrier and the shipper? Or is the deal a trilateral agreement in which the broker, as a principal, accepts responsibility by the safe delivery of freight vis-à-vis the shipper, and sole responsibility for freight charges to the carrier? When these conflicting duties are poorly defined in individual contracts and are interpreted in accordance with the peculiarities of 50 different state laws, the result is more litigation and muddled case law.

Whether out of concern that its model contract would not gain the support of major shippers or out of fear that a robustly pro-carrier document would raise antitrust concerns, ATA has devised a model contract that is not clear in defining the broker’s role as a conduit for freight charges and cargo claims.

As will be discussed in later months, the best starting point for both motor carriers and brokers in negotiating broker contracts is with the traditional model of the broker as an agent/arranger, incorporating general principles of federal transportation law, payment without offset, traditional cargo claims rules and prudent credit and collection provisions. Unfortunately, the model contract fails in these key respects.