They shouldn’t have it both ways

Q We handled a number of shipments for the same shipper through a broker who promptly collected most of the freight charges and went out of business. When we invoiced the shipper, it said its contract was with the deadbeat, who it paid, thus the end of the story. The shipper is indignant that we would seek payment from it, claiming it dealt with the broker as a carrier. Who is right?

AI read a similar question elsewhere recently, and another pundit reached a conclusion different from the one I’m about to explain. In my opinion, the answer is fact dependent, and all of the facts are not stated in the question.

To unbundle the issue, we must determine where the contractual liabilities lie. If the bill of lading established a contract of carriage between the shipper and the deadbeat that had carrier authority, and your name is nowhere on the bill of lading, you will have a difficult time asserting a contract of carriage with the shipper that requires it to pay you.

If, on the other hand, you are named as the carrier of record, and the shipper had reason to know the now-defunct entity was acting as a broker, there is good case law to suggest that the defunct party was the shipper’s agent for retaining your services. The same case law would suggest that you transported the shipment in return for the shipper’s ultimate promise to pay.

A shipper that complains when a carrier takes its recourse under the bill of lading should ask itself whether in fairness it would have been suing you as the underlying carrier if a cargo loss had occurred. Did that shipper take proper precautions to put you on notice that it would not guarantee the payment of your freight charges?

Historically, a shipper that did not trust its customer to pay carrier freight charges on collect shipments has executed Section 7, giving to the carrier notice to get paid up front. It’s not unreasonable to expect similar action from a shipper of truckload shipments that knows full well from the name on the trucks bumping its docks that its freight is being brokered.

Clearly, an innocent shipper has a promissory estoppel argument when it pays the named carrier on a bill of lading without notice that the shipment was actually transported by another. A carrier who never even gets his name on a bill of lading does not have much equitable appeal when he belatedly demands payment from the shipper under these circumstances.

Yet, the equitable estoppel argument can, I think, cut both ways. A shipper that has every reason to know its traffic is being brokered can easily avoid the consignor’s ultimate payment obligation by marking the bill of lading as a third party paid “without recourse.” Since the shipper usually is the one that first inserted the middleman in the transaction, it is not too much to ask a sophisticated shipper to take this step if it is not willing to vouch for the financial integrity of its business partner.

It is sad that the victims are often left to argue over who bears the loss, each professing greater comparative innocence and blaming the other for the malfeasance or misfeasance of the third party involved.

It would be more profitable, I believe, if responsible shippers, carriers and brokers alike would all agree – and enforce in their respective contracts – that any intermediary that does not provide the actual transportation services receives freight charges in trust and must transmit those funds to the underlying carrier upon receipt. Some courts at least recognize the conduit theory – via the interline trust theory or broker regulations – holding that the carrier’s rights to payment trump the intermediary’s secured creditors. Yet, until all the parties agree to raise the bar to the level of the judicially enforceable trust, this dispute will continue and no consensus will be possible.