The buck must stop somewhere

Department of Transportation said it will continue to take steps to ban companies and individuals convicted of defrauding the federal government from future federal contracts. Among the steps already taken is a June 5 order requiring operating administrations either to suspend or debar companies or individuals indicted or convicted of defrauding the government, or to justify why not.

U.S. District Court in Chicago last month sentenced Adam Babul to 41 months in federal prison and 36 months supervised release for his role in a conspiracy to obtain nearly 600 Wisconsin commercial driver’s licenses fraudulently.

FedEx Freight East, as successor to American Freightways, agreed to pay $500,000 to settle a class discrimination lawsuit filed by the U.S. Equal Employment Opportunity Commission alleging that 20 African-American dockworkers were denied promotions and assignments at the St. Louis terminal. The settlement also requires the carrier to report on promotions from part-time to full-time dockworker positions and to dock supervisor positions.

U.S. District Court in Denver in late October sentenced Virginia Villegas, a former driver’s license clerk for the Colorado Department of Revenue’s Division of Motor Vehicles, to 18 months in prison and 36 months of probation for fraud in connection with identification documents used to facilitate the unlawful sale of driver’s licenses and CDLs.

Q In reviewing payment terms in a prominent third-party logistics (3PL) contract, I noticed an unusual provision. It says the carrier can seek payment only from a 3PL unless the 3PL’s customer declares bankruptcy or becomes insolvent. In that case, the carrier’s recourse is only to the customer. Neither party guarantees payment to the carrier. Is this legal?

A This type of provision seems downright unfair, and I do not recommend you sign it. But is it illegal? Probably not. As a general principle, you are bound by what you sign. Ordinarily, a carrier when dealing with a 3PL or a broker who was chosen by a shipper should preserve recourse to the 3PL and the shipper in case of default.

There is good authority in many circuits for the premise that the carrier deserves to be paid and, although it may bill an intermediary, it can seek recourse from the consignor pursuant to the bill of lading unless Section 7 of the bill of lading is signed or the carrier otherwise expressly waives recourse. See National Shipping Co. of Saudi Arabia v. Omni Lines, 106 F.3d 1544 (11th Cir. 1997); Strachan Shipping Co. v. Dresser Industries Inc., 701 F.2d 483 (5th Cir. 1983); and Hawkspere Shipping Company Ltd. v. Intamex, S.A., 330 F.3d 225 (4th Cir. 2003).

In Hawkspere, the court suggested that the carrier should be able to look to both the intermediary and shipper for payment:

  • “We think that our result comports with economic reality. [An intermediary] provides a service. He sells his expertise and experience in booking and preparing cargo for shipment. He depends upon the fees paid by both shipper and carrier. He has few assets, and he books amounts of cargo far exceeding his net worth. Carriers must expect payment will come from the shipper, although it may pass through the [intermediary]’s hands. While the carrier may extend credit to the [intermediary], there is no economically rational motive for the carrier to release the shipper. The more parties that are liable, the greater the assurance for the carrier that he will be paid.”
  • “Taking this approach, only if the carrier has released the shipper from liability under the bills of lading is the shipper discharged from his duty to pay the carrier by remitting payment to the [intermediary]; otherwise, the shipper, by choosing not to pay the carrier directly, assumes the risk that the [intermediary] might fail to forward the freight payment on to the carrier.”

If left with a choice between extending credit ultimately to a customer or to its 3PL, most carriers would choose to preserve recourse to the customer by contract and provide that the 3PL act as a shipper’s paying agent. The payments received by the 3PL would be held in trust and transmitted to the carrier upon receipt. This constructive trust concept is entirely consistent with the broker regulations and the interline trust theory that has been recognized in a number of cases. See Parker Motor Freight Inc. v. Fifth Third Bank, 116 F.3d 1137 (6th Cir. 1997).

Ideally, look to the 3PL to bring something of value in the way of credit assurance to the deal. A provision that requires the broker to transmit payments from the shipper upon receipt – plus a guarantee that the carrier will be paid by the 3PL within a certain time limit – can be fashioned to preserve your recourse to both.

In this day of looming large corporate bankruptcies due to global competition and pension issues, I can understand why 3PLs are reluctant to guarantee customer payment in the event of default. Many 3PLs do not simply buy and sell transportation: They fulfill a dispatch function, manage contracts and process freight payment for a negotiated fee. A 3PL providing these functions may be unwilling and financially unable to guarantee its customer’s payment obligation in view of the sizeable float.

In sum, I can only counsel caution. Be careful what you sign. Use your credit application and the possibility of payment guarantee in order to make sure that recourse is preserved. Do not inadvertently sign waivers of recourse – or shipper- or broker-prepared contracts that contain waivers.