The challenges inherent in contracting with logistics and transportation intermediaries differ depending on the type of third party involved: an asset-based third-party logistics (3PL) company or a non-asset-based 3PL, a freight forwarder or a transportation broker. Savvy shippers should know the law governing each type of 3PL in order to protect their companies’ interests.

The following are some guidelines on what shippers should?and should not?do when contracting with third parties.

Third-Party Logistics Providers
When a shipper receives a business proposal from a 3PL, one of the most important issues to consider should not be how much money the third-party provider claims it will save. Rather, it’s whether the 3PL could have a conflict of interest that might lead it to make decisions that are unfavorable to its shipper client. (This assumes that the 3PL’s ownership, staff, financial condition, track record, and reputation have already passed scrutiny.)

The answer will vary depending on whether the third party is asset-based (a subsidiary of an asset-owning company, such as a motor carrier or warehousing company) or non-asset-based.

(a) Asset-based 3PLs
Asset-based third parties may be subject to conflicts of interest if they are pressured to use their parent companies’ facilities and services rather than those of a competitor. They also may be constrained by a parent’s policies and procedures, particularly in regard to claims resolution. These can create conflicts if those policies are unfavorable to the shipper.

One way to detect and avoid such conflicts is to ask a few questions about how the 3PL and the carriers it selects will resolve specific types of claims. For example, if a shipment is lost or damaged and the shipper replaces it with another shipment, will the carrier selected by the 3PL insist on paying only the “manufactured cost” of the goods, or will it pay the full invoice value? Some carriers (and their cargo insurers) attempt to evade liability for the full invoice value required by law. Their theory is, if the manufacturer has collected its full invoice price on the replacement shipment, the carrier’s payment of the invoice price would result in the manufacturer making a “double profit.” That theory has been soundly rejected by the courts. See Polaroid Corp. v. Shusters Express, Inc. 1 This landmark decision has been followed in other jurisdictions.

Consequently, a shipper that is considering hiring a 3PL should include provisions in its contract requiring the 3PL to select carriers whose claims policies include reimbursement for full invoice value rather than for manufacturing costs. Other claims scenarios that may determine a 3PL’s true “colors” include: denial of concealed-damage claims and claims on “shipper’s load and count” shipments without regard for what actually happened in transit; declining claims for an uncertain amount when filed in time but the exact amount of the loss could not be determined until after nine months have passed; and so forth.2

The same potential for a conflict of interest occurs with respect to carriers’ Rules Tariffs. Will the 3PL use carriers that publish unreasonable penalties for late payment of freight charges? Some carriers continue to publish a “loss of discount” penalty for payments made beyond their published credit period; that period usually is 30 days, but some are only 15 days. The Surface Transportation Board (STB) has prohibited members of motor carrier rate conferences from publishing loss-of-discount provisions, but they may still be found in some individual carriers’ tariffs. The STB’s predecessor, the Interstate Commerce Commission, previously ruled that a 35-percent penalty was unreasonable as it bore no relationship to the cost of collecting past-due freight charges. Nevertheless, some carriers continue to publish that level of penalty in their tariffs.

These penalties can be very costly if enforced. For example, when less-than-truckload carrier A-P-A sued a shipper that it alleged owed $106,924 because it had not paid its freight charges within 15 days, as required in its tariff, A-P-A’s penalties inflated the lawsuit to an astronomical $881,989?an increase of 825 percent!

(b) Non-asset-based 3PLs
Another type of 3PL is the non-asset-based third party, many of whom are also known as “transportation consultants.” These companies generally have no ties to carriers, and will use their experience and knowledge of the transportation market to negotiate the best deal for their clients. Thus the selection process largely comes down to examining their expertise and track record regarding the services they provide to shippers.

Look for a third party/consultant that offers the specific service required, such as pre-audit, post-audit, freight claims management, contract negotiation, and rate negotiation, to name a few possibilities. When working with a non-asset-based provider, be certain to draft a contract describing the specific services to be performed and the agreed-upon costs and fees.

Transportation Brokers
The problem most commonly encountered when dealing with transportation brokers is their failure to pay the carriers they hire. If this occurs, both the shipper and its receiver will be dunned and/or sued by the carrier, even if the shipper has already paid the broker. Although there are defenses against such actions, a better solution is to enter into a contract with the broker that requires the broker to contract with every carrier it uses.

That broker-carrier contract must contain a provision whereby the carrier designates the broker as its agent for the collection of freight charges from the shipper. Both contracts?the one between the shipper and the broker, and the one between the broker and the carrier?are necessary, otherwise the carrier will not be bound to this agency agreement. Drafting these contracts is the easy part; ensuring that brokers enter into a contract with every carrier is the tougher task.

If a shipper has no contract with the broker and the carrier is seeking payment from the shipper, the pivotal issue is whether the carrier has extended credit to the broker rather than to the shipper. Court decisions have held that the shipper is not liable to the carrier in such circumstances.3

Other issues that should be addressed relate to the carrier’s liability terms, claims practices and policies, time limits, cargo insurance terms, indemnification clauses, credit terms and penalties, and protection against “back-solicitation.”

Brokers present a special challenge with respect to cargo insurance coverage. Because brokers have no legal liability for cargo loss and damage (unless they voluntarily assume it by contract), they may not purchase a cargo liability policy. However, the insurance industry has created a “Contingency Cargo Liability Policy,” which offers to pay a claim for which the carrier is liable if the carrier and its insurer fail to pay it. Shippers that are presented with such a representation would be wise to request that the insurer furnish a written agreement, signed by a corporate officer, to pay such claims even though the broker has no insurable interest in the goods. There’s good reason to do so: Some insurers have been known to renounce the policy when a large claim is filed, on the grounds that the broker had no insurable interest in the cargo.

Freight Forwarders
Do’s and don’ts of contracting with freight forwarders depend on which type of freight forwarder is involved. There are several categories: surface freight forwarders, which are “carriers” under the Interstate Commerce Act and the Carmack Amendment, as per 49 U.S.C. ? 14706; ocean freight forwarders, which are not carriers, as per 46 USC ? 1702 (17)(A); and airfreight forwarders, which are “indirect carriers” that are subject to the same liability laws as airlines.

(a) Surface freight forwarders
Before signing a deal with a surface freight forwarder, the shipper should request a copy of its permit (registered with the Federal Motor Carrier Safety Administration) and its cargo policy, including a “BMC 32″ endorsement. Surface freight forwarders are the only type of intermediary that must maintain this endorsement, which makes the insurer directly liable to the claimant for up to $5,000 per vehicle or $10,000 per occurrence, without regard for any exception or deductible that may be in the policy. The BMC 32 endorsement is also mandated for interstate truckers.

All shippers should insist on seeing evidence that the freight forwarder actually performs shipment consolidation and break-bulk operations. If it doesn’t, and you experience a transit loss, a court could rule that the forwarder acted only as a broker, which is not liable for such losses.

(b) Ocean freight forwarders
These intermediaries, acting as the shipper’s agent, make transportation arrangements, prepare shipping documents, and handle documentary transactions with carriers. Those transactions typically involve ocean bills of lading, which are contracts of carriage.

Since ocean carriers have a record of attempting to treat the entire container as the “package” in order to limit their liability to $500 whenever possible, shippers and their agents must take extraordinary measures to express and enforce their intent to treat the smallest unit of packaging as the “package” on the ocean carrier’s bill of lading.

The Nov. 9, 2004 decision by the U.S. Supreme Court in Norfolk Southern Railway v. Kirby requires changes in the way importers deal with ocean freight forwarders. Two bills of lading were critical to that case. The first was a consolidator’s bill of lading issued by an Australian ocean freight forwarder to Kirby, the shipper. The second was issued by the ocean carrier to the freight forwarder.

The ocean carrier subcontracted with the Norfolk Southern Railway to carry Kirby’s shipment of 10 containers from the port of unloading to the destination. En route, the containers were destroyed in a derailment. The shipper believed that it was entitled to a payment of the full invoice value of $1.5 million under its contract with the freight forwarder. But the ocean carrier and the railroad contended that the shipper was bound by the terms of the bill of lading that the ocean carrier issued to the freight forwarder. That bill of lading limited Norfolk Southern, as the ocean carrier’s subcontractor, to a liability of $500 per container.

The Supreme Court ruled that the ocean freight forwarder acted as the shipper’s agent when it entered into the second bill of lading, therefore the shipper was bound by the terms of that bill of lading. Thus the shipper recovered only $5,000 for all 10 containers.

That decision overruled the law in some U.S. Circuits that there must be privity of contract between the shipper and the inland carrier in order to apply the inland carrier’s liability limitations. Those cases held that the ocean freight forwarder could not bind the shipper to deals it made with the inland carrier without the shipper’s consent. In the future, importers should assume that the ocean carrier’s limitation will be $500 per package, and that such a limit will extend to inland carriers unless they require that a different liability be inserted in all contracts governing their cargo throughout its entire journey.

Shippers also need to be certain that their forwarders or consolidators have cargo insurance policies that will cover the desired amount of coverage and pay for all losses. So-called “All Risk” policies are not as comprehensive as many shippers assume; up to 93 exclusions have been identified in such policies.

(c) Airfreight forwarders
It has been estimated that 80 percent of “air” shipments actually are shipped on a truck under an air waybill that purports to limit liability to 50 cents per pound. If such a shipment is lost or damaged in transit, the airfreight forwarder will attempt to pay only 50 cents per pound rather than the full invoice value as required of motor carriers under the Carmack Amendment.

The only lawful basis for such entities to move airfreight shipments on trucks is a statutory exemption that applies when the goods make a prior or subsequent movement by air [49 U.S.C. ? 13506 (8)(B)]; or when trucking has been necessitated by adverse weather conditions, mechanical breakdown, or conditions beyond the control of the carrier or shipper. [Id., sub-paragraph (8)(C)].

In practice, however, much of this traffic is being trucked in violation of the statutory exemptions. When lost or damaged, these shipments are subject to the Carmack Amendment, which makes the carrier liable for the full invoice value unless the shipper has given its written consent to lower the carrier’s liability in return for a lower rate. It doesn’t matter whether the carrier issued an “air waybill” that specifies the traditional airline liability limit of 50 cents per pound. If the ground movement did not meet the qualifications for the statutory exemption, it is subject to the Carmack Amendment’s “actual loss” standard.

Conclusion
Third-party logistics companies are not regulated. However, if they conduct operations that fall within the definition of a broker, freight forwarder, or motor carrier, they are subject to those regulations.

Brokers are not liable for transit damages, but may be liable for damages resulting from their negligent selection of a carrier.

Ocean freight forwarders are not carriers, as they do not issue their own bills of lading.

Make the Investment
Shipping through intermediaries of any type requires shippers to be knowledgeable (”sophisticated,” in the courts’ terminology) in the laws governing those entities. It also requires shippers to have a thorough understanding of the legal consequences of the arrangements and contracts they enter into. In short, education and training in this area is not an expense?it’s an investment!

Source: Logistics management

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