The Man-Caught-In-The-Middle: The Man-Caught-In-The-Middle: Conflicting Views of the Conflicting Views of the
Role of the 3PLRole of the 3PL
By Henry E. Seaton, Esq.By Henry E. Seaton, Esq.
Seaton & HuskSeaton & Huskwww.transportationlaw.netwww.transportationlaw.net
Henry E. SeatonHenry E. SeatonSeaton & Husk, LPSeaton & Husk, LP2240 Gallows Rd.2240 Gallows Rd.Vienna, VA 22182Vienna, VA 22182
www.transportationlaw.www.transportationlaw.netnet
Henry E. Seaton is a graduate of Duke University (A.B. ’70) and Vanderbilt Henry E. Seaton is a graduate of Duke University (A.B. ’70) and Vanderbilt School of Law (J.D. ’70). He has practiced law for 30 years in the School of Law (J.D. ’70). He has practiced law for 30 years in the Washington D.C. area representing motor carriers of brokers. He is a Washington D.C. area representing motor carriers of brokers. He is a member of the Vienna, VA based law firm of Seaton & Husk. The firm member of the Vienna, VA based law firm of Seaton & Husk. The firm specializes in freight claims, freight charge collection, contracting issues, specializes in freight claims, freight charge collection, contracting issues, carrier representation before the FMCSA and bankruptcy issues.carrier representation before the FMCSA and bankruptcy issues.
Mr. Seaton writes a monthly column on transportation law for the Mr. Seaton writes a monthly column on transportation law for the Commercial Carrier Journal (CCJ) and is the author of Commercial Carrier Journal (CCJ) and is the author of Protecting Motor Protecting Motor Carrier Interests in ContractsCarrier Interests in Contracts. He serves as commerce counsel for the . He serves as commerce counsel for the National Association of Small Trucking Companies. He was the Delta Nu National Association of Small Trucking Companies. He was the Delta Nu Alpha Transportation Professional of the Year in 2001 and is a frequent Alpha Transportation Professional of the Year in 2001 and is a frequent speaker and lecturer regarding cargo claims, freight charges, contracting speaker and lecturer regarding cargo claims, freight charges, contracting and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be reached at [email protected]. For articles and other information, please reached at [email protected]. For articles and other information, please see see www.transportationlaw.net..
LEGAL BASISLEGAL BASIS
Role established by Role established by common contract law and common contract law and statutes of regulation; 49 statutes of regulation; 49 CFR 371CFR 371
Broker arranges for Broker arranges for contracts between buyer contracts between buyer and sellersand sellers
Professional intermediary Professional intermediary life insurance agent or real life insurance agent or real estate brokerestate broker
Established by contract Established by contract waiving statutes and waiving statutes and regulation under regulation under ''14101(b)14101(b)
Principal enters contracts Principal enters contracts to provide goods or to provide goods or services, assumes liability services, assumes liability and hires subcontractorsand hires subcontractors
Frequently “broker” is Frequently “broker” is merely substituted for merely substituted for carrier in shipper carrier in shipper contracts.contracts.
Broker /Broker / ArrangerArranger PrincipalPrincipal // ProviderProvider
GENERAL DUTIESGENERAL DUTIES
Duty of good faith and Duty of good faith and due diligencedue diligence
Arranger of Arranger of transportationtransportation
Brings together buyers Brings together buyers and sellersand sellers
Bill of lading is Bill of lading is contract of haulcontract of haul
Assumes by contract Assumes by contract carrier-like duties:carrier-like duties:(1)(1) Payment of freightPayment of freight
chargescharges
(2) Cargo claim liability(2) Cargo claim liability
(3) Indemnity for BI & (3) Indemnity for BI & PD/”arising out of”PD/”arising out of”
(4) Purports to take (4) Purports to take “possession of cargo”“possession of cargo”
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
FREIGHT CHARGESFREIGHT CHARGES
Obligated to transmit Obligated to transmit upon receiptupon receipt
Constructive trust or Constructive trust or conduit corollaryconduit corollary
Can guarantee by Can guarantee by carrier payment from carrier payment from retained earningsretained earnings
See also Ontario See also Ontario legislationlegislation
Assumes primary Assumes primary payment obligation to payment obligation to carriers by contract carriers by contract
Protects shipper from Protects shipper from carrier payment carrier payment demands by contract demands by contract
Trumps bill of lading Trumps bill of lading recourserecourse
Accepts burden of Accepts burden of shipper insolvencyshipper insolvency
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
FREIGHT CLAIMSFREIGHT CLAIMS
No primary liability No primary liability under statuteunder statute
Typically warrants to Typically warrants to shipper that carrier is shipper that carrier is financially responsible financially responsible for paying cargo for paying cargo claims claims
Gets contingent cargo Gets contingent cargo insurance to cover insurance to cover that warrantythat warranty
Assumes cargo liability Assumes cargo liability by contract provision or by contract provision or broad indemnitybroad indemnity
Assumes risk of loss – Assumes risk of loss – allows offset which may allows offset which may not be recoupablenot be recoupable
Purports to take Purports to take possession and possession and guarantees condition guarantees condition upon arrivalupon arrival
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
OFFSETSOFFSETS
Cargo claims filed Cargo claims filed against carrieragainst carrier
Arbitration for Arbitration for economical economical determination determination
Broker pays if no Broker pays if no insurance and carrier insurance and carrier insolventinsolvent
Shipper offsets against Shipper offsets against intermediaryintermediary
Constructive trust Constructive trust concept violated concept violated
Funds needed to pay Funds needed to pay non-negligent carriers non-negligent carriers is withheld by shipperis withheld by shipper
3PL’s cash flow 3PL’s cash flow interruptedinterrupted
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
VICARIOUS LIABILITYVICARIOUS LIABILITY
Arranges for services Arranges for services provided by licensed and provided by licensed and authorized carrierauthorized carrier
Eschews joint venture Eschews joint venture on prime/subcontractor on prime/subcontractor claims claims
Broker not on bill of Broker not on bill of lading as carrierlading as carrier
Opens door to principal/ Opens door to principal/ subcontractor claimssubcontractor claims
““Assumption of duty” in Assumption of duty” in contract can be used contract can be used against in – against in – Schramm v. Schramm v. FosterFoster
Contractual indemnity Contractual indemnity language and purchase of language and purchase of insurance raises insurance raises settlement demandssettlement demands
Contingent auto hard to Contingent auto hard to find and too expensivefind and too expensive
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
““ARISING OUT OF” INDEMNITY ARISING OUT OF” INDEMNITY & “ADDITIONAL INSURED”& “ADDITIONAL INSURED”
Is responsible for Is responsible for carrier selectioncarrier selection
Errors and omissions Errors and omissions responsibility for responsibility for negligent entrustmentnegligent entrustment
Often accepts “arising out of” Often accepts “arising out of” indemnity including liability indemnity including liability for shipper’s negligence not for shipper’s negligence not covered by available covered by available insuranceinsurance• (a) CGL Exclusion for auto(a) CGL Exclusion for auto• (b) no auto because not (b) no auto because not
asset based asset based Anti-indemnity issues – TX, Anti-indemnity issues – TX,
VA, KS – leaves indemnity for VA, KS – leaves indemnity for shipper’s negligence shipper’s negligence unenforceable in unenforceable in broker/carrier contractsbroker/carrier contracts
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger
Many motor carriers will not and/or cannot offer similar indemnityMany motor carriers will not and/or cannot offer similar indemnity Anti-indemnity statutes may render carrier indemnity voidAnti-indemnity statutes may render carrier indemnity void
SHIPPER INSOLVENTSHIPPER INSOLVENT
Absent guarantee, risk Absent guarantee, risk of non-payment is of non-payment is shared with carriersshared with carriers
3PL has preference 3PL has preference defensedefense
3PL must pay 3PL must pay unfunded freight unfunded freight chargescharges
3PL is open to full 3PL is open to full preference chargepreference charge
Principal / ProviderPrincipal / Provider
Major bankruptcies are forcing 3PLs to rethinkMajor bankruptcies are forcing 3PLs to rethink
accepting freight payment responsibilityaccepting freight payment responsibility
when customer goes bankruptwhen customer goes bankrupt
Broker /Broker / ArrangerArranger
3PL INDUSTRY3PL INDUSTRY
Trust or escrow Trust or escrow account protects account protects shipper against double shipper against double paymentpayment
Property of 3PL is Property of 3PL is properly segregated in properly segregated in bankruptcybankruptcy
Shipper and Carrier Shipper and Carrier interest trump secured interest trump secured lenderslenders
Results in FIFO Results in FIFO accounting and accounting and conflicts with secured conflicts with secured lenderslenders
Possible breach of Possible breach of fiduciary obligation and fiduciary obligation and D&O liability; lender D&O liability; lender guaranteesguarantees
Worldpoint, ACI – Worldpoint, ACI – allows secured lender allows secured lender to frustrate payment to to frustrate payment to carriers.carriers.
Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger