"Double Payment" by Shippers: The Case in Favor of the Carrier’s Right to Payment
by John M. Daley, Esq. (April 2008)
Note: The last section of this article (entitled "Regulatory Reform?") has now been resolved as a result of legislation which requires the FMCSA to require the posting of a $75,000 bond by property brokers.
"Double Payment"--all shippers hate it, some brokers hate it, and all carriers believe they are entitled to it when a broker fails to pay the freight charges owed.
Although the prevailing view of the Courts is that the carrier is entitled to recover from the shipper even if they have already paid the freight charges owed to their property broker, shippers continue to argue that requiring them to pay twice is unfair, and that the Courts should deny carriers the right to recover the freight charges they have already paid for various reasons.
In this article, I shall explain why I believe the carrier is entitled to so-called "double payment" from the shipper when a broker fails to pay the freight charges owed to the carrier in all but the most unusual cases.
The"Fairness" Issue: The Unfairness of Nonpayment is Greater to the Carrier
The primary objection of shippers to "double payment" is that it is "unfair" for them to have to pay freight charges twice. However, the issue presented in double payment situations involves a balancing of "unfairness," since denying recovery of freight charges to the carrier is also "unfair."
The balance of equities on the issue of "unfairness" is greatly in favor of carriers, since the freight charges owed to them are needed to cover the labor, fuel, equipment and other expense they incur for the benefit of shippers. Depriving carriers of freight charges in even a small percentage shipments can wipe all earnings from a substantial number of shipments and, in some instances, could easily force them out of business. By comparison, the freight charges owed by a shipper represent a small percentage of total price charged for the product shipped, and the requirement that they "double pay" the carrier in a some instances, in general, is unlikely to have such a severe impact.
Moreover, carriers are very similar in many respects to laborers and materialmen who contribute value to a work of improvement on real property, and who are traditionally recognized as deserving of special protection under the law, even if it means that the property owner must "pay twice" for the same services or goods (e.g, once to the general contractor and again to the laborer or materialmen involved).
Furthermore, shippers are in a better position to control the risk of loss through a brokers’ default than are carriers. In fact, shippers can and should investigate the creditworthiness and reputation of property brokers before they retain them to perform brokerage services on their behalf.
As I shall explain below, for these and other reasons, the prevailing rule is that carriers are entitled to recover from the shipper and consignee unless the shipper or consignee can establish some sort of malfeasance by the carrier, usually, and perhaps exclusively, under the doctrine of "equitable estoppel."
The Prevailing Rule: Absent Malfeasance, the Carrier Gets Paid
The prevailing rule is that, absent malfeasance, the carrier gets paid. See Sorkin, Goods in Transit §§ 22.02 and 22.02[b]; Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., 513 F.3d 949 (9th Cir. 2008); Central States Trucking Company v. J.R. Simplot Company, 965 F.2d 431 (7th Cir. 1992); Bartlett-Collins Co. v. Surinam Navigation Co., 381 F.2d 546, 549 (10th Cir.1967); Strachan Shipping Co. v. Dresser Indus., Inc., 701 F.2d 483 (5thCir.1983); and National Shipping Company v. Omni Lines, Inc., 106 F.3d 1544 (11th Cir. 1997).
Stated another way, shippers who pay their broker, but whose broker does not pay the carrier, may avoid so-called "double payment" of the carrier’s freight charges only if they can show that the carrier made a representation or engaged in other conduct upon which they reasonably relied in making payment to their broker.
The cases most often cited by shippers in support of their defense to a carrier’s claim for "double payment" are Olson Distributing Systems, Inc. v. Glasurit America, Inc., 850 F.2d 295 (6th Cir. 1988) and Farrell Lines, Inc. v. Titan Industrial Corp., 306 F.Supp. 1348 (S.D.N.Y.), aff'd, 419 F.2d 835 (2d Cir. 1969), cert. denied, 397 U.S. 1042, 90 S. Ct. 1365, 25 L. Ed.2d 653 (1970). In both of these cases, the Courts adopted the shippers’ claim that the carrier should be "estopped" from recovering the unpaid freight charges owed to them on the grounds that the carrier’s bills of lading were marked with the notation "pre-paid" and upon other actions by the carrier which showed that the carriers extended credit to the forwarder, not to the shipper.
However, most Courts have rejected the approach employed in the Olson Distributing and Farrell Lines decisions. For example, in Strachan Shipping Co. v. Dresser Industries, Inc., 701 F.2d 483 (5th Cir. 1983), the Fifth Circuit Court of Appeals addressed these issues as follows:
The lower courts that have addressed this issue have asked whether the carrier extended credit to the forwarder. Farrell, 306 F. Supp. at 1350; Naviera Mercante S.A. v. Northrup King Co., 491 F. Supp. 508, 510 (S.D.Tex.1980). We think the question is not whether the carrier extended credit to the forwarder, but whether the carriers intended to release [the shipper] from its obligation and look solely to the forwarder for payment.
The district court held that the carriers extended credit to the forwarder and that Dresser was thereby relieved of its obligation to pay. The court did not, however, discuss whether the extension of credit to Sierra was intended to release Dresser. This issue necessarily depends upon the course of dealing of the particular parties, and must be judged from the totality of the circumstances. We hold that the carriers did not release Dresser from liability.
The fact most strongly indicating that Dresser was relieved of liability is that Strachan initially directed its collection efforts to Sierra. This fact is not conclusive, however, in light of the forwarder's position in the shipping industry.
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One reason the lower courts have relieved shippers of liability is that carriers preferred dealing with forwarders. As the court in Farrell Lines put it:
The carrier could have billed the shipper directly. Instead, for its own convenience, it chose to extend credit to the forwarder. The carrier derived many benefits from this arrangement. Since shippers do not have forwarders’ expertise in ocean freight, the carrier, by dealing solely with forwarders, is relieved of many of the burdensome details which unknowing shippers would thrust upon it. The carrier is also relieved from checking the credit ratings of an almost infinite number of shippers and, instead, can rely on the credit of a limited number of forwarders.
The court’s statement that the carrier "could have billed the shipper directly" misperceives the basic nature of the transaction. To bill the shipper directly is not feasible. Furthermore, the carrier is not the only party who benefits from this arrangement. The shipper secures the prompt release of the bill of lading. He is also relieved of many of the "burdensome details" which he might have to take care of. . . .
n9 We also note, that as a matter of commercial practice, to bill the shipper directly does not seem logical. Sierra is the point of contact for Dresser and Strachan. Delivery of the due bill to Sierra is reasonable since Sierra was acting for a disclosed third party. This practice is not inconsistent with relying on that third party for payment.
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Lastly, we think that our result comports with economic reality. A freight forwarder 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 forwarder's hands. While the carrier may extend credit to the forwarder, 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.
In Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., supra, 513 F.3d at p. 958-959, the Ninth Circuit explicitly responded to the shipper’s citation to and reliance upon the Glasurit decision as follows:
We agree with the district court that Olson is an "outlier," the extreme facts of which bear little resemblance to what happened here. . . . Three of our sister circuits--the Fourth, Fifth, and Eleventh Circuits--have reached a conclusion at odds with Olson on facts much closer to those before us. Those courts have held that a shipper should bear the risk when it chooses to pay for freight charges through a broker rather than directly to the carrier. Hawkspere Shipping Co. v. Intamex, S.A., 330 F.3d 225, 237-38 (4th Cir. 2003); Strachan Shipping Co. v. Dresser Indus., Inc., 701 F.2d 483, 489-90 (5th Cir. 1983); Nat'l Shipping Co. of Saudi Arabia v. Omni Lines, Inc., 106 F.3d 1544, 1546-47 (11th Cir. 1997). As noted by the district court, Oak Harbor, 420 F. Supp. 2d at 1151, the policy reasons for this result are persuasive [citing Strahan, quoted above]. Furthermore, as those courts have explained, the shipper, and not the carrier, is in the best position to avoid liability for double payment by dealing with a reputable freight forwarder, by contracting with the carrier to eliminate the shipper's liability, or by simply paying the carrier directly. See Nat'l Shipping, 106 F.3d at 1547 (recommending using reputable freight forwarders or contracting to eliminate liability); Hawkspere, 330 F.3d at 237 (recommending paying the carrier directly).
Notwithstanding the decisions in Oak Harbor, Strahan and others, the defense of "equitable estoppel" lives on, and shippers continue to rely upon various facts, including especially the marking of a bill of lading with the notation "pre-paid," in an effort to prevent carriers from recovering when their broker has defaulted, which at least makes the litigation more expensive by creating an issue of fact. See, e.g., National Shipping Co. v. Omni Lines, 106 F.3d 154 (11th Cir. 1997) (although the Court reversed an order granting summary judgment to the shipper, the Court also found that the shipper’s "pre-paid" argument raised an "issue of fact" which prevented it from awarding judgment to the carrier).
This situation has been compounded by decisions which carelessly address the "pre-paid" issue, even when the issue is not presented, without careful consideration. For example, in Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., supra, although the Court ruled in favor of the carrier on the issue presented, it also quoted with approval the following passage from its prior decision in C.A.R. Transportation Brokerage Co. v. Darden Restaurants, Inc., 213 F.3d 474, 478-79 (9th Cir. 2000):
The bill of lading provides that the owner or consignee shall pay the freight and all other lawful charges upon the transported property and that the consignor remains liable to the carrier for all lawful charges. The bill of lading, however, also contains "nonrecourse" and "prepaid" provisions that, if marked by the parties, release the consignor and consignee from liability for the freight charges. If the nonrecourse clause is signed by the consignor and no provision is made for the payment of freight, delivery of the shipment to the consignee relieves the consignor of liability. Similarly, when the prepaid provision on the bill of lading has been marked and the consignee has already paid its bill to the consignor, the consignee is not liable to the carrier for payment of the freight charges.
Underlining added. In footnote 9, moreover, the Court goes on to say as follows:
Had the bills of lading been marked "prepaid," Sears could have argued that it relied detrimentally on a representation by Oak Harbor. But they were not so marked.
Id. at p. 960, n. 9.
When presented with the "pre-paid" argument, Carriers should point out that the marking of a bill of lading with the notation "pre-paid" indicates only that payment arrangements have been made with the broker, from whom recovery is first sought, not that there has actually been any "pre-payment" of the freight charges owed. Carriers should also point out that this argument is really nothing more than an extension of the now almost universally rejected and discredited argument that the carrier should be denied recovery because it looked to the broker to pay the freight charges owed in the first instance.
Carriers should also point out that the "pre-paid" argument is also nothing more than one version of the "equitable estoppel" argument, which requires a showing not only that the carrier made a "misrepresentation" of some sort, but that the shipper actually relied upon the statement in making payments to its broker. See Logistics Mgmt. v. One (1) Pyramid Tent Arena, 86 F.3d 908 (9th Cir. 1996); compare with Mediterranean Shipping Co. v. Elof Hansson, Inc., 693 F. Supp. 80 (S.D.N.Y. 1988)(the consignee showed that it had actually relied upon the notation that the freight bills had been "pre-paid" by paying the freight charges to the consignor).
I believe that it will be difficult for a shipper or other party who is responsible for payment of freight charges to the broker to show that it actually relied upon "pre-paid" notation in a bill of lading in paying the broker. For one thing, this notation is often inserted in the bill (e.g., by checking a box) by a broker who prepares the bill using either blank forms or computer generated forms provided to it by the carrier. Moreover, the shipper knows that the bill was prepared prior to pickup and delivery of the goods and preparation of an invoice, and that the term therefore cannot mean that the bill was actually "pre-paid."
Furthermore, the bills of lading provided to them almost always indicate that the shipper is liable for payment, as do the carriers’ tariffs. Thus, except with respect to consignees who are neither the shipper nor the party responsible for payment, the "pre-paid" notation argument belongs in the dust bin of history.
Shippers sometimes make other arguments in an effort avoid paying the carrier in double payment cases, including arguments that (1) the shipper was not its agent, but was instead an "independent contractor," (2) the shipper was not "in privity" with the carrier, and (3) the carrier unreasonably delayed advising the shipper of the non-payment of charges by the broker.
Although there might be some instances in which "freight forwarders" or other third parties might properly be regarded as "independent contractors," and not "agents," of the shipper because of the freedom they must have to control shipments tendered to them, these arguments do not usually apply to property brokers, since the shipper almost always retains the right to control the conduct of the property broker by, for example, instructing it not to use a particular carrier.
If the broker is found to be the agent of the shipper, as I believe it should in almost every case, the carrier can rely upon each and every term or condition of its bill of lading and tariff, since the broker’s status as agent gave it the power to bind him to those terms. See California Civil Code § 2330 ("an agent represents his principal for all purposes within the scope of his actual or ostensible authority, and all the rights and liabilities which would accrue to the agent from transactions within such limit, if they had been entered into on his own account, accrue to the principal"); Civil Code § 2315 ("an agent has such authority as the principal, actually or ostensibly, confers upon him"); and Civil Code § 2337 ("An instrument within the scope of his authority by which an agent intends to bind his principal, does bind him if such intent is plainly inferable from the instrument itself").
Moreover, if the broker is found to be the agent of the shipper, the carrier can rely upon the knowledge of the broker to avoid the "delay" argument, since the knowledge of the agent is imputed to its principal. This rule is often said to be based upon a "presumption" that an agent will perform his duty to his principal and will communicate all knowledge which he has gained relative to subject matter of his agency. See Hetland v British Commercial Ins. Co. 221 Cal.App.2d 554(1963). However, the rule is actually "rule of law" which charges the principal with the knowledge possessed by his agent. See Trane Co. v. Gilbert, 267 Cal. App. 2d 720, 727-728 (1968)).
Furthermore, the carrier’s delay in notifying the shipper of unpaid charges, or of seeking recovery of freight charges, even if the delay constitutes a violation of the FMCSA’s credit rules, does not justify an "equitable estoppel" finding, at least unless the delay is truly egregious and inexplicable. S. Pac. Transp. Co. v. Commercial Metals Co., 456 U.S. 336, 351, 72 L. Ed. 2d 114, 102 S. Ct. 1815 (1982); see also Excel Transportation Services v. CSX Lines LLC, supra, 280 F.Supp.2d 617 (S.D. Tex. 2003).
Although confronting these arguments in an individual case requires an analysis of the particular facts involved, the factual patterns involved in a double payment case are often similar to those involved in the Excel case cited above. Accordingly, the following discussion in that decision is often worth quoting in full:
If a shipper has already paid a forwarder, a carrier can be equitably estopped from recovering shipping fees if it misrepresents material fact to the shipper’s detriment. See Exel argues that CSX misled it into believing that Cab had paid the shipping bills because CSX did not immediately notify it of Cab’s delinquency. Exel does not explain why CSX had a duty to contact Marriott when it was explicitly asked to bill only Cab.
CSX did not misrepresent Cab’s payment status. CSX sent multiple past-due notices to Marriott. These notices were somewhat delayed because CSX allowed thirty days for payment and because Cab told CSX that it was working on the payment problem. After the 30-day cushion, it is reasonable to allow several days for administrative friction before Marriott, Exel, or Cab received word that payments were late. Given this time frame, Marriott was properly notified as payments became overdue. Lag time is not a lie; the delay between Cab’s missed payments and notification to Exel was not a representation that Cab’s payments were satisfactory.
Had Marriott responded to the first past-due notice in October 2001, it would have recognized that Cab was not paying its bills. Marriott was negligent in not investigating the problem when it was first informed.
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Exel argues that it cannot be liable to CSX because they were never in privity of contract. Exel claims neither it nor Marriott were Cab’s principal; rather, Cab was acting as an independent contractor. Exel believes that if Cab was an independent contractor, it is not liable for Cab’s failure to pay CSX, because contracts bind only the contracting parties. Since Excel was neither Cab’s principal nor in privity with CSX, it feels it is absolved of responsibility, but Cab’s status as an independent contractor does not release Exel from liability. The bill of lading and CSX’s tariff made the shipper and consignee liable no matter what their relationship with the carrier.\
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The bedrock rule of carriage cases is that, absent malfeasance, the carrier gets paid. It is superficially unfair that Exel and Marriott must pay for the shipments twice. However, allowing them the benefit of carriage without compensating the carrier would eventually cripple the shipping industry, and the economy generally, as carriers devoted their time to investigating potential customers. The entire point of the tariff regime--promoting commerce by removing shippers’ creditworthiness from a carrier’s list of concerns--would be eviscerated.
Excel Transportation Services v. CSX Lines LLC, supra, 280 F.Supp.2d at p. 618-619.
Defense to Double Payment: Contractual Waiver by the Carrier
Unfortunately, many unsophisticated carriers, and even some otherwise relatively sophisticated carriers who do not hire counsel to review their contracts, may find themselves unable to recover from a shipper when the broker does not pay the freight charges owed because they waived the right to do so by contract.
As the Court explained in Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., supra, 513 F.3d at p. 956, carriers can waive the right to recover directly from shippers as a matter of contract:
The parties to a freight shipment generally are free to assign liability for the payment of freight charges through a contract separate from the bill of lading. Louisville & Nashville R.R. Co. v. Cent. Iron & Coal Co., 265 U.S. 59, 66-67, 44 S. Ct. 441, 68 L. Ed. 900 (1924). Such a contract may provide that "the shipper agrees absolutely to pay the charges, or . . . merely that he shall pay if the consignee does not pay . . . , or . . . that only the [consignee] shall be liable for the freight charges, or [that] both the shipper and the consignee may be made liable." Id. "It is only where the parties fail to agree or where discriminatory practices are present that the [bill of lading] default terms bind the parties." C.A.R. Transp., 213 F.3d at 479 (emphases added).
Although it is not entirely clear to me how such a waiver benefits a property broker, the Transportation Intermediary Association’s Model Broker-Carrier contract includes a provision (paragraph 2.D.i.) which provides that "CARRIER shall not seek payment from Shipper if Shipper can prove payment to BROKER." Thus, if the carrier is either inexperienced or not represented by competent transportation counsel, it might waive the right to collect unpaid freight charges from the shipper.
"Double Payment:" An Imperfect and Expensive Solution for Carriers
Although the carrier’s right to recover unpaid freight charges from shippers and consignees results in a degree of "unfairness" to shippers who have already paid the charges to their property broker, such recovery is presently carriers’ only means of obtaining relief when a broker fails to pay the charges owed, and it is by no means the best solution.
In particular, recovering "double payment" from shippers is neither easy, nor is it inexpensive. In addition to the sheer cost of litigating the "equitable estoppel" and other defenses to payment which are always asserted, the carrier has to spend a considerable amount just trying to determine the identity of the parties who should are responsible for the charges, demanding payment from the responsible parties, and serving parties who refuse to pay.
This is because, in many cases, carriers cannot determine the identity of the parties who are both legally and equitably responsible for payment of the charges owed (which I sometimes refer to as the "actual shippers"). This is because the bills of lading for which the carrier seeks recovery actually provide only (1) the name and address of the company or other person from which the goods are to be received, which information is inserted in the "shipper" portion of the bill, and (2) the name and address of the company other person to whom the goods are to be delivered, but not the identity of the "actual shipper."
For example, in a case I handled, a major LTL carrier sought recovery of over $160,000 owed for 250 unpaid invoices, all of which involved shipments arranged through a single property broker which had failed to pay the freight charges owed, and from which recovery was unavailable because it had pledged all of its receivables to a bank. The invoices were made out to 66 separate entities as "shippers."
After considerable expenditure of time and money, the carrier was able to determine that approximately $125,000 of the unpaid invoices were probably the responsibility of single customer: a garment manufacturer which obtained goods from various suppliers, transported partially completed goods from one subcontractor to another, then had the final product shipped either to itself or to customers.
Although the litigation eventually resulted in the recovery of almost all of the unpaid freight charges owed, the cost of the litigation represented a very substantial portion of the recovery.
Litigation is often an unsatisfactory solution to both sides, primarily because of the expense involved. Although various regulatory solutions have been suggested, there are presently no reforms which are likely to be adopted.
For example, the author of Goods in Transit has suggested that "one solution to the risk of a double payment problem would be to provide that all payments to intermediaries by shippers be considered trust funds with the further requirement that the intermediary be required to pay all freight and demurrage to the actual carrier before the intermediary can withdraw the portion of the charge which represents the intermediary’s compensation." Sorkin, Goods in Transit §§ 22.02[b]. However, it is not clear whether this requirement is either workable, or that the FMCSA would be able to enforce the requirement.
In 2004, the Owner Operator Independent Drivers Association ("OOIDA") filed a petition with the Department of Transportation in 2004 in which it suggested that the amount of the bond a property broker is required to post with the FMCSA be increased from the current $10,000 (see 49 CFR 387.307(a)) to $500,000. This approach would be both simple and efficient, since both carriers and shippers can sue the broker’s surety directly to recover unpaid freight charges. See Milan Express Co. v. Western Surety Co., 792 F. Supp. 571 (M.D. Tenn. 1992). However, the FMCSA has made thus far made no movement toward adopting any such proposal.
Unless and until a better solution is available, the carrier’s only effective method of recouping unpaid amounts owed by an insolvent or missing in action broker is to file a lawsuit for recovery of the amounts owed from the shippers and consignees who received the benefit of the carrier’s service.
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