The Mason and Dixon Case - Let's Get the Message Right
by John M. Daley (June 2010)
CUSTOMS BROKER HELD LIABLE AS A CARRIER BECAUSE IT ISSUED A DELIVERY ORDER!
That’s the message conveyed to me when I first received an e-mail about a May 2009 opinion issued by Judge Vaughn Walker from the United States District Court for the Northern District of California in a case entitled Mason and Dixon Intermodal, Inc. v. Lapmaster International, Inc., et al., Case No. C 08-1232.
In fact, a better description of the message of this decision is as follows:
CUSTOMS BROKER HELD LIABLE AS A CARRIER BECAUSE IT DIDN’T SET UP SEPARATE COMPANIES OR USE APPROPRIATE TERMS AND CONDITIONS!
The Customs Broker who had the misfortune to be on the losing side in this decision was World Express Shipping Transportation and Forwarding Services Incorporated ("WEST"), which was hired to handle the customs entry and to arrange for transportation of machines which had been imported from Japan into the United States.
WEST cleared the machines through U.S. Customs, then issued a Delivery Order to a property broker, which then hired a carrier to move the machines from the Port of Oakland to Fremont, California. The machines were improperly loaded and were destroyed when they hit an overpass en route.
Unfortunately for WEST (at least in the context of this lawsuit), in addition to being a Customs Broker, it also conducted business as a "freight forwarder" as that term is used in the Carmack Amendment, which means that it clearly was assuming liability as a "carrier" under some circumstances. (Caveat: This statement and others in this article are based solely upon the facts as set forth by Judge Walker in the attached decision, which may be inaccurate in one or more respects.)
Moreover, the terms and conditions which WEST had the importer sign did not include a provision which made it clear that it was not acting as a carrier when it merely issues a Delivery Order (commonly known as a "DO") to a motor carrier or broker.
Of course, there is nothing wrong about a "logistics company" such as WEST conducting business under different "hats"-e.g., as a motor carrier, property broker, warehouseman, or NVOCC (non-vessel operating common carrier). Indeed, doing so makes it possible for the company to offer its customers a "one source" solution for its logistics needs.
Since each of these functions raises a different set of liabilities under a different set of laws, however, it is best to form separate legal entities, with distinctive names (e.g., ACME Trucking, ACME Logistics, ACME Warehousing, and ACME Ocean Shipping) for each of the functions a "logistics" company undertakes.
Although creating separate legal entities increases the cost of doing business, the increased cost can be relatively small, especially if you are able to use the Limited Liability Company form of business for one or more of the companies. Moreover, the risk of not forming separate companies is that a catastrophic loss in one business function can take down the entire company, not just the business function which was responsible for the loss.
If you do not form separate companies, but perform more than one function, (e.g., as a motor carrier and a property broker) you can at least minimize the possibility of a catastrophic loss by creating separate sets of Terms and Conditions for each function you perform, plus one for the company as a whole.
The "company as a whole" set, which I like to describe as a "General Set of Terms and Conditions," should (1) make it clear that you are assuming different liabilities when you are performing different functions and (2) specify the factual circumstances which distinguish one function from another.
For example, if you have authority to act as a motor carrier, property broker and warehouseman, your General Set of Terms and Conditions might say that you are acting as a property broker only if you issue a Rate and Load Confirmation Sheet, that you are acting as a motor carrier only if you issue a Bill of Lading, that you are acting as a warehouseman only if you issue a warehouse receipt, and that you are acting as a Customs broker if you perform any function which only a Customs broker may do, such as filing a Customs Entry or administrative request for relief.
The function specific sets of terms and conditions should include appropriate limitations of liability and other provisions which are applicable to the function involved, i.e., one for motor carriage, one for property brokerage, one for warehousing, one for Customs brokerage, and so on.
Oh, and if one of the functions you perform is that of a Customs Broker (or even an FMCSA licensed Property Broker), you need to include a provision which says something like this:
WE DO NOT ASSUME LIABILITY AS A CARRIER UNLESS WE ISSUE A BILL OF LADING. IF WE ARRANGE CARRIAGE FOR YOU WITHOUT ISSUING A BILL OF LADING, WE ARE ACTING SOLELY AS YOUR AUTHORIZED AGENT IN DOING SO.
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