Questions & Answers

By George Carl Pezold, Esq.

333

Freight Claims – Measure of Damages on Refurbished Goods

Question:  We have several shipments where our commercial coolers were damaged in transit.  These commercial coolers were being moved from a refurb center (refurb consists of mechanical and cosmetic enhancements to bring cooler back to like new condition) to our distribution center.  Due to the fact that these units were not brand new our carrier deemed these units as “used”, and advised us that the amount of claim would be limited to $.10 per pound based on their tariff for used items.

In addition, we had other costs related to the loss (i.e. initial freight charges, repair estimate charges, moving the cooler to a repair location & moving the cooler back to our distribution center).  The carrier insists that it is only liable for the $.10 per pound, and that covers all expenses associated to the claim.

What cost can we actually collect on a claim for used equipment and how can the carrier determine whether these coolers are new or used if that information is not noted on the bill of lading at the time of pick up? 

Answer:  You indicate “these commercial coolers were being moved from a refurb center (refurbing consists of mechanical and cosmetic enhancements to bring cooler back to like new condition) to our distribution center.”

If this is true, then Item 425 of the National Motor Freight Classification would apply: 

Item 425  CLASSIFICATION OF RECONDITIONED ARTICLES

Unless otherwise provided in this Classification or in other tariffs governed by this Classification, articles which have been rebuilt, refurbished, remanufactured or reconditioned in any way will be subject to the same provisions applicable to such articles when new.

It is my opinion that the liability limitation of 10 cents per pound is not applicable, and the carrier should pay the claim in full.

 

333

Freight Claims – Offsets and Payment of Freight Charges

Question:  Is there any law or regulation regarding payment of freight charges?  Can a shipper offset, (unilaterally reduce) reduce its payment to a carrier because of a claim or past over payments?

Additionally:

1.  Does a claimant have to pay the freight bill in order to get a claim paid?

2.  If a claim processed and denied and the freight charges were not paid can the claimant refuse to pay the charges?

3.  If the claim is approved by the carrier and the freight charges were paid, can the claimant include the full freight charges in the claim?

Answer:  There is no “law or regulation” governing offsets.  It is not “illegal” for a shipper to offset its loss and damage claims against freight charges owed to a carrier.  However, the carrier is perfectly within its rights to demand (in writing) that the shipper submit a formal written claim for the alleged loss or damage, with appropriate backup documentation.  Additionally, the carrier could take legal action against the shipper to collect the unpaid freight charges (to which the shipper would likely assert a counterclaim for the loss).   Note that shippers who take unilateral offsets should be aware that if they fail to pay freight charges within the specified credit period, they expose themselves to the potential for additional penalties or costs that many carriers have in their tariffs.

1.  There is no legal requirement for a claimant to pay freight charges before submitting a claim.  Some carriers may have tariff provisions to this effect, which could be binding on the claimant if properly incorporated by reference through the contract of carriage (usually a bill of lading).

2.  A claimant can always refuse to pay freight charges.  Of course, the carrier has a remedy - bring a lawsuit for its freight charges.

3.  If the claimant has paid the freight charges and the goods have been lost or destroyed in transit, it is proper to include the freight charges as part of the claim.  The legal theory is that there has been a breach of contract and the carrier is not entitled to its charges.  I would note that where there is a partial loss, the claim should include a pro-rata portion of the freight charges based on the weight of the lost/damaged items vs. the total weight of the shipment.

333

Freight Claims – Late Delivery of Brokered Load

Question:  I contacted a broker to arrange the pickup and delivery of dairy products from a facility in Colorado to California.  The dairy products were to be delivered by a certain date because the products had an expiration date.  The trucking company hired by the broker failed to deliver the dairy products before the expiration date.  The broker insists that I pursue a claim against the trucking company for my damages.  Aren’t the broker and carrier both liable to me?  Can I claim the price I paid for the goods as my damages?

Answer:  The carrier is primarily liable for loss or damage to goods it transports.  If the carrier failed to deliver with “reasonable dispatch” (the usual and customary time to deliver similar goods between the same points), it should be liable for damages resulting from the delay.  And if the goods were “substantially worthless”, the measure of damages would normally be your invoice price to the customer rather than their cost.

There is one caveat however: if the carrier was not aware of the need for timely delivery and that the product had an expiration date, it might claim that it the invoice price is “special damages”, and that a lesser measure of damages is applicable.

Regarding the broker, normally a broker is not liable for loss or damage in transit unless it is negligent.  Now, if the broker failed to advise the carrier of the perishable nature of the goods, or that there was a need to deliver in a timely manner, or that there was an expiration date problem, it is quite likely that you could establish negligence on the part of the broker and also hold it liable for the loss.

333

Bills of Lading – Required Information

Question:  What information is legally necessary to be listed on a bill of lading?  We would like to generate a simple bill of lading in spreadsheet form for our off-site warehouse, but are curious if all the typical “fine print mumbo jumbo” is really necessary.

Answer:  The legal requirements for what a bill of lading must contain are minimal and are set forth in the federal regulations at 49 CFR Part 373:

373.101  Motor Carrier bills of lading.

Every motor common carrier shall issue a receipt or bill of lading for property tendered for transportation in interstate or foreign commerce containing the following information:

  (a)  Names of consignor and consignee.

  (b)  Origin and destination points.

  (c)  Number of packages.

  (d)  Description of freight.

  (e)  Weight, volume, or measurement of freight (if applicable to the rating of the freight).

I would not recommend that you use an “off the shelf” bill of lading or try to copy the contractual language from the motor carrier's Uniform Straight Bill of Lading.

I recommend that shippers enter into written transportation agreements with their motor carriers that clearly spell out the duties and obligations of the parties, and the terms and conditions of carriage.  A properly drafted transportation agreement avoids problems inherent with using the Uniform Straight Bill of Lading (and many variations thereof) that incorporate by reference the Classification and the carrier's rates and rules tariffs.  If you use a bill of lading that incorporates other terms by reference, unless you review all the incorporated terms, you may be unpleasantly surprised when you discover what you have agreed to.

You should contact a knowledgeable transportation attorney if you need assistance in developing an appropriate transportation agreement or other shipping documents.

333

Freight Charges – Brokered Load

Question:  We are a truckload carrier trying to collect payment from a broker. Their customer has filed for bankruptcy, and is negotiating a payment plan with the broker to pay roughly 60% of the original rate. The broker says it does not have to pay us until they are paid, and they can short pay us in accordance to what they get paid. Since our business is with the broker, don't they have to pay up in full? Also, we operate a brokerage arm as well, and routinely load their trucks.  Can we divert the money we owe their carrier division to cover the money their brokerage owes our carrier division?

Answer:  It would seem to me that your contractual relationship is with the broker; there is no “privity of contract” between your company and the broker's customer (shipper).  Assuming that you have appropriate documentation as to your agreement for the shipments in question, you should have an enforceable contract.

Please note, however, that there is some support for the broker’s contention that it is not liable to pay the carrier unless and until it is paid by the shipper.  In New Prime, Inc. v. Professional Logistics Management Co., Inc., 28 S.W. 3d 898 (Mo.App.S.D. October 19, 2000), a  Missouri trial court reasoned that if a broker is merely a “conduit” for freight charges, it’s not obliged to pay the carrier unless it receives funds from the shipper.  [See TransDigest #46 for more detail].

As for possible setoffs, I don't see any reason why you can't setoff mutual debts, so long as the legal entities are both the same.

333

Freight Claims – Measure of Damages

Question:  We sent a shipment to our warehouse via LTL common carrier.  When the shipment arrived it was noted as damaged.  The common carrier covered the cost of repairs to the equipment, however they would not cover the original freight charges that we paid.  They advised us that the only freight charges that they are liable for is moving the freight from the destination warehouse to a repair center.  They also stated in order for us to collect on the original freight cost we would need to make a replacement shipment and provide them with documentation.  Are they correct that we must make a replacement shipment in order to collect the freight charges from the original shipment?

Answer:  As I understand it, the goods were delivered, but were in a damaged condition.  In order to mitigate the loss, they were taken to a repair facility and repaired to their original condition. 

It is my opinion that, under these circumstances, the carrier would be liable for the cost of transporting the goods to and from the repair facility and the cost of the labor and materials to make the repairs. 

If the goods had NOT been delivered and had been lost or destroyed in transit, the situation would be different.  Then, if the claimant has paid the freight charges, it is proper to include the freight charges as part of the claim.  The legal theory is that there has been a breach of contract and the carrier is not entitled to its charges.  This would be true whether or not there was a “replacement” shipment.

333

Liability – Bills of Lading and Terms of Sale

Question:  I understand that Incoterms do NOT address the transfer of title between the buyer and seller.  But I am not sure what addresses the transfer of title, a bill of lading or the sales contract.  When we handle an ocean shipment, the consignee needs to surrender the original bill of lading (“B/L”) to claim the goods.  Thus in an ocean shipment, I think the B/L addresses the transfer of title of the shipment.  But in an air shipment, consignee needs not surrender the airway bill.  Then what addresses the transfer of title in an air shipment?  The sales contract?

Answer:  Incoterms are similar to the UCC terms of sale in that they address matters such as delivery, risk of loss in transit, insurance, etc.  Neither specifically uses the old terminology of “title” - the UCC for example speaks in terms of the right to possession, which is essentially equivalent to title”.

The difference between ocean and air shipments is that ocean B/Ls are usually “negotiable” B/Ls, while air waybills are “non-negotiable” B/Ls.  This distinction - and the applicable law in the U.S. - is found in the Bills of Lading Act, codified at 49 U.S.C. Section 80101, et seq.

With a “negotiable” B/L, surrender of the B/L is usually necessary to obtain possession of the goods from the carrier. 

When a “non-negotiable” B/L is used, the carrier is free to deliver the goods to the consignee without surrender of the B/L.  Thus, with a “non-negotiable” B/L, matters such as the right of possession, insurance, risk of loss, etc. are controlled by the contract of sale and purchase, and the interpretation of the contract terms is governed by the UCC or Incoterms.

333

Third Party Providers – Surety Bonds

Question:  I am checking credit on a potential customer.  This customer is an airfreight forwarder.  My question is, are air freight forwarders required to have surety bonds?

Answer:  Airfreight forwarders, unfortunately, are unregulated by the U.S Department of Transportation or any other federal agency, so there is no requirement for registration, insurance, surety bonds, etc. 

I would note that many so-called “air freight forwarders” actually engage in surface transportation by truck, where no portion of the movement is by air.  In such circumstances they would be required to register as a freight forwarder with the Federal Motor Carrier Safety Administration.

333

Freight Claims – BMC-32

Question:  We are trying to wrap up all of the issues on our carrier contracts, and we do still have a few questions about the BMC-32 endorsement and warehouseman's liability. As I read the literature regarding the BMC-32, it just requires that if the carrier is liable for the loss, then the carrier's insurer must pay it up to $5,000 per occurrence regardless of any deductibles or policy exclusions.  If the claim exceeds $5,000, the exclusions and deductibles in the carrier's policy would only apply to the amount above $5,000.

Our questions have to do with the situation we had in Houston last year.  In June of 2001, we had a large quantity of product destroyed by flooding resulting from the intense rainfall associated with a tropical storm.  This product was located at a 3PL facility with which we have contracted to deconsolidate our freight, sort by store, and ship it to our various retail outlets in their area.  The freight was in the 3PL facility preparatory to being shipped to the stores in the Houston market.  Our questions are; First, was the 3PL acting as a warehouseman at the time of the damage?  I do not believe so, since there were further steps they had to take to complete the deliveries, but we wanted to be sure.  If they were acting as a  warehouseman, will we need to put some text in the contract stating that the 3PL's liability will always be that of a carrier, not a warehouseman?

Second, would a BMC-32 endorsement have helped in this situation?  Since the 3PL claimed that the damage was due to an Act of God, they would not have been liable and therefore, as I read the BMC-32 language, the insurer would not have to pay.

Answer:

1.    The BMC 32 only applies to motor carriers, not warehousemen.

2.    If your "3PL" was a motor carrier, and was incidentally providing some kind of consolidation or distribution services as part of their transportation services, I would say that their BMC 32  (if they had one) would be applicable to this loss.

3.    Intense rainfall, a severe storm, etc. is NOT an "act of God" -  It must be an "ACT OF GOD"  (a bona-fide hurricane, tornado, typhoon, etc.).  Also, there can be no contributing negligence on the part of the carrier, see Freight Claims in Plain English at Section 6.3.

4.    You should find out if your "3PL" is licensed as a motor carrier, broker, freight forwarder, etc.  If it is a motor carrier or a freight forwarder, it must comply with the FMCSA minimum cargo insurance regulations.  If it does not, you should not be doing business with them, because they are acting illegally.

5.  Yes, you should cover matters such as this in your transportation and logistics services agreements.