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Lets take a closer look at the Oak Harbor case: Oak Harbor Freightlines, Inc. vs. Sears Roebuck and National Logistics Corporation
U.S. District Court, Western District of Washington 2006 USDIST. Lexis 14636 decided March 2, 2006.
In this billing dispute, both the freight broker National Logistics Corporation (NLC) and Sears were held liable for the freight bills asserted owing by Oak Harbor Freightlines (OAK), the motor carrier. OAK is a licensed motor carrier under the FMSCA. Everybody knows who Sears is. NLC is a licensed, registered property broker under FMCSA. The parties had a long history of conducting business with each other, going back at least to 1992 when NLC and OAK entered into a written contract.
OAK brought suit against Sears and NLC to recover $426,417.94 for past due freight bills for 3,386 shipments which occurred between August and November 2004. Sears and NLC each argued that other was liable for the payment. Sears argued that the contract signed in 1992 between NLC and OAK makes NLC solely liable for OAK’s freight charges. NLC, the broker, argued that the bills of lading issued in connection with the shipments arranged by NLC constituted contracts between Sears and OAK and that these bill of lading contracts made Sears solely liable for OAK’s freight charges.
Sears filed a cross-claim against NLC for $227,222.50 an amount that Sears had already paid to NLC to cover OAK’s freight charges. NLC responded to Sears cross-claim by asserting that Sears owed NLC over 2.9 million for freight charges rendered between 1995 and 2004. That dispute is currently pending in a separate lawsuit in the state of Illinois.
In this case, Sears instructed NLC to work with OAK. OAK had been transporting Sears freight since, at least, 1986. In 1992 OAK and NLC signed a “National Logistics Corporation Contract” (“Contract”) (A complete copy of the contract is not included in the court’s decision).
In the Contract NLC is referred to as the “Broker/Shipper,” however in one place the Contract provides, “...Shipper agrees to pay carrier within a predetermined time from date of receipt regardless whether or Broker/Shipper has paid for movement...”
The Contract identifies NLC as the Broker/Shipper and OAK as the carrier. It does not define who the “Shipper” is and ultimately the court decided that “Shipper” also meant Broker/Shipper, i.e. NLC..
The parties used two different bills of lading, some generated by Sears for outbound shipments, and some generated by OAK for inbound/return shipments. The majority of the shipments at issue were outbound shipments where Sears’ computer system generated an automated, uniform straight bill of lading. The Sears generated bill of lading stated, “freight terms: prepaid.” The bills of lading instructed the carrier to send the freight bills to NLC. The bills of lading showed OAK as the carrier. In the inbound bills of lading, where OAK generated the bills of lading, Sears Contract Sales was designated as the consignee and those bills of lading stated, “freight charges are prepaid unless marked collect” after which the box next to collect was marked. “Third party billing” was written on the bill to section of these bills of lading.
The court discussed the Breach of Contract Claim as follows: OAK argued that NLC breached the carrier Contract by not paying OAK within thirty (30) days of NLC’s receipt of OAK’s freight bills. The carrier Contract provided in relevant part, “...Shipper agrees to pay carrier within a predetermined time from date of receipt regardless of whether or not broker/shipper has been paid for movement” NLC argues that the term “Shipper” in the carrier Contract referred to Sears, and not to NLC. The court, after stating usual Contract interpretation laws, stated that under the facts of this case, the term “Shipper” in the broker/carrier Contract meant NLC. The court concluded as follows, “Furthermore the subsequent conduct of NLC and OAK makes it absolutely clear that NLC was expected to pay and typically did pay OAK within thirty days of NLC’s receipt of OAK’s freight bills.” The court concluded that the parties intended the term “Shipper” to mean NLC. Thus, the carrier Contract imposed a payment obligation on NLC which NLC has breached by not paying OAK within thirty days of NLC’s receipt of OAK’s freight bills.
The court goes on to state that OAK is entitled to recover from broker NLC the full amount of the claim, namely $426,417.94, even though OAK had only moved for summary judgment against NLC for $227,222.50, the amount which Sears had, in fact, paid to NLC. According to the court, “the breach of contract rationale for holding NLC liable does not limit OAK’s recovery.”
In OAK’s claim against Sears, Sears argued that the bills of lading were “trumped” by the carrier Contract and that the bills of lading were mere “receipts.” However, at oral argument, Sears admitted that it would be liable on the Sears generated bills of lading if no carrier Contract existed.
On the inbound bills of lading, generated by the carrier, Sears argued that those bills of lading were trumped by the carrier Contract. In looking at the terms of the Broker/Carrier Contract the court provided guidance for drafting broker/carrier contracts as follows:
“In other words, the carrier contract does not state that Sears has made no agreement express or implied to pay OAK for its freight services; it does not state that OAK will not seek payment from Sears for such services; and it does not state that OAK waives any claim for payment from Sears. The carrier contract does not even mention Sears by name or implication. In the absence of an unequivocal waiver of OAK’s rights to collect freight charges from Sears, Sears argument that the carrier contract trumps the bills of lading thus failed.” (Underlining emphasis added)
The court further goes on to state that “the terms of the carrier Contract make NLC liable to OAK are not inconsistent with the allocation presumption on the bills of lading. The Sears generated bills of lading for outbound shipments make Sears liable as the shipper/consignor of the goods being shipped and the OAK generated bills of lading for return shipments make Sears liable as the consignee.”
Sears then argued that under equitable estoppel rules it should not be liable for the $227,222.50 which it had already paid to NLC.
The court determined in this case the meaning of “equitable.” The court stated
“The question is which party, the shipper or the carrier, bears the risk if a middle man (i.e. cargo consolidator, freight forwarder, or broker) fails to forward the freight payment to the carrier or if a consignee fails to pay both the shipper and the carrier. The Ninth Circuit has not ruled on the issue and other Circuit courts are split on the question.”
In this case the court concluded that Sears is better able to bear the risk of loss than the carrier, OAK. Further, the court stated that Sears did not protect itself by including a non-recourse provision on the bills of lading that it generated. On the return shipments where Sears was the consignee there was no provision for “prepaid” notation that Sears as consignee could have detrimentally relied upon. By not taking those actions Sears failed to protect itself from double payment liability for the shipment. Sears could have protected itself, but it failed to do so and therefore assumed the risk of double payment liability and therefore the equitable estoppel rule did not protect Sears from the double liability payment of $227,222.50, which it had already paid to NLC.
Now let’s look at the TIA model broker/carrier agreement.
In the TIA model broker/carrier agreement the payment clause reads as follows:
“The parties agree that broker is the sole party responsible for payment of carrier’s charges. Failure of broker to collect payment from their customer shall not exonerate broker of its obligation to pay carrier. Broker agrees to pay carrier’s invoice within days of receipt of the bill of lading or proof of delivery, provided carrier is not in default under the terms of this agreement. If the broker has not paid carrier’s invoices as agreed, and carrier has complied with the terms with this agreement carrier may seek payment from the shipper or other party responsible for payment after giving broker (business days) advance written notice. Carrier shall not seek payment from shipper if shipper can prove payment to broker.”
This payment language was exhaustively negotiated by members of the TIA contract committee. It was, and is intended as a balance of the interests between the broker and the carrier. In taking the direction from the U.S. District Court in Washington, the question is how the TIA model language protects the interest of the parties. First, it clearly states Broker is liable to pay carrier’s freight charges. Secondly, it clearly states that broker’s responsibility to pay carrier is not dependent on broker’s receipt of payment from the shipper. Thirdly, it obligates the broker to pay carrier in a certain number of days, to be negotiated by the parties, provided the carrier is not in default. Fourthly, if the broker does not pay the carrier as agreed (and carrier is not in default) the carrier can, on advance written notice to broker, take collection action against the shipper in an agreed number of days. Finally, the carrier agrees not to seek payment from shipper if the shipper can prove payment to the broker.
If NLC and OAK had used the TIA model, the last sentence of the TIA model payment clause could have saved Sears $227,000.00!
The moral of the story is “use the TIA model broker/carrier contract.”
Finally, in the TIA model contract, the paragraph dealing with bills of lading provides
“Any terms of the bill of lading inconsistent with the terms of this Agreement shall be controlled by the terms of this agreement”
Thus in its present form, the TIA model makes clear that broker/carrier agreement “trumps” any bills of lading.
In my opinion, the language of our model contract adequately addresses the issues raised in the Oak Harbor case.
As I said in my last communication to you, if we do anything we could add a parenthetical clause to our bill of lading clause so that the relevant sentence would read as follows:
“ Any terms of a bill of lading ( including but not limited to payment terms) which are inconsistent with the terms of this Agreement, shall be controlled by the terms of this Agreement.
Keep in mind that the TIA model contract is like a balance sheet in that it reflects the best thinking of the parties at a specific time and date. In order to keep it relevant and updated, and avoid obsolescence, it will have to be updated periodically, to reflect new ideas, and new directions that come out of legislation, and court decisions.