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MODEL CONTRACT TO BE APPLAUDED
Your opinion page in the May 29, 2006 edition requires a response because it is so convoluted that even Mr. Dwinell’s students must be scratching their heads. It was also fascinating to read objections to a contract last week (May 29th) when the contract was first made public on Monday, June 5, 2006!
First, let’s deal with the headline, “MODEL CONTRACTS DISPUTED”. The only “model” contract discussed is the “broker/carrier” contract which was released to the public Monday, June 5, 2006 by TIA (Transportation Intermediaries Association ). The model was negotiated by a group consisting of six non-asset-based brokers and six asset-based broker/carriers and reviewed regularly by counsel, author of this article. Mr. Dwinell is correct that there are a multitude of contracts floating around the marketplace that are titled, “Broker/Carrier” contracts, many of which seek to impose strict motor carrier liability on brokers. The driving force behind the “model contract” was to create a broker and carrier neutral agreement in a form that is designed to become a market standard, that will in time replace the multiple forms now used in the marketplace, and that any broker or carrier could study once, learn the contents, and then with subsequent usage not have to figure out the meaning of terms that in the past have changed with each contract. One of the most heavily discussed and negotiated terms was the payment clause because of shipper’s concerns about the risk of double-payment liability and carrier’s concerns about giving up their rights to recover payment for freight charges (from the shipper or consignee) if the broker did not pay. The wording in the contract does not change any laws. It merely reflects the reality of the marketplace. First, carriers must conduct their own due diligence of the credit-worthiness of their broker customers before conducting any business. That shouldn’t be too burdensome. Secondly (assuming carrier is not in default), it can seek payment of its freight bills from shippers after giving broker notice. (The amount of notice time is to be negotiated between the broker and carrier.) That gives broker time to make payment without getting its shipper customer involved. Thirdly, if shipper can prove payment to the broker, carrier can no longer seek payment from the shipper but must seek payment from the broker. This is designed to protect the shipper from the risk of double payment liability. The trend of legal authority is to allow shippers to assert an affirmative defense called, “promissory estoppel” in order to avoid double payment liability. In another industry important “model” contract released last year, which Mr. Dwinell fails to mention, TIA and NITL (National Industrial Transportation League) the contract committee of which was chaired by John Gentle of Owens/Corning, collaborated on a broker/shipper contract. Its payment clause is similar to the TIA broker/carrier contract, in that it provides that once payment is made to broker, broker must indemnify and hold shipper harmless from any double payment claims from carriers.
Mr. Dwinell fails to recognize another marketplace reality, that is that federal regulations prohibit brokers from holding themselves out as carriers. It is well established that brokers have no authority to issue a bill of lading. The marketplace problem is that in many instances when a shipper computer generates its own bill of lading, for certain traffic lanes, it does not know at that time who the carrier will be, it will not create multiple bills of lading, and its own computers insert the brokers name as “carrier”. Brokers are advised to put their shippers on notice requesting that their names not be inserted as “carrier” on bills of lading but that doesn’t mean that shippers won’t do it anyway. Many shipper/broker contracts contain wording to the effect that, “The appearance of broker’s name as shipper on the bill of lading is for shipper’s convenience only and shall not change the legal relationship of the parties”. In the recent SCHRAMM decision, the US District Court Maryland specifically addressed that issue and determined that it would look to all facts and circumstances of the case in making the decision. Thus, the appearance of the broker’s name as “carrier” in a bill of lading standing alone is not sufficient to impose on the broker the liability of a carrier.
Another nasty marketplace problem facing the industry is “double brokering” which is specifically addressed in the TIA model broker/carrier contract. The model contract contains significant penalties for violation of the term prohibiting it. Why? Because the broker must “qualify”/ exercise due diligence in the selection of carriers. The TIA model sets out a detailed list of representations and warranties made by the carrier confirming Carrier’s compliance with applicable federal safety regulations. If that carrier brokers the load to another carrier (without the broker’s consent), not only has the first carrier breached the contract but it has also rendered useless the carrier’s confirmation of safety regulations, and the broker’s effort to exercise due diligence. It has also caused unjustified interference with the broker’s contract with its shipper customer because broker has represented (in the model broker shipper contract) that it has or will exercise due diligence in the selection of carriers (ands spells out how it will do that with various contract provisions) to the shipper. An unknown carrier transporting the freight subjects both shipper and broker to unknown risks and liabilities that violates the trust relationship between broker and shipper. Brokering under federal law requires FMCSA registration and the filing of a bond. Carriers who conduct brokering without FMCSA authority run the risks that come with knowingly operating an illegal business.
As a matter of freedom of contract, Brokers may negotiate freight rates with shippers and carriers from any source they wish, and label those rates however the parties may agree.
The TIA model broker/carrier contract seeks to define very clearly the responsibilities and obligations of the parties, including monetary insurance limits, obligations and proof of insurance. The TIA model contract requires that the parties provide each other with proof of insurance in the form of insurance certificates or policies. Certificates must show the parties as “certificate holders” and NOT additional insureds. A party who is an “additional insured” stands in the shoes of the insured and is therefore subject to all the deductibles, exclusions and other terms of the insurance contract. Under the TIA and NITL model contracts, broker/shipper and broker/carrier, even if the insurance is invalid for some reason, the parties’ indemnity liability to each other does not exceed the monetary liability limits stated in the insurance clauses. Thus, liability cannot be avoided if for some reason the insurance is invalid, but will not exceed the monetary limits of the policy.
The TIA model broker/carrier contract in its present form is six pages long. When formatted in double columns, it is 3½ pages long. Nothing in the contract precludes the parties from adding an addendum to spell out additional terms and conditions as circumstances may require, and nothing precludes the parties from editing the contract to suit their specific needs. The TIA model broker/carrier contract may be viewed at the TIA website, www.tianet.org.
Ronald H. Usem is a transportation attorney and partner in Huffman, Usem, Saboe, Crawford and Greenberg PA, 5101 Olson Memorial Highway, Minneapolis, MN. 55422, 763-545-2720, a member of the Bar of Minnesota, Eighth Circuit Court of Appeals and US Supreme Court, and a member of the Transportation Lawyers Association, Conference of Freight Counsel, ATLLP, Associate member TIA, and member of the TIA Directors Circle, and has been practicing transportation law for over 24 years.
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June 2006
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