The Law and Your Business

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"THE LAW AND YOUR BUSINESS”

Reported by Ronald H. Usem, Transportation Attorney, Huffman, Usem, Saboe, Crawford & Greenberg PA

This is the second in a series of articles devoted to exploring various legal decisions and the impact they may have on the conduct of your business. In last month’s issue (Feb. 2005) of the Logistics Journal we reviewed claims against a broker for catastrophic personal injuries. In the CGU case described in this issue we examine a courts decision in a claim against a broker for substantial cargo loss and damage. The common thread between the two cases is that liability is asserted against the broker for alleged “negligent hiring” of a motor carrier. (Underlining constitutes writers emphasis and ( ) represents the writer's comments). (Citations have been omitted to expedite reading).

CGU Intern. Ins., PLC v. Keystone Lines Corp. 2004 WL 1047982 (N.D.Cal, May 5, 2004)

The facts of the case are as follows: Plaintiff CGU International Insurance ("CGU") brought a negligence action against Defendant Keystone Lines Corp. ("Keystone"). Following a full bench trial on the merits, the Court made the following findings:Plaintiff is a foreign corporation and the subrogated insurer of Asia United Enterprises, Ltd. ("AUE"). In July of 2000, AUE contracted to sell seven new bottle-labeling machines to Coca Cola Korea Bottling Company Ltd. of Seoul, Korea, for $1,326,202.85. The sale was on an F.O.B. basis from the Port of Oakland. To fulfill the order to Coca Cola Korea, AUE purchased seven new labeling machines from Trine Labeling Systems ("Trine"). AUE's contract with Trine was F.O.B. from Turlock, California, the location of Trine's manufacturing facilities. AUE selected NewTrans Worldwide ("NewTrans")as the freight-forwarder to coordinate shipment of the labeling machines. As the anticipated shipment date approached in December of 2000, NewTrans was unable to find a carrier to transport the machines from Trine's facility in Turlock to the Port of Oakland. On Trine's recommendation, NewTrans contacted Alex Abbley, an agent for Keystone, to help locate a carrier to move the machines from Turlock to the Port of Oakland. Soon after, Abbley, on Keystone's behalf, hired Europa Specialized Carriers, Inc. ("Europa") to pick up the labeling machines from Trine in Turlock and move them to Oakland, where they would be loaded onto a vessel for carriage to Korea.On January 2, 2001, while in route from Turlock to Oakland, one of Europa's trucks struck a highway overpass, resulting in complete damage to two of the machines. Pursuant to AUE's insurance policy with CGU, CGU paid AUE $397,860.83 to cover the two damaged machines. CGU subsequently initiated this action against Keystone, alleging that Keystone was negligent in selecting Europa to transport the machines.......,

At the outset of trial, various third-party and cross-claims were at issue. During the course of trial those claims were dismissed upon mutual agreement of the parties.

Carrier versus Broker: The Court analyzed the negligent hiring issue in the following manner:

The first issue for the Court to resolve is whether Keystone qualifies as a carrier or broker under the Carmack Amendment, 49 U.S .C. § 14706 et seq. The Carmack Amendment, a federal law governing liability for loss, damage, or injury to property transported in interstate commerce, preempts state regulation of carrier liability.(Citations). Carmack governs carriers but not brokers. 49 U.S.C. § 14706(a). Therefore, if Keystone qualifies as a carrier as defined by Carmack, then CGU's state-law cause of action is preempted. (citation) Section 13102 defines a broker as: "a person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation." 49 U.S.C § 13102(2). The Code of Federal Regulations adds: "motor carriers, or persons who are employees or bona fide agents of carriers, are not brokers within the meaning of this section when they arrange or offer to arrange the transportation of shipments which they are authorized to transport and which they have accepted and legally bound themselves to transport." 49 C.F.R. § 371.2(a). By contrast, a carrier is "a person providing ... transportation for compensation." 49 U.S.C. § 13102(12). The difference between a carrier and a broker is often blurry. The crucial distinction is whether the party legally binds itself to transport, in which case it is considered a carrier. See 49 C.F.R. § 371.2(a). That is, if Keystone accepted responsibility for ensuring delivery of the goods, regardless of who actually transported them, then Keystone qualifies as a carrier. If however Keystone merely agreed to locate and hire a third party to transport the machines, then it was acting as a broker. We find that Keystone was a broker in this transaction. Abbley worked as an agent for Keystone's brokerage division. There was never an understanding that Keystone assumed responsibility for shipment of the labeling machines from Turlock to Oakland. NewTrans contacted Keystone (on Trine's suggestion) because NewTrans was unable to locate a carrier and such was Abbley's speciality. Abbley testified that he was to receive the standard seven percent brokerage commission (as a percentage of the freight charge) for his services. Also, Keystone never took physical possession of the machines. Further evidencing Keystone's role as a broker is the trip contract it entered into with Europa in which Keystone designated itself as the broker and Europa as the carrier. For these reasons, Keystone was merely a conduit between AUE and Europa and therefore qualifies as a broker under Carmack. Therefore, Plaintiff's negligence claim is viable.B. Negligence The sole issue in this case is whether Keystone was negligent in the selection of Europa as a carrier. To establish negligence, CGU must prove that (1) Keystone owed a duty to AUE, (2) Keystone breached such a duty, (3) a causal connection exists between said breach and AUE's injury, and (4) AUE suffered actual damages.(Citation). CGU claims that Keystone, as the broker, had a duty to AUE as the owner of goods to hire a competent carrier. Keystone allegedly breached its duty by not adequately investigating Europa's qualifications before selecting it as the carrier, resulting in AUE's eventual loss when Europa's truck crashed into the overpass.There is no dispute as to CGU's standing as AUE's subrogated insurer to seek recompense for the loss which AUE sustained. While CGU and Keystone dispute the proper measure of damages, they agree that AUE did in fact suffer monetary damages as a result of Europa's accident. Keystone does not contest the duty that it owed to AUE despite the absence of any contractual privity between them.(citation) Thus questions regarding duty and harm are not at issue, and the Court need only address breach and causation. The applicable standard of care in this case is the ordinary and reasonable prudent person standard. (citation) Keystone's actions must constitute a departure from the expected behavior of an ordinarily prudent person in the same circumstances to constitute a breach of its duty to AUE. CGU claims that Keystone's failure to investigate Europa's safety record and the driving history of its employees constitutes the breach. Also, CGU argues that the appropriate standard of care required Keystone to check the route which Europa was to follow from Turlock to Oakland. According to CGU, Keystone was under a tight deadline to hire a carrier. Consequently, it hastily and carelessly selected Europa to transport the labeling machines, neglecting important steps in the process to verify Europa's competence. Had Keystone bothered to investigate Europa more thoroughly, it would have determined that Europa was not competent to serve as the carrier and hired another company, thereby avoiding the accident and resulting damages.After careful consideration of the evidence presented, the Court finds that Plaintiff's contention is untenable. The admissible facts undoubtedly refute CGU's allegation that Keystone failed to abide by a standard of care commensurate with an ordinarily prudent person. Alex Abbley testified that Keystone's standard procedure for qualifying a potential carrier entailed verifying the carrier's transportation licenses and insurance status. Before selecting Europa, Abbley indeed determined that Europa had valid state and federal carriers' licenses. Additionally, Abbley ascertained that Europa possessed both cargo and liability insurance. A carrier's status regarding licensing and insurance reflects on its safety history and driving record. Any blemishes regarding Europa's accident history would have appeared on its insurance and licensing information. Therefore, Abbley's having verified that Europa was duly licensed and possessed adequate insurance foreclosed any possible need to separately inquire about Europa's drivers and accident history. Furthermore, within a month or two prior to hiring Europa for the Trine shipment, Abbley visited the Europa facility in order to get a feel for the company's operations. In explaining that such visits to carrier's headquarters were extremely rare, Abbley testified that the size, organization, and equipment at the Europa facility convinced him of its competence as a carrier. Notwithstanding his impressions of Europa following this visit, Abbley still proceeded through the standard verification process before hiring Europa for the Trine shipment. Accordingly, we find that Keystone did not breach any duty owed to AUE in selecting Europa to serve as the carrier.

(The Court concluded that CGU failed to establish that Keystone acted negligently in hiring Europa to transport the labeling machines and ruled in favor of Defendant. )

(The actions of CGU in this case( except for the visit to the site) can easily be considered standard practices in the selection of a motor carrier. The Court in this case, like the court in the Schramm decision reported in the February,2005 Logistics Journal, provides no guidance for what investigation into a carriers drivers records could legally be disclosed by a carrier even if asked for by a broker .However it would seem obvious and appropriate to obtain a representation from the carrier that it was in compliance with all applicable safety regulations, and that it had in place it’s own procedures to assure its drivers were complying with applicable safety laws and regulations. In the everyday fast moving marketplace, both brokers and carriers must try to find that delicate balance, in answering the question, how much due diligence investigation is enough? In the coming months we’ll review other decisions to see if we can gain any further insights on this issue.

The CGU case was decided in US Federal District court, California and constitutes the law of that state. Any other court can choose to follow it.)

Ronald H. Usem, Transportation Attorney, Huffman, Usem, Saboe, Crawford & Greenberg PA can be reached at 5101 Olson Memorial Highway, 1000 Water Park Place, Minneapolis, Mn 55422; telephone 763-545-2720; fax 763-545-2350.

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