May 2006 | Commentary | Fine Print

Freight Transport Free-for-all

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William J. Augello, Esq. is an adjunct professor at the University of Arizona's College of Law and author of Transportation, Logistics and the Law.

How can shippers tell whether they are contracting with a legitimate carrier when carriers and third-party logistics providers (3PLs) offer so many different deals? What exactly constitutes a 3PL? And who monitors transportation entities today?

These questions, and others, plague shippers in today's deregulated transportation environment. It is not always easy to tell whether a service provider's offerings are legitimate.

Knowing a service provider's legal status is crucial because it determines the terms of the contract of carriage, as well as the service provider's liability for loss or damage, the cargo insurer's liability, and the shipper's liability for freight charges.

What's In A Name?

A limited number of regulated entities exist today in surface transportation: rail, motor carriers (including parcel express and household goods carriers), freight forwarders, and brokers.

Statutory definitions do not exist for 3PLs, shipper's agents, shipper associations, broker's agents, or intermodal marketing companies. But this does not stop companies from marketing their services under these banners and others.

By law, an entity is governed by its actions, not by the name tag it uses. The fact that a company is registered as a carrier with the Federal Motor Carrier Safety Administration (FMCSA), for example, is not determinative unless it is providing carrier services for the shipment in issue.

Furthermore, many entities hold all three types of operating authority—motor carrier, broker, and freight forwarder—under the same corporate name. Therefore, shippers must determine a party's legal status from the service it provides.

If a company offers to transport a shipment in its own or leased trucks, for instance, it is acting as a motor carrier. If it offers to arrange for motor carrier transportation by others for a fee, it is performing the services of a broker.

If it offers to pick up, assemble, and consolidate shipments; assume liability for transportation; and hire certificated motor carriers to transport shipments over-the-road, breakbulk, and deliver to destination, then the company falls within the statutory definition of a surface freight forwarder. If it does not assemble or breakbulk, but only transports truckload shipments, it is considered a broker.

The distinction between "broker" and "surface freight forwarder" is important because brokers are not liable for loss or damage in transit, while freight forwarders act as the carrier, and, therefore, are liable to shippers. Usually, brokers collect freight charges from shippers to pay carriers.

When carriers extend credit to brokers, they waive their right to collect from a shipper if the broker fails to pay the carrier. Similarly, carriers have no privity of contract with shippers when they fail to collect from a freight forwarder.

Exemptions and Complications

To further complicate shippers' dilemmas, many entities masquerade as airfreight forwarders, operating under a statute that exempts them from U.S. Department of Transportation (DOT) control if a ground shipment has a prior or subsequent movement via aircraft.

Another statutory exemption allows companies to substitute trucks for airfreight shipments when situations arise such as adverse weather, aircraft mechanical breakdown, or other conditions beyond shippers' or carriers' control. Forwarders regularly use trucks to move their cargo without regard for meeting one of these statutory exemptions.

Forwarders may also issue airbills that limit their liability to 50 cents per pound, which is the standard liability for airlines and airfreight forwarders, but much lower than motor carriers' limits.

Shippers are rarely informed in advance of the 50-cents-per-pound limitation, or the grounds for substituting motor carriers for aircraft. Shippers often learn of this substitution only when a loss occurs and they are offered payment at 50 cents per pound, which is usually substantially lower than the invoice value.

The Civil Aeronautics Board declared 50 cents per pound to be unreasonably low in 1977 and ordered domestic airlines to instead use the Warsaw Convention limit of $9.07 per pound. Four months later, cargo airlines were deregulated, and the airline industry reverted to 50 cents per pound.

Shippers, therefore, should not accept or sign an airbill from a carrier or freight forwarder unless the shipment was supposed to move via air, and they are given proof that one of the statutory exemption conditions—adverse weather, mechanical breakdown, or other causes beyond shippers' or carriers' control—existed for that shipment. Shippers should insist that their carriers accept the normal liability limitation for truckers—$25 per pound—as a condition for accepting the load.

Defining a 3PL

Many entities define themselves as a 3PL, and offer a wide variety of services. As stated earlier, there is no statutory recognition of a third party in transportation. Therefore, 3PLs must fall within one of the statutory definitions and obtain a license for each service they perform—motor carrier, broker, or freight forwarder. As a result, shippers must understand which "hat" a third party is wearing for each service it provides.

As a general rule, shippers should not pay freight charges to entities that are not responsible for delivering their freight. Shippers should pay freight bill payment companies, for instance, under a trust arrangement that protects the shipper against any later claims that a carrier was never paid.

Similarly, payments to brokers should be covered by written contracts that protect shippers against double payment if a carrier does not receive payment from the broker.

How can shippers avoid these surprises and costly errors when selecting service providers? One method might be to confer with experienced transportation consultants, such as the members of the Freight Transportation Consultants Association.

This 70-year-old organization posts a list of members on its web site, www.transportpros.org, and lists the various services each member offers. Shippers can readily shop the site for consultants that offer the precise combination of services they need.

Experienced consultants represent hundreds of shippers and deal with hundreds of carriers and intermediaries. They know which transportation entities are legitimate, which carriers are best equipped to serve shippers' traffic lanes, and how much of a discount shippers should receive based on their shipment volumes. Consultants also often operate freight brokerage services and maintain a large stable of reliable carriers. They can sometimes provide professional expertise for shippers lacking extensive training and education in the transportation industry.

More importantly, they use their collective clout when negotiating with carriers for an individual client. And as they generally are non-asset-based, consultants do not have a conflict of interest with their parent carrier-based companies.

Missing Monitors

The last question dogging shippers today—who monitors transportation entities?—has a disappointing answer. Except when it comes to motor carrier safety issues, transportation companies are not monitored.

Though the DOT retained some statutory authority in the Interstate Commerce Commission's (ICC) Termination Act of 1995, Congress also told the DOT secretary not to spend scarce resources on private disputes, and that policy has filtered down to the entire department, including the Surface Transportation Board and FMCSA.

The statutory requirement that motor carrier rates and charges be reasonable has been repealed. Motor carriers now charge whatever the market will bear, and they limit their liability in ways the ICC would not approve.

In addition, the government does not monitor truckers that are illegally substituting trucks for aircraft shipments in order to limit their liability to 50 cents per pound.

Intermediaries and third parties are also not monitored to ensure they are properly registered with the FMCSA and are fully insured pursuant to FMCSA regulations. Carriers and intermediaries that lose their insurance merely receive a warning that their authority will be revoked in 30 days if the insurance is not restored, but there is little enforcement or effort to see that illegal operators are removed from the marketplace. In fact, the FMCSA is proposing to repeal its regulations requiring insurance filing.

Shippers Exposed

Another danger is that any shipper hiring a trucker is now exposed to lawsuits for any damages, injuries, and/or deaths caused by the trucker on the grounds that the company was negligent in failing to properly check the trucker's safety record.

Shippers rarely have the time or resources to follow the procedures the courts believe are necessary to properly check into a carrier's safety record before hiring it to transport a load. This is one of the selling points used by experienced brokers and third parties that have installed monitoring procedures to automatically check changes in carriers' safety records and insurance coverage.

Using an intermediary to arrange transportation may also shield shippers from allegations that it negligently hired the trucker.

Today's marketplace is a free-freight transportation society fraught with illegal operations and scams that prey upon uninformed shippers, particularly small and household goods shippers. In some cases, utilizing the services of professional consultants can help shippers avoid the potential consequences of dealing in the current risky, troubled freight transportation environment.

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