3PL Liabilities Exposed: Who Gets Stuck With the Bill?

3PL usage is increasing. Along with that are corollary increases in liability. Just what are the limits of liabilities for all partners—transport buyer, intermediary, carrier? Legally who is responsible for what? This feature explores 3PL liability limits as seen through the eyes of a top logistics legal expert.

While the term 3PL may be relatively new, there is nothing new about contractual relationships with third-party providers of transportation and logistics services. In my experience, the single most contentious issue has been defining the limits of liability for transport buyers who use the services of a third party, and providing transport buyers with transactions free of any secondary liability.

With the growing acceptance of the 3PL concept there are also growing risks for error in defining that relationship. Those relationship gray areas can, and will, lead to increased liabilities. All parties should understand their commercial duties and responsibilities, while safeguarding their legal liabilities, in order to optimize this important method of supply chain management, with minimal risk. To do so requires a better understanding of this three-party contractual relationship.

Many legal issues impact these relationships. Let’s limit the scope of our focus to one important risk area: how transport buyers can manage the financial exposure of having to pay twice for carrier services, should their 3PL fail to pay for those services rendered on the transport buyer’s behalf.

Surprising? It is to many transport buyers. They don’t understand that without proper contractual and financial precautions, the law leaves them open to the possibility of paying first the 3PL contractor, and then being required to pay the carrier for the same services, if the 3PL contractor defaults. In some instances, within the context of brokered services, transport buyers have been held liable for payments of defaulting intermediaries, and should be made aware of steps they can take to minimize this risk.

3PL defaults to carriers sometimes occur when they use your carrier payment to fund other operating expenses. When an intermediary has cash flow problems that prevent full payment to carriers for services rendered, carriers then look to shippers or beneficial owners (consignees) of the goods for payment of those services. Ultimately, unless alternative resolution methods, such as mediation, are specified within the 3PL contract, a court is then called upon to decide the liabilities of the parties—customer, carrier, consignee, intermediary.

Understanding 3PL Relationships In the Law

Fundamentally, we have to accept the reality that the courts have, for many years, recognized under certain circumstances that a transport buyer could be required to pay for the carrier’s services, even though the transport buyer had already paid the intermediary. This is so for a variety of historical reasons that are too complex for full review here.

Within this history, the United States Supreme Court has ruled on this issue in Southern Pacific Transportation Co. v. Commercial Metals Co., 456 U.S. 336 (1982). There the Court gave very succinct guidance to all who use third parties to manage some, or all, logistics needs. The Court noted, “a carrier has not only the right, but also the duty, to recover its proper charges for services performed.” That can mean recovery from a transport buyer who has already paid an intermediary or 3PL under existing statutory and case law.

While recognizing that this responsibility may be properly shifted to a third party, the Court concluded, “the transfer of this responsibility must be clearly established by the agreement between the parties, or the circumstances surrounding the receipt and transportation of the goods.”

Many cases before and after the Commercial Metals case reach the conclusion that because of the “circumstances,” or failure to properly contract, an unsuspecting shipper must pay the carrier, even though it has already paid the intermediary or 3PL. Other cases reach a contrary conclusion.

A review of these cases adds little to our fundamental purpose. The point is that if we are to properly safeguard the developing 3PL relationship, we must take the advice of the Supreme Court in Commercial Metals. Shippers who utilize intermediaries, and transfer to them the responsibility to pay all carriers, should realize that, “the transfer of this responsibility must be clearly established by the agreement between the parties.”

This means establishing not only proper functional responsibilities by the contract, but also delineating potential liabilities that could spring from those functions. To effectively achieve this protection we must fully understand the proper role of an intermediary, and how that functionary may be perceived in the law.

Get It In The Contract

By definition, a 3PL becomes a third party to the traditional two party (shipper/carrier), contract for transportation. Historically, the terms and conditions of this contract were specified in the bill of lading, if not more thoroughly in a separate express contract. The bill of lading identifies the shipper/beneficial owner (usually the consignee) and carrier, as well as the duties and responsibilities of each, including the obligation to pay the carrier.

When a 3PL is involved in this transaction on behalf of the shipper, it is important to specifically clarify these duties and responsibilities. Even assuming the 3PL is contracting directly with the carrier, unless properly addressed, the shipper may continue to be secondarily liable to the carrier by the terms and conditions of the bill of lading, especially where that bill of lading identifies the shipper and/or beneficial owner (consignee) as the responsible party.

As the 11th Circuit Court of Appeals held in National Shipping Co. of Saudi Arabia, 106 F.3d 1544 (11th Cir. 1997), “unless a carrier intends to release a shipper from its duty to pay under the bill of lading, the shipper remains liable to the carrier, irrespective of the shipper’s payment to a freight forwarder (i.e., intermediary).”

This begs the question: how does the shipper best protect against subsequent liability to carriers after paying the 3PL contractor for transportation charges? The “belt and suspenders” answer to this question is found in a three-dimensional approach to the contract with the 3PL.

Spell It Out Beforehand

First, the shipper should be careful to assure that all concerns are addressed within the express contract with the 3PL. While it is easy to get confused by the various court decisions on this issue, all agree that “the parties are free to allocate freight charges by contract as they wish, unaffected by 49 USC Section 10743. Re Roll Form Products Inc. 662 F2d ISO (1981); Consolidated Freightways v. Admiral Corp., 442 F2d 56 (1971).”

At the very least, this is advice from the courts—you can avoid court interpretation of duties and responsibilities among the parties by clearly defining those duties and responsibilities (including payment of carriers) within the four corners of the contract.

A contract that clearly defines the duty of the insolvent 3PL to pay all carriers is of little help, however, if the carrier is not a party to that contract, unless the carrier has in other ways indicated an agreement relying exclusively on the 3PL’s credit and waived its right to collect from the shipper.

The exclusive reliance by the carrier on the creditworthiness of the 3PL (not on the transport buyer or consignee) can be indicated within the contracts between the 3PL and the carriers. This can be done by way of specific terms wherein the carriers agree to look entirely to the 3PL, not to the transport buyer, for payment.

Thus, the transport buyer is well advised to not only have carrier payment duty specified in the bilateral contract with the 3PL provider, but the buyer should further require proof from the 3PL that the 3PL contracts with carriers have specific language requiring the carrier to look exclusively to the 3PL for payment.

It is clear that a careful drafting of the bilateral contract between the shipper and 3PL contractor to specify the 3PL contractor’s duty to pay carriers and indemnify the shipper, as well as providing for the release of the shipper by all contract carriers, is needed. There still remains perhaps the most singularly important element to completely safeguarding your participation in any 3PL relationship. It is as simple as being careful who you deal with.

The Court suggests buyers of transport wishing to avoid liability for double payment must take precautions to deal with reputable intermediaries. While “reputable” is subject to interpretation, the term, in this context, should include having a strong balance sheet with which to assure absolute indemnity protection to the shipper, should any carrier demand reparations from the shipper for services rendered to the 3PL.

The Bottom Line

Third-party logistics, as a sector within the transportation industry, is growing exponentially. Essentially, 3PL services amount to brokered transportation and other supply chain management services by the 3PL contractor for the shipper. While there are some variations to this methodology, the law will look clinically at these transactions in determining ultimate liability should the 3PL contractor default in payment to carriers.

Because the Courts make this determination after the fact, you cannot be oblivious to secondary liabilities. On the other hand, shippers with good legal advice and the right combination of protection will be fully insulated from further liability.

A Conflict of Interest?

It gets even more complicated if a third-party logistics provider is owned by, or affiliated with a carrier, and uses that carrier’s equipment to transport the shipper’s goods. A conflict of interest may arise when goods are lost or damaged, or vehicles are involved in an accident while in the 3PL’s or its carrier’s possession or control, as the 3PL may be representing both the shipper and the carrier at the same time.

The terms of the 3PL will reveal whether it is representing and protecting the interests of the property owner (the shipper or consignee) or protecting the interests of a parent carrier organization.

Here are the issues that generally reveal a 3PL’s real interests:

  • Whether the shipper will be paid for the full value of its products if lost or damaged in transit.
  • Whether concealed loss or damage claims will be paid or subjected to an arbitrary formula.
  • Whether shippers’ load and count will be denied automatically, without regard for the facts.
  • Whether the 3PL will incorporate its parent carrier’s rules tariffs by reference in the government contracts.
  • Whether the rate agreements will include limitations on the carrier’s liability, including a “per piece” clause for partial losses.
  • Whether the carriers will assess penalties for late payment of freight charges, such as “loss of discount” provision.

—SOURCE: Transportation and the Law (Augello, 2001)

Paul Stewart is General Counsel to the GST Corporation and is the director of Optimum Resolutions & Consulting (ORC), a firm that provides mediation, arbitration, case evaluation, and consulting specific to commercial, transportation/logistics, and employment-related issues. Stewart has more than 25 years of transportation and logistics experience in the legal field.