For Maximum Protection, See Section 7 of B/L

Q: A shipment is to go from us to the customer of our customer, with a 3PL doing the actual carrier routing. Our terms of sale for any and all such shipments are f.o.b. origin, freight collect.

Now the customer’s 3PL is providing a bill of lading listing my company “in-care-of” our customer as the shipper. The consignee also is listed by name with the same in-care-of notation. My issue is with the logistics company’s statement that the B/L must be marked as “prepaid third party” for its customer to receive the correct pricing.

The 3PL also informed me this method is an acceptable shipping term and if the carrier accepts this B/L as tendered, it has no legal recourse against the shipper for nonpayment by the third party.

Another issue I’m not comfortable with: The 3PL’s B/L doesn’t include an option for us to sign Section 7. I have always used the thought process that a B/L marked prepaid with the notation to bill a third party could be billed to us in the event of nonpayment by the third party. Is this accurate or did I miss a change in the rules for third-party shipping?

Most of the major less-than-truckload carriers also insist the B/L be listed as prepaid third party. Their stated reason for this is so their driver won’t try to collect for the freight charges at the time of delivery. I know the real reason is so they can bill someone for the freight charges.

After writing the above, I received a call from the 3PL in question, who told me the National Motor Freight Classification Committee instructed him to change the B/L to “collect third party,” and it must include Section 7 for us to sign.

A: You have good instincts; go with the NMFCC’s recommendation.

This is apparently a “direct-ship” deal by your customer. That is, your customer buys from you, resells to its own customer and has you ship directly to the second-tier customer.

At the same time, rather than handle carrier interactions itself, your customer has a third party do so. That 3PL, in turn, has set up deals with carriers apparently requiring it to mention its name to get the special pricing it’s negotiated.

So far, so good, and not an uncommon arrangement: You unload your stuff at a profit, your customer makes its own profit from peddling said stuff, the 3PL gets its profit from marking up the carrier’s charges, the carrier makes a buck, too, and the ultimate consumer — your customer’s customer — pays for all.

But there are some weak links in this handy-dandy chain, and one of them, as you seem to be aware, is your customer’s 3PL. What happens if it folds in midstream and stiffs the carrier?

Superficially, the “prepaid third party” designation of the 3PL’s original B/L might seem to protect you. I mean, doesn’t that say plainly that the 3PL is responsible for freight charges? So how could you, a poor shipper with only an “in care of” designation, be held liable?

Trouble is, that “in care of” includes your name and your address as the shipper; and that “prepaid third party,” for all that it names the 3PL, includes the dreadful (to you) word “prepaid.” It also doesn’t allow you to exonerate yourself from responsibility by executing Section 7, which directs the carrier not to make delivery without first collecting its charges — thereby absolving you from liability for those charges if it violates that instruction.

“Prepaid third party” isn’t — as of this writing, at least — recognized as a legal payment term, so would a court accept it as proof the carrier had agreed to look only to the 3PL for payment? Or would it, notwithstanding that lame “in care of” designation, consider that “prepaid” (which is legally recognized, and assigns freight charge liability to the shipper), hold you responsible if the carrier sued?

Absent legal precedent — and I know of none — I’m not jumping into the middle of that mess.

But “freight collect third party,” with you executing Section 7, gets you off the hook entirely. The “collect” part says that if the 3PL defaults, the ultimate buyer or your middleman customer (that “in care of” business might carry weight here) is responsible; but Section 7 immunizes you. That’s the one to do, not your customer’s 3PL’s version.

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

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