Bills of Lading and Section 7

Q: I have a QUESTION pertaining to the non-recourse clause on bills of lading.

Unfortunately, we had a customer who said to send his shipments collect but then filed for bankruptcy. Because the customer did not pay the freight bills, the carrier came to us seeking payment because we did not sign Section 7, dealing with responsibility for charges.

We are thinking about signing this section of the bill of lading for future shipments. From my understanding, if we sign this section, we would not be responsible for freight charges if a customer does not pay. But we’re unsure what happens on the consignee’s end. Are shipments treated as c.o.d., or are they held until the carrier receives payment?

A: An excellent question, which warrants some exploration.

Strictly speaking, you’re correct that collect shipments moving with Section 7 executed may be held until the consignee pays the carrier. In fact, by signing Section 7, that’s exactly what you’re telling the carrier to do.

Different B/L forms use different phrasing, but the generic version goes something like this: “The carrier shall not make delivery of this shipment without payment of freight and all other lawful charges.” This direction is what protects you, the shipper, from being yourself liable for the freight charges if the consignee doesn’t pay, because it’s an integral part of the contract between you and the carrier.

Let’s say the carrier delivers without collecting up front, planning to bill later. That’s the usual circumstance, by the way; carriers mostly disregard the explicit language of Section 7. But in doing that, the carrier has technically violated the B/L contract when Section 7 is executed. And this violation precludes it from seeking later to penalize the shipper — by demanding that it pay freight charges when the consignee doesn’t — for its own failure to observe the contract terms.

Keep in mind this is entirely different from c.o.d. terms. Under those, the consignee is obliged to pony up for the shipper’s (vendor’s) invoice for the goods themselves before delivery is made.

Carriers take this very seriously, because it imposes on them a fiduciary responsibility for the invoice value. If they deliver a c.o.d. shipment without collecting for the invoice, they are held liable for the uncollected money.

Section 7 says nothing about the shipper’s invoice, and places the carrier under no obligation to collect it. It merely advises the carrier to get its own freight charges at the time of delivery; it leaves the shipper and receiver to set up their own payment arrangements between themselves. But by executing Section 7, you’ve given it the right to require pre-delivery payment by the consignee.

And it’s quite possible that, in the case you mention, the carriers might have done so, or at least some of them. You say your consignee went bankrupt, apparently fairly shortly after the deliveries were made.

Bankruptcies usually don’t come as any great surprise to the astute observer. There are ordinarily lots of early warning signals reflected in the company’s credit rating. Especially these days, carriers are growing more cautious about extending credit. They frequently require credit applications, run the normal checks on creditworthiness, and so on.

Now, the carriers quite likely wouldn’t have troubled with such action on the shipments as you dispatched them, with Section 7 unsigned. They’d have recognized that, in the event the consignee didn’t pay, they had recourse against you. But had you deprived them of this option by executing Section 7, at least some might have been more circumspect. To protect themselves, they might have demanded timely payment by the consignee when it didn’t, as one might expect, pass muster for extension of credit.

So this possible inconvenience to your customers is the price you’ll pay for executing Section 7 on future shipments. Personally, I think it’s a price worth paying in most cases; even if you yourself are willing to give credit to your customers, at least it protects you against insult added to injury to not only having your own invoice unpaid but being obliged to pay shipment costs, too.

Of course, it’s to you, but I’d consider it carefully.

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 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.