Paying Double When a Broker Doesn’t

Q: Our Canadian division in Ontario shipped five machines to its customer pickup account in California. The shipment was freight collect via the customer’s Broker X.

Broker X hired Carrier Y to handle the move. The California customer paid Broker X, and Broker X failed to pay Carrier Y. Carrier Y has handed over the $2,600 freight bill to a collection agency, which is threatening to sue the California customer who paid Broker X and my company’s Canadian division as the shipper.

The collection agency is citing Contship Container Lines v. Howard Industries, 309 F.3d (U.S.C.A.6, 2002), to assert that “a shipper may be liable even though it has paid the broker already.”

The problem I see with the Contship reference is that the shipper (our Canadian division) didn’t pay the freight bill; the consignee did. I believe we’re completely insulated from a lawsuit for second payment, this time to the actual carrier, because Broker X and the underlying carrier were selected and hired by the consignee. Do you agree?

A: Based on the little you’ve told me, I think you’re probably in the clear, though I wouldn’t call it “completely insulated.”

You omit a raft of relevant information. Was it a Canadian or a U.S. bill of lading? Who were the named parties to the B/L? Was there reference in the B/L to Broker X as the paying party? Was Section 7 — the so-called no recourse clause — executed by the shipper? Your defense largely rests on such documentary details.

Yeah, don’t tell me, it’s all just paperwork — legalistic pettifoggery in the face of the “obvious” facts. But the reality is that since writing was invented in (so far as we know) ancient Sumer 5,000 or more years ago, what’s inscribed on whatever medium is used to record it — from clay tablets to papyrus scrolls to paper to (these days) electronic capture — has governed commercial transactions.

It’s what was — or, in that case, what wasn’t — written down that decided the Contship case cited by the collection agency, as well as most other cases of that ilk I’ve seen. In the end, it’s what will probably decide your case as well.

There are two issues here, and it’s important to recognize that they’re separate: First, does somebody (other than Broker X) owe the carrier its money, and second, if so, who? Let’s take them in sequence.

If the bill of lading makes clear that there was a third party involved, and the third party was the one everybody expected would get paid, that’s pretty well an end to the situation. Even if it doesn’t, but that understanding is fairly obviously implicit in the arrangements as described, the carrier is likely to have little success in a lawsuit against anybody else.

But I’ve seen situations where the paperwork description is very murky. I’ve seen cases in which the bill of lading makes no mention whatever of any third party, and where there’s precious little other documentary evidence of one being in the picture. That’s where the carrier has a fairly decent shot at collecting its charges notwithstanding that the third party left it high and dry, and notwithstanding that somebody else already paid the third party.

So far, you’ve probably had little input, because you say it was your consignee, not your Canadian division, who hired the third party. Assuming there’s a lawsuit, your consignee has had to carry most of the load up to now.

And given that the shipment moved freight collect, it’s also your consignee who’ll have primary liability to the carrier if it fails to sustain that burden in court. That’s why I told you you’re probably coming out of this clean.

If your Canadian division executed Section 7, that’s absolute. You told the carrier not to deliver without getting your freight charges. It violated that and delivered anyway, so the carrier’s out of luck, end of story.

However, if you didn’t execute Section 7 and your consignee is held liable to the carrier but can’t pay, you’re in trouble. Never mind who arranged for what with whom, your name’s on that bill of lading as shipper and, irrespective of shipping terms, you’re therefore payer of last resort if the carrier prevails otherwise.

Now, if it’s a Canadian (rather than a U.S.) bill, that could make a difference; I’m unfamiliar with how Canadian B/Ls parse such a situation. But under a U.S. bill, your failure to execute Sec-tion 7 could prove fatal to you here. Unfair? Maybe, but that’s the law.

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, Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

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