Forwarders vs. Brokers: The Bond That Ties

Q: As CEO of an honest-to-God old-fashioned freight forwarder, I’m not at all happy that forwarders got lumped into the “broker” problem in the MAP-21 thing.

(Editor’s Note: The “MAP-21 thing” is the recently legislated increase in the amount of the security bond required for motor carrier brokers from $10,000 to $75,000. It’s intended to provide greater security to brokers’ customers and the carriers they employ. The bond requirement was expanded, however, to include anyone registered as a domestic freight forwarder with the Federal Motor Carrier Safety Administration.)

I remember years ago a transportation lawyer named Bob Gallagher in Boston tried to differentiate forwarders and brokers. He’d tell shippers to use forwarders and not brokers to avoid all of the problems that have received so much publicity in recent years. There’s not much new under the sun, really, and maybe that isn’t a bad sales pitch for us.

We really are simply a domestic offshore freight forwarder that actually has warehouses and touches the freight. We provide our service by buying underlying inbound truck transportation and we issue a bill of lading covering the freight from origin to destination with Carmack loss-and-damage liability and pretty heavy insurance coverage. So everything we now do is under a bill of lading as a forwarder.

Why then do we need a bond as well?

A: In the interest of full disclosure, I should mention that the foregoing is redacted from an e-mail a longtime friend recently sent me. He didn’t actually ask the concluding question, but it was implicit in what he wrote and warrants attention.

Over the past couple of decades the dividing line between a forwarder and a broker has become hopelessly blurred. That’s due in part to the transformation of broker operations so that brokers now contract directly with underlying carriers (just as forwarders do) instead of, as previously, simply mediating contractual relationships between shippers and carriers.

But it’s also due to the significant number of brokers who represent themselves (in ads, customer solicitations, etc.) as “freight forwarders.” And, unlike the former Interstate Commerce Commission, the FMCSA doesn’t vet registration applications to ensure that those who sign up as forwarders really operate as forwarders.

The distinction remains clear in the statute. A broker is solely an intermediary, usually never even laying eyes ‑ much less hands ‑ on the freight. The broker hooks shipper-customers up with carriers who can haul their shipments and basically walks away. That the broker today receives his compensation by billing the shipper (at a markup) and then being responsible for paying the carrier out of the proceeds doesn’t alter this situation.

By contrast, the forwarder acts in all respects but one as carrier in its relationship with the shipper. The forwarder picks up or receives the freight, issues a bill of lading directly assuming liability for in-transit loss and damage, bills his own freight charges to the shipper, etc. The only thing the forwarder doesn’t do is line-haul the freight, instead hiring carriers to whom the forwarder is their shipper of record.

Some readers may recognize this description as that of the maritime non-vessel-operating common carrier. In overland transportation, the domestic forwarder is indeed an NVOCC. (Further confusion is presented by the fact that there are also maritime forwarders, whose role is that of the overland broker. The conflicting nomenclature results from the different evolution of the two modes.)

Under FMCSA rules, domestic forwarders are subject to the same insurance requirements as motor carriers – and because they’re liable to their shippers for loss and damage (as brokers aren’t), they also ordinarily must carry cargo insurance. That would seem to make the bond requirement on forwarders redundantly unnecessary, would it not?

Except, that is, for the fact that forwarders hire carriers just as contemporary brokers do, and the bond can help assure those carriers of payment. To be sure, a forwarder ‑ with some investment in infrastructure ‑ is less likely to simply vanish overnight as can happen with non-asset-based brokers (and historically too often has). But forwarders can go out of business, too, and if they do so owing their carriers, the bond helps ensure the carriers won’t go begging.

So, although Congress may indeed be confused about the difference between forwarders and brokers, the new bond requirement does serve a real-world purpose. It also thwarts those brokers who used to evade being bonded by registering instead as forwarders.

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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