Q&A: Profiting From a Loss?

Q: I attended one of your claims seminars a few years back, and I remember enough to get into trouble but can’t recall where I’ve seen what I’m thinking of.

We’re a consultant and freight bill auditor. One of our clients has a claim involving a lost/damaged shipment, about $1,000. The shipment was replaced, that is, shipped anew (with the same carrier). Our client is claiming destination value of the original shipment (sales price to consignee). The carrier is saying no, that it should be for manufacturing cost.

This is where I don’t recall a remedy saying something like the manufacturer has the right to make a profit on everything it makes, and should be allowed to claim and expect to recover full destination value.

Can you help clear my cobwebs?

 

A: You remember correctly, provided one key condition is met.

This is how I discussed the issue in my “Manager’s Guide to Freight Loss and Damage Claims” (Fort Valley, Va.: Loft Press, 3rd ed., 2003, p. 180):

“(I)f a sale has been completed, to the point that the only remaining thing to be done to consummate it is physical delivery of the goods, the profit has already been earned by the shipper, and must be paid by the carrier as part of the claim if the goods are lost (or destroyed) in transit. And this holds true without regard to whether a replacement shipment is made and accepted by the consignee, as to which the shipper may reap a second profit.”

As I noted in the book, carriers tend to squeal like stuck pigs at the second part of this. They think the shipper is just getting greedy, and that, because there’s only a single sales transaction, the shipper should settle for only one profit — just as it would have realized had the original shipment not been lost or destroyed. Only production cost should be paid for the first shipment, they argue.

The courts, however, believe otherwise. They point out that, first, the buyer (consignee) is under no obligation to reorder; Nashville, C. & St. L. Ry. v. W. L. Halsey Grocery Co., 121 So. 16.

“(S)o,” I continued in the book, “it’s not unreasonable to ascribe some additional sales activity to the replacement shipment, which entails some level of cost for which the claimant is entitled to reimbursement.”

Moreover, another court noted, suppose a second or even a third shipment were likewise lost or destroyed? “Could (the shipper) be required to continue to manufacture goods for the (carrier) at cost?” Gore Products, Inc. v. T. & N. O. R. Co., 34 So.2d 418.

What the shipper lost when the loss or destruction of its goods happened was the opportunity of selling those particular goods to somebody else. It has one fewer unit or lot available to fulfill demand by virtue of having to dispatch a second unit or lot to complete this sale. It’s that opportunity cost for which the carrier is liable.

Or, from another practical standpoint, consider the situation if the goods had shipped f.o.b. origin, so that the consignee and not the shipper were their owner in transit and were filing the claim. That claim, of course, would be for the purchase price, including the shipper’s profit — and that would be so irrespective of whether the consignee/claimant ordered a replacement.

Does it make any sense for the value of the claim to vary depending solely on which party files the claim?

As I also noted in my book, however, “the profit on lost/destroyed goods will be considered ‘earned,’ and therefore recoverable from the carrier, only if the sale transaction had been completed except for physical delivery of the goods.” This is the condition I mentioned at the start; although there are a few limited exceptions, the sale must have been complete and not “conditional” or otherwise uncertain.

The basic rule of freight loss-and-damage law is “that the owner shall be made whole by receiving the proper money equivalent for what he has actually lost, or, in other words, to restore him to the position he would have occupied, had the carrier performed its contract”; A. C. L. Ry. Co. v. Roe, 118 So. 155; and see also Hicks v. Guinness, 269 U.S. 71 (1925), in which the U.S. Supreme Court held that “(t)he loss for which the (claimant) is entitled to be indemnified is ... what the (claimant) would have had if the contract had been performed.”

The shipper would have had its sale price if the goods had arrived intact. Therefore, that’s what
it’s entitled to receive from the carrier.   

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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