Forwarders, Brokers on an Even Keel

Q: As you know, the surface transportation law, MAP-21, among other things, will require motor carriers (common or contract) to divorce their brokerage operations from their carrier operations. Under the current situation, with almost all motor carriers also functioning as property brokers, the shipper really doesn’t know if the transportation entity it tenders its shipment to will or won’t be ultimately liable for cargo loss or damage. The new law (so the theory goes) will let the shipper unambiguously know this information “up front” — that is, if freight is tendered to a carrier or to a broker.

My question has to do with freight forwarders. A freight forwarder is technically a carrier and, as I understand it, can utilize other carriers (much like a broker) to move a shipper’s freight. So, if a motor carrier currently has common and/or contract authority and a property broker’s license (a very typical scenario), wouldn’t it make sense to obtain additional freight forwarder authority instead of establishing a new corporate entity for brokerage operations, with all the associated costs and hassles that go with it?

As a forwarder, one could require one’s sub-haulers (“broker carriers”) to assume liability for cargo loss or damage in the forwarder-motor carrier contract. So while you, as a forwarder, would be technically liable for cargo loss and damage, in actuality such liability would be shifted/subrogated back to the actual motor carrier transporting the cargo. In the end, you’d still be operating basically as you now do as a property broker, but without the need to establish a separate legal entity (with all those associated costs, hassles and headaches) to broker your freight.

 

A: There’s nothing wrong with your presentation. The problem is that you have your facts muddled — nearly as much as Congress did when it wrote the law in this regard.

Our esteemed legislators fell short by being unable to differentiate between forwarders and brokers, both of which they treated as indistinguishable “third parties” in transportation. You’ve mastered that distinction, but you’ve missed several points of the law itself.

First, although the law does require divorcement of a company’s carrier and broker operations, it doesn’t require that this be done by separate companies. The same corporate entity may hold both carrier and broker authority. There is no need to establish a separate company for either purpose. So your thesis fails at that point.

In addition, because the statute treats brokers and forwarders identically, if a separate subsidiary were needed to operate as a broker, one also would be needed to operate as a forwarder. The “benefit” you identify for offering forwarder instead of broker services thus wouldn’t exist.

You also take a lighthearted view of the forwarder’s obligation to issue its own bill of lading for each shipment, and assume thereby liability to the shipper. You speak easily of subrogating that liability to underlying carriers, but this isn’t nearly so clear-cut as you make it out to be.

Finally, although Congress seemed to conflate the two, freight forwarding and brokerage are by no means simply variants on the same theme, either in law or in fact. Among other things, the forwarder must offer assembly and consolidation services at origin and break bulk and distribution services at destination. By statutory definition and by case law, a party that doesn’t do so is not legally a forwarder.

Thus, if your proposal ever came up in court, I’m pretty sure it would not be deemed freight forwarding at all, but simply what you presented it to be: disguised brokerage. But you propose that carriers simply eschew registering with the Federal Motor Carrier Safety Administration as brokers, and therefore it would be illegal brokerage. In the circumstances, I certainly couldn’t recommend your approach to anyone. It has, as I have pointed out, significant flaws.

Actually, I don’t see anything all that forbidding about carriers securing broker authority and then operating in both capacities. The only real requirement of MAP-21 is that they secure a broker bond, and also identify whether they are acting as a carrier or a broker as to a particular shipment. None of this is overwhelmingly difficult, or economically unattainable than it is for pure brokers. And such an operation does have the big advantage of being fully legal, which your proposition does not.  

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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