Failure to Specify Third-Party Payer

Failure to Specify Third-Party Payer

Copyright 2006, Traffic World, Inc.


We purchased some goods at a delivered price from a supplier. The supplier (shipper) executed section 7 on the bill of lading but failed to stipulate on the B/L the proper payer of the freight charges. In this case there was a third party that should have been named.

The carrier issued the freight bill to the third party and that party has not yet paid. Now the carrier is taking collection action against us to recover the charges due.

Our position is twofold. When section 7 is executed, as the shipper you must show who will pay the bill - e.g., third party, consignee, etc. We feel that failing to do that voids the protection the shipper is looking for from section 7.

Additionally, since we purchased the material at a delivered price as we always have, we should not be implicated. The fact that the carrier''s invoice mentions the third party is indication to us that there was communication that this was the person to pay but it was not shown on the original B/L. Are we correct?


Well, you''re pretty much correct, provided the B/L wasn''t made out as freight-collect.

I mention this because most carriers won''t accept bills of lading with section 7 executed where terms are third-party-pay. Indeed, a good many have tariff provisions to that effect, purporting to invalidate section 7 if it''s executed notwithstanding the prohibition.

Whether this overrides the carrier''s blunder in accepting such a B/L with section 7 signed in violation of its own tariff is debatable, but that''s nothing in your young life; let the carrier and the shipper argue this one.

Your only problem arises if the B/L did indeed specify terms as collect. If it did I think you''re quite possibly hung; you have some arguments, but in general I think a court would side with the carrier on the premise that you shouldn''t have accepted delivery under those terms if you weren''t prepared to pay the charges as specified.

But I doubt this was the case. You say the shipper didn''t name the third party on the B/L, but in the next breath you add that the carrier properly billed the third party anyway; only when that party failed to pay did the carrier turn to you. To me that''s pretty suggestive that the payment terms were known by the carrier from the git-go, and that it''s just taking advantage of a billing quirk to dun you for the money.

To which, in such circumstances, you have a solid defense. Under a variety of court decisions, you aren''t liable to the carrier if (a) the bill of lading indicated that somebody else would pay it, and (b) in reliance on that, you went ahead and paid the shipper some amount that included freight charge reimbursement (e.g., a delivered price). See, e.g., Griffin Grocery Co. v. Penn. R. Co., 92 S.E.2d 854; C. F. Arrowhead Services, Inc. v. AMCEC Corp., 614 F.Supp. 1384; Inman Freight Systems, Inc. v. Olin Corp., 807 F.2d 117 (U.S.C.A.8, 1986); Southern Auto Sound, Inc. v. Consolidated Freightways, Inc., 510 So.2d 1085; and In re Penn-Dixie Steel Corp., 6 B.R. 817, aff''d 10 B.R. 878, among many others.

Now you can''t use this if the carrier''s freight bill reached you before you made your delivered-price payment to the shipper. That is, if you knew the carrier was looking to you for unpaid freight charges and even so went gaily ahead reimbursing the shipper for those charges, you did so at your own risk.

But what with the delay caused by the carrier initially presenting its bill to the third party and waiting for payment, I doubt that''s the case; I expect by the time the carrier got round to you you''d long since paid the shipper. Moreover, you can also use the carrier''s action in first billing the third party against it; that''s evidence of the carrier''s knowledge of proper billing terms, and its awareness that you weren''t the party intended to pay it.

As I say, so long as you''re off the hook you need not concern yourself with the rights and wrongs of the situation as between carrier and shipper (your supplier). But you seem to care about that anyway, so I''ll cover it briefly.

So long as terms weren''t specified as freight-collect, the presumption is they''re prepaid (whether or not the "prepay" box was checked). Without further specifications that''s completely inconsistent with execution of section 7, so I really think the shipper can''t hide behind that. The carrier can also argue that the third party was the shipper''s agent for paying the freight bill, and the principal is responsible for its agent''s acts and failures.

For its part, the shipper can contend that the third party was actually the carrier''s agent for receipt of payment, and also that it''s already paid the third party to which the carrier initially looked for its own money. How these counter-arguments fare if the matter goes to court will probably depend a good deal on some fairly detailed facts, but in the ordinary run of such cases the carrier will come up empty. But as long as youre out of the picture, I suggest you simply stand on the sideline and cheer vigorously for both sides.

-- Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at P.O. Box 76, Morganton, Ga. 30560; phone, (706) 374-7201; fax, (706) 374-7202; e-mail Contact him to order the 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.