Q: We are a manufacturer who utilized a freight broker to arrange for delivery of our product to our customers.
The broker has been paid for all loads delivered. Unfortunately, they declared bankruptcy and did not pay the carrier they contracted with to deliver the product. The carrier is now demanding payment from us for these loads.
Based on a quick internet search, I see a lot of case law that talks about bills of ladings and language on same. The problem is that the bills of lading were, in our opinion, nothing more than evidence that the deliveries were made.
What is our best defense, if any?
A: Well, I suppose it’s nice to know that you have your opinion about the meaning and purpose of the bills of lading under which you shipped.
Unfortunately for you, the law doesn’t share that opinion. Legally speaking, these bills of lading constituted the contracts of carriage for the movement of your goods, and were — in the usual course of broker-arranged transportation — strictly between you and the carrier, with the broker not a party to them. These contracts are therefore binding on you in relation to the carrier, irrespective of your opinion of their validity for that purpose.
That means you contractually owe the carrier for the services it performed for you. The only question remaining is whether you can be deemed to have satisfied that debt by your payment to the broker. That’s where the law is less than fully clear.
Some courts have held that the shipper’s debt to the carrier is never satisfied until the carrier actually receives its money, whether from the broker or directly from the shipper. The first rule of commercial transportation, these courts say, is that the carrier gets paid, and they deem it of little or no legal consequence that the shipper may thereby be compelled in some cases to pay twice for the same service — once to the broker under its off-the-bill-of-lading arrangement with that party, and a second time to the carrier when the broker defaults on its obligation to pass the money on to the carrier.
In general, though, this is a minority view among courts. The stronger judicial opinion is that the carrier, by its arrangement with the broker that led to its acceptance of the load in the first place, has also de facto accepted the broker as its designated agent for the receipt of payment from the beneficial shipper, and therefore the shipper’s payment to the broker settles the debt; the broker’s failure to pay the carrier is, under this view, regrettable, but is a matter strictly between the broker and the carrier.
That idea is often supported by separate contracts between brokers and carriers that, although not specifically related to any given shipment, cover the carrier’s transportation of loads tendered to them under the auspices of the broker’s arrangements with its shipper-clients.
Now, there’s a broadly recognized exception to this judicial viewpoint, acknowledging the carrier’s right under the bill of lading to demand payment from its B/L [bill of lading] contracting party, the shipper. If the carrier exercises that right promptly, before the shipper has made its payment to the intermediary broker, the carrier’s demand of the shipper takes priority; by directly billing the shipper, the carrier is deemed to have disavowed its tacit acceptance of payment to the broker as discharging the shipper’s obligation to it (the carrier).
So the issue you confront is whether your carrier’s demands for direct payment from you reached you before the time that you made your payment to the broker or afterwards. If the latter, your payment to the broker would still be protected by your understanding that the carrier accepted such payments as satisfying its bill for the service; if the former, you’d have been placed on effective notice that your payment to the broker wouldn’t suffice as a substitute for paying the carrier directly.
The way your question is phrased suggests to me that the carrier(s) in question didn’t present their bills to you until some time after you’d already paid the broker. If that’s the case, most courts would absolve you of liability to the carrier(s). You may still be sued, though, in which case you’ll need a lawyer experienced in this area of the law to defend you and help educate the court trying the case in the nuances of this somewhat complicated environment.
Consultant, author, and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, SC 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.