Who’s Liable When a Broker Goes Broke?

Who’s Liable When a Broker Goes Broke?

Q: I had a woman ask me if she’s liable if she paid a truckload broker and they didn’t forward payment onto the carrier. Apparently, the carrier is seeking collection on this. I referred her to your previous articles from times when others have asked a similar question and you’ve said shippers generally won’t be liable in such circumstances.

This was helpful, but then she asked, “What if the broker has since filed bankruptcy and the carrier is now demanding payment from her as per ‘the federally mandated law, Title 49?’ ”

Am I to assume that the point you made in your prior articles would hold true despite the broker filing for bankruptcy?

A: This question keeps popping up, and I think it’s time I laid down the general rule of law about the issue.

Basically it’s this: If the shipper pays the broker, and the broker doesn’t pass on payment to the carrier, the shipper will be directly liable to the unpaid carrier only if it (the shipper) has made some express or implied commitment to make that payment.

That can happen in one of two ways. First, there may be some kind of contractual undertaking on the shipper’s part to be liable to the carrier. Or second, the broker may be deemed the legal agent of the shipper, which, as principal, is therefore liable for its agent’s default.

Note I say nothing about whether the broker has declared bankruptcy, which is irrelevant. A bankruptcy filing protects the bankrupt from its own creditors, but doesn’t assign its debts to anyone else.

As for “the federally mandated law, Title 49,” that’s just lawyerly (or collection agency) gobbledygook. Title 49 of the U.S. Code is merely the section of law covering transportation; it includes lots of provisions, none of which assigns liability for freight charges to any person in particular.

Now, let’s take my two cases one at a time. The first, and most common, is where there’s an apparent contract between shipper and carrier. A bill of lading is such a contract; if it shows the shipper’s name as “shipper” and the carrier’s as “carrier,” then it arguably commits both of them, the carrier to haul the goods and the shipper to pay for the haulage.

Many bills of lading, however, aren’t made out that way. Quite often they’ll show the shipper as “shipper,” all right, but the name in the “carrier” box is that of the broker. Now, that’s usually not a legal contract, because the broker isn’t authorized to perform actual transportation, but much more to the point, it isn’t a contract between the shipper and the carrier.

Therefore, the carrier has no contractual call on the shipper for its money, and the shipper has no contractual obligation to pay it.

That leaves the agency relationship. It’s wisest for the shipper to have written agreements with any brokers it uses specifying that the broker is acting as independent contractor, but not all shippers are so clever.

Even without that, though, the carrier faces an uphill fight trying to show the broker was in fact the shipper’s agent unless there’s some clear tie between the two. The shipper’s counterargument is that the broker was indeed an agent, but was the agent of the carrier for purposes of arranging service and receiving compensation therefor. Especially if there was a separate contract between the broker and the carrier, as there often is, this can be a strong argument.

There’s one other circumstance in which the shipper can be on shaky footing, and that’s if the carrier makes its demand for direct payment before the shipper has paid the broker. That’s unlikely, but could happen if, for example, the broker files for bankruptcy very shortly after the shipment moves and the carrier gets wind of it before the bill is presented to the shipper.

If that ever happens, the shipper should put the brakes on hard and not pay anybody until the legalities are sorted out. If there’s a bankruptcy, the bankruptcy court will decide in due course who gets paid, and it’s prudent to wait until it does so.

This, admittedly, is a pretty abbreviated summary — the magazine allocates me but one page — but if you adhere to these basic precepts, you won’t go far wrong. And I have yet to see a case of broker-using shippers being forced to double-pay carriers where one of these points didn’t play a strong role.

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.