Who Pays If the Third Party Doesn''t?

Who Pays If the Third Party Doesn''t?

Copyright 2008, Traffic World, Inc.


A client just asked me the following question and I can''t answer her completely, so can you please help me?

If we send a shipment third-party billing through a carrier that is not a designated carrier of ours, do we have to pay the carrier if the third party does not pay?

Or does the consignee have to pay for the shipment?

The client''s bill of lading does not contain a section 7 stipulation.


Oh, this is nasty.

I know I just addressed this issue very recently, but the two questions aren''t entirely on "all fours," as lawyers phrase it - not exactly the same as to substance - so I''ll have another go at it. And the answer is a resounding maybe, on all counts.

Forget section 7, it almost certainly doesn''t apply. That''s the provision that tells carriers not to deliver without collecting freight charges first, and most carriers have tariffs disallowing it on third-party billings, if they''ll accept such a B/L at all. And I''ve never seen it enforced in court for third-party billing.

Brokers will tell you (some of them pretty vehemently) that there''s no chance of shipper or consignee liability to carriers for freight charges if you work through them. Their argument is that they''re the agent of the carrier for the purpose of receiving payment, and therefore payment to them discharges any obligation to the carrier even if they (the broker) don''t pass on your payment to the carrier.

And there''s case law supporting that, especially Olson Distributing Systems v. Glasurit, 850 F.2d 295 (U.S.C.A.6, 1988); Farrell Lines v. Titan Industrial Corp., 306 F.Supp. 1348 (S.D.NY), aff''d 419 F.2d 835 (U.S.C.A.2, 1969), cert. den. 397 U.S. 1042 (1970); and Inman Freight System v. Olin Corp., 807 F.2d 117 (U.S.C.A.8, 1986).

There''s a competing argument, though - to wit, the carrier did the service and is therefore entitled to its freight charges no matter who else may have been paid for the service. This view regards the B/L as an inviolable contract between shipper and carrier to which the consignee becomes party by accepting delivery.

In other words, if the broker doesn''t pay the carrier, this view says the shipper or consignee has to even if the broker has already been paid, notwithstanding that this may result in a double payment.

And there''s case law backing this view as well: Ranger Transportation v. Wal-Mart Stores, 903 F.2d 1185 (U.S.C.A.8, 1990); Hawkspere Shipping Co. v. Intamex, 330 F.3d 225 (U.S.C.A.4, 2003); Strachan Co. v. Dresser Industries, 701 F.2d 483 (U.S.C.A.5, 1983); National Shipping Co. of Saudi Arabia v. Omni Lines, 106 F.3d 1544 (U.S.C.A.11, 1997); and, most recently, Oak Harbor Freight Lines v. Sears, Roebuck & Co., 513 F.3d 949 (U.S.C.A.9, 2008).

OK, Ranger hinged on fairly specific facts, and Hawkspere, Strachan and Omni were maritime cases (if that makes a difference), but there''s no getting around Oak Harbor. It deals with precisely the situation you describe and the court held the shipper (Sears) liable for freight charges even though it had previously paid the broker.

All of which is, I''m afraid, to say two things: (a) the courts are divided on the question, and (b) the more recent decisions generally hold the shipper liable to the unpaid carrier even if it''s paid the broker.

Ouch. Especially ouch for brokers, who''ve been reassuring customers for years that they can''t be held liable and now have an Oak Harbor-size hole in their claims.

You also ask whether shipper or consignee would be the one liable in such circumstances. Well, that depends. If the shipment is billed prepaid (as is usual for third-party billing), the shipper has primary liability. But by accepting the shipment the consignee also accepts the B/L contract of carriage and becomes co-liable; Corpus Juris Secundum, 13 C.J.S. Carriers ? 478(a).

Yes, there''s lots of case law to the effect that if the consignee has already paid the shipper by the time the carrier starts demanding its freight charges, it''s immune from carrier claims for those charges. I won''t cite the cases here lest this begin to look like a legal brief instead of a magazine column, but there are plenty of them.

On the other hand, if the shipment is billed freight collect - that is, it was the consignee rather than the shipper who set it up through the non-paying broker - the consignee will have primary liability to the carrier.

That doesn''t, however, let the shipper off the hook - and this is the one situation in which your client''s lack of a section 7 provision in its B/L form matters. The shipper is the contracting party in the B/L, and as such is also liable if the carrier demands payment it can''t collect from anybody else.

Does that clarify it for you? OK, it doesn''t for me, either; you were probably wise not to "completely" answer your client''s questions. Because, I''m afraid, there isn''t any wholly accurate answer to those questions, and won''t be until the Supreme Court addresses them. I wish there were, but I only report law, I don''t make it.

-- 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 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.