the man-caught-in-the-middle: conflicting views of the role of the 3pl by henry e. seaton, esq....

The Man-Caught-In-The-Middle: The Man-Caught-In-The-Middle: Conflicting Views of the Conflicting Views of the

Role of the 3PLRole of the 3PL

By Henry E. Seaton, Esq.By Henry E. Seaton, Esq.

Seaton & HuskSeaton & Huskwww.transportationlaw.netwww.transportationlaw.net

Henry E. SeatonHenry E. SeatonSeaton & Husk, LPSeaton & Husk, LP2240 Gallows Rd.2240 Gallows Rd.Vienna, VA 22182Vienna, VA 22182

www.transportationlaw.www.transportationlaw.netnet

Henry E. Seaton is a graduate of Duke University (A.B. ’70) and Vanderbilt Henry E. Seaton is a graduate of Duke University (A.B. ’70) and Vanderbilt School of Law (J.D. ’70). He has practiced law for 30 years in the School of Law (J.D. ’70). He has practiced law for 30 years in the Washington D.C. area representing motor carriers of brokers. He is a Washington D.C. area representing motor carriers of brokers. He is a member of the Vienna, VA based law firm of Seaton & Husk. The firm member of the Vienna, VA based law firm of Seaton & Husk. The firm specializes in freight claims, freight charge collection, contracting issues, specializes in freight claims, freight charge collection, contracting issues, carrier representation before the FMCSA and bankruptcy issues.carrier representation before the FMCSA and bankruptcy issues.

Mr. Seaton writes a monthly column on transportation law for the Mr. Seaton writes a monthly column on transportation law for the Commercial Carrier Journal (CCJ) and is the author of Commercial Carrier Journal (CCJ) and is the author of Protecting Motor Protecting Motor Carrier Interests in ContractsCarrier Interests in Contracts. He serves as commerce counsel for the . He serves as commerce counsel for the National Association of Small Trucking Companies. He was the Delta Nu National Association of Small Trucking Companies. He was the Delta Nu Alpha Transportation Professional of the Year in 2001 and is a frequent Alpha Transportation Professional of the Year in 2001 and is a frequent speaker and lecturer regarding cargo claims, freight charges, contracting speaker and lecturer regarding cargo claims, freight charges, contracting and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be reached at [email protected]. For articles and other information, please reached at [email protected]. For articles and other information, please see see www.transportationlaw.net..

LEGAL BASISLEGAL BASIS

Role established by Role established by common contract law and common contract law and statutes of regulation; 49 statutes of regulation; 49 CFR 371CFR 371

Broker arranges for Broker arranges for contracts between buyer contracts between buyer and sellersand sellers

Professional intermediary Professional intermediary life insurance agent or real life insurance agent or real estate brokerestate broker

Established by contract Established by contract waiving statutes and waiving statutes and regulation under regulation under ''14101(b)14101(b)

Principal enters contracts Principal enters contracts to provide goods or to provide goods or services, assumes liability services, assumes liability and hires subcontractorsand hires subcontractors

Frequently “broker” is Frequently “broker” is merely substituted for merely substituted for carrier in shipper carrier in shipper contracts.contracts.

Broker /Broker / ArrangerArranger PrincipalPrincipal // ProviderProvider

GENERAL DUTIESGENERAL DUTIES

Duty of good faith and Duty of good faith and due diligencedue diligence

Arranger of Arranger of transportationtransportation

Brings together buyers Brings together buyers and sellersand sellers

Bill of lading is Bill of lading is contract of haulcontract of haul

Assumes by contract Assumes by contract carrier-like duties:carrier-like duties:(1)(1) Payment of freightPayment of freight

chargescharges

(2) Cargo claim liability(2) Cargo claim liability

(3) Indemnity for BI & (3) Indemnity for BI & PD/”arising out of”PD/”arising out of”

(4) Purports to take (4) Purports to take “possession of cargo”“possession of cargo”

Principal / ProviderPrincipal / ProviderBroker /Broker / ArrangerArranger

FREIGHT CHARGESFREIGHT CHARGES

Obligated to transmit Obligated to transmit upon receiptupon receipt

Constructive trust or Constructive trust or conduit corollaryconduit corollary

Can guarantee by Can guarantee by carrier payment from carrier payment from retained earningsretained earnings

See also Ontario See also Ontario legislationlegislation

Assumes primary Assumes primary payment obligation to payment obligation to carriers by contract carriers by contract

Protects shipper from Protects shipper from carrier payment carrier payment demands by contract demands by contract

Trumps bill of lading Trumps bill of lading recourserecourse

Accepts burden of Accepts burden of shipper insolvencyshipper insolvency


FREIGHT CLAIMSFREIGHT CLAIMS

No primary liability No primary liability under statuteunder statute

Typically warrants to Typically warrants to shipper that carrier is shipper that carrier is financially responsible financially responsible for paying cargo for paying cargo claims claims

Gets contingent cargo Gets contingent cargo insurance to cover insurance to cover that warrantythat warranty

Assumes cargo liability Assumes cargo liability by contract provision or by contract provision or broad indemnitybroad indemnity

Assumes risk of loss – Assumes risk of loss – allows offset which may allows offset which may not be recoupablenot be recoupable

Purports to take Purports to take possession and possession and guarantees condition guarantees condition upon arrivalupon arrival


OFFSETSOFFSETS

Cargo claims filed Cargo claims filed against carrieragainst carrier

Arbitration for Arbitration for economical economical determination determination

Broker pays if no Broker pays if no insurance and carrier insurance and carrier insolventinsolvent

Shipper offsets against Shipper offsets against intermediaryintermediary

Constructive trust Constructive trust concept violated concept violated

Funds needed to pay Funds needed to pay non-negligent carriers non-negligent carriers is withheld by shipperis withheld by shipper

3PL’s cash flow 3PL’s cash flow interruptedinterrupted


VICARIOUS LIABILITYVICARIOUS LIABILITY

Arranges for services Arranges for services provided by licensed and provided by licensed and authorized carrierauthorized carrier

Eschews joint venture Eschews joint venture on prime/subcontractor on prime/subcontractor claims claims

Broker not on bill of Broker not on bill of lading as carrierlading as carrier

Opens door to principal/ Opens door to principal/ subcontractor claimssubcontractor claims

““Assumption of duty” in Assumption of duty” in contract can be used contract can be used against in – against in – Schramm v. Schramm v. FosterFoster

Contractual indemnity Contractual indemnity language and purchase of language and purchase of insurance raises insurance raises settlement demandssettlement demands

Contingent auto hard to Contingent auto hard to find and too expensivefind and too expensive


““ARISING OUT OF” INDEMNITY ARISING OUT OF” INDEMNITY & “ADDITIONAL INSURED”& “ADDITIONAL INSURED”

Is responsible for Is responsible for carrier selectioncarrier selection

Errors and omissions Errors and omissions responsibility for responsibility for negligent entrustmentnegligent entrustment

Often accepts “arising out of” Often accepts “arising out of” indemnity including liability indemnity including liability for shipper’s negligence not for shipper’s negligence not covered by available covered by available insuranceinsurance• (a) CGL Exclusion for auto(a) CGL Exclusion for auto• (b) no auto because not (b) no auto because not

asset based asset based Anti-indemnity issues – TX, Anti-indemnity issues – TX,

VA, KS – leaves indemnity for VA, KS – leaves indemnity for shipper’s negligence shipper’s negligence unenforceable in unenforceable in broker/carrier contractsbroker/carrier contracts


Many motor carriers will not and/or cannot offer similar indemnityMany motor carriers will not and/or cannot offer similar indemnity Anti-indemnity statutes may render carrier indemnity voidAnti-indemnity statutes may render carrier indemnity void

SHIPPER INSOLVENTSHIPPER INSOLVENT

Absent guarantee, risk Absent guarantee, risk of non-payment is of non-payment is shared with carriersshared with carriers

3PL has preference 3PL has preference defensedefense

3PL must pay 3PL must pay unfunded freight unfunded freight chargescharges

3PL is open to full 3PL is open to full preference chargepreference charge

Principal / ProviderPrincipal / Provider

Major bankruptcies are forcing 3PLs to rethinkMajor bankruptcies are forcing 3PLs to rethink

accepting freight payment responsibilityaccepting freight payment responsibility

when customer goes bankruptwhen customer goes bankrupt

Broker /Broker / ArrangerArranger

3PL INDUSTRY3PL INDUSTRY

Trust or escrow Trust or escrow account protects account protects shipper against double shipper against double paymentpayment

Property of 3PL is Property of 3PL is properly segregated in properly segregated in bankruptcybankruptcy

Shipper and Carrier Shipper and Carrier interest trump secured interest trump secured lenderslenders

Results in FIFO Results in FIFO accounting and accounting and conflicts with secured conflicts with secured lenderslenders

Possible breach of Possible breach of fiduciary obligation and fiduciary obligation and D&O liability; lender D&O liability; lender guaranteesguarantees

Worldpoint, ACI – Worldpoint, ACI – allows secured lender allows secured lender to frustrate payment to to frustrate payment to carriers.carriers.


the man-caught-in-the-middle: conflicting views of the role of the 3pl by henry e. seaton, esq....

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