Section 7 Conundrum

Reproduced with the Permission of Miles L. Kavaller

One of the most often asked questions by carriers is whether they may collect freight charges from a consignee in the absence of payment by the consignor. The answer depends on the bill of lading. Generally speaking, the consignor is the party with whom the carrier has contracted for the transportation of freight. Accordingly, it is the consignor who is primarily obligated to pay the carrier’s freight charges. Under this arrangement, the bill of lading reflects this obligation showing the freight charges as “prepaid”. The bill of lading may also designate the consignee as the party obligated to pay the carrier’s freight charges. Under that arrangement, the bill of lading reflects the freight charges as “collect”.

If the bill of lading specifies nothing further, both the consignor and the consignee are liable for the payment of the carrier’s freight charges. If the consignor does not pay, the carrier may collect from the consignee. And this is true, regardless of whether the freight charges are prepaid or collect. The theory supporting this obligation is that both the consignor and consignee receive the benefit of the carrier’s services.

A consignor which has tendered a shipment to a carrier with freight charges “collect” may protect itself by executing the non-recourse provision contained in what is commonly known as “Section 7”. This term comes from the reference to Section 7 of the Uniform Motor Carrier Bill of Lading published by the National Motor Freight Traffic Association and contained in the National Motor Freight Classification. While space limitations prevent reproduction of the entire provision, a pertinent portion provides as follows:

“The consignor shall be liable for the freight and all other lawful charges, except that if the consignor stipulates, by signature, in the space provided for that purpose on the face of this bill of lading that the carrier shall not make delivery without requiring payment of such charges and the carrier, contrary to such stipulation shall make delivery without requiring such payment, the consignor . . . shall not be liable for such charges.”

Most bills of lading contain a box which has some similar abbreviated language and a space for the signature of a representative of the consignor. When “Section 7” is signed by the consignor, it puts the carrier on notice that it must collect its freight charges from the consignee. If the carrier fails to do so, it may not look to the consignor for payment.

What happens where the parties, either inadvertently or purposefully, fail to designate whether the freight charges will be “prepaid” or “collect” on the bill of lading? Delivery of the shipment to the consignee under these circumstances relieves the consignor of liability and acceptance of the shipment establishes the consignee’s liability for the payment of freight charges.

Suppose the freight charges are “prepaid” and the consignor nevertheless signs Section 7? At first blush this would appear to be a conflict in terms: How can the consignor be relieved of payment of prepaid freight charges? But a consignor who is astute may sign Section 7 on a “prepaid” shipment in order to avoid additional charges resulting from services provided after the carrier has completed transportation. Further, it may relieve the consignor from the payment of freight undercharges unless the proviso added to Section 7 in NMFC 100-F effective May 7, 1989 stating that “. . . where the shipment is designated `prepaid’, the shipper or consignee shall remain liable for undercharges which result from an erroneous determination of the transportation charge assessed” is incorporated into the bill of lading.