The Double Payment Dilemma: Shippers Beware!

By Miles L. Kavaller

1. INTRODUCTION.

The scenario is well known: shipper hires broker, shipper pays broker, broker obtains carrier, broker does not pay carrier. Carrier sues broker, broker defaults. Carrier sues shipper. Shipper cries foul—in legal terms “equitable estoppel”.

2. FILED RATE DOCTRINE CASES.

Until TIRRA in 1994, motor carriers were required by statute to charge only the rates published in their ICC filed tariffs. See for example, Thurston Motor Lines, Inc. v. Jordan K. Rand, Ltd., 460 U.S. 533 (1983); Maislin Industries, U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116 (1990). But even under this legal regime courts often sided with the shipper particularly where the shipper was the consignee and had prepaid the freight charges to its vendor, the consignor. See for example, Consolidated Freightways Corp. v. Admiral Corp., 442 F.2d 56 (7th Cir. 1971).

Notably the tide shifted in a case involving an ocean freight forwarder holding the shipper liable to the ocean carrier where the intermediary failed to pay the carrier. National Shipping Co. of Saudi Arabia v. Omni Lines, Inc. (11th Cir. 1997). The most recent decision in this line of cases was issued by the Ninth Circuit Court of Appeals in Oak Harbor Freight Lines, Inc. v. Sears Roebuck, & Co., 513 F.3d 949 (9th Cir. 2008) (“Oak Harbor”).

3. FACTS IN OAK HARBOR.

Sears contracted with National Logistics Corp. (“NLC”) to manage its freight including the payment of motor carrier freight charges.

  • NLC had a contract with Oak Harbor Freight Lines, Inc. (”Oak Harbor”) for transportation of its customers’ cargo.
  • Bills of lading were issued for each load by Oak Harbor.
  • The Agreement between NLC and Oak Harbor contained the following provision:
      “…NATIONAL LOGISTICS CORPORATION will offer a series of shipments to the CARRIER, which the CARRIER agrees to transport…. BROKER/SHIPPER and CARRIER agree rates governing shipments will be established to meet the schedules verbally agreed upon and verbal agreement will be reduced to writing by CARRIER submitting its invoice to BROKER/SHIPPER. SHIPPER agrees to pay CARRIER within a predetermined time from date of receipt regardless whether or not BROKER/SHIPPER has been paid for movement. … ” (Emphasis added.)
  • Standard form bills of lading were used.
  • For return shipments from Sears vendors inbound to its warehouses Oak Harbor generated the bills of lading.
  • Sears was shown as the consignee.
  • Freight charges were designated: Collect.
  • The “Bill To” field identified: “Third Party Billing”
  • Sears generated the bills of lading for its outbound shipments.
  • The bills of lading stated as follows:
    • “All terms and conditions of the straight bill of lading and applicable tariff and classifications in effect as of the date hereon apply.”
    • Freight Terms: “PREPAID”
    • The bills of lading instructed Oak Harbor to send invoices to NLC.
    • “Ship From”: “Sears [warehouse]”
    • “Consign to”: Destination of shipment.
    • “Carrier”: “Oak Harbor”
  • Sears terminated its contract with NLC on November 12, 2004.
  • Oak Harbor was then owed more than $400,000.
  • On December 12, 2004 NLC sent Oak Harbor a letter suggesting that Oak Harbor seek payment directly from Sears.
  • Sears advised Oak Harbor to seek payment from NLC.
  • At the time Oak Harbor sought payment from Sears, Sears had paid Oak Harbor $227,202.50.
    • Suit in U.S. District Court.

Oak Harbor sued both NLC and Sears in Washington state court. Sears removed to USDC in Seattle.

  • Oak Harbor moved for summary judgment on its claim.
  • Sears and NLC moved for summary judgment on their defenses.
  • The USDC ruled that Sears and NLC were jointly and severally liable to Oak Harbor for $426,417.94 and that Sears could recover from NLC any portion of the $227,202.50 that Sears paid directly to Oak Harbor.
  • The bill of lading is the basic transportation contract between the shipper/consignor and the carrier and the terms and conditions bind the shipper and all connecting carriers. S. Pac. Transp. Co. v. Commercial Metals Co., 456 U.S. 336, 342 (1982).
  • Under the standard straight bill of lading (NMFC uniform domestic straight bill of lading) the consignor remains primarily liable to the carrier for freight charges absent some statement to the contrary.
    • The Appeal.
  • The USDC correctly held Sears liable for Oak Harbor’s freight charges.
  • Default terms of the standard bill of lading provide the following:
      C.A.R. Transportation Brokerage Co. v. Darden Restaurants, 213 F.3d 474, 478 (9th Cir. 2000): “The bill of lading provides that the owner or consignee shall pay the freight and all other lawful charges upon the transported property and that the consignor remains liable to the carrier for all lawful charges. See Illinois Steel Co. v. Baltimore & Ohio R.R., 320 U.S. 508, 512-13, 64 S.Ct. 322, 88 L.Ed. 259 (1944). The bill of lading, however, also contains “nonrecourse” and “prepaid” provisions that, if marked by the parties, release the consignor and consignee from liability for the freight charges. If the nonrecourse clause is signed by the consignor and no provision is made for the payment of freight, delivery of the shipment to the consignee relieves the consignor of liability. See id. at 513, 64 S.Ct. 322. Similarly, when the prepaid provision on the bill of lading has been marked and the consignee has already paid its bill to the consignor, the consignee is not liable to the carrier for payment of the freight charges. See Missouri Pac. R.R. Co. v. National Milling Co., 409 F.2d 882, 883-84 (3d Cir.1969); In re Penn-Dixie Steel Corp., 6 B.R. 817, 822 (Bankr.S.D.N.Y.1980), aff’d 10 B.R. 878 (S.D.N.Y.1981).

      [FN5. A bill of lading serves three distinct functions: “First a receipt for the goods; second, a contract for their carriage; and, third, documentary evidence of title to the goods.” In re Chateaugay Corp., 78 B.R. 713, 717 (Bankr.S.D.N.Y.1987) (citation omitted).

      FN6. Section 7 of the bill of lading provides in pertinent part: “The owner or consignee shall pay the freight and average, if any, and all other lawful charges accruing on said property according to lawfully filed tariffs of the carrier…. The consignor shall be liable for the freight and all other lawful charges….”]

      Although the bill of lading contains default terms allocating liability for freight charges, the Supreme Court’s description of the bill of lading as “the basic transportation contract between the shipper-consignor and the carrier,” Southern Pacific, 456 U.S. at 342, 102 S.Ct. 1815, “did not purport to characterize the bill of lading as the exclusive means of creating a contract.” A-Transport Northwest Co. v. United States, 36 F.3d 1576, 1583 (Fed.Cir.1994). Subject to the rule that prohibits discrimination, the parties are free to contract when or by whom the freight charges should be paid. See Louisville & Nashville R.R. v. Central Iron & Coal Co., 265 U.S. 59, 66, 44 S.Ct. 441, 68 L.Ed. 900 (1924); Illinois Steel Co. v. Baltimore & Ohio R.R., 320 U.S. 508, 512, 64 S.Ct. 322, 88 L.Ed. 259 (1944). It is only where the parties fail to agree or where discriminatory practices are present that the ICA’s default terms bind the parties. See In re Roll Form Products, Inc., 662 F.2d 150, 154 (2d Cir.1981). In the face of other provisions, the liability allocation presumptions on the bill of lading are unnecessary. See Fikse & Co. v. United States, 23 Cl.Ct. 200, 204 (1991).”

Here both Sears and Oak Harbor generated the bills of lading containing the terms and conditions of the uniform domestic straight bill of lading in the NMFC.

  • Sears was liable as the shipper/consignor since the nonrecourse provision (Section 7) was not signed.
  • And Sears was also liable as the consignee on the bills of lading where the freight charges were collect.

SEARS DEFENSES:

  • Sears 1st Defense: Carrier Contract-Waiver
    • The NLC-Oak Harbor contract waived Oak Harbor’s recourse against Sears.
    • REJECTED: Sears is not a party to this contract. It IS a party to the bill of lading contracts.
    • The NLC-Oak Harbor contract required the “Shipper” to pay the carrier regardless of whether or not the “Broker/Shipper” was paid. The “Shipper” was the Broker, not Sears. This does not imply that Sears is not liable
  • Sears 2nd Defense: The NLC-Oak Harbor Contract was the only lawful contract.
    • The NLC-Oak Harbor Contract was executed in 1992 (before TIRRA of 1994-deregulation of “tariffs”) under the former ICC’s regulations and made the bills of lading no more than receipts for the cargo.
    • REJECTED: There are no inconsistencies or conflicts between the bill of lading terms and conditions and the contract terms and conditions.
    • The contracts can be read together.
  • Sears 3rd Defense: Equitable Estoppel
    • Some cases have excused the shipper from paying carrier freight charges a second time where the shipper relied on “prepaid” notation on bill of lading and paid an intermediary such as a broker, consolidator or forwarder.
    • Question of “first impression” for 9th Circuit.
    • Sears argued that an innocent party should not be made to paty twice relying on equitable estoppel cases such as Olson Distributing Systems, Inc. v. Glasurit America, Inc., 850 F.2d 295 8th Cir.1988).
    • REJECTED:
      • Unusual and extreme facts in Olson, not present here;
      • Cases decided by 4th Circuit (Hawkspere Shipping Co. v. Intamex, S.A., 330 F.3d 225 (4th Cir. 2003)); 5th Circuit (Strachan Shipping Co. v. Dresser Indus., Inc. (701 F.2d 483 (5th Cir. 1983)) and 11th Circuit (National Shipping Co. of Saudi Arabia v. Omni Lines, Inc. (11th Cir. 1997)) holding that the shipper should bear the risk when it chooses to pay for freight charges through a broker rather than directly to a carrier are more persuasive.
      • Why?: Shipper, not carrier, is in the best position to avoid liability for double payment by:
        • Dealing with a reputable intermediary;
        • Contracting with the carrier to eliminate the shipper’s liability; or
        • Paying the carrier directly.
        • Shipper assumes the risk the intermediary (broker, forwarder, 3PL or 4PL) will not pay carrier exposing shipper to double payment risk.
    • COMMENT
        The court focused on the terms of the contracts between Sears and NLC, between NLC and Oak Harbor and the bills of lading. None of the provisions were in conflict. Sears was the consignor for outbound shipments and consignee on the collect inbound shipments and liable under the bill of lading for the payment of freight charges. Nothing in other contracts provided otherwise.

Where possible, depending on negotiating strength, when contracting with the intermediary whether for a single shipment or series of shipments insist that the contract between the intermediary and the carrier(s) contain the following provisions:

  • The bill of lading payment terms and conditions do not apply to the shipment to the extent they are inconsistent with the contract between the intermediary and the carrier;
  • Carrier shall look solely to intermediary for payment of charges notwithstanding anything in the bill of lading, tariff or other rules.