While this article will necessarily discuss some aspects of consignor/consignee secondary liability for double payment of transportation charges, such is not the primary purpose. The central purpose of this article is more about how a 3PL/broker (“intermediary”) may effectively avoid losing credibility with their shipper or consignee customer when such a situation arises within the context of some rather “unfair” methods by collection agencies representing unpaid carriers.

Collection Agencies Know Commercial Leverage When They See It

Assume a shipper is allowing an intermediary to manage truck transport on their behalf. The intermediary brokers loads to a carrier, who subsequently further brokers the loads to a carrier unknown to the original intermediary. For any number of possible reasons, the ultimate carrier is not paid. The unpaid carrier then assigns their claim for unpaid transportation charges to a collection agency.

Regretfully, many such collection agencies have a rather common modus operandi by which they approach this fact pattern. It usually includes a form letter by which they may first notify the intermediary that liability for all such charges is “absolute”, and the intermediary’s customer/shipper must pay their carrier/client, even though the shipper has paid the intermediary for all such charges and the intermediary has paid the party to whom they brokered the load. This notice will usually include some boilerplate citation of favorable case law (many times inapplicable) ostensibly standing for the premise that consignors or consignees have indefensible liability to the unpaid carrier, notwithstanding that they have already paid the transportation charges to an intermediary.

Almost without fail, the form letter will include a not so subtle Hobbesian Choice for the intermediary to either pay the charges, or have the collection agency make direct demand upon their customer. A variation of this approach will skip the letter to the intermediary, and the collection agency will send the initial demand to the customer, with the implication that the intermediary has been irresponsible in how they handled payments to carriers after being paid by the shipper/customer.

Many times valid defenses to the claim by the collection agency will be available, but the collection agency being mindful of their “commercial leverage” will refuse to discuss the merits of the claim with the intermediary, claiming that the intermediary is not a “party in interest”. Having taken that position, they will not provide documentation or otherwise discuss the merits of the claim with the intermediary, knowing full well that the intermediary does not want the collection agency to discuss the “facts” with their customer.

In either of these alternative fact situations, unless the intermediary relents to this “extortion” and pays the claim (which they should never do without investigating the facts and documents), the customer is usually made aware of the potential liability for double payment of the transportation charges. The customer naturally just wants this to go away and look to their intermediary to make it happen. However, the collection agency knows the intermediary has no legal standing to defend the claim, stop the collection agency from harassing their customer, or otherwise avoid losing their customer…except for what is to be suggested below.

Making Lemonade Out of Lemons

For many years of dealing with such situations, both as general counsel to an international logistics company and in private practice, I have had a recommended procedure for my intermediary clients, which works effectively, assuming they do not want to just give in to this unethical leverage. It begins with the assumption that their customer wants to see them take responsibility, and at the same time pursue justice for all concerned.

I routinely advise my clients to offer to their customer an Indemnity and Defense Agreement whereby my client/intermediary will assume the defense of such claims; and, if necessary, be responsible for payment of the claim. Such initiative by my clients is always well received by their customers, in that they see a responsible action by them, which does not yield to extortion, and at the same time assures the customer that the outcome will not be negative to the customer.

The further purpose of the Indemnity and Defense Agreement allows my client to now advise the collection agency that they are, in fact and law, a “party in interest”. They have assumed full responsibility for defense of the claim. The collection agency must now deal with my client’s counsel in providing all substantiating documentation and facts relative to the claim, or face the prospect of being sued for intentional interference with the existing business relationship between my client and their customer. This allows my client to have a full look at the issue of liability, for which, in my experience, there is more often than not a valid defense.

In taking this course of action, my client is clearly in no worse condition, but has also taken a “proactive” position in the eyes of their customer, while at the same time potentially avoiding liability for the claim. Unless my client had intentions of merely avoiding this exposure by leaving it in the hands of the collection agency dealing with their customer, clearly with the likelihood of losing their customer, there would seem to be no better alternative.

The Myth of Absolute Liability by Consignors and Consignees to Subsequent Carriers

In addition to the foregoing practical rationale for assuming the defense of such claims, intermediaries and consignors/consignees should not accept the sometimes overstated certainty of liability to subsequent carriers without privity of contract. Indeed, there are instances wherein a subsequent carrier will be entitled to collect from consignors or consignees on behalf of unknown carriers. However, too often there is a quick and false generalization that in all such fact situations, the shipper/consignor is “automatically” liable to the carrier for double payment of the transportation charges. This just simply is not the case. All such claims are very fact specific, as many courts have held.

The first primary issue in any claim that the consignor is responsible to a carrier otherwise unknown to them for payment of freight charges is whether the bills of lading create a contract between the consignor and carrier for such an obligation. As far back as Louisville Co v Central Iron Coal Co, 265 U.S. 59 (1924), the U.S. Supreme Court held that such an obligation is inferred, “ [b]ut this inference may be rebutted, as in the case of other contracts. [emphasis added] It may be shown, by the bill of lading or otherwise, that the shipper of the goods was not acting on his own behalf; that this fact was known by the carrier…”

While collection agencies have selectively chosen case law which is sometimes inappropriately cited in their collection letters, they for obvious reasons do not make it known that there are numerous instances in the case law wherein the courts were not inclined to impose “double liability” on either the consignor, consignee or intermediaries. That said, all such demands should be carefully examined regarding appropriate facts relative to the existing law on this issue. Having executed the Indemnity and Defense Agreement with their customer/shipper, the intermediary now has legal standing to fully pursue all such facts and a complete defense of the claim.

Some might say intermediaries could just pay the claim and avoid the legal cost of defending it. Of course, that choice might be considered in instances where the amount of the claim is negligible. But even in such negligible amount cases, one should be mindful that such collection agencies keep records, or otherwise know who pays without a strong defense. In my experience, once an intermediary rolls over for such collection agencies, they should expect the next demand to be sent by the collection agency with confidence that the intermediary will continue to be their easy mark, rather than be proactive in defending the claim on its merits.

There is, after all, a better way.