Five Things 3PL’s Should Never Do…and Do All the Time

I represent a number of third party logistics companies, and have been an operating executive in three such companies. So, I want to make it clear that all of the lessons I portray here, of course, are about and drawn from logistics companies other than the one for which the reader is employed or owns.

Most of the topics I have discussed over the years in Linkedin articles are taken from actual or threatened litigation, and those that follow are no different in that regard. After thirty-five years of attending to logistics law issues, I say with almost certainty they all could have been avoided with minimal preventive attention, especially when compared to the attention and cost required by those for which the adage, “worry about that later, let’s get this freight moving”, was the guiding “management” philosophy.

Having again been involved in recent litigation where such was the guiding principle, I should like to mention some of the most flagrant violations of preparedness and practices best not included within strategic planning of 3PLs.

I. Never Accept Primary Responsibility for Loss or Damage Claims.

A survey of the ten largest domestic U.S. third-party logistics companies reveals that nine of the ten refuse to accept primary responsibility for loss or damage claims, where they do not operate as the actual carrier. This is so because neither logic nor law requires the 3PL to be responsible for cargo loss or damage. Thus, the larger 3PLs avoid the added cost of claims management (except, of course, for agreeing to facilitate the resolution of claims with carriers they might employ), and by doing so, add to their competitive cost advantage over the smaller 3PL who accedes to shipper leverage and agrees to accepting such responsibility not otherwise required of them by the law or larger 3PL competitive market.

A 3PL who only facilitates transportation of the shippers’ property, as opposed to taking possession and control of that property as a carrier, is a property broker of transportation. A “broker” is defined at 49 U.S.C 13102(2) as one who “sells, offers for sale, negotiates for or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for transportation by motor carrier for compensation.”

Nothing in that definition should have ever suggested responsibility for cargo loss or damage. The primary reasoning for the first such agreement is not a function of orderly legal reasoning. On the contrary, the “legal fiction” that was so created was not based upon legal logic at all.

The only logic involved in requiring a 3PL/broker to be responsible for cargo loss or damage, is the logic of leverage.

It is as base as, “well we know you really want this business and we just thought we would add a senseless, but leveraged, duty of broker responsibility for cargo loss or damage, as though you were a carrier, which of course, we know you are NOT”.

There is no more compelling logic or law for the shipper’s demand of the out-leveraged 3PL. It not only fails any logic, it adds much cost and inefficiency to the fundamental shipper, carrier, and 3PL business process. All parties should just say NO to this practice continuing.

II. 3PLs who find it Necessary to Accept Responsibility for Cargo Claims Should do so with a Precise Strategy

3PL Planning for Assuming Cargo Claims Liability

Once the strategic decision is made to accept cargo claims liability, the 3PL must contract accordingly with all shippers, consignee customers, and carriers, in order to mitigate the ultimate cost of such a policy.

Contract with the Shipper – Even though the 3PL has agreed to be responsible for cargo claims liability, that does not translate into being an insurer of all cargo claims, regardless of fault, or some provable criteria for such liability. Among several issues, the 3PL’s contract with the shipper must at least consider the following:

• Responsibility of shipper for loading and sealing, and acquiring carrier acknowledgment of good order.
• Being responsible for some standard of inspection and mitigation of damages.
• Warranted cooperation of shipper in proving value of damage or loss.
• A mutually agreed limitation on total value of damages or loss for which the 3PL is responsible.
• Agreed procedure for assignment of shipper’s interest in the claim.

Contract with the Carrier – Once a 3PL adopts a policy of being responsible for cargo claim liability, the Broker/Carrier Agreement (“BCA”) becomes important in protecting a reasonable expectation of recovery against a negligent carrier. The BCA will provide a fundamental road map to recovery by the 3PL of all damages paid by the 3PL to the shipper. For reasons that are too lengthy to cover fully here, the BCA must be drafted in a manner that allows the 3PL to recover all litigation costs, as well as the cargo claim amount.

Attorney fees in a fully litigated cargo claim action can be very significant. One recent case where the 3PL litigated the claim on behalf of their shipper resulted in recovery of the claim amount of $450,000, and attorney fees of $171,000. Such an example again points to the value of a well drafted BCA.

Since attorney fees are not ordinarily allowed in an action whereby the 3PL gets an assignment of the shipper’s interest in the claim and sues the carrier under the Carmack Amendment, the BCA must be drafted in a manner which gives the 3PL a contract action and/or a contract of indemnity action against the carrier, rather than a Carmack action. By so structuring the BCA, the 3PL may also recover all attorney fees and related costs.

Another key issue for the 3PL in pursuing cargo claims against a carrier is that of jurisdiction and venue for any litigation. Because of recent court decisions, it is now very difficult to bring a lawsuit against a carrier in any jurisdiction other than the carrier’s “home” state, unless that carrier has agreed to submit to personal jurisdiction in the state wherein the 3PL has its primary operations. This becomes a key issue in managing the cost of such litigation. Therefore, the BCA must have a well drafted choice of forum provision, which will allow personal jurisdiction over the carrier in the 3PL’s home state.

In sum, in order to efficiently manage cargo claims where the 3PL has agreed to be responsible to the shipper for cargo claims, the 3PL’s broker/carrier agreement with the carrier should be drafted to include provisions which at a minimum address the following:

• Independent contractor status
• Clear language establishing that the terms of the BCA shall prevail over any other document, such as the bill of lading or any extraneous limitation of value for the cargo by way of carrier “rules tariffs”.
• Liability for cargo loss or damage shall be the full purchase invoice value.
• Carrier’s liability for cargo loss or damage should not be limited to carrier’s insurance coverage.
• Carrier’s liability for loss or damage must include attorney fees which are to be considered special damages, the risk of which the carrier is expressly assuming.
• An indemnity provision, which includes both duty to defend and full indemnity for any claims paid by the 3PL to the shipper/consignee.
• A strict prohibition of any subcontracting of the duties the carrier assumes under the BCA. In addition to the agreement not to subcontract, the BCA must also include specific language whereby the carrier agrees that in instances where the carrier breaches such a provision, the carrier agrees to assume all liability for all transportation costs and loss or damage should another carrier actually transport the cargo.
• A clear forum selection provision, which not only provides for consent to personal jurisdiction, but also agrees to venue of the 3PL’s choice.

Of course the BCA should also include a number of other important provisions, such as how carrier safety fitness is to be managed, warranty of compliance with all transaction-specific regulations (such as hazardous materials and new FDA food safety requirements), but the bullet-pointed provisions above are of primary importance to the 3PL in managing any future pursuit of cargo claims against the carrier in a manner that fully mitigates the 3PL’s payment of the claim.

In summary, a 3PL must elect a clear and well administered claims management strategy of either accepting liability for claims management, or not. But in all instances wherein the 3PL believes it necessary to accept cargo claims liability, in order to mitigate that process and remain whole, the 3PL must develop a well- considered policy which is more likely to make them whole.

III. While Serving Shippers as a 3PL, Do Not Misrepresent Your Service as that of a Carrier.

While selling their services to the shipping public many smaller 3PLs often mislead the shipper into believing they are actual carriers (either purposely or by benign neglect). This is another instance of the short sighted management strategy, “worry about that later, let’s get this freight moving”.

In perpetrating this misrepresentation, some 3PLs will even instruct the actual carrier to “sign in” as the 3PL. The practice of instructing carriers to “sign in” as a carrier other than the actual carrier violates several regulations and statutes:

9 CFR 371.7 Misrepresentation.

(a) A broker shall not perform or offer to perform any brokerage service (including advertising), in any name other than that in which its registration is issued.

(b) A broker shall not, directly or indirectly, represent its operations to be that of a carrier. Any advertising shall show the broker status of the operation.

When the broker of Company A instructs brokered carriers (Company B) to “sign in” as the Company A carrier, in addition to being misleading, and possibly fraudulent, the broker has caused the shipper to believe that the Company A broker and carrier are the same, and thus, both directly and indirectly representing themselves to be Carrier A.

Many states also have statutes and regulations similar to 49 CFR 371.7, as well as criminal statutes directed at purposeful creation of a false statement or representation on any bill of lading, and 49 U.S.C. 524 provides for significant fines for each violation of “evading regulation of motor carriers”.

IV. If Participating in the Shipment of Food Products, Review and Reform All “Deemed Loss” Contracts with Shippers

New FDA Rules and Required Procedures have changed standards which are to be applied in determining what food products are to be considered “adulterated”.

Under FDA’s Final Rules, all parties to a shipment of food products are now much more responsible for specific instructions, training of personnel, cleanliness of equipment, temperature control, seal integrity and record keeping as to the condition of each load. The effect of these new rules is to give very different guidance to courts in the future in determining whether foods will be considered “adulterated”. Likewise, the new rules should cause beneficial owners of food shipments to be more reasonable in determining actual damages to any food shipment, rather than an arbitrary decision imposed upon 3PLs and carriers by inequitable economic leverage.

FDA has refined regulatory definition of foods that may be considered adulterated, to exclude all foods which are “completely enclosed in a container”, and gives guidance indicating that foods enclosed within a metal can, glass or plastic bottle, or a sealed bag are exempt from any such regulation. Within FDA’s comments to the new rules they also further state that a broken seal or a “deviation from the shippers temperature specifications does not necessarily and automatically cause the food to be unsafe, and, therefore, adulterated.”

Further, FDA removed the former presumption of adulteration by temperature deviations when they provided at 21 CFR 1.908(6) that a “qualified individual” (inspector) may make a determination that the temperature deviation or other condition did not render the food unsafe.

Whether by these suggested methods, or others, full implementation of SFTA and FSMA by FDA’s Final Rules now calls for a more equitable manner of handling purported damage to food shipments than the former arbitrarily imposed “deemed loss” provisions of the past.

Should all the parties fail to find such a reasonable approach, after much costly litigation, it is likely that the courts will soon give a new definition to the duties of all within the context of a new definition of “adulterated” food.

V. Consider Your Legal Counsel as a Strategic Partner, Rather than a Tactical Cost

There are few industries wherein legal review is more compelling than the 3PL sector of logistics management. The law of logistics, and in particular third-party logistics, is always forming anew.

The logistics industry has grown faster than the law supporting and forming around it, often leaving a void in the law, which courts are asked to fill.

What we now know as the 3PL sector is little more than 20 years old. Prior to that time supply chain management was more simplistic, dyadic and surrounded by equally simple, well established legal concepts. By 2000, the U.S. 3PL gross revenue amounted to $50B, and today has grown to over $250B.

All of these 3PL functions are mostly unregulated and have to be defined, both as business and legal concepts; but moreover, proper risk management and efficiency requires legal review within the context of each new project and the evolving law of logistics.

3PL functions, by definition, involve more than two parties, and often many more. Legal implications of 3PL transactions are geometric to the number of parties and separate functions involved in successfully managing any aspect of a supply chain. Easily, the greater majority of court decisions interpreting these relationships have been rendered within the past 20 years. But, the courts are considerably behind the formation of these relationships in defining and enforcing their real impact. New law is being formed every day in the logistics industry, and often to the financial and professional disappointment of those who fail to completely involve knowing legal analysis within their strategic plans.

The strategic planning process to which I make reference is much more than simple contract review, although my experience indicates that such an elementary process as mandatory contract review would be a good first step for some logistics companies. It becomes much more effective when experienced (logistics-specific) counsel is involved in the functional aspects of a planned initiative. Effective process design, with the assistance of counsel who is familiar with the many nuances of 3PL logistics management, will often not only avoid negative legal ramifications, but may also help design a more profitable initial process.