When a property broker is really a forwarder

Property brokers are at risk for claims when they act as a carrier or forwarder. Unfortunately, the line separating these roles can be thin, and even using the wrong language on your website or service agreements can leave you open to liabilities. This article will teach you the latest best practices of property brokers that could protect you from potentially costly lawsuits.

"Whether a company is a broker or a carrier/freight forwarder is not determined by how it labels itself, but by how it holds itself out to the world and its relationship to the shipper." [1]

Introduction

This presentation is intended as a practical primer on best practices by property brokers to preserve their ability to avoid or limit the risks and liabilities when providing interstate transport services.

The goal of the guidance that follows is to maximize the ability of a property broker to avoid crossing a line that may expose it to greater liability than it would normally expect to assume.

The bottom line consideration is who pays and how does one avoid the transfer of risk of payment, when a claim arises.

Discussion

The rights and duties of interstate motor carriers and surface freight forwarders are governed by the Interstate Commerce Act (the Act) and the Carmack Amendment to the Act (Carmack), together with the Regulations of the Federal Motor Carrier Safety Administration (Regulations).

Under Carmack motor carriers and surface freight forwarders (defined by Carmack as a "carrier") are liable for the actual loss or injury to property transported under cover of bills of lading issued by them for the shipment of the property. The quid pro quo for the imposition of this full liability is the right to limit the carrier's or forwarder's liability, provided certain conditions are satisfied.

Although licensed by the FMCSA to operate, a property broker is not subject to Carmack and generally is not liable for loss, damage or delay to goods it arranges to be transported on behalf of shippers, except in certain circumstances.

Consequently, if a property broker is:

  • Responsible for negligently selecting a carrier, or
  • Intentionally causes the loss or damage to property, or
  • Acts in such a manner as to assume liability, as, for example, by agreeing to liability in a written contract or providing services that are beyond the scope of a property broker's normal services, the broker may be charged with full liability.

However, so long as a property broker operates within the confines of those services normally identified with its customary activities, or imposed by law, it can conduct business with reasonable confidence that the ability to avoid or limit liability for loss or damage to goods in transit will be preserved.

Unfortunately, due to bad judgment, inadvertence or marketing goals, brokers sometimes cross the line that separates them from carriers and forwarders.

In such instances the broker risks being deemed to have acted as a forwarder or carrier. The rub is that interstate forwarders have the authority of Carmack to limit their liability and, in addition, Carmack preempts all state law causes of action. On the other hand, brokers aren't subject to Carmack or federal preemption of state laws and causes of action.

Consequently, adjudication of a claim against a broker is likely to be subject to state law causes of liability, such as breach of contract or negligence. In some jurisdiction this can lead to harsh consequences, that may include consequential and/or punitive damages, in addition to the full value of the lost or damaged goods.

For example, we recently successfully concluded a case on behalf of a property broker which we commenced to collect a significant account receivable due the broker from a shipper on whose behalf it arranged sixty-five truck moves of the shipper's goods. Two of the shipments were the subject of a counterclaim by the shipper for goods it alleged were lost in transit.

As noted above, generally a property broker is not liable for loss, damage or delay to goods in transit that it arranges to be transported by a motor carrier on behalf of a shipper. Therefore, we felt fairly comfortable that the shipper's claim against the property broker was more than reasonably defendable, all other things being equal.

The shipper in our case maintained that as far as it was concerned it was not dealing with a property broker. Rather the shipper claimed it was dealing with a freight forwarder. If the shipper's claim that the broker was a forwarder was sustained, the broker's liability would have gone from zero to a quarter of a million dollars.

As far as the broker was concerned it was not acting as a forwarder. Therefore, the broker had not taken any of the steps a forwarder would to limit its liability under the authority to do so authorized by Carmack. [2]

The fly in the ointment was the fact that on the broker's website it billed itself as a forwarder, not as a property broker. In addition, the shipper claimed that it generally thought the broker was a forwarder while it was doing business with the broker due, in part, because the broker had issued bills of lading covering the shipper’s shipments, something a property broker should never do.

By itself, the foregoing may not have been sufficient evidence that the broker was holding itself out as a forwarder. It was, however, sufficient to subject the issue to scrutiny by the court. Fortunately, due to other inadequacies in the shipper's case we were able to obtain a judgment in favor of the broker, on both the freight charge collection claim and the counterclaim.

As the foregoing example suggests, a broker can often make mistakes, most often unintentionally, that can expose it to liability that it should not normally have to be concerned with.

These can include, but not necessary be limited to:

  • Executing shipper's service agreements that identify the broker as a "carrier" or "service provider", rather than as an "arranger" of shipments.

As you no doubt know, it is common for forwarders to hire motor carriers as subcontractors for carriage of shipments the forwarder is servicing. As a practical matter the forwarder is engaging in the same activity as a property broker. The important distinction is that while a motor carrier engaged by a forwarder is a subcontractor or agent of the forwarder, a motor carrier which a property broker arranges to handle a shipment for a shipper, is neither a subcontractor nor an agent of the broker.

Consequently, the forwarder will be either directly or, at the least, vicariously liable for the acts or omissions of the motor carrier. However, the property broker will not be liable for the acts or omissions of the motor carrier.
Entering into agreements with a shipper that calls upon the broker to perform services or take on responsibilities of a carrier or forwarder, beyond merely arranging for a motor carrier to transport a shipment that meets the shippers’ time, route and cost requirements.

  • Entering into shipper agreements that refer to carriers, with which the broker arranges to transport the shipper's goods, as "subcontractors".
  • Issuing the bill of lading or other transportation document covering the shipment in its name.
  • Misrepresenting the scope of the broker's operations or failing to clearly draw a distinction between its role as an intermediary and that of a service provider.

Companies that wear multiple service hats, such as domestic forwarding, property brokerage, motor carrier, IAC, foreign forwarder, NVOCC or customs broker, that seek to be a full service, one stop shopping intermediary, sometimes fall into the trap of blurring the distinctions between their various roles. Websites fail to delineate the services as separate and distinct; sales and promotional literature (and sales persons) likewise do not offer clear explanations and distinctions as to the different services, and; standard terms and conditions or contracts of carriage are written in such a manner as to try and cover all the various types of service in one document, which only serves to confuse the shipper as to which terms apply to which service. In such circumstances, shippers are often justifiably misled as to which service hat is being worn and what the rules are that govern the relationship.

The consequence of this can be that a court might give the shipper the benefit of the doubt that most favors it when adjudicating a claim for loss or damage to goods in transit.

There is no fool-proof template or code of conduct which, if adhered to, will guarantee immunity from ultimate liability for claims on the part of a broker. What follows, though, is a checklist that offers some practices that will certainly minimize the risks of unintended assumption of liability. The specifics of the list may also act as a stimulus to coming up with other steps that can be taken by individual brokers on the basis of their unique experiences and operations.

  1. Lumbermens v. Swift Trans., 303 F. Supp.2d (N.D. Ill. 2003).
  2. In order for a forwarder or motor carrier to limit its liability pursuant to Carmack, it must:  (1) obtain an agreement with the shipper based on a choice of liability; (2) give the shipper a reasonable opportunity to choose between levels of liability; and (3) issue a bill of lading prior to shipment.  A broker on the other hand is not subject to Carmack.  Therefore, it should have a written understanding, or publish and call to the shippers' attention, terms and conditions that contain an express limitation of liability.