The Man-Caught-In-The-Middle: Conflicting Views of the Role of the 3PL

1. The Man-Caught-In-The-Middle: Conflicting Views of the Role of the 3PL By Henry E. Seaton, Esq. Seaton & Husk www.transportationlaw.net

2. Henry E. SeatonSeaton & Husk, LP2240 Gallows Rd.Vienna, VA 22182www.transportationlaw.net Henry E. Seaton is a graduate of Duke University (A.B. ’70) and Vanderbilt School of Law (J.D. ’70). He has practiced law for 30 years in the Washington D.C. area representing motor carriers of brokers. He is a member of the Vienna, VA based law firm of Seaton & Husk. The firm specializes in freight claims, freight charge collection, contracting issues, carrier representation before the FMCSA and bankruptcy issues. Mr. Seaton writes a monthly column on transportation law for the Commercial Carrier Journal (CCJ) and is the author of Protecting Motor Carrier Interests in Contracts. He serves as commerce counsel for the National Association of Small Trucking Companies. He was the Delta Nu Alpha Transportation Professional of the Year in 2001 and is a frequent speaker and lecturer regarding cargo claims, freight charges, contracting and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be reached at HESeaton@aol.com. For articles and other information, please see www.transportationlaw.net.

3. Role established by common contract law and statutes of regulation; 49 CFR 371 Broker arranges for contracts between buyer and sellers Professional intermediary life insurance agent or real estate broker Established by contract waiving statutes and regulation under '14101(b) Principal enters contracts to provide goods or services, assumes liability and hires subcontractors Frequently “broker” is merely substituted for carrier in shipper contracts. LEGAL BASIS Broker /Arranger Principal/Provider

4. Duty of good faith and due diligence Arranger of transportation Brings together buyers and sellers Bill of lading is contract of haul GENERAL DUTIES Broker /Arranger Principal / Provider • Assumes by contract carrier-like duties: (1) Payment of freight charges (2) Cargo claim liability (3) Indemnity for BI & PD/”arising out of” (4) Purports to take “possession of cargo”

5. Obligated to transmit upon receipt Constructive trust or conduit corollary Can guarantee by carrier payment from retained earnings See also Ontario legislation FREIGHT CHARGES Broker /Arranger Principal / Provider • Assumes primary payment obligation to carriers by contract • Protects shipper from carrier payment demands by contract • Trumps bill of lading recourse • Accepts burden of shipper insolvency

6. No primary liability under statute Typically warrants to shipper that carrier is financially responsible for paying cargo claims Gets contingent cargo insurance to cover that warranty FREIGHT CLAIMS Broker /Arranger Principal / Provider • Assumes cargo liability by contract provision or broad indemnity • Assumes risk of loss – allows offset which may not be recoupable • Purports to take possession and guarantees condition upon arrival

7. Cargo claims filed against carrier Arbitration for economical determination Broker pays if no insurance and carrier insolvent OFFSETS Broker /Arranger Principal / Provider • Shipper offsets against intermediary • Constructive trust concept violated • Funds needed to pay non-negligent carriers is withheld by shipper • 3PL’s cash flow interrupted

8. Arranges for services provided by licensed and authorized carrier Eschews joint venture on prime/subcontractor claims Broker not on bill of lading as carrier VICARIOUS LIABILITY Broker /Arranger Principal / Provider • Opens door to principal/ subcontractor claims • “Assumption of duty” in contract can be used against in – Schramm v. Foster • Contractual indemnity language and purchase of insurance raises settlement demands • Contingent auto hard to find and too expensive

9. Is responsible for carrier selection Errors and omissions responsibility for negligent entrustment “ARISING OUT OF” INDEMNITY & “ADDITIONAL INSURED” Broker /Arranger Principal / Provider • Often accepts “arising out of” indemnity including liability for shipper’s negligence not covered by available insurance • (a) CGL Exclusion for auto • (b) no auto because not asset based • Anti-indemnity issues – TX, VA, KS – leaves indemnity for shipper’s negligence unenforceable in broker/carrier contracts • Many motor carriers will not and/or cannot offer similar indemnity • Anti-indemnity statutes may render carrier indemnity void

10. Absent guarantee, risk of non-payment is shared with carriers 3PL has preference defense SHIPPER INSOLVENT Broker /Arranger Principal / Provider • 3PL must pay unfunded freight charges • 3PL is open to full preference charge Major bankruptcies are forcing 3PLs to rethink accepting freight payment responsibility when customer goes bankrupt

11. Trust or escrow account protects shipper against double payment Property of 3PL is properly segregated in bankruptcy Shipper and Carrier interest trump secured lenders 3PL INDUSTRY Broker /Arranger Principal / Provider • Results in FIFO accounting and conflicts with secured lenders • Possible breach of fiduciary obligation and D&O liability; lender guarantees • Worldpoint, ACI – allows secured lender to frustrate payment to carriers.