Delta Nu Alpha - June 26, 2008 Henry E. Seaton, Esq. Seaton & Husk, LP transportationlaw

1. CONTRACTS OF CARRIAGEA Study of Controversial Provisions which Divide Shippers, Brokers and Carriers Delta Nu Alpha - June 26, 2008 Henry E. Seaton, Esq. Seaton & Husk, LP www.transportationlaw.net -and- Scott W. McMickle, Esq. Dennis, Corry, Porter & Smith, LLP www.dcplaw.com

2. Air & Expedited Motor Carrier Association Apex Capital LP Champagne Logistics Greatwide Truckload Management Kings Express Landstar RMCS USA Transportation Services, International

3. About DNA • Fraternity of transportation professionals • Open to all with interest in education • Interdisciplinary – shippers, carriers, third party logisticians and students • Traditional chapter format – Milwaukee, Chicago, Rockford, Nashville, Bowling Green, Grand Rapids, Louisville, Le High Valley • Student chapters at Western IL University • Scholarship program www.deltanualpha.org

4. Syllabus of Future Webinars Contains Chronic and Acute Industry Problems • Format is issue presentation followed by open question and answer. • Diverse opinions are encouraged. • Goal is to assess issues, impart information and better prepare listeners as knowledgeable professionals in any industry which too frequently ignores day-to-day problems of contracts, claims and operations in favor of “supply chain management.” • CCPAC accreditation of 3 courses for cargo claims specialists.

5. Upcoming Webinar Topics 7/15/2008 FMCSA Safety Regulations 8/19/2008 The Scourge of Double Brokering 9/16/2008 Cargo Claim Mitigation, Adjustment and Salvage Issues 10/21/2008 INCOTERMS – The Language of the Global Economy 11/18/2008 Supply Chain Security Issues – Alphabet Soup and New Regulations For more information and to register, go to www.deltanualpha.org Approved for Certified Claims Professional Accreditation Council (CCPAC) Credit (1.5 CEUs)

6. SHIPPER AND BROKER CONTRACTS • Waiver of statutes and regulations • Special and consequential damages • Indemnification clauses • “Additional insured” language • The right of setoff • Salvage / no duty to mitigate • Shipper load and count / concealed damage waivers • No penalties for nonpayment • Homer provision / arbitration • Integration clauses • No recourse provisions; and • No back solicitation agreements • Shipper contracts making a broker into a “carrier” or “service provider”

7. What is a Waiver? Answer: Pursuant to 49 U.S.C. 14101(b): “If the shipper and carrier, in writing, expressly waive any or all rights and remedies … for transportation covered by contract, the [services] provided under the contract shall not be subject to the waived rights and remedies and may not be subsequently challenged on the grounds that it violates the waived rights and remedies.”

8. What are the consequences of waiving federal “rights and remedies” and standard bill of lading terms and conditions? Answer: It takes 10 to 20 pages of fine print to address the issues you just excluded and in the details the carrier often loses.

9. 61 Good Reasons Not to Waive Federal Transportation Law and Bill of Lading Terms I. Introduction II. What is Waiver? 49 U.S.C. §14101(b) III. What gets thrown out by a blanket waiver? A. Carmack (49 U.S.C. §14706) 1. National uniformity and consistency of statute 2. Predictability v. state law variance 3. Uniform treatment of special and consequential damage issue 4. Removal to federal court, 28 U.S.C. §1337 5. Venue flexibility for deciding and situs of loss, 49 U.S.C. §14705(a) 6. Forum non-conviens, right to transfer to convenient venue, 28 U.S.C. §1391 7. Burden of proof for negligence transferred to shipper 8. Document presumption of good order and case law lost.

10. 9. Consignee duty to accept shipment unless practically worthless and to mitigate damage loss 10. State law liability standard inconsistent with cargo insurance coverage 11. Joint line apportionment-49 USC 14706 12. Liability imposed on connecting line carriers, issuance of bill of lading not required, 49 USC 14706(1) 13. Full actual value 14. Released evaluation 15. Preemption trumps state law causes of action B. Written Claims Requirements 16. Regulations establish standards of what constitutes a claim-370.3(c) 17. Minimum claims requirements established-370.3(b) 18. Adjustment and response procedures-deadlines, free astray certifications-370.5 and 370.7(c) 19. Administrative Ruling 65 and 128-payment of freight charges/dispute resolution of claims vs. offset C. Uniform bill of lading or standard bill of lading provisions waived 20. Bill of lading is contract of carriage/waiver results in shipping documents becoming simple receipt for goods-VICS bill contains no terms and conditions 21. Loss of release rate notice and inadvertence clause, opportunity to declare higher rate

11. 22. Loss of C.O.D. provision to require collection upon delivery 23. Special instruction block for special service terms 24. Identity and definition of the party-who is the carrier in possession and control 25. Identify payor of charges/is shipment prepaid or collect or third party 26. Accurate description of commodity including hazmat certificate Back Side Terms and Conditions Omitted from Contract 27. Reasonable dispatch defined 28. Act of God exception 29. Act of public enemy 30. Authority of law 31. Inherent vice 32. Act or omission of shipper Common Law Exceptions Trumped by Waiver

12. 33. 9 month rule for filing claims, statement in writing required-49 U.S.C. 14706(e)(1)(a) 34. 2 years after denial to file suit limitation, stated in writing- 49 U.S.C. 14706(e)(1) 35. Carrier lien for freight charges confirmed-49 U.S.C. 80109, 49 U.S.C. 13707 36. Provision for warehouse statement of status upon wrongful rejection 37. Salvage provisions/non-perishable 38. Salvage provisions/perishable 39. Deduction of transportation charges from salvage after sale 40. No liability for items of extraordinary value 41. Hazmat protocol/shipper duty to identify 42. Payment of freight charges/liability of consignor and consignee (UBOL Section 7)

13. 43. Instrumentalities of Transportation-Define the Parties • Consignor-49 USC 80101(2) • Consignee-49 USC 80101(1) • Broker-49 USC 13102(2), 49 CFR 371 • Motor Carrier-13102(14) • Not defined – 3PL, Logistics company or “transportation service provider” 44. Pitfalls to broker of waiving statutory definition • Loses statutory definition as arranger, easily becomes “provider” entering the liability loop and chain of custody vs. the mischief of “Service Provider” status 45. Shipper pitfalls • Loses standard as “member of shipping public” and public utility analysis – prime contractor in supply chain

14. 46. Broker recordkeeping and production of payment records waived-49 CFR 371.3 47. Misrepresentation provision separating broker from carrier-49 CFR 371.7 48. Anti-rebate prohibitions waived-49 CFR 371.9 49. Broker responsible for discharging shipper’s payment duties-371.10 50. Prohibition against broker commingling of funds and requirements of segregation waived-371.11 51. Basis for “constructive trust” under statutes and regulations waived Miscellaneous statutes 52. Off-Bill discounts, truth-in-billing-49 USC 13708 53. Overcharge, undercharge and duplicate payment regulations wiaved-49 CFR 378

15. 54. Statutory time limits for identifying overcharges and undercharges-180 day rule, 49 USC 13710 55. Broker’s bond registration and bond requirements waived 56. Shipper load and count provisions which result presumption on shortage and damage claim waived- 49 USC 80113 57. Possessory lien and duty to deliver-49 USC 80109- 49 USC 13707 58. Self-help provision, 49 USC 14704 59. Anti-lumping statute, 49 USC 14109 60. Payment liability, 49 USC 13706, 49 USC 13707, Credit Regulation at 49 CFR 377 61. Statute of limitation for collecting freight charges

16. Waiver Under §14101 (b) Objectionable Language Acceptable Language “General principles of Federal Transportation Law, Statutes and Regulations shall apply to the extent not expressly waived herein.” “The parties expressly waive all rights, duties and obligations permitted under § 14101 (b)" Partial List of Affected Items • Preemption • Claims rules and salvage §370 • Overcharge and Undercharge §378 • Through routing and joint rates • Carmack • Bill of Lading Terms • Federal Court Jurisdiction • Credit Regulations §377 • Broker Accounting and Segregation • 180 Day Rule for auditing bills ATA Broker

17. Special and Consequential Damages • Carmack – is “full actual value” • No special or consequential damages • Shipper has duty to mitigate • By contract shippers seek • Payment of penalties for late deliveries • Waiting crane fees, missed market fees • What can result • Crushed new cars because of bent bumpers • $30,000 charter plane bill to replace $500 delayed shipment • Imposition of penalties for delay beyond driver’s control which exceed guarantees of expediters like FedEx, DHL or UPS

18. Special and Consequential Damages Objectionable Language Acceptable Language “Carrier shall be liable for all loss resulting from loss, damage, or delay to cargo including but not limited to lost profits and sales, the cost of cover, the cost of expedited replacement, lost down time, additional handling and shipping costs, and restocking fees.” “Carrier shall be liable for cargo loss and damage in accordance with federal law (49 U.S.C. §14706) with respect to all shipments. Carrier shall not be liable for special or consequential damages. Carrier’s liability for cargo loss and damage shall be limited to the shipper’s actual cost of the articles, lost, damaged or destroyed and shall not exceed $___per truckload or $___per pound per article, whichever is less.” What’s the Difference? • Do you pay for plant shut downs, air freight replacements, waiting cranes, etc.? • The Carmack Amendment limits liability – no state law remedy (emotional distress, punitives) • Reasonable dispatch only as per Bill of Lading • Don’t admit “foreseeability” • Time sensitive/JIT freight ATA/NITL Section 7-No special or consequential without notice

19. Risk Transfer Provisions in Contracts • Contractual risk transfer involves an attempt to allocate potential legal liabilities which would arise in connection with the performance of a contract between the parties to the contract. These liability risks are often allocated in a manner that would not have occurred under common law or in the absence of contract.

20. Types of Contractual Provisions • Two types of contractual provisions are typically used to effect non-insurance risk transfer from shippers and brokers to carriers. The are: (1) Hold harmless or indemnity provisions; and (2) Additional insured and related insurance provisions

21. What is a Hold Harmless and Indemnity Provision? • An agreement whereby one party (the indemnitor), assumes the other party’s (the indemnitee) legal liability to whatever extent delineated in the provisions. • Typically if a hold harmless and indemnity provision is limited to the extent the shipper or broker is held vicariously liable for injury or damage that the carrier causes, the indemnity clause is unobjectionable, yet many shippers and brokers seek broader indemnification for losses “arising out of” the services provided regardless of fault which extends the carrier indemnity obligation to include: • The negligent acts or omissions of third parties; • The contributory negligence of the indemnitee, if not indemnification for the sole negligence of the indemnitee (if prevented by state anti-indemnity statute)

22. Importantly, indemnity provisions operate independently from the carrier’s insurance which may or may not cover the risk assumed by the carrier in the contract

23. Indemnity Objectionable Language Acceptable Language “It is the express intent of the parties to this agreement that carrier will indemnify the shipper for all loss, damage and claim of any kind arising out of this contract except for shipper’s sole gross negligence.” “Except with respect to cargo damage claims as set forth herein, each party will indemnify and hold harmless the other from all loss, liability or claims to the extent same is caused by a negligent or willful act or omission of their respective employees, agents or subcontractors in the performance of this contract.” What’s the Difference? • “Arising out of” language is broader than coverage afforded by additional insured language in new standard ISO endorsement • Comparative Negligence • Can Carrier can pay for shipper negligence? • See anti-indemnity statutes of CA, IN, KS, MD, NC, NE, SC, TN, TX, VA and WV ATA/NITL Section 10

24. Two-Handed Pick Pocket The “two handed pick pocket” is the name given to the combination of overreaching indemnification provisions coupled with “additional insurance” requirements.

25. Indemnity Provisions and Insurance Coverage • Where a motor carrier is obligated to indemnify a shipper or broker by contract, the motor carrier’s general liability policy will respond to the obligation if and only if the coverage for the claim is not otherwise precluded by the terms of the policy.

26. A Caveat • A motor cannot assume that a broadly worded indemnity will be automatically covered by its commercial liability policy without a detailed analysis of the exclusions. • Even if the policy extends coverage to cover the shipper’s risk of loss by contract, indemnification beyond legal liability dilutes coverage and can increase loss runs.

27. Motor Carriers Maintain: • BI & PD • In an amount of $1 million which goes to pay injured third parties/ MCS-90 endorsement and BMC 91X gives shipper assurance of payment for primary liability for carrier • Cargo • Policy loopholes exist • Carmack is best that can be expected • “Loss payee” status is of no help in extending coverage • General Liability • Covers “non-auto” BI & PD (i.e. excludes coverage for truck wrecks) • Shipper is automatically insured under contractual liability language • New ISO form limits “automatic contractual coverage” to “to the extent caused by”

28. Shippers demand and think they are getting more: • They seek: • Coverage for their own act of negligence (i.e. no contributory or comparative negligence). If motor carrier is 1% negligent it is responsible. • Protection from third party torts (i.e. if lumper runs over their dockhand while loading the carrier’s truck the want protection under “arising out of” language. • They want waiver of subrogation and protection against suit by carrier’s driver or owner-operator and their estates if carrier’s driver or agent is injured by shipper.

29. Additional Insured Status • Additional insured status is a second contractual risk transfer device intended to achieve a similar end without relying on the terms of the indemnity clause. • It makes the shipper or broker an insured in the carrier’s general liability policy and in the carrier’s auto liability policy subject to the terms and conditions of the policy and the additional insured endorsement.

30. What are the primary motives of shippers and brokers for requiring additional insured status on liability policies? • Additional insured status may reinforce risk transfers that would otherwise be invalidated by state anti-indemnity statutes (e.g. Condor Express) • It may give the indemnitee direct rights under the carrier’s insurance, particularly with respect to defense coverage • It may prohibit the indemnitor’s insurer from subrogating against the indemnitee when the loss is caused by the indemnitee’s act or omission • It may avoid having losses impact the shipper’s loss run history, avoiding increased insurance premiums in the future • It may lessen the chance of the shipper having to sue the carrier to be made whole following a claim

31. Additional Insured Objectionable Language Acceptable Language “Carrier warrants that it maintains personal injury and property damage insurance ($1Mil per occurrence and cargo insurance as required by the Fed. Motor Carrier Safety Admin. (Form BMC-91X and BMC-34 on file). In addition Carrier warrants that it maintains workman’s compensation insurance as required by state law and all risk cargo insurance in the amount of not less than ___ per occurrence. “Shipper shall be included as an additional insured, with respect to the insurance policies required above. All insurance required and provided by Carrier shall be primary and any insurance maintained by Shipper shall be excess and not contributing with Carrier’s insurance.” Problems Note: • If shipper insists on “additional insured” for 3rd party liability, you should exercise extreme caution, providing policy and insurers written endorsement warranting nothing about what is covered • Watch cargo loopholes and Accord exclusions Most shippers think you are buying them indemnity covering their own negligence; most insurers don’t agree. Shippers can outsmart themselves and lose their own coverage. ATA/NITL Section 5

32. Avoid the Complexity of Indemnity/Insurance Issues • If you are foolish enough to try to extend your policy to cover a shipper’s negligence (1) you may be covered but don’t bet on it; (2) as a general rule, say no, and be EXTREMELY careful with exceptions. • Examples of horror shows involving the two handed pick pocket.

33. Carrier agreed to indemnify shipper and to acquire insurance protecting the shipper against injured driver suit (Quaker v. Condor) • Shipper’s negligence injures driver • Indemnity found against public policy under state law • Carrier required to pay because it did not procure insurance for shipper

34. Indemnity under UIIA – no coverage for brokered load • Chicago drayman checks out container and chassis and gives load to another carrier • Subcontractor hit a bridge • Indemnitee (chassis owner) sues drayman’s insurer for indemnity • Insurer denies coverage (brokerage excluded from auto liability; auto coverage was excluded from general liability) • $10 million verdict against drayman

35. Indemnity Trumps Carmack and Bill of Lading Limitation • Air waybill limits liability to $100,000. • Forwarder pays $692,000 claim and turns to carrier under shipper/carrier contract for “indemnity” • No contract limitation found, no Carmack or bill of lading limitation applied • Carrier has to pay $692,000

36. Groping for Solutions • Limit indemnity to “to the extent caused by” • Work with your insurer to meet shipper’s needs • Be sure “waiver of subrogation” request is acceptable and does not vitiate worker’s comp • Examine use of broadly worded CG2026 or CG2010 which should meet shipper’s needs for general liability coverage. It can dilute carrier coverage, but no gaps in coverage if 2 handed pick pocket is otherwise limited. • “Additional insured” status may give shipper assurances of representation in vicarious liability BI-PD auto case but won’t necessarily “extend” coverage to shipper for its acts of negligence. (Carrier spills diesel/shipper’s employee lights a match and throws it on the spill.) • Know your insurance and offer the shipper only what you have!

37. Time to Take a Break

38. Offset • What is it? • When shipper deducts a contested cargo claim from a carrier; OR • When a broker pays a contested cargo claim and deducts from carrier • Why do shippers and brokers offset? • Carriers and their insurer do not settle claims; OR • Because the carrier’s insurance contains loopholes which allow denial of coverage and the carrier factors its bills • What is the result? • Cargo claims are not adjusted in accordance with 49 CFR 370 • Insurers will not pay carrier • Carrier is deprived of needed revenue

39. Right of Offset Objectionable Language Acceptable Language “Shipper/broker shall pay freight charges within 30 days without offset” OR “Freight charges shall be paid in accordance with the terms of carrier’s Service Conditions. See www.___.com” “Compensation paid to Carriers may be withheld to satisfy claims or shortages, or any debt owed by carrier to shipper/broker at shipper/broker’s sole discretion.” Reasons to Reject Offset ATA/NITL Section 3(a)-No Offset • Spiral of death to carrier a) Insurer won’t pay b) Factoring terms are violated c) Cash flow interrupted • No mitigation of loss – broker or carrier takes full unadjusted amount of loss • Rules circular deal with important collection issues • Brokers who have no cargo liability take advantage of carrier to keep shippers happy ATA Broker

40. Duty to Mitigate • Under common law, a the consignee must accept goods unless “practically worthless” • Consignee cannot reject 22 pallets because 2 are damaged – the mitigation test is one of reasonableness

41. By contract, shippers seek waiver of duty to mitigate using “sole discretion” language • They require return of rejected shipments at the carrier’s expense and dump the goods

42. Examples of Duty to Mitigate Abuse • Dumping of good foodstuff without inspection due to broken seals • Pickles • Orange Juice • Coca-Cola • Crushing new cars because of bumper damage

43. Salvage/No Duty to Mitigate Objectionable Language Acceptable Language “Neither shipper nor its customers shall have a duty to mitigate damages. In the event of damaged, branded or labeled goods, shipper’s customer may determine, within its sole discretion, whether all or part of the shipment may be salvaged and the value of such salvage.” Delete and incorporate Service Conditions which contain salvage rules – Bill of Lading also includes the shipper and consignee common law duty to mitigate unless agreed to the contrary. Reasons for Objection • Objectionable language makes “wrongful rejection” legal • Consignor has duty to accept shipment unless its “effectively worthless” • Don’t let one broken pallet cost you a truckload • “Distress sale” of rejected shipment will produce losses a consignee can avoid by using undamaged product in stream of commerce • Issue on-hand notice and get an expert ATA/NITL Section 7(d)-Shipper and consignee have duty to mitigate

44. Shipper Load and Count • New HOS rules have proliferated use of spotted trailers • Carrier’s drivers are not there to count freight on or off trucks • Bill of Lading Act contemplates “SL&C” and says carrier is not liable for count or upset due to loading when: • Loaded by shipper, unloaded by consignee • Phrase “Shipper Load and Count” or similar is on bill • Carrier should not be responsible absent negligence for delivery of spotted trailer with seal intact • Many shipper contracts make carrier responsible for count and warehouse shortage resulting from short counts

45. Shipper Load and Count/Concealed Damages Objectionable Language Acceptable Language “Carrier shall not be responsible for shortage on shipments loaded and counted by consignor where the trailer is received at destination with seals intact. Failure to indicate “SL+C”, “Subject to shipper load and count” or like notations on shipping documents shall not be a conclusive determination of carrier liability when driver is not present during the loading or unloading of shipment.” “Carrier will provide spotted trailers for shipper’s convenience in loading and unloading. Notwithstanding the use of spotted equipment carrier will accept responsibility for the loading and counting of each shipment.” Note: • Carrier rules circular will address this issue • Accept pallet count not individual piece count ATA/NITL–SL&C is standard/consignee has duty to accept broker seals

46. Freight Payment Terms • Carriers are general unsecured creditors • Bankruptcy is rampant • Goody’s • Dan River • Rust Belt • 3PL won’t guarantee payments • Fuel cost of 80¢ per mile must be paid immediately • Shipper increasingly want 45 to 60 day credit terms/no interest or penalty • Most small carriers must factor paying 1.5% to 3% per month - cost on many exceeds profit margin • Carriers must get paid early and on time to avoid “preferences” • Factors can and will pull the sting if a major shipper goes down • Carriers are the last to get paid by failing shipper

47. No Penalties for Non-Payment of Freight Charges Objectionable Language Acceptable Language “Payment will be made within 60 days receipt of carrier’s invoice including the original delivery receipt to which no exception is noted – Carrier waives any lien it may have on shipments for freight charges.” “Freight charges are due within 30 days of receipt of invoice and certified copy of the delivery receipt (via fax, mail or EDI). Freight charges not paid within 45 days are subject to interest and collection fees (see Carrier’s Rules Circular).” Note • Carrier can ill afford to provide interest free loans • Collection remedies must be incorporated into contract or by reference in Rules Circular and be referenced on each invoice (49 CFR 377) ATA/NITL Section 3(a)-Interest but no penalties ATA Broker

48. Homer Provisions/Arbitration Objectionable Language Acceptable Language “Carrier consents to exclusive jurisdiction and venue in shipper’s/broker’s hometown of Hilo, HI. The laws of the State of HI will apply. All disputes will be subject to binding arbitration at shipper’s election before the arbiter of its choice at its home town.” “General principles of federal transportation law, jurisdiction and venue state apply. Subject to the approval of carrier’s cargo insurer, cargo claims not paid within 120 days may be subject to binding arbitration initiated by either party before the arbitration services of the Trans. Lawyers Assoc.” Note: • Federal law not state law should apply • Shippers choice of venue is often irrelevant to dispute, just a difficult place to sue • Arbitration or ADR (Alternative Dispute Resolution) is in both parties’ interest and expedited arbitration or mediation is to be preferred. ATA/NITL Section 22-General principles of federal transportation law/ADR is voluntary

49. Integration Clauses Objectionable Language Acceptable Language “This contract contains each and every term of the agreement between shipper/broker and carrier and no provision of any carrier published tariff or rule applies. This contract may only be modified by a signed written amendment.” “The terms and conditions of the Standard Truckload Bill of Lading and Carrier’s Rules Circular (www.carriers.com) shall apply. This contract otherwise includes all of the terms and conditions of the agreement between the parties and may be modified only by a signed written agreement.” Note: • Be sure the Bill of Lading and your Service Terms and Conditions are incorporated by reference and are not excluded. ATA/NITL – has integration/must incorporate rules tariff and standard BOL

50. Carrier Recourse to Consignor • The majority rules is the broker is agent of shipper and carrier has bill of lading recourse to shipper if (1) carrier is not paid and (2) carrier has not surrendered recourse for signing Section 7 or waiving recourse. • See Contship Container Lines, Inc. v. Howard Industries, Inc., 309 F.3d 910 (6th Cir. 2002); Hawkspere Shipping Company, Ltd. v. Intamex, S.A., 330 F.3d 225 (4th Cir. 2003); National Shipping Co. Of Saudi Arabia v. Omni Lines, 106 F.3d 1544 (11th Cir. 1997); Exel Transp. Servs. v. CSX Lines L.L.C., 280 F. Supp. 2d 617 (D. Tex. 2003); Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., 513 F.3d 949 (9th Cir. 2008) • 75% of collection cases involve broker non-payment • Scourge of double brokerage to be covered in August • Major fault line between carrier and broker industry