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Perils of Today's Economy: Consignee Liability for "Prepaid" Shipments
August 11, 2009
Picture this scenario: You purchased widgets from a vendor. The vendor agreed to arrange for a motor carrier to deliver the widgets to you “prepaid”, meaning the vendor will pay the freight. When the shipment of widgets arrived, you inspected the cargo and accepted delivery. The vendor then invoiced you for the cost of the widgets and the cost of shipping. You paid the invoice. Months later, you received a letter from the motor carrier claiming you are responsible for the freight charges because the vendor, which is now in bankruptcy, did not pay. Are you responsible? If the vendor signed the no-recourse clause on the bill of lading and “prepaid” was NOT noted on the bill of lading, then you will be. Even if the bill of lading is marked “pre-paid” by the motor carrier, you may still be responsible for accessorial charges and undercharges. Moreover, if the motor carrier’s published tariff provides that the consignee is responsible for freight charges even if the bill of lading is marked “pre-paid”, then you may be on the hook for the entire freight charge.
Consignee Liability Under the Common Law and Other Transportation Acts
Under the common law, both the consignee (typically the buyer) and the consignor (typically the seller) were liable to a carrier for freight charges, regardless of the agreement between the consignee and the consignor as to who would pay. Pittsburgh, C.C. & St. C. Ry. Co., v. Fink, 250 U.S. 577 (1919). Thus, even if the seller hired the carrier and agreed to be responsible for the freight charges, if the seller failed to pay the carrier, the carrier could look to the buyer for payment. With the passage of the Interstate Commerce Act (“ICA”) at the turn of the 20th Century, the courts continued this tradition of holding the buyer/consignee jointly responsible for freight charges. In order to eliminate discriminatory pricing practices, the ICA prohibited a carrier from delivering or relinquishing possession of cargo unless it received payment. The ICA was repealed in 1995, but 49 USC § 13707 still requires that a motor carrier collect payment before delivering the cargo. Courts historically interpreted the ICA to mean that absent an agreement to the contrary, the carrier must seek payment from the consignee if the consignor fails to pay. Cf. Southern Pacific Transportation Co., v. Commercial Metals Co.,456 U.S. 336 (1982) (noting that the carrier has not only the right but also the duty to recover its proper charges for services performed). In some instances, this resulted in the buyer having to pay twice for the same shipping charges: once to the seller and once to the carrier. See Missouri Pac. R.R. Co. v. The Phelan Co., 444 S.W.2d 832 (Tex. Civ. App. 1969).
While federal law may be used as a basis for imposing liability on the buyer in the motor carrier context, the statutes governing international sea and air transportation do not require a similar result. Neither the Shipping Act of 1916 (“Shipping Act”), the Carriage of Goods by Sea Act (“COGSA”), nor the Warsaw Convention have provisions for consignee liability. However, such liability may be contractually assumed via the bill of lading or airway bill.
Contractual Agreements Regarding Payment
Neither federal law, the Shipping Act, COGSA, nor the Warsaw Convention impose rules on who should pay, thus parties are free to negotiate who will be responsible for freight charges. However, an agreement between the seller and buyer as to who will be liable for freight charges will only be binding upon the carrier if the carrier is a party to the agreement.
“No-Recourse” Clause in the Bill of Lading
The terms of the bill of lading are binding on the seller and the carrier. If the seller signs the no-recourse clause on the bill of lading, the carrier may not seek freight and other charges from the seller once the shipment is accepted by the buyer. A typical no-recourse provision reads like this:
Subject to Section 7 of the conditions of applicable bill of lading, if this shipment is to be delivered to the consignee without recourse to the consignor, the consignor shall sign the following statement. The carrier shall not make delivery of the shipment without payment of freight and all other lawful charges.
The effect of a no-recourse provision is to put the burden on the buyer to verify that the carrier has been paid prior to accepting the cargo. Once the buyer accepts the delivery, he is responsible for the freight charges and the seller is off the hook.
Bills of Lading Marked “Pre-Paid”
Historically, if a no-recourse clause was signed by the seller, the buyer was liable for the freight charges even if the Bill of Lading was marked “pre-paid.” Cf., Missouri Pac. R.R. Co. v. The Phelan Co., 444 S.W.2d 832 (Tex. Civ. App. 1969). Recent cases have retreated from the hard-line view that the buyer will always be jointly and severally liable with the consignor if the bill of lading is marked “pre-paid.” The majority rule today is that the buyer is not liable to the carrier for payment of freight charges where the shipment is accompanied by a bill of lading marked prepaid and the buyer has paid the seller for the freight charges. Thunderbird Motor Freight Lines, Inc. v. Penn-Dixie Steel Corp. (In re Penn-Dixie Steel Corp.), 6 B.R. 817 (Bank. D. N.Y. 1980) (noting that this is now the majority rule). The federal statute that requires motor carriers to collect payment before releasing the cargo was not intended to be used as a sword by carriers to ensure collection of their fees. Id. (“In fact the trend of the cases . . . has been to hold that a carrier will be barred from recovering from a consignee when the ICA’s policy against discrimination is not violated, and further, these holdings are not limited to preventing double payment by the consignee.”) citing Consolidated Freightways Corp. v. Admiral Corp., 442 F.2d 56 (7th Cir. 1971).
Where the bill of lading reflects both a no-recourse provision and a pre-paid notation, courts have harmonized the seemingly conflicting terms by holding that the seller is liable for the shipping charges, but the buyer is liable for ancillary charges and undercharges. Jones Motor Co., Inc. v. Teledyne, Inc., 732 F. Supp. 490 (D. De. 1990) (holding that the prepayment clause renders the consignor liable for the original transportation charges and the non-recourse clause operates to shield the consignor for liability for additional charges, but not for the original charges it agreed to prepay). However, a carrier may stipulate in its bill of lading or published tariff that the consignee remains secondarily liable, despite a “prepaid” notation.
To ensure that you will not be held liable for transportation charges that should have been paid by the seller or consignor, you should consider taking the following precautions:
- Identify your vendors’ carriers and review those carriers’ tariffs for provisions that make you liable even if the bill of lading is marked “pre-paid”.
- Review and understand all the terms in the carrier’s bill of lading, especially those that relate to the consignee’s liability for freight charges.
- Verify that “pre-paid” shipments have actually been paid before accepting delivery.
- Obtain an agreement by the carrier to expressly waive its right to seek payment from you and to look only to the consignor for payment of its charges.
- Avoid no-recourse provisions in the bills of lading. Rather, if you agree to be liable for accessorial charges or under charges, have the bill of lading so state.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2009 Posternak Blankstein & Lund LLP. All rights reserved.